霍頓房屋 (DHI) 2014 Q4 法說會逐字稿

Good morning, and welcome to the fourth quarter 2014 earnings conference call of D.R. Horton, America's Builder, the largest builder in the United States.

(Operator Instructions)

As a reminder, this conference is being recorded.

I will now turn the call over to Jessica Hansen, Vice President of Investor Relations for D.R. Horton.

Please go ahead, Jessica.

Thank you, Kevin.

Good morning, and welcome to our call to discuss our fourth quarter and FY14 financial results.

Before we get started, today's call may include comments that constitute forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995.

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

All forward-looking statements are based upon information available to D.R. Horton on the date of this conference call, and D.R. 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 D.R. Horton's annual report on Form 10-K, and our most recent quarterly report on Form 10-Q, both of which are filed with the Securities and Exchange Commission.

For your convenience, this morning's earnings release can be found on our website at investor.

DRHorton.com, and we plan to file our 10-K within the next week.

Also, after the conclusion of our call, we will be posting some supplementary historical data that is not readily available on our public filings on the Investor Relations section of our website, for your reference.

Now, I will turn the call over to David Auld, our President and CEO.

Thank you, Jessica, and good morning.

In addition to Jessica, I am pleased to be joined on this call by Mike Murray, recently promoted to Executive Vice President and Chief Operating Officer; and Bill Wheat, Executive Vice President and Chief Financial Officer.

Before we review our business and financial results with you, I would like to take a minute to recognize Don Tomnitz on his recent retirement, and thank him for his leadership, advice and support over the years.

On behalf of the entire D.R. Horton team, I would like to congratulate him on an outstanding career of 31 years with the Company, 15 years as our CEO.

During Don's tenure, we grew to become the largest home builder in the United States, and have maintained that position for over 12 years.

We look forward to still working with Don in a consulting role, as he continues to be involved in a number of areas of our operations.

Now, on to our results.

In 2014, while demand for new homes across most of our markets remained relatively stable, we generated greater than 20% growth in both revenue and pretax income by successfully leveraging our platform as the nation's largest and most geographically diverse home builder.

Our national market share is the largest in Company history.

We have closed 46% more homes than any other builder in the recently reported 12-month period, and we are positioned to generate further growth.

In the fourth quarter, our homes sold and closed increased 38% and 25% respectively, and we had another good quarter of profitability, with $250.8 million of pretax income, and a 10.1% pretax operating margin.

Our increased community count, well-stocked supply of land, lots and homes provide us with a strong competitive position.

Based on a 25% increase in the value of our sales backlog, and our October sales growth that exceeded 20% on a year-over-year basis, we expect further double-digit growth in home closings, revenues, and pretax profits in 2015.

Our continued strategic focus is to leverage our competitive position to generate double-digit growth in both revenue and pretax profits, while improving our cash flows and increasing our returns.

Mike?

Net income for the fourth quarter increased 19% to $166.3 million, or $0.45 per diluted share, compared to $139.5 million, or $0.40 per diluted share, in the year-ago quarter.

Our consolidated pretax income increased 24% to $250.8 million in the fourth quarter, compared to $202.8 million in the year-ago quarter.

And home building pretax income increased 25%, to $236.6 million, compared to $189.4 million.

Our fourth-quarter home sales revenues increased 33%, to $2.4 billion, on 8,612 homes closed, up from $1.8 billion on 6,866 homes closed in the year-ago quarter.

Our average closing price for the quarter was $279,100, up 6% compared to the prior year, primarily driven by a 4% increase on our average home size, and a small increase in our average sales price per square foot.

Bill?

The value of our net sales orders in the fourth quarter increased 41% from the year-ago quarter, to $2 billion.

And homes sold increased 38%, to 7,135 homes, on a 10% increase in average active selling communities.

Our average sales price on net sales orders in the fourth quarter increased 2%, to $281,700.

The cancellation rate for the quarter was 28%, down from 31% in the year-ago quarter.

The value of our backlog increased 29% from a year ago, to $2.9 billion, with an average sales price per home of $289,100.

And homes in backlog increased 21%, to 9,888 homes.

Our backlog conversion rate for the fourth quarter was 76%.

We expect backlog conversion rate for the first quarter of FY15 to be around 75%, which is higher than our long-term first quarter average.

We also expect our home closings for the full year of FY15 to increase 20% to 30% compared to FY14, based on the current relatively stable housing market conditions.

Please note that percentage changes in our average active community counts, and our quarterly net sales orders by region for FY13 and FY14, will be included in the supplementary data we referenced earlier, which can be found on the Investor Relations section of our website after this call.

Jessica?

We continue to experience strong growth and profitability in the heart of our business and our D.R. Horton branded communities, which accounted for the substantial majority of our sales and closings this quarter.

We are also pleased with the progress and performance of the rollouts of our Express Homes and Emerald Homes brands.

Our Express Homes brand, which is targeted at the true entry-level buyer focused primarily on affordability, is now being offered in 24 markets and eight states, with the significant majority of our Express sales and closings to date coming from Texas and the Carolinas.

This quarter, Express accounted for 10% of our homes sold, 6% of homes closed, and 4% of home sales revenue.

The average closing price of an Express home in the fourth quarter was $169,000.

For the year, Express accounted for 7% of our homes sold, 5% of homes closed, and 3% of home sales revenue.

Customer response to our affordable Express product offerings has been extremely positive, and we expect to have Express Homes communities open in the majority of our markets by the end of FY15.

Emerald Homes, our brand for higher-end move-up and luxury communities, is now available in 34 markets across 14 states.

In the fourth quarter, 7% of our homes closed were priced higher than $500,000, accounting for 17% of our home sales revenue, up from 5% homes closed and 13% in revenues in the same quarter last year.

For the year, 6% of our homes closed were priced higher than $500,000, accounting for 16% of our home sales revenue, up from 4% in homes closed, and 10% revenues in FY13.

We plan to continue to steadily introduce new Emerald Homes communities across more of our markets in FY15.

Mike?

Our gross profit margin on home sales revenue in the fourth quarter was 20.5%, down 20 basis points sequentially from the third quarter.

The sequential margin decrease was primarily driven by a 70 basis point impact from cost increases in excess of sales price increases, and changes in our product mix.

The decrease was partially offset by a margin increase of 30 basis points from lower relative warranty and litigation costs, 10 basis points from lower interest and property tax costs, and 10 basis points from a lower purchase accounting impact from acquisitions.

Our fourth-quarter incentive level was essentially flat with the third quarter.

Compared to the prior year, our home sales gross margin decreased 140 basis points, primarily due to the combined effect of cost increases in excess of sales price increases, and higher incentives.

As we have discussed on previous calls, our incentive levels were extremely low in most markets during FY13 and early 2014.

But incentives returned to normal levels in many markets during the course of 2014, with significant variations across our communities.

With the very strong performance of our Express communities so far, we expect this brand to grow quickly as a percentage of our product mix, which will help us generate strong growth in both revenues and profits, but will likely bring our average gross margin percentage down in FY15 from our current level.

In the current stable housing environment, we generally expect our average home sales gross margin to be around 20%, with quarterly fluctuations that can range from 19% to 21%, due to product and geographic mix, and the relative impact of warranty, litigation, and interest costs.

As a reminder, our reported gross margins include all of our interest costs.

Historical detail on the components impacting our home sales gross margin will be included in the supplementary data on our website after this call.

Bill?

Home building SG&A expense for the quarter was $241 million, compared to $186.6 million in the prior-year quarter.

As a percentage of home building revenues, our SG&A improved 40 basis points to 9.9% this quarter, compared to 10.3% in the prior-year quarter.

FY14 SG&A, as a percentage of home building revenues, was 10.6%, compared to 10.7% in FY13.

During 2014, we made significant investments in our SG&A infrastructure to support our current and expected growth, and we expect to leverage these SG&A investments in 2015, and move closer to our annual SG&A goal of 10% of home building revenues.

In the first two quarters of FY15, we expect our SG&A as a percentage of home building revenues to be seasonally higher than in our third and fourth quarters, as we typically deliver fewer homes in the first half of the fiscal year than in the second half.

Jessica?

Financial services pretax income for the quarter increased 6%, to $14.2 million, from $13.4 million in the year-ago quarter.

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

FHA and VA loans accounted for 42% of the mortgage company's volume this quarter, down from 45% in the year-ago quarter.

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

Select historical data from our mortgage company, including loan product mix, will also be included in the supplementary data on our website after this call.

David?

At the end of September, we had 20,600 homes in inventory, of which 1,500 were models, 11,200 were spec homes, and 3,900 of the specs were completed.

Our construction-in-progress and finished homes inventory increased by $159 million during the quarter.

Our fourth-quarter investment in lots, land, and development totaled $618 million, of which $353 million was to replenish finished lots and land, and $265 million was for land development.

In 2014, we invested $2.3 billion in land, lots, and development.

At September 30, 2014, our lot portfolio consisted of 125,000 owned lots, with an additional 59,000 lots controlled through option contracts.

69,000 of our lots are finished, with 32,000 owned and 37,000 optioned.

Our 184,000 total lots owned and controlled put us in a strong competitive position in the current housing market, with a sufficient lot supply to support strong growth in sales and closings in future periods.

As we invest in new communities for all three of our brands, our main underwriting criteria is a minimum annual pretax return on inventory of 20%, defined as pretax income divided by average inventory over the life of the community.

We expect each community, regardless of brand, to achieve this target by optimizing the balance between absorptions, margins and inventory levels that is most appropriate for that community.

For reference, our total home building pretax return on inventory has improved 560 basis points over the past two years, from 5.5% in 2012 to 11.1% in 2014, and we expect to make further improvement on this metric in 2015, as we improve our pretax profitability and manage our inventory levels efficiently.

Mike?

During the fourth quarter, we recorded $3.2 million in land option charges for write-offs of earnest money deposits and due diligence costs for projects that we do not intend to pursue.

We also recorded $18.1 million of impairment charges, of which $15.7 million were in our East region, primarily related to long-held, inactive and underperforming projects in the Washington, DC area, that we intend to sell to improve returns by redeploying the capital into more productive assets.

Our inactive land held for development of $332.8 million at the end of the year represents 14,000 lots, down 17% from June and down 33% from a year ago.

We are proactively working through these older, unproductive assets to redeploy the capital, thereby improving the cash flows and returns.

We continue to formulate our operating plans for each of our remaining inactive land parcels, and we expect that our land held for development balance will continue to decline during FY15.

We will continue to evaluate our inactive land parcels for potential impairment.

These evaluations may result in additional impairment charges in future periods, but the timing and magnitude of these charges will fluctuate, as they have in the past.

Bill?

At September 30, our home building liquidity included $632.5 million of unrestricted home building cash, and $582 million available capacity on our revolving credit facility.

We had $300 million of cash borrowings, and $92.7 million of letters of credit outstanding on the revolver.

Our gross home building leverage was 39.4%, and our home building leverage ratio net of cash was 34.5%.

During the quarter, we repaid $137.9 million of our senior notes at their maturity in September.

Our home building debt maturities in FY15 are $158 million, and our public notes outstanding at September 30 totaled $3 billion.

Our fiscal year end shareholders equity balance was $5.1 billion, and book value per share was $14.04, up 12% from a year ago.

Jessica?

Looking forward, we would like to highlight some of our future expectations, which are based on the current relatively stable housing market conditions.

In FY15, we expect to close between 34,500 and 37,500 homes, and generate consolidated revenues of between $9.5 billion and $10.5 billion.

We anticipate our home sales gross margin for the full year of FY15 will range from 19.5% to 20.5%, with potential quarterly fluctuations outside of this range.

We estimate our home building SG&A expense to range from 10 to 10.3% of home building revenues for the full year, with the first two quarters of the year being higher than this range, and the third and fourth quarters at the low end or below the annual range.

We expect our financial services operating margin to range from 25% to 30%.

We are forecasting our FY15 income tax rate to be between 35% and 36%, and our diluted share count to be approximately 370 million shares.

For our first fiscal quarter of 2015, we expect our number of homes closed to approximate a beginning backlog conversion rate of around 75%.

We anticipate our first-quarter home sales gross margin will be around 19.5% to 20%, subject to potential fluctuations from product mix, warranty and interest costs, and we expect our homebuilding SG&A in the first quarter to be around 11% of revenues.

David?

In closing, our fourth quarter and 2014 growth in sales, closings and profits, and a relatively stable market, is a result of the strength of our operating platform, and we are excited about our opportunities ahead.

This quarter, the value of our sales and closings increased by 41% and 33% respectively, and we generated another solid quarter of profitability, with consolidated pretax income of $250.8 million, on $2.5 billion of revenue.

For the year, the value of our sales, closings and backlog increased by 27%, 30%, and 29% respectively, and consolidated pretax income increased 24%, to $814.2 million, on $8 billion of revenues.

We also made considerable progress this year toward our long-term goal of producing positive cash flow from operations.

While still growing the business, our cash used in operations of $661 million improved by $570 million from last year's level, and we expect further substantial progress in our cash flow performance in 2015.

We remain focused on growing both our revenues and pretax profit at a double-digit pace, while improving our cash flows and increasing our returns.

We are well positioned to do this, with our solid balance sheet, industry-leading market share, broad geographic footprint, diversified product offerings across our three brands, attractive finished lots and land position, and most importantly, our tremendous operational team across the country.

We would like to thank all of our employees for their continued hard work and accomplishments this year, and we look forward to working together to continue growing and improving our operations to make 2015 an even better year.

This concludes our prepared remarks.

We will now host questions.

Thank you.

(Operator Instructions)

Our first question today is coming from Stephen Kim from Barclays.

Please proceed with your question.

Hey, guys.

Good results.

I'm wishing you guys a proud Veterans Day.

Wanted to ask you a quick question regarding incentives.

I think you had indicated that your incentives were flat sequentially, which I think is going to be perceived positively by folks who had been concerned that you were going to be amping up your incentives pretty significantly.

You've also talked about increasing the share of your business -- your volume that's going to be coming from Express.

And I was wondering if you could talk specifically about your strategy around incentives, as you've seen Express evolving?

And whether you see the approach you're going to be using to incentives being different for the Express communities than for the Emerald or for the Horton communities?

And what that's going to mean for incentives going forward?

Steve, it's David.

The market -- we found the market to be relatively stable, and not -- we had significant pricing power last year in Q1 to Q2.

We saw that slide down, increased incentives, but really just back to normal market-type conditions.

And right now, we feel pretty good about where we are in the market, and what's taking place out there.

And in terms of our approach to incentives across our brand, Stephen, I wouldn't see a significant change from where we've been in the past.

We manage our incentives levels at a community-by-community level.

And we go in, regardless of brand, with our business plan for each community, and we look to achieve that.

And if, depending on how the market responds, then we adjust our incentive levels.

And I think that would apply to our approach, really, across all three of our brands.

Clearly, with Express, we're providing a tremendous value to the buyer in the marketplace today.

And so we're not seeing a significant level of incentives across the board in Express.

Community by community, we're going to manage to what that market is.

But within Express, we're seeing strong market acceptance, and a buyer that's been underserved.

Yes, that's great.

That's exactly what we were looking for.

The second question relates to the use of speculative building, and I think you guys, in your prepared remarks, gave us some numbers.

I wanted to just generally, though, speak about -- or ask about what you're seeing in the marketplace?

And what your intention going forward is, with respect to the role of speculative building?

Some of your peers have indicated that they are expecting to go into the spring selling season with a higher level of spec activity, with the hope of capturing those buyers who have chosen to sell their house first, before trying to sign a contract for another one, and so were looking for a quick move-in.

I guess, A, do you generally believe or agree that the presence of this kind of buyer is -- would make having more specs than normal, historically, a good strategy entering the spring selling season?

Are you preparing for that?

And are you seeing your competitors taking steps to prepare for that yet?

Have not really seen significant competition out in the market from other builders on the spec build program.

That has always been what we've done.

We've always tried to look at the next quarter out, and align ourselves for what we believe demand will be, based upon what we're seeing that day.

Spec building is a good, consistent way to manage communities and drive absorption.

So that's just something we've always done.

And as a reminder, Steve, about 70% to 80% of our closings each quarter are spec.

So when you're looking at our reported gross margin, that's essentially a spec gross margin.

Thank you.

Our next question today is coming from Ken Zener from KeyBanc.

Please proceed with your question.

Good morning.

Good morning.

Good morning, Ken.

So a rather different approach to the forward year this year.

The growth that you gave in terms of your closings, and I think everyone's going to be happy, it sounds like that you are disclosing community count.

Is that accurate?

We're not actually disclosing absolute community count, but we are giving you two years of historical data of what our community count has done in percentage terms, at a regional level.

Okay.

Then what is the underlying -- and I apologize if I missed it, with all the numbers you're giving.

But the 34,500 to 37,000 unit closing, what does that imply for community count growth?

In terms of community count growth, we actually expect -- the increase in our community count, we're at 10% this quarter.

We expect that to moderate into 2015.

And we could be relatively flat, on a year-over-year basis, for the whole year.

Any increases would be more in the mid- to single-digit range.

But clearly, our expectation, as we've shown the last couple quarters, is for improvement in our absorptions per community.

And that's really what is -- what we plan to drive the 20% to 30% increase in our closings next year.

Interesting.

So that's actually largely coming from absorption.

So related to that, and David, we had talked about this earlier in the year, with the success you guys have been having with Express.

Because it's going to be rising as a percentage of orders and closings, I'm just -- if you could highlight the dynamic between the volume you are seeing and the revenue?

Because I think you basically said it was like 5% of closings, 3% of revenue.

How does one think about the incremental flow-through of, you getting the volumes, but since it's less ASP, the margins can be the same, but you're pulling less dollars through.

Do you think this 1.5 million starts, certain share, as it relates to single-family homes, is just going to happen at a lot lower price point that Express is characteristic of?

I can tell you, our model, our thought process is, we're going to grow every brand.

Now, the Express brand is going to grow faster, because we're introducing a new product into an underserved market across the country.

And there is a tremendous amount of pent-up demand that we're picking up with that brand.

Right.

But we're not growing Express at the expense of Horton.

The Horton brand will continue to grow, and the Emerald brand.

Really we're just rolling out, still.

It's got a lot of upside.

And I think you're hitting the sweet spot there.

Does that -- the average price, is it saying -- did you talk about how much you think the price is down, given the business, the product mix for next year?

I think we're looking, going forward, Ken, at a flat ASP.

Hard to predict, because the potential changes in mix that we'll be seeing.

But as David said, we're looking to grow all the brands.

Express growing probably at a faster clip than the other brands, but we're still seeing good growth in demand across all brands.

And still seeing some markets where we have price appreciation, which helps to offset a bit of the mix changes.

Thank you.

Our next question today is coming from Michael Rehaut from JPMorgan.

Please proceed with your question.

Hi, thanks.

Good morning, and nice quarter.

Thank you.

The first question I had was, I guess circling back to Express, but just asked a little bit of a different way.

And I think you started to hit on this in talking about community count.

But with your outlook for growth next year being -- I guess you're saying primarily driven by an increase in absorption, is that going to be primarily driven by the higher mix of Express?

Or is there going to be perhaps growth in certain regions that maybe have a lower ASP or a faster turn?

Just trying to get a sense.

Because to have absorption up 15%, 20% or more next year, I think that's probably pretty much ahead of the pack right now, in terms of how most other builders are thinking about 2015, if they haven't articulated it explicitly.

And so just trying to get a sense, is that really the Express Homes initiative, or is it a regional mix?

Or do you have a view of certain -- of the market that's a little bit different?

I think -- this is David, Michael.

I think the Express is certainly a factor in it, and regional growth is also a factor.

We're very strongly positioned right now in Texas, the Carolinas and Florida, and those are growth markets.

And so we expect to do well or better there than we have in the past.

And Express, as we continue to roll it out, we are seeing high unit absorptions there.

So it's -- that's why we're -- we think overall, we'll see pricing power in certain markets.

But the Express brand, at that price point, as it grows and becomes a bigger percentage, is going to keep our average sales price pretty much flat.

And we think that's a good thing.

Right.

No, it makes sense.

And I guess just circling back on the incentives for a moment.

Just wanted to clarify, you said that incentives in the fourth quarter were flat sequentially.

I presume that was on closings, not orders.

So if that's correct, just trying to get a sense of, perhaps on an order basis, the orders themselves, as you're bringing in the new sales over the past three months, were the incentives on those orders also relatively stable versus the prior quarter?

And as a result, are to we infer that the gross margin for next year coming in a little bit is primarily driven by mix, I think as you've stated?

I think that's a pretty fair characterization of everything, Michael.

Incentives have been flat on the closings.

That was correct.

And we're probably seeing a similar flat trend in the sales line right now.

So that has brought us down for the full-year margin expectations for next year, from where we were in FY14.

And clearly, with Express certainly driving much higher absorptions in volume, but slightly lower on the gross margin side.

But as it grows to a bigger mix of our overall business, that's the primary driver for us moderating back to our normal gross margin range of around 20%.

Thank you.

Our next question today is coming from Stephen East from Evercore ISI.

Please proceed with your question.

Thank you.

David, congratulations on your role.

Thank you, Stephen.

If I look at, call it your first six weeks or so, a couple different questions.

One, where's your first focus and actions been?

And then when you look out a bit longer, what vision do you see for Horton?

Everybody's got their own twist on things.

So how, maybe, does your vision differ a little bit from DT's, as you move out three, five years?

I guess the initial focus is really getting a handle on this public position role, Stephen.

I've always been a behind-the-curtain kind of guy, and being pushed out front is a different for me.

Three to five years down the road, I think my goal is just to continue the excellence the Company's had.

The focus is on consistency, really, on a day-by-day, subdivision-by-subdivision execution.

I feel like the -- our position in the industry today is so unique.

The fact that we've been the largest for as long as we've been the largest, the geographic footprint that we have, it really is -- if we just execute and do what we can do on a day-to-day basis, we should have a great three- to five-year run.

Okay.

I appreciate that.

And then, different topic, if you look at the SG&A, your goal has always been 10%.

And I guess my question here is, most builders, yourself included, have talked a lot about, hey, during the downturn, we've gotten a lot more efficient.

We've been able to do more with less people, et cetera.

Why shouldn't we expect, in this -- maybe even into 2015, but why shouldn't we expect that SG&A to drop down below the levels you've run in previous cycles?

I'm probably going to get in trouble for this, but that is my expectation.

If we do not -- because we are more efficient.

We do have great operators out there.

The launch of the Emerald, Express, that we've been through the last couple of years, we did have to build some infrastructure and ramp up.

And I have told all these guys, and all the people out there in the field, that our expectation is to leverage that position and become more efficient.

So that is my expectation.

The accountants are going to disagree with me.

That might be a little bit longer term view, too, and not a FY15 call, Stephen.

(laughter)

Thank you.

Our next question today is coming from Adam Rudiger from Wells Fargo Securities.

Please proceed with your question.

Hi, good morning.

David, you mentioned in your prepared remarks that I think one of the focuses was going to be to improve cash flow.

Operating cash flow has been negative the past three years.

So I was wondering when, or if, we should expect an inflection point in that?

And when you actually plan on starting to generate cash?

I think right now, we expect to be relatively flat this year.

We -- if the market remains stable and -- or even gives us a little bit more, we could beat that.

And flat, even cash flow this next year would be an improvement of $660 million, so that would be a substantial improvement.

But yes, I think -- specifically, I think we're pretty close to that inflection point.

Yes.

Okay.

Second question was, there's been some speculation or percolation, I guess, on Texas and oil prices, and things like that.

I was wondering if you had any comments you wanted to share on what you've been seeing recently.

I know it's pretty early, but any thoughts there would be helpful.

Texas remains strong for us.

I think if oil prices stay down, it could soften somewhat.

But any softening we see in Texas, I think low oil prices should create additional demand in the other markets.

So we are Texas-based, but we are significant in really every market in the country that we want to be in.

So it's -- pretty good balance for us.

Could actually be beneficial.

Thank you.

Our next question today is coming from Bob Wetenhall from RBC Capital Markets.

Please proceed with your questions.

Hi, good morning, and really nice quarter.

Just wanted to get some color on the impairment charge of $21 million in the quarter.

I know you had one for $57 million in 3Q.

Any color about this would be great.

And what should we think about charges going forward?

Bob, the charges we took this quarter were primarily in our Washington, DC area.

We had a couple of long-lived old projects that we had for quite a while that were inactive.

And we evaluated the market, and had some opportunities to sell those projects.

And so we're looking to move forward with those, redeploy that capital.

We've consistently been working through our older land positions, bringing most of it into production in our home building operations.

And most of that not requiring an impairment charge, when it comes into operations.

So looking forward, we're going to continue to evaluate all these projects in the market that we're in, and look to make that capital work for the Company as quickly as we can.

When we do elect to sell something, when that's the best option for us, that has traditionally produced the bigger impairment charges, and hard to predict when or if those things will be occurring.

Okay.

That's helpful.

And I think it's for Bill.

You guys have a very robust balance sheet, net debt to home buildings in the mid-30%s.

You're obviously trying to drive better financial performance with the 20% ROI inventory.

What's the goal?

How should we think about the balance sheet in the context of -- land spend is going to continue next year.

Looks like you might burn a little cash as you grow the business.

What's your target for net home building debt to capital?

Thanks, and good luck.

You bet.

Thanks, Bob.

From a net debt to cap, we've consistently said we want to stay at or below a 40% to 45% range.

Clearly, we're a bit below that right now, and we're comfortable in the mid-30%s, as well.

And really, so as long as we're in a good solid position, we have flexibility.

Right now, our first priority, as we look at our business, look at the opportunities in the marketplace to generate returns in our business, and that's going to be the first priority for our investments of capital.

With that being said, we feel like we're in a great position in our land position.

So we're not having to grow that position significantly right now.

So right now, in terms of land and development expectation, spending expectations for FY15, we would expect that to be relatively flat with FY14 right now.

But that would depend, also then, ultimately, on what we see in the sales environment in the spring.

If things are much stronger than we expect in the spring, we might expect -- we might wind up investing more than we did in FY14.

And conversely, it could go the other way as well.

So first and foremost, we're going to look at the business.

Secondly, we'll continue to handle our debt obligations as we move forward, and continue to pay a dividend.

Thank you.

Our next question today is coming from David Goldberg with UBS.

Please proceed with your question.

Thanks.

Good morning, everybody, and congratulations, David.

Thank you, David.

My first question, I was wondering if we could take a step back, and just think a little bit about, if you could take us through the actual procedure to determine what kind of spec you guys want heading into the next year?

The spec count now under construction is up to 24%, 25%.

It's in line with, obviously your closing guidance for FY15.

But if you go through the mechanics of how you get to that number with your local operators, I think that would be helpful, in terms of the assumptions and puts and pulls you put into the process.

David, it -- and I know we keep saying this, and it gets monotonous.

But it really does come down to specific demand, or expected demand, within a community, within a sub-market, within a division.

And we build these models, or these programs, based upon power position in that community, and what kind of demand or absorption we think it will give us, at the margin we want to make.

And so, from a very simplistic standpoint, and it varies throughout the year, but we generally like to have about three months of sales at three various stages of inventory coming out of the ground.

So if it's a community doing two a month, that would be carrying six specs in that community, two completed, two at frame, and two at slab.

And then sell into that inventory, and supplement sales with build jobs.

As you go community by community, and add it all up, that's how we get to the numbers we get to.

Okay.

That's very helpful.

And then just as a follow-up question, I was wondering if you could talk about the kind of leverage you're seeing in land -- on the land acquisition side?

And what we should expect as you move to more Express series land purchases?

I would assume there's a little bit more financial leverage, it's a little bit easier to option that land.

So maybe you could talk about what you're seeing in the market, and what you think that means for the balance sheet, as the product does shift a little bit more towards Express here.

Is that going to be more free cash flow generative, as you move forward?

Or less free cash flow intensive, I guess is how we think about it?

I think on the leverage side, we, when there was nobody out there developing lots, we -- and there were finished lots on the ground that we could buy at very advantageous prices, we ended up with a lot of owned lots.

One of the prior questions was about focus.

One of the things that I think we need to do is move back to our historical 50/50 owned versus optioned lots.

And as developers are coming back into the market, one of our primary objectives is to maintain, develop, maintain, and support those relationships, so that we have people delivering lots in front of us.

And the high absorption communities, the high absorption model of Express, is a perfect place to get somebody in front of us doing it.

David, we're pretty much there on the 50/50 on our finished lot position, and we've made good progress on our overall owned position, but we're still not there.

We're at about 68% owned, 32% optioned.

So we are headed in the right direction to get to that 50/50 split that David mentioned.

We've got some good development partners out there, and we're going to try to grow those relationships and strengthen them.

Thank you.

Our next question today is coming from Mike Roxland from Bank of America Merrill Lynch.

Please proceed with your question.

Hi.

Thanks for taking my questions, and congrats on your new role, David.

Thank you, Mike.

Can you just talk about some of the progress you've made on improving your construction efficiency, with respect to the Emerald brand?

Obviously, that's a new brand for you guys, and you've experienced, I think, some growing pains with the product.

And just wanted to see where you are in the learning curve?

And how the efficiency, in terms of the construction, has improved, let's say, this quarter over the last couple of quarters?

I think we are learning that buyer and that market, and adjusting different processes and procedures to meet the expectation that buyer has.

And I think our original -- some of the original product we put out, we probably were building more for ourselves than for the customer.

And we are adjusting that, and really just drilling down and putting into the houses what that buyer really wants.

And I think that's going to create efficiency and improve our overall performance of the brand.

Specifically, Mike, we haven't measured the -- and we don't have it in front of us -- the production turn times for each, by brand.

And so we really can't comment on any specific changes this quarter versus last.

Got you.

But just suffice to say that, have you seen an improvement in the margins that you're generating from that products, relative to a couple quarters ago?

Yes, we have.

Yes.

As we drill down and understand what that buyer wants, we are generating our margins.

Got you.

And then just last question, you mentioned that your incentives were flat quarter over quarter.

And I think in the last quarter, you mentioned that you weren't happy with the absorption pace, hence you raised your incentive levels.

Is it fair to say, now that you are happy with the absorptions that you're seeing on an aggregate basis, and that at this -- if these continue, there is no need for you to discount any further, because you're happy with the sales pace overall?

We are on plan, meeting our absorption targets.

So yes, we are happy with where we are right now, in the -- so if that's the question, yes.

In total, yes, we're certainly pleased with where we are, and what we're seeing overall.

But again, we don't necessarily manage it at a global level.

We're going to manage it at each community.

So we have some communities where we may be cutting back on incentives, because we're exceeding our absorption targets.

Some might be right on track, some might be a little short, so we're going to increase incentives.

But in total, absolutely.

At 38% increase, we feel like the aggregate result is definitely in line with where we want to be.

Thank you.

Our next question today is coming from Eric Bosshard from Cleveland Research Company.

Please proceed with your question.

Good morning.

Good morning.

In terms of input costs, just curious if you could talk a little bit about the trend in land costs, where we are, as you're working through your inventory, if that is something that's changing meaningfully?

And then also your assumptions in terms of building components, and what trends happen there?

And then eventually curious on how you think how that is matching up with your average selling price expectation for 2015?

Sure, Eric.

Our land cost has remained relatively flat as a component of the overall costs going into our house.

We called out some of the other things that did impact our margin this quarter, but land remained relatively flat.

And in terms of the other input costs, on a year-over-year basis, we have seen some cost pressures.

Our stick and brick cost is, on a per square foot basis, are up about 5%, on a year-over-year basis.

Sequentially, they are up about 2%.

As you think about those factors into 2015, a year where I think you talked about no real expected change is ASP, some of that a function of mix, how do you think about that balance between those factors?

I think the mix is probably the biggest driver of the flat average sales price.

We do and are experiencing pricing power in a lot of our markets.

Steady as she goes.

Yes.

Consistency is -- I guess is the -- right now, we're seeing a lot of consistency in the market at the subdivision level, at the division level, and think it's going to be a good year.

Thank you.

Our next question today is coming from Nishu Sood from Deutsche Bank.

Please proceed with your questions.

Thanks, and congratulations to David and Mike on your new roles.

Thank you, Nishu.

Thank you.

I wanted to ask first about the October sales trends.

Obviously a strong number, 20% plus, in the context of what we've been seeing from just the industry in general.

But somewhat of a slowdown from the pace in the September quarter.

How should we think about that?

I mean, obviously, going into year end, I imagine there's a real push.

So is that just month-to-month volatility, maybe around the year end?

Or have you seen some slowdown into October?

Nishu, that shows what we get for giving more than we normally do on a monthly basis.

(laughter) But we wanted to give a little bit of color.

But as we always have said, a month does not make a quarter.

So we're letting you know that our October sales pace was strong.

We feel good with what we've seen thus far, even though we're only 11 days into November.

But that greater than 20% in October, as David said earlier, we're on plan to deliver what is in our business plan.

And you'll have to wait until January to see what we deliver for the quarter.

I wouldn't read anything special into whether we accelerated or decelerated in October.

I think in general, we would still say it's a very good sales environment.

August was still a very good sales month for us, and 20% was the floor.

Nishu, we're looking for consistency, month to month.

Okay.

And second question, the 20% return on inventory metric, the pretax income, divided by the average investment in the community over the life of it, that sounds like a local -- at the divisional level.

So I imagine that's not fully loaded with the entire expense structure.

So my question is, how would we translate that number to the overall D.R. Horton corporate level?

And how -- what is your target for that number?

Let's say that 20% translates to, I don't know, to 15%-ish.

How -- what's your target, and when would you expect to get there?

Nishu, first of all, definitionally, that 20% is a fully loaded number at the community level.

So we look at project pro formas and performances, on a fully burdened basis, to drive that 20% average pretax return on the inventory investment in that community.

So that will translate up, as a goal, to the total.

Obviously, we're not there yet.

We're a little over 11% on a consolidated basis, including any impairments we've taken.

But to get all the way to 20% on a consolidated basis, I don't have a time line for when it's going to be there, but that is where we're pushing the bar to.

And that's what we're measuring ourselves against internally.

Steady, consistent improvement in the ROI is the goal.

And we feel like that we're doing the things today that should achieve steady improvement.

Thank you.

Our next question today is coming from Michael Dahl from Credit Suisse.

Please proceed with your question.

Hi, thanks.

Wanted to ask, just as a point of reference, if we go back to the mix of communities, thinking about the absorptions, could you give us a sense of just how much of a difference in absorption there is between Express, Horton and Emerald?

Yes.

In general, Mike, our Express communities, on an absorption basis, are about double our Company average, ballpark, which is in line with where our expectations would be.

And then Emerald is certainly lower than our Company average, but obviously the dollars per home is much greater.

Got it.

And then on a related topic, then, if we think about the margin guide for next year, 19.5% to 20.5%, is that -- what's the biggest delta?

And you did mention it could be higher or lower than that range, quarter to quarter.

What's the biggest driver that you think of that could push it to either the low end or the high end, based on what you're seeing today?

I think the -- to the low end would be a change in market conditions, where right now, we've been experiencing stability in the market, and slight improvement month-to-month, quarter to quarter.

We had a reset on values in the spring, which we responded to with additional incentives.

But since then, we're operating on the flat waters right now.

Yes.

And then absent a change in market conditions, I really feel the product mix changes as we roll out Express primarily, is the wild card, in terms of exactly how that translates to margins, quarter to quarter, is probably the biggest driver, and it's assuming the market stays stable.

Thank you.

Our next question today is coming from Jade Rahmani from KBW.

Please proceed with your question.

Yes, hi.

Thanks for taking the question.

I was wondering if you could provide some color on what you're seeing in the land market?

If you're seeing less competition for land parcels?

If there's any geographic color on what you find most attractive?

And maybe just the average size of new deals you're looking at?

Competition in the market, always there.

We had a brief opportunity in 2011 and 2012, really, where we were the only ones buying.

But since then, everybody's back.

Right now, we're pretty much in a replacement mode, market to market.

The markets that are generating high levels of sales is where we're putting most of the dollars.

And I don't remember the third part of the question.

Average size, maybe, in terms of number of lots.

Typically, we underwrite to a two-year cash back program.

So it depends on the absorption that we should be generating out of that.

On an average, though, it's 50 to 100 lots, probably.

Great, thanks.

And just secondly, a follow-up on the mix of buyer profiles, and I apologize if you gave this earlier in the quarter.

But do you have the mix of orders to first time and first time move-up?

Sure, Jade.

We only have that data for the buyers that use our mortgage company, which is about 50% of our buyers this quarter, roughly.

And we were at 39% first time home buyers for the quarter.

Thank you.

Our next question today is coming from Megan McGrath from MKM Partners.

Please proceed with your question.

Good morning, thanks.

I guess most of my questions have been answered, but did want to ask, as a follow-up to that last question, any thoughts on the recent news from the FHFA?

And as a follow-up to that, I know it's hard to sometimes get data on those who didn't come through the system.

But any sense of what's the bigger issue for your buyers?

Is it down payment, typically, or is it more a DTI issue?

Thanks.

In terms of the FHA, clearly, there's a lot of talk going on, in terms of our assumptions.

As we look at our business, we're not assuming any change in the mortgage environment.

This assumes current mortgage lending standards.

Any changes going forward, we'll deal with those as they come.

In terms of the biggest issue, Megan, really, anything we tell you is going to be primarily anecdotal.

But we do hear DTI is one of the bigger categories that our buyers struggle with today, which is why Express, we feel, has been very positive for us.

We can't control our buyers' debt levels, but we can control the sales price of the houses we're selling.

And so if we can help that piece of the debt-to-income metric, we've seen a lot of success on that front.

Great.

Thanks.

That's helpful.

And I guess just as a follow-up on balance sheet and capital allocation, it feels like going through this earnings season, we've seen a bit of a higher level of announcements around share buybacks from home builders.

Certainly, with your announcement on your expected share count, doesn't sound like that's something that you're looking at.

But maybe give your thoughts on why it's something that you don't feel is something you want to pursue?

Right now, we still see tremendous opportunities to invest in our business.

We're generating improving returns.

We're seeing the opportunity to grow at an improving return.

So right now, that is our highest priority.

We would never rule out buybacks at some point in the future, but right now, we still see great opportunities in our business.

Thank you.

Our final question today is coming from Alex Barron from Housing Research Center.

Please proceed with your question.

Thanks, and good morning, and congratulations on the quarter and everybody in their new roles.

Thank you, Alex.

I wanted to I guess focus a little bit on express, and sorry if you already covered it and I missed it.

But I think you said that the deliveries -- or the orders were 10%, the orders were, I believe, 7%.

How do you guys see that -- what percentage are you guys thinking or aiming at for 2015?

And also, what kind of sales rate, I guess, are you guys thinking or experiencing so far in Express?

And last question on Express.

How many communities do you have currently?

And how many do you expect to have by the end of next year?

Sure, Alex.

We said, for the quarter, that Express was 10% of our home sales and 6% of our closings.

For the full fiscal year, it was 7% of our home sales and 5% of our closings.

We don't have any set targets for where that's going to go in FY15, but we would continue to expect -- or we would continue to expect to ramp up our community openings in 2015, and have the sales and closings follow.

We've talked about, over the next few years, we think Express could be anywhere from 25% to 30% of our units.

And do you guys track the number of boomerang buyers that you have seen so far, either this quarter or this year?

We don't, Alex.

But do you expect that to be a meaningful size of your buyers, I guess, through the Express brand?

That's certainly possible, Alex.

And certainly, where we are on the calendar, there's more of those that have the potential to come back into the market.

But that's not something we're specifically targeting, necessarily.

Thank you.

We have reached the end of our question-and-answer session.

I would like to turn the floor back over to Management for any further or closing comments.

Thank you, Kevin.

We appreciate everyone's time on the call today, and look forward to speaking with you again in January to share our first-quarter results.

Thank you.

Thank you, everybody.

Thank you.

That does conclude today's teleconference.

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

We thank you for your participation today.