霍頓房屋 (DHI) 2014 Q1 法說會逐字稿

Good morning, and welcome to the DR Horton, America's builder, the largest builder in the United States, first-quarter 2014 earnings release conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Donald Tomnitz, President and CEO for DR Horton.

Thank you, Mr. Tomnitz, you may begin.

Thank you and good morning.

Joining me this morning are Bill Wheat, Executive Vice President and Chief Financial Officer; Stacey Dwyer, Executive Vice President and Treasurer; and Mike Murray, Senior Vice President.

Before we get started, as usual, Stacey?

Some comments made on this call may constitute forward-looking statements, as defined by the Private Securities Litigation Reform Act of 1995.

Although DR Horton believes any such statements are based on reasonable assumptions, there's no assurance that actual outcomes will not be materially different.

All forward-looking statements are based upon information available to DR Horton on the date of this conference call, and DR Horton does not undertake any obligation to publicly update or revise any forward-looking statements.

Additional information about issues that could lead to material changes in performance is contained in DR Horton's annual report on Form 10-K, which is filed with the Securities and Exchange Commission.

Don?

DR Horton is off to a strong start in FY14.

Our first-quarter results were highlighted by $189.7 million of pre-tax income, on $1.7 billion of revenues, and a pre-tax operating margin of 11.4%.

Our home sales gross margin improved 350 basis points, year over year, to our highest level since 2006, setting a firm foundation for strong profitability as volume grows.

Housing market conditions continued to improve across most of our operating markets, and we are optimistic about the upcoming Spring selling season.

We are prepared for Spring with attractive communities in great locations, and a strong supply of finished lots and homes in inventory to capture the expected increase in demand.

Our weekly sales pace accelerated in January, compared to the first quarter, which could be an early sign of strong demand to come in the Spring.

Bill?

In the first quarter, our consolidated pre-tax income increased 76% to $189.7 million, from $107.9 million in the year-ago quarter.

Our pre-tax income as a percentage of consolidated revenue was 11.4%, an increase of 290 basis points from 8.5% in the year-ago quarter.

Home building pre-tax income more than doubled to $181.9 million, from $90.2 million.

And financial services pre-tax income was $7.8 million, compared to $17.7 million.

Net income for the first quarter increased 86% to $123.2 million, or $0.36 per diluted share, compared to $66.3 million, or $0.20 per diluted share in the year-ago quarter.

Mike?

Our first-quarter home sales revenues increased 33% to $1.6 billion, on 6,188 homes closed, up from $1.2 billion, on 5,182 homes closed in the year-ago quarter.

Our average closing price for the quarter was $263,500, up 12% compared to the prior year, driven by pricing power and an increased mix of larger, move-up homes.

Stacey?

The value of our net sales orders in the first quarter increased 14% to $1.5 billion.

Homes sold increased 4% to 5,454 homes, and our average selling price increased 10% to $275,600.

The cancellation rate for the first quarter was 23%, compared to 22% in the year-ago quarter.

The value of our backlog increased 20% from a year ago to $2.1 billion, with an average sales price per home of $275,100, and homes in backlog increased 5% to 7,684 homes.

Our backlog conversion rate for the quarter was 75%.

We are ready for the Spring selling season with a strong supply of homes available to close by March, so we expect our second-quarter backlog conversion rate to be around 75%, which is higher than our second-quarter historical conversion rate.

Bill?

Our gross profit margin on home sales revenue in the first quarter was 22.3%, up 350 basis points from the year-ago period.

200 basis points of the margin increase was due to improved market conditions, resulting in reduced incentives and higher selling prices in excess of cost increases.

110 basis points was due to lower relative costs for warranty and construction defect claims as a percentage of home sales revenue.

And the remaining 40 basis points of the margin increase was due to lower amortized interest and property taxes.

We have invested in attractively priced land and lots over the last two years, and we continue to see solid demand and improved pricing in many of our markets.

Based on current market conditions, we expect our gross margins to continue at a strong level.

Don?

Home building and SG&A expense for the quarter was $183.4 million, compared to $140.8 million in the prior-year quarter.

As a percentage of home building revenues, SG&A improved 20 basis points to 11.2% from 11.4%.

We continue to leverage our fixed cost structure, while at the same time building our sales and production capabilities where necessary.

We expect our SG&A as a percentage of home building revenues to increase seasonally in the second quarter, before trending lower in the third and fourth quarters, with higher expected revenues.

The improvements in our gross profit percentage and SG&A expense ratio expanded our home building pre-tax margin to 11.1% in the current quarter, an increase of 380 basis points, from 7.3% in the year-ago quarter.

Mike?

Financial services pre-tax income for the quarter was $7.8 million, down from $17.7 million in the year-ago quarter.

This quarter reflected a more competitive pricing environment, whereas the year-ago quarter benefited from unusually favorable market conditions, which produced higher-than-normal gains on sale of mortgages.

88% of our mortgage company's loan originations during the quarter related to homes closed by our home building operations.

FHA and VA loans accounted for 45% of our mortgage company's volume this quarter, down from 49% in the year-ago quarter.

Borrowers originating loans with our mortgage company during the quarter had an average FICO score of 719, and an average loan-to-value ratio of 89%.

First-time home buyers represented 41% of the closings handled by our mortgage company this quarter compared to 50% in the year-ago quarter.

Bill?

Since September, our construction in progress and finished homes inventory increased by approximately $224 million.

We had 16,800 homes in inventory at the end of December, of which 1,400 were models, 9,300 were speculative homes, and 3,400 of the specs were completed.

Our average community count for the quarter increased 13% from a year ago.

In our first fiscal quarter, our investments in lots, land, and development totaled $467 million, of which $254 million was for land development, and $213 million was to purchase finished lots and land.

At December 31, 2013, we owned 126,000 lots, and controlled 49,000 lots through option contracts.

61,000 of our lots are finished, of which 33,500 are owned, and 27,500 are optioned.

We are well positioned to meet demand with our 175,000 total lots owned and controlled.

Mike?

In October, we acquired the home building operations of Regent Homes for $34.5 million in cash.

Regent operates in Charlotte, Greensboro, and Winston-Salem, North Carolina.

At the date of acquisition, we acquired approximately 240 homes in inventory, 300 lots, and control of an additional 600 lots through option contracts.

We also acquired a sales order backlog of 213 homes valued at $31.1 million.

Our first-quarter results include 76 net sales and 136 closings in Regent's operations.

Stacey?

Our unrestricted home building cash totaled $801 million at quarter end.

At December 31, we had available capacity on our revolving credit facility of $656 million, and no cash borrowings outstanding.

Our home building leverage ratio, net of cash, was 37.1%, and our gross home building leverage was 43.8%.

The balance of our public notes outstanding at December 31 was $3.3 billion.

Subsequent to the quarter end, we repaid the remaining $145.9 million principal amount of our 6 1/8% senior notes at maturity.

Our $500-million principal amount of convertible notes mature in May.

These notes are eligible for conversion into equity if our stock price is at or above $12.96.

If the notes convert, we intend to settle them with common stock.

In January, our Board of Directors approved a payment of a quarterly dividend of $0.0375 per share, payable on February 18 to shareholders of record on February 7.

Don?

In closing, this quarter was DR Horton's most profitable first quarter since 2006, with $189.7 million of pre-tax income.

The majority of our operating metrics continued to improve on a year-over-year basis this quarter.

The value of our sales, closings, and backlog increased by 14%, 33%, and 20%, respectively.

Our pre-tax income increased 76%.

Our pre-tax income margin increased 290 basis points to 11.4%.

Our gross margin on home sales revenues increased 350 basis points.

Our SG&A as a percentage of home building revenues improved 20 basis points.

Our average sales price increased 10%, as we experienced pricing power in many of our markets.

We are better prepared this year than we have been for any recent Spring selling season.

We have a strong finished lot position and an attractive cost basis, and we continue to bring new communities to market which reflect extraordinarily competitive finished lot costs due to our excellent low-cost land purchases over the last several years.

January sales are accelerating into the Spring, and we have a supply of spec homes available to meet that demand.

We look forward to a very strong Spring selling season.

We'd like to personally thank all of the DR Horton team.

Let's keep the momentum from January going.

This concludes our prepared remarks, and we now will host any questions you may have.

Thank you.

(Operator Instructions)

David Goldberg, UBS.

Great quarter, guys.

Congratulations.

Thank you, David.

Good morning.

Good morning.

My first question was actually on absorption.

If I got the numbers right, it seems like absorptions were down high-single-digits, community counts up, and obviously pricing is very, very strong in the backlog and in terms of order growth.

Should we see that as a little bit of a change strategically that you're going to let absorptions get a little bit lighter year-over-year maybe if that is the way it falls out, but you're going to hold pricing?

Or is the commitment still very much, let's make sure we drive absorptions through the system and through the communities?

Maybe if you can just talk about the balance at this point.

I think where we are clearly is the same place where we were at the end of the fourth quarter, and that is, we're holding our pricing strong and firm, going into the strong selling season.

We feel like there's a limited supply of new homes on the market.

I think as we move into the strong selling season that we'll be able to continue to maintain our pricing, if not slightly increase it.

We don't see any real reason as we said at the end of the fourth quarter, David, to begin discounting early.

There's no use to over react.

We think we're in an extraordinarily strong position.

Based upon our sales in January and especially this last week, we feel very good about the strong spring selling season and our ability to continue to maintain our pricing stability and raise prices.

That's very helpful.

Then maybe you guys can comment on the Regent Homes deal.

If I got the numbers correctly in the dialogue, in the prepared remarks, you paid just over a book it sounded like, maybe a slight premium for [off-book].

What's the deal flow look like, especially after the second half of last year?

A little bit of uncertainty heading into this year?

Are you finding the deals will pick up in terms of M&A and the willingness of maybe private builders to be flexible on pricing, is that changing out there right now?

We are seeing a lot of opportunities as we have been, and we're evaluating them.

There was a bit of pause in the sales environment late last summer into the early fall.

That perhaps did bring a few more people to coming out and trying to look at their alternatives and options.

We continue to look at opportunities, and hopefully we'll continue to be successful finding the right acquisitions.

We're not stressed to have to do any one given deal.

We're looking for the right thing that fits strategically with what we see as a Company, and improving our footprint, and our capabilities.

That's helpful.

Thank you guys.

Congrats again.

Adam Rudiger, Wells Fargo Securities.

Hi, good morning.

It was interesting to note in your press release you specifically called out the move-up buyer as an area of strength.

I was wondering if you could elaborate on that a little bit more, and also address what you're seeing in the first-time buyer?

Clearly, we opened Emerald Homes probably about six months, longer than that, nine months ago, and we're bringing that into fruition in a number our divisions.

That's focusing on the higher end, and that product line has met with a lot of strong demand in the marketplace.

We're expanding it into more and more divisions, and we expect to continue to grow that, to the point where it'll become a significant portion of the Corporation on a go-forward basis.

Okay.

In terms of the first-time buyer though, I don't ever want people to think that, that's not a core part of our business as well.

The first-time buyer and the first-time move-up buyer has been our bread and butter for many years, and we're going to continue to focus on those segments as well.

But we have seen an opportunity to expand our product offering, so we're offering more things to more people in many of our markets.

I guess from a demand perspective, can you discern any different trends between the segments?

I think we're seeing some improvement in the move-ups, simply because we've added that product line.

It's really hard for us to gauge what the incremental demand in that is overall.

For our business, it's been an increasing portion of demand.

Okay.

Don, it sounded to me like in your tone, when you were talking about accelerations into January was that was a little bit more than what you might see normally.

Is that correct?

I would relate it to specifically my expectations, and as you know, I'm a more conservative person.

I would tell you that in January, and especially this last week, that our sales have been better than I had expected.

I'm excited about where we are.

I feel like that we're right on the cusp of a strong selling -- spring selling season, and for my own personal perspective, I think the spring selling season has started a little early, for our Company, and that's a very positive thing that I'm seeing.

Okay.

Thanks for taking my questions.

Sure.

Mike Roxland, Bank of America Merrill Lynch.

Thanks very much.

Congrats on a very good quarter.

Thank you.

Can you just talk about specific trends during the quarter?

Was any one month particularly better?

And if so, what do you think drove that?

It sounded like you didn't increase your incentives at all, so what did you see as the quarter played out?

Really our sales pace through the quarter was fairly consistent.

Each month of the quarter was up on a year-over-year basis, so we saw just very consistent sales trends, and then we've seen that accelerate in the month of January.

I also think that the buyer is becoming more accustomed to the current mortgage rates.

If you recall, back a couple of quarters ago, there was a pretty adverse reaction to the increase in mortgage rates, even though they were slight, and they're still historically low by anybody's standards.

But frankly over the last four to six months, the buyer's become accustomed to the mortgage rates and I think that, that will be less and less a factor as we move into the spring selling season and FY14.

And you've seen that in terms of your traffic as well, that traffic has accelerated?

Yes.

Got you.

Last question, just quickly, can you help us frame how we should be thinking about rising rates and really the impact on your business?

Obviously, we don't expect another spike in rates but rates should head higher this year alongside, obviously, the Fed tapering.

At what point should we expect to see more notable impact on your business?

Should we expect you to increase your focus on move-up luxury buyers in anticipation of rates going up?

I personally believe that rates are going up, as I've said for a number of quarters although they haven't gone up significantly.

I don't believe rates are going to go up significantly, and the way that I look at it today, the affordability index is still at one of the highest it's been in many, many years.

I look at the current opportunity for the buyers to buy a home, at still reasonable prices relative to where they've been on an historical basis, and where the mortgage rates are that it's certainly a great time to buy a home.

I think a lot of buyers are continuing to accept that and believe that.

We've looked at numerous charts over the past few years, and the tightest correlation in terms of new home sales isn't with interest rates, it's with jobs.

If interest rates are rising because the economy is improving, because more people are employed, we view that as a strong [positive] for our business.

Got you.

Thanks for the color.

Good luck in the quarter.

Dan Oppenheim, Credit Suisse.

Thanks very much.

It sounds like you're in great shape in terms of being prepared for the demand this spring season.

I was wondering, Stacey, you'd talked about the higher backlog conversion in based on the specs there for the March quarter.

I was wondering how much of that in terms of what you're doing in specs is really for the first-time buyers in terms of, just call it the 2/5 of the business there, versus the higher-price points?

With the first-time buyers, what are you typically seeing in terms of timing from contracts and [lien] to closing?

More of our specs are probably going to be targeted toward the first-time buyer and first-time move-up buyer.

In terms of time to contract, I don't think we're seeing anything that's significantly different.

Would had expected, as the economy recovery and the demand recovers, that we'd seen more build to order, and we actually did see our backlog conversion rate slowing down some.

We're still running above historical trends, so we're still seeing a more compacted contract to close than we've seen historically.

And still, with the number of changes in the mortgage underwriting guidelines it's taking longer to qualify a buyer than what it has in the past.

We're processing those as quickly and as efficiently as we possibly can, but that is a slowing process to our business.

Great.

Then in terms of the comments, in terms of the better trends in January, especially this past week, any regional color you can offer in terms of where you saw pockets of strength?

Dan, I have passed that stage in my life.

I'm going to pass on that question.

We just look at the business overall, and I leave it to other people to make the commentaries on various markets and grade the markets.

Thank you.

Michael Rehaut, JPMorgan.

Hi.

Good morning, everyone.

Good morning.

First question, just wanted to dig in a little bit more, Don, on your comments, regarding sales trends in January, and how you're thinking about the spring.

Given that sales pace is still down year-over-year, obviously with some of the shorter term comps and recent gyrations earlier this year with the mortgage environment, in terms of your expectations, you're obviously looking forward, as you said, to a strong spring selling season.

But as that comps against last year where it was also a very strong selling season, are you thinking more that you'd be happy matching on a sales-per-community basis the results of the year-ago, and that would certainly qualify as a strong season?

Or are you actually looking for year-over-year improvement on a sales pace basis?

We're constantly looking for year-over-year improvements on a sales basis.

But to your specific question, we're always trying to increase our absorptions on a per-community basis.

That's our best leverage of our SG&A.

That's a focus of each one of our communities, so we are focusing on how we penetrate each market deeper but also how we increase our absorptions on a community-by-community basis.

I would add one thing on that.

If you look at our West region, we actually have been raising our sales prices and really improving our operating margin, but we're not focused on absorptions in that region just because of the lot supply dynamics there.

There's always the nuance that we're going to approach our business differently based on the different market conditions everywhere.

It may not be a one-size-fits-all answer.

Okay.

I appreciate that.

Then just some clarification, if possible.

Don, you mentioned about SG&A, you expect it to increase seasonally in the second quarter.

Just wanted to clarify if that was in dollars, or on a percent of sales basis, relative to 1Q?

Also, if you could give what the community count was in the first quarter, sequentially in the year-over-year, in terms of the growth, as you have in the past?

On the SG&A, certainly as a percentage, but certainly not in terms of dollars.

If you'll notice that our Q1 SG&A dollars were down.

So as a result, we expect the same thing to happen to us in the second quarter.

The community count?

The community count, on a sequential basis, our average community count was up 2%, and year-over-year was up 13%.

Okay.

But the SG&A as a percentage of sales versus 1Q, on year-over-year, I'd assume you'll have leverage, but sequentially, would that be up as well?

We think on a percentage basis, we'll be up because typically our second quarter is our slowest quarter for closings.

If you take a look at our expectation on our backlog conversion, the 75% would produce slightly fewer units in Q2 closed than what we did in Q1, so our SG&A as a percentage of revenues will be slightly up.

That's our normal seasonality in terms of SG&A.

Thank you.

Stephen East, ISI Group.

Thank you.

Congratulations, guys.

Good morning.

Thank you.

Don, you talked a little bit about SG&A.

If I step back and just look at all of the costs that are rolling through, your gross margin, when I backed out last quarter's warranty benefit, was up pretty significantly sequentially.

One, did that surprise you?

Two, what are the expectations moving forward relative to this past quarter in that?

Then on your SG&A, what's driving that?

We expected it would drop a little bit more than what it's been dropping.

Is it just your infrastructure build, or are you using more dollars on brokers, et cetera, than expected?

Tied into that, what do you all think about cost expectations as we go through [quarter two] 2014?

On our gross margin basis, obviously what we have been doing is we've been holding our prices steady, even though the demand, if you look at our fourth quarter sales and our first quarter sales, we have been able to hold it even in a slow part of the time period.

As Stacey had said earlier, clearly in the West region, as well as other regions, we are not discounting homes, and we're maximizing our prices.

In terms of gross margins, our gross margins are basically close to their historical peak.

But we don't think we're at peak pricing in most of our markets, and we strongly believe one of the factors that will continue to improve our gross margins, actually two factors.

One is our very competitive land positions that we're bringing to market in the form of finished lots.

And secondly, if you take a look at what we think is a constrained or reduced demand, or of inventory of homes out there for the expected demand, I think that we're going to have pricing power because of those two factors but especially the limited amount of inventory that's prevalent in most of the markets today.

I'll let you guys handle the SG&A.

In terms of SG&A, clearly we are prepared for stronger volumes in 2014, so we have been building infrastructure on our sales teams and our production capabilities.

From that standpoint, we definitely are prepared for some stronger volumes.

On a year-over-year basis, we did leverage it 20 basis points, so we are ahead of the pace that we set last year in Q1.

We finished the year at 10.7% last year, so we're on pace to do better than that.

Clearly, we're always looking to leverage SG&A as much as we possibly can.

Our expectation is with higher volumes later in the year that we will leverage it further.

To digress just for a moment, obviously we're expecting to close more units in FY14 than FY13.

So we had to add the additional SG&A particularly on the construction side to get our homes built and have them available for the spring selling season.

As the market continues to improve as we think it will throughout the third and fourth quarters, we've got to have superintendents to deliver those homes.

Okay.

Thanks.

That is a very thorough answer for all of that.

That helps me a lot.

I appreciate it.

Then just the other thing that I had, in your fiscal first quarter, if you look at it sequentially, your orders usually drop about 15% to 20%, versus the fourth quarter.

This time, they were up about 6%.

Blending that with what you've said about the January commentary, is the result in the fourth quarter more a function of the fourth quarter improving -- or the first quarter improving, or the fourth quarter just being much weaker than normal?

No, I think it's a function of the first quarter improving.

Like I said, that improvement has continued over into the second quarter.

We're very happy even though we're focusing on double-digit increases in all of the important metrics, except for SG&A.

The fact that we're up 4% in units and 14% in terms of dollars in our sales, we're very pleased with that.

We continue to feel like there's momentum building, and we're pleased with those numbers.

Okay.

Congratulations on the quarter.

Jay McCanless, Sterne Agee.

Good morning, everyone.

I wanted to ask first on the community count growth numbers you gave.

Should we expect that plus 13% or somewhere in that range to be the growth rate for the rest of the year?

Jay, we would expect it to moderate a bit.

We do expect our community count to continue to be up on a year-over-year basis.

But it may not continue to be double-digit, based on what we can see right now.

But really, what will ultimately happen will depend on what we see in terms of the strength of the market, as we get into the spring and later in the year.

If the strength exceeds our current expectations, we could end up adding some additional communities.

But right now, we'd expect it to stay positive, but perhaps not at the double-digit level.

One of the factors in the marketplace today is that the number of markets have land prices reflecting continued increase in median house prices, and we're very, very pleased with our current land position because we bought before the prices ran up as dramatically as they have.

Clearly, that's what we're expecting in terms of a compliment to our gross margins, because we do have less expensive land than what the market is reflecting in terms of land prices today.

In each of the last two years, we've built our community count by double-digit percentages, each of the last two years, so we've built up to a very good footprint, to be prepared for this year.

We're in a very good position, and really don't feel the urgency to have to continue to increase our community count at the same pace.

That's reflected in our first quarter land spend because basically we had $45 million worth of land spend in the first quarter, so that's less than what we've had for quite some time.

The total land and finish lots were at $213 million.

That is moderating from where we've been.

Okay.

Great.

Thank you.

Stephen Kim, Barclays.

Hey, guys.

A few questions.

First, I was wondering if you could talk a little bit about the spec situation.

I guess first, you talked about the fact that you've got, I think you said 9,300 specs, and that positions you well.

A lot of times, when you have a lot of specs, people sometimes in previous times say that's a bad thing because that means they're going to have to discount.

But in periods when the demand's very strong, you really don't have to discount that much.

I guess if you could help us understand, if sales progress through the first quarter, let's say a little lighter than you anticipate, would there be a point where you might feel you have to accelerate the discounting on those units?

What sort of scenarios are embedded in your expectations, since you're going to be having more specs, as a percentage of your deliveries, I would think, than you did for some time?

First of all, we're in a very strong position given our specs, although our specs as a percentage of our total inventory are nowhere near what our peak specs were at one point in time as a percentage of our inventories.

Our specs as a percentage of inventory increased from 53% to 56% sequentially which is normal process, so that we get ready for the spring selling season.

But we don't share your concern about a weak selling season.

I think there's going to be a strong selling season.

But coming to your specific point, if there were such, currently our spec gross margins are continuing to exceed our build job gross margins.

We feel like that we're in an extraordinarily strong position; given one, our spec count, and two, the margins built into our specs.

So even if we have to discount them, we don't think that we're going to be eroding our overall gross margin significantly in the ordinary course of business.

When we're managing specs in the ordinary course of business, the ones that really will receive more discounts are those that are aged, and that's what we monitor very closely to manage our specs.

Our age completed specs continue to stay at a very low level.

That's helpful.

That's very interesting.

Secondly, regarding your land spend, you pointed out just now that it is really low.

It's actually really the lowest we've seen for a while from you guys.

Some people would take that as a sign of confidence that when you start feeling really good about the business, again, that you might actually start coming back into the market and spending more land -- some more on land.

But from your commentary, it sounds like you're pretty much planning on standing pat for at least the next few quarter -- or the next couple of quarters in terms of land spend at this kind of level.

Is that a fair characterization, or are you guys thinking that the land market is starting to look more interesting here?

It's always interesting.

It has been for 30 some odd years, but I'd say -- where the key in the land side is to be proactive earlier in the market, just like we do on the acquisition side.

I would say to you the wonderful thing about where we are today is we were proactive.

We have some great subdivisions and master plan communities that we're bringing in at lower than current prices, which gives us that pricing power.

We're proactive in the market.

We're always taking a look at opportunities, and I wouldn't describe our land acquisition policy as on the back burner.

We're always out there aggressively looking for quality deals that we can make our return on.

Great.

That's very helpful.

Then lastly, the FHA changes, the loan limit's coming down and what not.

I was just in Florida last week.

It was definitely a topic of conversation but people haven't really been seeing the effect yet.

With your commentary about the last week of January -- or the most recent week of January, it sounds like it's not really having much of a bite on your ability to transact.

Could you comment on what you think the loan limit impact is going to be on your business?

Thanks.

It's probably a smaller impact for us now than it would've been a few years ago because we've already seen the mix of the mortgages that we're writing through our mortgage Company come down significantly in the FHA category.

I think part of that has been intentional as they've raised the down payment for the last three years, and then increased the insurance costs, both on the upfront and the monthly premiums.

The cost of an FHA loan compared to a conventional loan is getting to be in the same ballpark.

If people have the 5%, they're probably going to choose to put the 5% down.

I'm sure there that will be some places that are impacted, some buyers that are impacted, but there are good alternatives for them with the conventional financing that's available as well.

Great.

Thanks very much, guys.

Nishu Sood, Deutsche Bank.

Thanks.

This is Rob Hansen on for Nishu.

Just noticing over the past few quarters your total land supply, on an absolute basis, and on a year supply basis has come down pretty significantly.

I just wanted to see if you could comment on what you think your optimal land supply is here going forward.

Currently, we're sitting on approximately a 2.5 year supply of finished lots, both owned and optioned.

Our total lot supply, both our finished and unfinished, is right at 5 years.

My definition of a conservative but more than adequate land supply is a 5-year supply, and we're right on that number right now.

And 2.5-year supply of finished lots, that gives us more than enough lots to meet the demand, and meet the construction cycles and so forth on the land development side.

We think we're well positioned.

Those are good numbers, 2.5 and 5.

Okay.

Given the comments you've made on land prices, and a little bit of a slowdown in land spend, I guess you're right around where you need to be in terms of total land.

But does this mean that acquisitions may be a better way to pick up land in the future, given your other comments?

Not to create a high hurdle for Mike sitting over here to my left, but I guess it all depends on the premium he has to pay for (laughter) the lot positions.

Absolutely.

It's one strategy to acquire greater land position, but it's also, acquisitions give you sometimes a functional capability you didn't have before.

Or gets you quicker to achieving efficiency in a given functional capability beyond just acquiring land or lots.

I'm always looking at land and lot option positions, and while the spend did come down in the first quarter, that is looking at a discrete three-month window.

Though that's a short window to look at, and it was much higher in the prior quarter, and a little bit lower in the quarter before that.

It is going to fall up and down, as we see the opportunities in one various land transaction close.

It's hard to look at any one three-month period and extrapolate to that.

Plus, our development spending has increased as we're bringing more of those land purchases from last fiscal year into production this year.

The key in the land acquisition business is to be able to be opportunistic, based upon your inventory of land and lots to supply your expected housing production.

We're right in the right place, right now, in terms of where we brought and when we bought.

We don't have to be desperate to go out and replace lots.

We see land transactions taking place in several markets that I've been in recently where it doesn't make any sense to us the prices of our competitors are paying for land prices.

Again, we feel like that 2.5- and 5-year supply at the prices we have, and we can replace those, as we see fit and as demand dictates, but we don't have to over react on the land purchase side.

All right.

Thank you very much guys.

Ken Zener, KeyBanc Capital Markets.

Good morning, all.

Good morning.

Don, the question of seasonality, as we look at the home builders right now, usually since 1Q decelerates rates from 4Q, it's not abnormal for 2Q to go up from 1Q.

Our estimate is you guys go up around 50% sequentially.

Is that somewhat accurate?

Is that a reasonable benchmark for our and perhaps your expectations, if a season is doing well or not?

For absorptions per community.

I would answer that question yes.

Clearly.

Okay.

Now, as we're seeing differences by regions, so the Southeast, in terms of backlog, it had come down, versus other places like Southwest, excuse me, had come down versus the East.

Could you perhaps comment if those absorptions are different by the region, or why we're seeing such swings in those particular markets?

Thank you.

I think in particular, if you look at the Southwest, basically our ASPs are out there are flat.

Essentially the Southwest for us is Phoenix and New Mexico, or Arizona and New Mexico.

As a result, I just came out of Phoenix and Tucson, and if you look at Phoenix specifically, at this point in the year, they have about 25,000 or 26,000 existing homes on the market, compared to 16,000 last year.

That's a lot of competition for all sellers.

Secondly, that the ASPs in calendar year 2013 in Phoenix increased 25%, and that's not expected to happen in fiscal year, or calendar year 2014.

As a result, I think that pricing ran up dramatically and quickly in Phoenix, and it's plateaued.

And I think that it will stay flat to slightly decrease in Phoenix, and maybe to a certain extent in Tucson.

But that's the wonderful thing about where DR Horton is, and in our footprint because we're well diversified, and we want to be a bigger builder in Phoenix, but right now is not the right time given where the demand and the pricing point is.

It's a good market for us but it's not a great market, and it's going to be weaker, I think, in 2014 than what it was in 2013.

You're asserting rising existing inventory is hurting the new supply demand?

I think if you're a seller in the marketplace, and you have 26,000 homes on the market versus 16,000 homes, I think that notwithstanding the fact there's a percentage of the buyer out there who is a new home buyer and not an existing home buyer, that nevertheless, that additional inventory in the marketplace creates a more competitive environment.

Do you see pressure from what had been investor-related properties coming back to the market, or are they in just different locales?

Thank you.

I think it's difficult to ascertain what the level of investor ownership is in each one of these markets.

I do believe that the investors are still holding.

But as the ASPs flatten, year-over-year, I think that will create more opportunities -- or create more reason for those owners to bring those units to market.

You could face more increased competition, especially in some of the Sun Belt cities like Phoenix and Las Vegas and so forth, where there has been a huge investor participation.

I think there's a possibility those units will start coming back to market and compete with all sellers.

Thank you for your comments.

Joel Locker, FBN Securities.

Hi, guys.

I just was curious on your tax rate.

It was around 35%.

What do you expect going forward into the rest of 2014 and 2015?

For the remainder of 2014, we would expect to be between 35% and 36% this year.

The primary difference this year is that we expect to be able to fully utilize the domestic production activities deduction, which has been limited for the last few years, as we have been utilizing our NOL carry-forward.

We've now fully utilized our Federal NOL carry-forward, so now we'll get that deduction which helps to offset our overall tax rate, so our expectation's between 35% and 36%.

And what about 2015?

Is that going to be any different?

Based on what we can see right now, I wouldn't guide to anything really different than that.

There could be changes between now and then.

But as of right now, I wouldn't see any significant difference from 2014.

All right.

Thanks a lot.

Bob Wetenhall, RBC Capital Markets.

Good morning.

Your average order price was up 10% year-over-year which is fantastic, but it was sequentially flat.

I wanted to get a view, with the opening ASP for orders at $275,000, what should we expect for modeling purposes, and how should we think about it moving forward through the rest of the year?

We've seen very good average selling price increases throughout 2013.

We have stated previously that while we do expect to see some further pricing power into 2014, depending on the strength of the market, we don't expect the prices to continue to increase at the same rate.

As we sit here today, seeing early results that points towards a strong spring, we would expect to continue to see some further pricing increases over our current levels, but perhaps not the same pace we saw last year.

Would mid-single-digit for the full year be a good starting point for thinking about it?

If you look at the course of history, if you have sales price increases in the mid-single-digits, that's a very solid year.

We would certainly take that.

Great.

We would expect more, but accept that.

Okay.

Great job on gross margin.

Huge move.

It also sounds like it's sustainable which is a great setup for 2014.

Can you just give us a framework for thinking about operating margin on a net basis, how you see that moving through the year?

Obviously, you have a tail wind with the gross margins, but what's the leverage look like on SG&A and how much more upside should we be thinking this year in a good set-up to the spring selling season?

Volume is good.

Pricing is strong so far.

Should we be expecting big things out of operating margin performance?

As you well know, the whole year will really be determined by how strong the spring selling season is.

Certainly, there is some uncertainty about where it could go.

But where we stand today, with where our backlog margins are, with what we see in our communities across our operation, we feel good about our current margin levels.

We feel like we should be able to sustain them in the current range, and we certainly expect to continue to be able to leverage SG&A.

We've got 20 basis points in the first quarter.

We would expect to continue to get further leverage through the year and improve on our previous year's operating margin.

Past that, it's really going to depend on the strength we see in the marketplace as we get into the spring.

A lot of that is a function of the fact that we've been steadfast and holding onto our margins through the fourth quarter of FY13 and clearly the first quarter.

I will say with the demand that we're experiencing in the first several weeks of January, I feel like with the limited inventory that's prevalent in the marketplace today, that we should be in a pricing power position -- strong pricing power position, in most of our markets on a go-forward basis for FY14.

You guys have commented traditionally gross margin has been between 20% and 22%.

You obviously beat that this quarter.

Is there any chance we're seeing a shift toward a higher gross margin range above that 20% to 22%, maybe like 21% to 23%?

Thanks so much.

It depends upon a couple of factors.

If we continue to do a good job of controlling our costs, our stick and brick costs, as we have been doing relative to our sales prices.

As well as, as I continue to say, everything that I read, everything that I see in the marketplaces, there's a limited supply of new homes on the marketplace.

And if the demand is as good as I would think it's going to be in the spring FY14 selling season, we will have an opportunity to expand those margins.

Thanks very much.

Will Randow, Citi.

Good morning and thanks for taking my question.

In regards to your financing business, with implementation of the ability to payroll, just about 20 days ago, can you talk about any added costs that we should expect, and how that may impact margins?

Have you seen that impact, closings of those mortgages as well?

So far, we've not seen any impact on the closing of the mortgages.

We have added some level of overhead for additional staffing because we have implemented additional review processes at different points during the originating process to make sure that we are complying with the new regulations.

The customer's ending up with essentially the same mortgage product, and we've added a few more costs to deliver that product.

Thanks for that, Stacey.

Then just to follow up to an earlier question.

Can you talk about the top five categories where you're seeing incremental pressure on input costs?

It sounds like land might be one of them, but might be stabilizing.

First of all, it's not impacting our input cost, simply because we are not having to buy land at those higher prices today.

Clearly, we see a little bit of increase, potential increase on the drywall side.

I don't know how much that's going to be, but we think it's going to be a low total dollar amount per home.

Lumber prices right now have been working in our favor, clearly.

The one thing that is pretty constant in our business is that the lumber companies know that we have a strong spring selling season, and typically lumber prices will increase in the spring selling season as the demand increases.

I would anticipate lumber will do the same thing that it has historically done for some 30-odd years that I've been in the business.

They'll continue to raise prices in the spring.

Other than that, those are my reflections.

I don't know if you guys have any additional thoughts.

I'd just add labor to the bucket in selected markets, just based on the construction level that we're seeing there and the availability of labor among the various trades, but that is not a consistent across the nation increase.

Just as a point of order, if you take a look at our year-over-year stick and brick cost per square foot, they're up less than what our year-over-year increase in our revenue per square foot is.

We're continuing to be able to raise prices at a faster pace than what we are experiencing in cost increases.

Thanks again, and great quarter.

Alex Barron, Housing Research Center.

Good morning, guys, and strong results.

Thank you.

Good morning, Alex.

Good morning, Don.

Don, I wanted to just get a little bit better understanding of your enthusiasm for the spring selling season because last year, spring selling season was pretty darn strong.

Mortgages were 3.5%, or lower.

Prices were much lower than they are today.

I guess I'm just trying to understand, do you think we're going to be able to see higher sales than we did a year ago, or can you help me out with that?

We personally are counting on higher sales this year than a year ago.

A couple of factors that I think are impacting that, one is that even though not overly excited about the growth in the economy -- the national economy, the one thing that is accurate is that there seems to be a slowing improvement in the overall economy.

That's good for our business.

I think that translates into increased jobs, especially permanent jobs, or full-time jobs, that will be additive to our business.

Also, as I've mentioned earlier, there's been an adaptation to the current mortgage rates by the buyer over the last four or five years -- or four or five months, I should say.

I think that's a positive to our business, and I also believe that when buyers are going into communities and looking for new homes, and there's not an excess inventory of new homes, I think that's a positive factor.

One of the most negative things about a selling environment is that if there's excess inventory in a subdivision, or in the market in particular, because then there's very little urgency on the part of the buyer.

I think the supply side is definitely helping the demand side, if no other reason from a psychological point of view is that there's not a lot of excess inventory out there.

That's helpful.

The other thing that I was trying to I guess understand better was it seemed like obviously your margins were better, and I think you guys noticed that it was because incentives were lower than a year ago.

I would have thought it the other way around because it seems like the market slowed down at the end of 2013, and many builders were increasing incentives it seems versus the previous year.

I thought margins would have been under a little bit of pressure, but it seemed like in your case that wasn't the case.

How is it that you think incentives were lower this year than last year?

I think largely, as we said, Alex, from our fiscal year end 2013 conference call, is that we were not going to over react.

We looked at the inventory levels across the country, and our markets, and we didn't see any excess inventory out there.

As a result, and especially places like the West in particular, all the way from Seattle, to Portland, and Northern California, to Southern California, there's just not a lot of inventory out there, both in terms of finished lots nor finished homes.

We decided that we would not over react and that we would maximize our margins in that area.

If you take a look at the West in particular, our average sales price in the West was up 21%, and our operating margins increased from 9% to 15%.

I feel like that we called it perfectly out there, and we are in a strong position, like I said, in almost all of our markets, and we're going to let the market come to us.

Okay.

That's great, and the last one for Bill.

Bill, you can help me on the interest, amortized on cost of goods sold versus interest incurred?

Are those [going to converge] towards each other at some point later this year, or not until next year you think?

I would expect that gap to narrow over the next year, as we began capitalizing all of our interest costs beginning in Q3 of last year, once our active inventory exceeded our debt.

The amount of inventory and interest in inventory has started to rise a bit.

I would expect that gap between interest incurred and amortized cost of sales to narrow a bit over time.

Thanks.

Great job.

Thank you, Alex.

Jim Krapfel, Morningstar.

Hi, good morning, everyone.

What were the selling prices and costs per square foot in your closings and new orders?

For closings, our revenue per square foot was $115 for the first quarter.

How much is that up on a year-over-year basis?

On a year-over-year basis, that was up 8.4%

8.4%, and then the cost per square foot?

It was up about 8.2%.

And that's just stick and bricks.

That's stick and bricks.

That's vertical construction costs.

Right.

We do that on homes closed because on homes sold, it's not final-final.

Closings, we can actually measure that and know that's the final number.

Okay.

As we said earlier, we're continuing to raise our prices faster than our costs are increasing.

When do the higher underwritten land deals really start to flow through the P&L?

We anticipate third and fourth quarters of this fiscal year, and then throughout FY15.

Okay.

Final question, how much would you estimate you're getting in margin benefit just from previously impaired land?

That's very little.

That's been declining every quarter for the last three years.

It's pretty minimal now.

The majority of our closings are on more recent land.

Right.

Yes.

Okay.

One last question I'll throw in there.

What's the latest activity with small private builders?

Are you seeing them become a greater participant in the land market?

I think the land market for most of the small builders is still a difficult proposition, simply because of the fact that the banks are not lending.

A lot of those smaller builders are still relying upon forming LLCs and finding private investors to finance them for them.

Obviously, those are at higher interest rates than what you could get from a commercial bank, except the commercial banks are not lending.

As a result, we still believe the public builder has a very advantageous opportunity, both on the land side as well as the cost side.

And the houses, the smaller builders, are not that significant a competitive environment for us simply because of the fact that they lack financing.

You don't expect that to improve for them going forward the next year or two?

At some point in time, I presume the banks will begin lending, but I don't see that imminent on the marketplace.

One of the things that Mike is seeing on the acquisition side are smaller and medium sized builders who are having difficulty acquiring financing.

As a result, they're soliciting or interested in I guess liquidating their companies, selling their companies.

It's very competitive on the financing side out there for small people.

Thanks.

That's very helpful.

Great quarter.

Thank you.

Buck Horne, Raymond James.

Hey, thanks for taking the last question here.

I want to go back to the spec inventory that you guys have and just could you help me characterize what kind of specs you're building at this point.

Whether your mix of specs is more entry level focused, or more of the move-up product that's going our the door?

And to what extent your view of mortgage availability this year is influencing the product mix of specs that you're building right now?

Our specs are across all subdivision, all product lines, and all price lines.

Clearly, from a volume perspective, we are going to have more of them on the entry level and lesser in the move-up buyer, and even lesser into the second- and third-time buyer on our [Emerald] side.

But clearly as Stacey said earlier, the heart and the core of DR Horton is still that first-time and to a lesser extent second-time home buyer, but that's the vast majority of our focus.

That's where our specs are.

Okay, and separate topic.

Just going to the idea of investors in the markets, have you been approached by any single-family rental operators that are out there, some of the larger guy, or even smaller guys, that may want to buy new homes, and build them for rent purposes?

Is that something you would consider doing?

We have not been approached with that on a large scale.

That happens from time to time.

We're in the business of building, selling, and closing single-family homes to individual home buyer.

We've avoided selling blocks of homes to investors.

That's not our business, and that's not a business that we want to be in.

Okay.

All right.

Thanks a lot, guys.

Congratulations.

Thank you.

That does conclude today's question-and-answer session.

I would like to turn the floor back over to Mr. Tomnitz for closing or further comments.

Yes, thank you very much.

DR and I would like to thank all of our DR Horton employees.

We've done a phenomenal job over the last three or four years.

I can't say enough kudos to you.

We continue to outperform our competitors.

I've been here for 30 years.

We've never been better positioned than we are today for the spring selling season, in terms of opportunistic land purchases that we made, finished lot costs that we have in our land development deals, as well as our inventory that's in the field.

All of our sales people are totally in a position of power because we're well inventoried with specs in the communities, and we ask you to do the same thing that we've always asked you to do, and that you've done, sell our specs and close them, and let's move on to a fantastic year.

We're very optimistic about FY14.

It's the culmination of a lot of hard work over the last four or five years, and it's time to slam dunk it.

Thank you very much.

Thank you.

That does conclude today's teleconference.

DR Horton would like to thank you for participating today.

You may disconnect your lines at this time, and have a wonderful day.