霍頓房屋 (DHI) 2015 Q1 法說會逐字稿

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  • Operator

  • Greetings and welcome to the first-quarter 2015 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 would now like to turn the conference over to Miss Jessica Hansen, Vice President of Investor Relations for D.R. Horton.

  • Thank you, Miss Hanson.

  • You may begin.

  • Jessica Hansen - VP of IR

  • Thank you, Manny, good morning and welcome to our call to discuss our first-quarter 2015 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 statement.

  • 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, which is filed with the Securities and Exchange Commission.

  • For your convenience, this morning's earnings release can be found on our website at www.investor.drhorton.com, and we plan to file our 10-Q in the next few days.

  • Also, after the conclusion of our call, we will be posting updated supplementary historical data on the Investor Relations section of our website for your reference.

  • The supplementary information includes historical data on gross margins, change in active selling communities, product mix and our mortgage operations.

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

  • David Auld - President & CEO

  • Thank you Jessica, and good morning.

  • In addition to Jessica I'm pleased to be joined on this call by Mike Murray, our Executive Vice President and Chief Operating Officer, and Bill Wheat, our Executive Vice President and Chief Financial Officer.

  • We are off to a great start in 2015 and are looking forward to the spring.

  • In the first quarter, our homes sold and closed increased by 35% and 29%, respectively.

  • And we had another solid quarter of profitability, with $220.7 million of pretax income on $2.3 billion of revenue.

  • Demand for new homes remains stable across most of our markets during this quarter and consistent with normal seasonality, our weekly sales pace has accelerated in January.

  • We are in a strong competitive position for the upcoming spring sales season with a well-stocked supply of land, lots and homes.

  • For our full-year and 2015, we expect to generate a 20% to 30% increase in revenues, with similar levels of profitability and operating margins as we shared on our last call.

  • Our continued strategic focus is to leverage our operating platform to generate double-digit growth in both revenues and pretax profits, while improving our cash flows and increasing our returns.

  • Mike?

  • Mike Murray - EVP & COO

  • Net income for the first quarter increased 16% to $142.5 million, or $0.39 per diluted share, compared to $123.2 million, or $0.36 per diluted share in the year ago quarter.

  • Our consolidated pretax income increased 16% to $220.7 million in the first quarter, compared to $189.7 million the year ago quarter, and home building pretax income increased 13% to $206.1 million, compared to $181.9 million in the prior-year quarter.

  • Our first-quarter home sales revenues increased 37% to $2.2 billion on 70,973 homes closed, up from $1.6 billion on 6188 homes closed in the year ago quarter.

  • Our average closing price for the quarter was $281,000, up 7% compared to the prior year, primarily driven by a 4% increase in our average home size and a small increase in our average sales price per square foot.

  • Bill?

  • Bill Wheat - EVP & CFO

  • The value of our net sales orders in the first quarter increased 40% from a year ago quarter, to $2.1 billion.

  • And homes sold increased 35% to 7,370 homes, on a 6% increase in active selling communities.

  • Our average sales price on net sales orders in the first quarter increased 4% to $286,100.

  • The cancellation rate for the first quarter was 24%, relatively stable compared to 23% in the year ago quarter.

  • The value of our backlog increased 29% from a year ago, to $2.7 billion with an average sales price per home of $293,600.

  • And homes and backlog increased 21% to 9,285 homes.

  • Our backlog conversion rate for the first quarter was higher than our expectations, at 81%.

  • We expect our second quarter backlog conversion rate to be in the range of 81% to 85%.

  • Jessica?

  • Jessica Hansen - VP of IR

  • We are experiencing strong growth in profitability in the heart of our business in 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 38 markets and 11 states.

  • With the significant majority of our Express sales and closings to date coming from Texas, the Carolinas and Florida.

  • This quarter, Express accounted for 13% of our homes sold, 10% of homes closed and 6% of homes sales revenue.

  • The average closing price in Express Home in the first quarter was $169,000.

  • Customer response to our affordable Express product offerings has been extremely positive, and we expect to have Express homes communities open in a substantial majority of our markets by the end of this fiscal year.

  • Emerald Homes, our brand for higher-end move-up and luxury communities, is available in 35 markets across 15 states.

  • In the first quarter, 7% of our homes closed were priced greater than $500,000, accounting for 17% of our home sales revenue, up from 5% homes closed and 14% revenues in the same quarter of last year.

  • Mike?

  • Mike Murray - EVP & COO

  • Our gross profit margin on home sales revenue in the first quarter was 19.8%, in the middle of the expected range we shared on our last call.

  • This was a 70 basis points sequential decline from the fourth quarter.

  • 80 basis points in the margin decrease was due to cost increases in excess of sales price increases and changes in product mix.

  • And 10 basis points was due to slightly higher relative costs for warranty and construction defect claims.

  • These margin decreases were partially offset by a 20 basis point improvement, related to less impact from purchase accounting for acquisitions.

  • Our general gross margin expectations for FY15 remain unchanged from what we shared last quarter.

  • With the strong performance of our Express communities so far, we continue to expect this brand to grow quickly as a percentage of our product mix, helping us generate strong growth in both revenues and profits, but bringing our average gross margin percentage down this year.

  • In the current stable housing environment we continue to 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.

  • Bill?

  • Bill Wheat - EVP & CFO

  • Home building SG&A expense for the quarter was $238 million, compared to $183.4 million in the prior-year quarter.

  • As a percentage of home building revenues, our SG&A improved 60 basis points to 10.6%, compared to 11.2% in the prior-year quarter, as our significant revenue increase this quarter improved our SG&A leverage.

  • For the second quarter we expect our SG&A as a percentage of home sales revenues to improve year over year by 30 to 50 basis points, to the range of 10.6% to 10.8%.

  • We expect our third- and fourth-quarter SG&A percentage to trend down sequentially from the second quarter, on higher expect volumes.

  • Our ongoing annual target for SG&A as a percentage of home building revenues is 10%.

  • Jessica?

  • Jessica Hansen - VP of IR

  • Financial Services pretax income in the first quarter increased 87% to $14.6 million, from $7.8 million in the year ago quarter.

  • 89% 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, down from 45% in the year ago quarter.

  • Borrowers originating loans with our mortgage company this quarter had an average FICO score of 717 and an average loan-to-value ratio of 89%.

  • David?

  • David Auld - President & CEO

  • At the end of December we had 21,300 homes in inventory, of which 1600 were models, 12,400 were spec homes and 4500 of the specs were completed.

  • Our construction in progress and finished homes inventory increased by $178 million in the quarter, as we prepare for seasonally higher demand in the spring.

  • Our first-quarter investment in lots, land and development, totaled $564 million, of which $309 million was to replenish finished lots and land, and $255 million was for land development.

  • At December 31, 2014, our lot portfolio consisted of 125,000 owned lots with an additional 60,000 lots controlled through option contracts.

  • 71,000 of our lots are finished, 33,000 are owned and 38,000 are optioned.

  • Our 185,000 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 remains unchanged.

  • 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 absorption, margins and inventory levels.

  • We expect our home building pretax return on inventory to improve this year, as compared to last year.

  • Mike?

  • Mike Murray - EVP & COO

  • During the first quarter we recorded $2.2 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 $3.8 million of inventory impairment charges, related to a pending land sale in West region.

  • Our inactive land held for development of $304.3 million at the end of the quarter represents 13,900 lots, down slightly from September and down 36% from a year ago.

  • We are proactively working to these older, unproductive assets to redeploy the capital and improve 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 will continue to decline this fiscal year.

  • We will continue to evaluate our inactive land parcels for potential impairment, which 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?

  • Bill Wheat - EVP & CFO

  • At December 31 our home building liquidity included $517.7 million of unrestricted home building cash, and $506 million available capacity on our revolving credit facility.

  • We had $375 million of cash borrowings and $94 million of letters of credit outstanding on the revolver.

  • Our gross home building leverage ratio was 39.3%, and our home building leverage ratio net of cash was 35.4%.

  • The balance of our public notes outstanding at December 31, was $3 billion.

  • Our only public debt maturity in FY15 is our $158 million of senior notes due in February.

  • At December 31, our shareholders' equity balance was $5.3 billion and book value per share was $14.40, up 11% from a year ago.

  • Jessica?

  • Jessica Hansen - VP of IR

  • Looking forward we would like to highlight some of our expectations for the fiscal year which are unchanged from our last call and based on the current stable housing market conditions.

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

  • We also continue to expect to generate a similar level of profitability and operating margins as what we shared on our last call.

  • 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 will range from 10% to 10.3% of home building revenues for the full year, with our next quarter 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 second fiscal quarter of 2015, we expect our number of homes closed to approximate a beginning backlog conversion rate of between 81% and 85%.

  • We anticipate our second-quarter home sales gross margin will be in the range of 19.5% to 20%, subject to potential fluctuations from product mix, warranty and interest costs.

  • We expect our home building SG&A in the second quarter to be in the range of 10.6% to 10.8% of revenues.

  • David?

  • David Auld - President & CEO

  • In closing, our first-quarter growth in sales, closings and profits in a relatively stable market is a result of the strength of our operating platform, and we are excited about the spring selling season and the opportunities ahead.

  • This quarter, the value of our sales and closings increased by 40% and 37% respectively, and we generated another solid quarter of profitability, with a consolidated pretax income of $220.7 million on $2.3 billion of revenue.

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

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

  • We'd like to thank all of our employees for their continued hard work and we look forward to working together to continue growing and improving our operations during 2015.

  • This concludes our prepared remarks.

  • We will now host questions.

  • Operator

  • (Operator Instructions).

  • David Goldberg, UBS.

  • David Goldberg - Analyst

  • Congratulations on a great quarter.

  • David Auld - President & CEO

  • Thanks, David.

  • David Goldberg - Analyst

  • My first question was on competitive behavior.

  • We've been hearing about more and more builders talking about incentives increasing.

  • Obviously you guys haven't had to change your gross margin forecast.

  • I was wondering if you could give us a little bit of color on what you're hearing from the field.

  • Are you hearing buyers are coming and asking for more incentives and you're not willing to be flexible that way?

  • Or is the value proposition such that you think you already have a more competitive product essentials?

  • David Auld - President & CEO

  • David, it's David Auld.

  • I think we have been focusing on the value proposition really since last spring.

  • And because of our broad footprint, number of communities we have, we're just not seeing the same pressure at any one location that some of the guys are.

  • Bill Wheat - EVP & CFO

  • And just specifically David our incentive levels are in the same range that we've seen really since last spring.

  • It's obviously that's at a community by community level so we've seen some variation there, but in general, we're hitting our absorption targets pretty consistently and therefore at a high level we're not seeing any big changes in incentive levels.

  • David Goldberg - Analyst

  • Got it.

  • And just as a follow-up, I think everybody would love to get some color on the markets in Texas.

  • Obviously you guys have a very big position, there's a lot of concern given what's going on with oil.

  • Maybe you can give us some on the ground, I know you said January sales and traffic were up sequentially as would expect, generally.

  • But maybe focus in on the markets in Texas and how you're seeing them move here, if we're seeing any pause from the buyers, would be helpful.

  • Thank you.

  • Mike Murray - EVP & COO

  • This is Mike.

  • We saw our Texas operations performed in line with the Company and our expectations for the first quarter into the first few weeks of January so far.

  • So while we would expect that there could be some general slowdown in Texas at some point, specifically perhaps Houston and Midland, we haven't exactly seen it yet.

  • And we're very encouraged seeing the results in line with expectations right now.

  • David Goldberg - Analyst

  • Great.

  • Thank you.

  • Operator

  • Stephen East, Evercore.

  • Stephen East - Analyst

  • Just following on the Texas since we get so many questions about it, have you changed what you're doing on land deals?

  • What type of contingency planning are you going through and again, I understand primarily Houston, but I would love your opinions about how much you think the other markets would ultimately be impacted versus what Houston would be impacted.

  • David Auld - President & CEO

  • Stephen, this is David.

  • Obviously Houston, Midland are going to have a tougher time if oil prices stay down, than the balance of the markets in Texas.

  • All of them will be impacted.

  • From an investment standpoint, we are well-positioned in Texas.

  • We don't have to go out today and take a lot of risk on the land side.

  • As the competition from other builders decreases, even if the market stays relatively strong, price tomorrow just on rumor and innuendo is probably going to be less than it is today.

  • So we're in the market.

  • We're going to continue to be in the market.

  • But we're not in a place today where we have to go buy anything.

  • So we are going to take a more conservative approach than what you've seen the last couple years.

  • Bill Wheat - EVP & CFO

  • Stephen, this is Bill.

  • Just to add some specifics to Houston and Midland, our FY14 revenues in Houston were about 5% of the Company.

  • And our FY14 revenues in Midland were less than 1%.

  • So it is, certainly compared to the rest of the Company, relatively small piece, but as you know we manage our business market by market so we're treating these markets in what we're seeing there individually, and we'll adjust our investment decisions based on what we see in those markets.

  • Stephen East - Analyst

  • Okay.

  • Fair enough.

  • And then a two-part, one Southwest and West, strong order growth just trying to understand where that's occurring and why it's occurring.

  • And then David, you're finishing your first hundred days if you will, I would love to get your thoughts about what you're seeing maybe a little bit different than your expectations, maybe a direction you'd like to move the Company a little bit more or a little bit less, just sort of an initial hundred day wrap-up if you would.

  • David Auld - President & CEO

  • I can tell you from the hundred day perspective, I've been a part of this management team for 25 years.

  • There were no surprises coming up here.

  • The difference in operational philosophy where we just continue to drive down subdivision by subdivision by subdivision, house by house, that's been a part of our program for a long time.

  • I probably provide a little more focus on that or conversation with our operators about it.

  • But it's always been there.

  • Stephen East - Analyst

  • Okay.

  • Bill Wheat - EVP & CFO

  • Stephen, this is Bill.

  • You asked about the West and the Southwest, obviously the West is a bigger region for us.

  • We have some very good positions in our Western markets and we're seeing -- we've seen pretty good strength in the market there through December.

  • And so we feel like that's reflecting in our sales growth there.

  • I wouldn't necessarily call out one market in particular.

  • Southwest is pretty small for us.

  • Basically Arizona, New Mexico, and obviously there's been a lot of volatility there over the last couple years and so you're seeing a nice increase this quarter, but I wouldn't read too much into our Southwest results given its size.

  • Jessica Hansen - VP of IR

  • The changes you are seeing, Stephen though, are truly being driven by absorption which is what we're pretty excited about.

  • That's what we've been focused on for quite some time now and with our active selling communities only up about 6% on a year-over-year basis, for the entire Company, you saw a very strong pick up in our absorption pace this quarter.

  • Stephen East - Analyst

  • Okay.

  • Thanks.

  • And congratulations on a nice quarter.

  • David Auld - President & CEO

  • Thank you.

  • Operator

  • Robert Wetenhall, RBC Capital Markets.

  • Unidentified Participant - Analyst

  • This is Colin filling in for Bob, actually.

  • I just had a question on ASP.

  • You guys some pretty solid increase in ASP year over year.

  • How do you think this pricing's going to trend throughout the year sequentially?

  • Mike Murray - EVP & COO

  • We're kind of projecting ASPs to be flat.

  • Hard to really predict given the changing mix that we're seeing with Express representing a larger proportion of our sales and deliveries.

  • But we're looking for a flat sales price outlook for the year.

  • Unidentified Participant - Analyst

  • Great.

  • Thank you very much.

  • Operator

  • Stephen Kim, Barclays.

  • Stephen Kim - Analyst

  • Congratulations.

  • Good job executing.

  • Wanted to ask you a question about costs.

  • And as we've been talking to folks in the industry, we've gotten some I would say, haven't really gotten a lot of agreement about the ability to extract some concessions from your subcontractors, your suppliers et cetera.

  • Was wondering if you, given your significant gap that you created here between you all and number two, whether you're seeing more success in driving down your input costs, whether it be across labor or materials or really anything, if you could call out something that would be very helpful.

  • Thanks.

  • Bill Wheat - EVP & CFO

  • Stephen, this is Bill.

  • That's something we're still working to try to find a balance on.

  • If we look year over year on our closings this quarter, our stick and brick costs still increased on a per square foot basis about 6%, and our revenues were only up 3%, so we've still got some work to do there.

  • We've seen that trend the last few quarters.

  • That's something we're very focused on.

  • In terms of improving our costs relative to our ability to raise our prices.

  • Certainly there's always things that we can do with our scale, market by market and globally.

  • Through our national arrangements and we can assure you that's something that we're very focused on throughout our organization, is to even out that relationship.

  • And stabilize that going forward so we can improve our margins.

  • As far as specific matters, it's across the gamut.

  • In different categories, with oil prices down we have the potential of seeing some benefit on some categories like shingles and things that have petroleum products in them.

  • But I would tell you we're just focused on anything we can do across the board to improve our cost structure.

  • Stephen Kim - Analyst

  • Got it.

  • Okay.

  • So it's a little early still, but still hopeful.

  • Bill Wheat - EVP & CFO

  • Absolutely.

  • Stephen Kim - Analyst

  • I wanted to also than follow-up if I could a little bit on the other half of the margin equation, which is your price.

  • So, obviously you put up a very good order number here as we expected you to.

  • You're continuing to obviously gain a lot of share.

  • But you also mentioned that pretty much your absorption rates were, I think you said in line with your targets.

  • I guess I'm trying to figure out whether or not the order growth that you achieved in the quarter, and are achieving generally, is enough for you to perhaps think you might have more opportunity on a pricing side, to get a little more aggressive with pricing.

  • Because from your commentary it didn't sound like -- you maintained your guidance on margins and things like that.

  • Do you think that you do have the ability to push pricing more than you have been, given what you've seen so far in the spring selling season?

  • David Auld - President & CEO

  • Stephen, it's way too early in the spring selling season to really send out that kind of message.

  • We're happy with where we are.

  • We feel like if it continues, if the market is a good market this spring, then yes, we will try to push margins.

  • But based upon where we are today, it's just not something we can put out there.

  • Mike Murray - EVP & COO

  • Stephen, as we talked about, our goal is to increase efficiencies and at a community by community level, and that means taking the communities to the planned pace that we want for each community.

  • Pace then begets good momentum, positive momentum in the given community, and certainly as David said, it's early in spring, spring is not even really here yet, but we're in line with our expectations and we would expect that we're going to get every margin of dollar -- every dollar of margin we can.

  • As we move through the spring and as our pace and absorptions stay on track.

  • Stephen Kim - Analyst

  • Okay.

  • Great.

  • Thanks very much, guys.

  • Good job.

  • Operator

  • Ken Zener, KeyBanc.

  • Ken Zener - Analyst

  • Gentlemen, Jessica, several items I'd just like to clarify and get a little feedback on.

  • So your sales pace rose sequentially it seems, is that normal seasonality to you or was there really just a step function in absorptions that as we move into the second quarter, and third-quarter we'll have more normal seasonality?

  • Jessica Hansen - VP of IR

  • Ken we actually saw our active selling communities on average trend down a little bit, so you're right.

  • Our increase in absorption was up say, call it low- to mid-single digits.

  • That's actually pretty consistent with what we've seen over the last few years.

  • So nothing out of line.

  • What's more important, which I think is what you're getting at, is the pickup that we'll see from December to March, and we'll be very focused on driving that increase in absorption and making sure that we're hitting that normal seasonal trend.

  • Ken Zener - Analyst

  • So to get to that, and realizing you guys aren't necessarily going to give guidance, but historically over the last 15 years, you usually had December pace decelerate 15% to 18% from September.

  • And usually you picked up around 50%, 55% in the March quarter.

  • While the December pace is now different, so up slightly, do you still think the March pace, is there any reason that would accelerate or decelerate versus that 50% rate that we've seen historically?

  • Bill Wheat - EVP & CFO

  • Ken I don't think there's anything that we would say that December would read into March.

  • Obviously with the improved pace in December we would feel very good if we see our normal 50% increase into the March quarter.

  • Ken Zener - Analyst

  • Okay.

  • Last question around Express, given that you're looking for flat pricing this year, your costs are still up, you're obviously executing well in terms of understanding how your gross margins are trending.

  • Do you think -- this is a bigger question -- but if you're getting more mix from your Express product, would it surprise you if 2016 if your price mix was actually down?

  • It's not necessarily a bad thing obviously if your pace is up at the rate that you're going, but would that surprise you?

  • David Auld - President & CEO

  • I don't think we'd be surprised.

  • Because there's a lot less competition at that price point.

  • And it's going to continuing to drive month over month, quarter over quarter increases.

  • Bill Wheat - EVP & CFO

  • Ken, I think we would agree with you.

  • That's not necessarily a bad thing.

  • It's not a bad thing at all if our average sales price were to go down because our Express mix has grown and that's really part of what's behind our expectations for our average selling price to be roughly flat this year.

  • Obviously we still saw an increase in Q1, but our expectation was roughly flat because we do expect Express to grow as a percentage of our business this year and while we may see appreciation in some markets, our mix towards Express may offset that somewhat.

  • Ken Zener - Analyst

  • Thank you.

  • Operator

  • Eli Hackel, Goldman Sachs.

  • Eli Hackel - Analyst

  • Just following up on Express, but a little differently, obviously you're rolling it out throughout your markets now.

  • I'm curious, what happens when you roll it out, the buyer types that are coming.

  • Are these people that have been trying to buy a home for a year or two, and just there hasn't been anything in their price point and there's just a flood of buyers that come and they're happy there's something finally that they can afford?

  • I'm curious about what happens as you enter markets and who's showing up at the door.

  • Thanks.

  • Mike Murray - EVP & COO

  • This is Mike.

  • I think you have hit it pretty well.

  • I think that's been underserved market segment and that they're getting a new home product at a very affordable price as an alternative they haven't had.

  • That, combined with some general strength in the economy over the past few years, and in some job numbers, working together, to provide that product has been a good outcome for us quite frankly.

  • Eli Hackel - Analyst

  • Great.

  • Thanks.

  • And different direction, you talked earlier about increasing cash flows.

  • What type of horizon are you thinking about the cash flows going from negative to positive, and could you talk about preference in order and use of cash when it does do that flip?

  • Thanks.

  • Bill Wheat - EVP & CFO

  • Hi Eli, this is Bill.

  • We've talked about FY15 being the point at which we hit an inflection point at a roughly breakeven level for cash.

  • We could be slightly positive, slightly negative.

  • That will largely be determined based on what we see in the market in the spring and whether that affects our investment decisions in inventory.

  • But then our expectation is then moving to FY16, that we should generate solid positive cash flows.

  • We've talked quite a bit about the fact that our land supply is at an adequate level and should support strong growth in sales and closings and revenue over the next couple of years without really needing to increase that land supply, and we think that's going to be a big driver towards getting us to a positive cash flow position.

  • What we will do with it when we get to that point is, really we will make that decision when we get there.

  • Today we're still seeing very strong opportunities in our business to continue to invest in strong markets and so to the extent that we see strong opportunities to reinvest in the business, that will continue to be our number one priority.

  • Beyond that we've continued to be a consistent dividend payer and we'll always look at our debt levels.

  • And to the extent that we feel like it's most appropriate for us to reduce debt, then we would look at that as well.

  • Eli Hackel - Analyst

  • Great.

  • Thank you very much.

  • Operator

  • Eric Bosshard, Cleveland Research.

  • Eric Bosshard - Analyst

  • Follow-up on Express, just curious as you continue to roll these homes out and have success, how are things evolving with the strategy, especially as you move into other markets, just thinking on if there's anything different on price points or features?

  • Anything that you can do to improve the margin profile?

  • Just give us a little bit of an update if you could on how the product is evolving?

  • David Auld - President & CEO

  • Well, as you roll out a new product, you gain efficiencies every time you build it.

  • And we are also giving a better definition of who's buying, why they're buying and targeting what we're building and what we're putting into it to that buyer.

  • So the general belief is, over time we'll get better at it and we'll make more money delivering it.

  • Bill Wheat - EVP & CFO

  • Thus far, Express, while the average margin is below the Company average, I think we would in general say that margins have been a little better than our original expectations on Express.

  • Still below the average and as we execute and roll it out I think there's definitely going to be opportunities to improve on that.

  • Eric Bosshard - Analyst

  • Great.

  • That's helpful.

  • Secondly in terms of land costs, if you give us some perspective on the cost of land that you're using and expect to use over the next year, if there's any meaningful change in the margin opportunity or the pricing requirements associated with the inflation that's taking place in your base of land?

  • Bill Wheat - EVP & CFO

  • No doubt.

  • Our land costs are a component that we do expect to increase.

  • We have seen our land as a percentage of our overall revenues, or on a per square foot basis, similar to how we look at stick and brick.

  • It has increased as well on a year-over-year basis, it's up about 6%.

  • And as we work through some of the communities where we bought the lots and land in 2011 and 2012, and begin to work through more of the ones we purchased in 2013 and 2014, we would expect that to increase somewhat.

  • But that's one of the things that we're certainly focused on and as we look at our expectations for pricing and demand in our markets going forward, we're certainly focused on trying to only pay what we can afford to hit our margins and return objectives going forward.

  • Eric Bosshard - Analyst

  • Is the up 6%, is that kind of sustained, that's what should be, or as you work into more of the 2013, 2014 land, does that tilt up a little bit that 6% number?

  • Bill Wheat - EVP & CFO

  • That's on a per square foot basis.

  • And that's where things have been just recently.

  • I would not be surprised for that to continue to move upward a bit as we move through 2015.

  • Eric Bosshard - Analyst

  • Okay.

  • Great.

  • Thank you.

  • Operator

  • Will Randow, Citi.

  • Will Randow - Analyst

  • Congratulations.

  • As you guys think about buying land today, want to get a sense of what are you assuming for ASP inflation if you will?

  • I'm assuming low-single digit, I know you're not looking for inflation in your numbers.

  • I would assume that land has actually become a bit cheaper as a percentage of, call it home sales revenue, over the last call it six months versus 2013 when we were at that bubble.

  • But I'd love to get your views on that.

  • David Auld - President & CEO

  • From a price of the lot to the selling price of the house, we haven't seen a decline over 2013.

  • Primarily, I think because what we delivered in 2013 we bought in 2012.

  • Mike Murray - EVP & COO

  • But as we look forward Will, underwrite a land purchase, we assume flat pricing on the homes as well as flat pricing on the cost to develop, if it's a land parcel to be developed in the stick and brick.

  • It's just too hard to start predicting this is going to go up by this percent, these costs will go up by that percent.

  • It's much more, for us, controllable underwriting process to look at pricing on a flat basis and then understand what that performance we expect it to be to make the investment decision.

  • Will Randow - Analyst

  • And in terms of regional exposure it seems like the Southeast is still firing pretty strong particularly Atlanta where you've done a recent acquisition.

  • I guess what's been your strongest market and your weakest market and where have you been surprised?

  • Thanks again.

  • David Auld - President & CEO

  • We've done, I wouldn't say we've been surprised.

  • We made a conscious decision to push assets to the East, Southeast particularly.

  • Just the demographics and the growth trends and the job growth there.

  • Texas, has been strong despite the softening of oil.

  • Texas is going to remain strong at least in my opinion.

  • Bill Wheat - EVP & CFO

  • I think our investments we've made the last couple years in terms of if you look at inventory growth by region, you're now seeing that deliver in our results, especially out of the Southeast and South Central.

  • Will Randow - Analyst

  • Appreciate the color.

  • Congrats again.

  • Operator

  • Mike Dahl, Credit Suisse.

  • Mike Dahl - Analyst

  • Wanted to follow up on the Texas comment.

  • Tying in Express.

  • If we look at the growth in Express, seems like it's accounted for about half of the overall growth in unit orders for the Company, presumably it's a bit higher in Texas.

  • So just wondering how you think -- would units ex Express still be up in Texas?

  • Just trying to think about how many of these comments are Horton specific versus the market.

  • Bill Wheat - EVP & CFO

  • I don't think there's any doubt that our units would still be up in Texas without Express.

  • Express certainly is a key part of our rollout right now in Texas and in other markets.

  • But I think there is some Company specific factors with respect to D.R. Horton in Texas versus what you may hear from some other builders.

  • Obviously we're based in Texas.

  • We've had strong positions in Texas historically and we have a strong operating platform there that's allowing to us to execute in the current market, and we believe would allow us to execute very effectively if the market changes.

  • It has historically and we believe that we're in very good position to handle whatever the market may bring to us coming forward.

  • Mike Dahl - Analyst

  • Got it.

  • Thanks.

  • Shifting gears, I guess curious your thoughts on the FHA premium issue given the 42% FHA, VA, and how your salespeople are thinking about this.

  • Is this something where that buyer is even aware of the change in premiums yet?

  • Or is it a tool that you have your salespeople needing to educate buyers and whether or not you've seen any initial response from that?

  • Thanks.

  • Jessica Hansen - VP of IR

  • Mike, it's definitely a tool for our salespeople.

  • And something that they're already out there talking to our potential home buyers about.

  • I think some people do come in educated just because that makes a lot of headlines when there are changes on that front, and then there's some people who probably come in that are a little less educated.

  • But our salespeople already have flyers out and about letting people know about the change.

  • And we're definitely using that to our advantage from a marketing perspective.

  • A little too early to know what kind of impact that could have, but clearly any incremental easing, in this case lowering of insurance premiums, we would look at as a positive.

  • David Auld - President & CEO

  • And whether they are educated about exactly what it means or don't know exactly what it means, it has people talking about buying a house.

  • And that's always a good thing for us.

  • Mike Dahl - Analyst

  • Okay.

  • Great.

  • Thanks.

  • Operator

  • Nishu Sood, Deutsche Bank.

  • Nishu Sood - Analyst

  • Wanted to follow up discussion about the gross margins.

  • It's been a while since we've had a normal year from a seasonal flow perspective, so if we do end up with that this year, stable pricing, incentives et cetera and closings volumes rising throughout your fiscal year, would we expect to see the normal gross margin leverage on fixed costs and therefore some increase this year as the year goes on?

  • Bill Wheat - EVP & CFO

  • Nishu, we really don't have any significant fixed costs in our gross margin at all.

  • Virtually all of our costs are associated and are variable within our margin, so we really don't see that leverage with volume across our year.

  • We do on the SG&A side, because obviously there's a fixed component to SG&A, but there's not in terms of margin.

  • What you would see if we see the normal lift, and we see consistency through the market, that may allow us in our communities to adjust pricing, which certainly could help.

  • But no, we don't expect anything seasonally from a leverage of fixed cost to help our margins.

  • We're guiding to a range of 19.5% to 20.5%.

  • Could have some potential quarterly fluctuations there, and right now at three weeks into January really the spring and what we see in the market in the spring, is going to determine the trajectory of our margins going forward for the rest of the year.

  • Nishu Sood - Analyst

  • Got it.

  • That's very helpful.

  • Second question, I wanted to ask about the January comments you made, and I know it's obviously a difficult time of year to assess trends but given the strong demand that you've been seeing, any kind of anecdotal indicators you've seen to help you understand where that's coming from?

  • Is that the market?

  • Is that the lower rate environment we've seen?

  • Gas prices some of the mortgage stuff, that has helped out, or is it just D.R. Horton specific?

  • Any kind of anecdotal color on that would be helpful.

  • David Auld - President & CEO

  • I think weather patterns have been better this year than last year.

  • We didn't give a weather report last year but I do think that weather impacted people's ability to get out and buy a house.

  • I think the FHA conversation has got people thinking about buying a house and going into models.

  • And the gasoline price is a huge -- that's money directly back into the economy, every week.

  • There is no better way to get money to into the economy then give it directly to the consumer.

  • So, I think it's a combination of all three things.

  • I think we're better positioned this year coming out of the blocks than we were last year.

  • So we're excited.

  • We've got good people working hard.

  • And are well positioned to capture what we think's going to be a good spring.

  • Nishu Sood - Analyst

  • Okay.

  • Great.

  • Thank you for your color.

  • Operator

  • Adam Rudiger, Wells Fargo.

  • Adam Rudiger - Analyst

  • On the heels of that question, this has been addressed, but I was just curious if you think about your year-over-year change in orders per community, how much of that do you think is due to, say in acquisitions, say the product mix, maybe the incentives that increased a little bit earlier in the year.

  • Just trying to get a sense of how much of this might be like on a true organic changes and buying patterns versus as asked earlier, Company specific?

  • Bill Wheat - EVP & CFO

  • Adam, there's clearly a couple of things running from our acquisition of Crown communities they're a very efficient community builder, so there is a component there as well as the mix to Express.

  • That's at a higher absorption rate.

  • There's no doubt those are components, but with our sales increase of 35% on an average selling community increase of 6%, obviously there's a lot of organic improvement as well across our organization.

  • And I really think that's a result of us being very focused, community by community, and that's been an emphasis across our organization over the last year to deliver community by community, hitting our absorptions, hitting our targets, staying on plan.

  • And then adjusting inventory levels, adjusting our pricing accordingly, whether it's down or up in order to make sure we stay on target to generate the best returns that we can.

  • I really think that's the biggest factor.

  • Adam Rudiger - Analyst

  • Got it.

  • Thanks.

  • The rest of my questions have been answered.

  • Thank you.

  • Operator

  • (Operator Instructions).

  • Michael Rehaut, JPMorgan.

  • Michael Rehaut - Analyst

  • Nice quarter.

  • The first question I had, just to go back to the community count and absorption stats from the quarter itself, community count year over year slowed a little bit and you said was down a little bit sequentially.

  • Is that more of a one quarter phenomenon at least from a sequential standpoint?

  • Given that you had sort of this consistent low double-digit growth in 2014?

  • Would that stay in the mid-single-digit year-over-year rate for 2015 or how should we think about that?

  • Jessica Hansen - VP of IR

  • Mike, what happened this quarter is pretty much exactly in line with what we shared on our last call.

  • We talked about, for the year we would anticipate our community count being up only a low- to mid-single digit range.

  • I think we still feel the same way about that after this quarter.

  • We were up 6% on a year-over-year basis and we were down 2% on average sequentially, so we could see some more sequential quarters that are decreases.

  • But we'll see.

  • A lot of it depends on our sales pace, and as always what we see in the spring, but I think we still think for the full year low- to mid-single digits is about as much as we would get in terms of an increase in community count.

  • And we still expect the vast majority of our growth this year to come from an increase in absorptions rather than communities.

  • Michael Rehaut - Analyst

  • Great.

  • That's very helpful.

  • Switching to the sales pace, maybe a two-parter, with a strong improvement in 1Q, and that follows a similar type of rate in 4Q on a year-over-year basis, wanted to get a sense of, if you strip out the mix shift from the success of Express, what the -- let's call it the D.R. Horton branded bread and butter communities, would we see a similar type of increase or would it be more like in a maybe mid-teens type of rate?

  • That's one.

  • And two, just a clarification on the -- when you talk about accelerating sales pace in January that's typical with seasonality.

  • I presume then if those comments were more towards seasonality, that on a year-over-year basis maybe you're still seeing a similar type of absorption that you saw in 1Q?

  • Mike Murray - EVP & COO

  • Mike, on the seasonality we are seeing January move in line with expectations.

  • But three weeks in, it's hard to call a full month and to compare year over year.

  • It's kind of a short window for the comparison.

  • We are encouraged with the January sales pace.

  • It's meeting our expectations.

  • But there is a seasonal lift that generally occurs this time of year as well.

  • And then the prior question on the organic Horton sales pace growth, we are getting a lift from the Express rollout.

  • That's good but we are also seeing strong solid growth in the Horton brand as well.

  • Michael Rehaut - Analyst

  • And is it mid-teens type of number the right way to think about that?

  • I know it's maybe difficult parsing out, but clearly there's a positive mix impact from Express.

  • Just trying to get the order of magnitude.

  • Bill Wheat - EVP & CFO

  • Mike, we don't have that specifically.

  • But clearly there's still a strong double-digit growth across all of our brands right now.

  • To nail it down to whether it's 15 or whether it's 20 would be a little bit difficult for us right here.

  • Michael Rehaut - Analyst

  • Okay.

  • Great.

  • Thanks very much.

  • Operator

  • Jack Micenko, SIG.

  • Jack Micenko - Analyst

  • In thinking about the mix and the absorption and the backlog conversion, are you going into spring 2015 with a greater, larger number of finished specs than you did in 2014?

  • David Auld - President & CEO

  • Yes, we are.

  • And it really ties to our expectation of what the market's going to be.

  • Jack Micenko - Analyst

  • Okay, and can you give us a magnitude on a same-store sales basis how many more you think you have versus last year?

  • Is that something you can give us?

  • David Auld - President & CEO

  • It's tied to the absorption per flag.

  • As we have pushed up absorptions in our subdivision performance, we have increased spec levels to facilitate the next 90 days sales.

  • Jessica Hansen - VP of IR

  • Jack, in absolute terms we're up about 1000 completed specs on a year-over-year basis.

  • Jack Micenko - Analyst

  • Okay.

  • That's helpful.

  • And then on the impairment line, knowing that it's a fluid situation and you're going to be opportunistic.

  • The question is more, in context, are you going to be -- should we think of 2015 on that line as something closer to 2014 or something lower like the 2013 or 2012 numbers?

  • Just from a volume I think you said you had $304 million in land you look to sell or something like that, any context there?

  • Mike Murray - EVP & COO

  • As we said that's kind of an opportunistic taking advantage of pulling those assets out.

  • Sometimes that results in impairments, sometimes it doesn't.

  • Generally my gut would be that it be a little bit inside the 2014 level.

  • Hard to exactly predict it though.

  • Jack Micenko - Analyst

  • That's fair.

  • Bill Wheat - EVP & CFO

  • Project by project, the $304 million, that's our land held for development some of which we may choose to bring out and build homes on, some of which we may decide at some point to sell.

  • What we've seen thus far is typically the deals that we've been able to bring out in build homes on or develop and build homes, we've had very few impairments on those.

  • As projects that we determined that our best option is to sell in the current markets has given more of our impairments.

  • So it will depend on our evaluations project by project.

  • Jack Micenko - Analyst

  • Okay.

  • Thank you.

  • Operator

  • Jade Rahmani, KBW.

  • Jade Rahmani - Analyst

  • Just two small ones.

  • What was the mix of spec sales in the quarter and can also give the mix of first time and first time move-up at your mortgage company?

  • Thank you.

  • Jessica Hansen - VP of IR

  • Jade, in terms of our specs as a percentage of our closings this quarter, it was right in the normal range we would see, which was around 70% to 75%.

  • And then the mix of our products for the mortgage company, were you asking specifically about FHA and VA?

  • Jade Rahmani - Analyst

  • First time

  • Jessica Hansen - VP of IR

  • First time, I'm sorry.

  • We were right around 40%, so back kind of in line with a more long-term average range for us.

  • Not surprisingly our Express percentage is running higher than the Company average.

  • Jade Rahmani - Analyst

  • Thank you very much for taking the questions.

  • Operator

  • Mike Roxland, Bank of America Merrill Lynch.

  • Mike Roxland - Analyst

  • Congrats on a good quarter.

  • As you begin to open communities, I think this goes back to one of Bill's comments, as you begin to open communities on the lots you purchased in 2013 and 2014, is it possible that we could see further margin compression, especially if you're unable to get a better balance between rising inputs and modest price appreciation?

  • Bill Wheat - EVP & CFO

  • Could you repeat some of that, Mike?

  • I'm not sure we're quite following.

  • Mike Roxland - Analyst

  • Well, I think you mentioned you made a comment that expect to see a lot of costs continue to obviously increase and could serve as a potential headwind for gross margins going forward.

  • So if you're unable to get a better balance between rising inputs in aggregate, you're obviously going to be dealing with rising inputs, higher lot costs, prices that are modestly improving.

  • Could we see some continued gross margin compression or future gross margin compression in outer years?

  • Maybe not quite 2015 but let's say 2016 and beyond?

  • David Auld - President & CEO

  • We don't have that kind of visibility.

  • If the market gets better, our margins will improve.

  • And the differential in land costs is not going to drive margins significantly higher or significantly lower.

  • Bill Wheat - EVP & CFO

  • What we ultimately pay for land is really the output of where we expect the market to be when we're buying it.

  • My comments were specific to the next few quarters in 2015 as we're working through land that we may have purchased a bit higher prices in 2013 and 2014.

  • But clearly as the market moderated a bit in 2014, the land market while it may not have come down much, certainly isn't rising at the pace it was.

  • So that's self adjusting at some point here so the comment really beyond the next few quarters, we really don't have that visibility.

  • Mike Roxland - Analyst

  • Got it.

  • Thanks for the color.

  • Quickly on homebuilding SG&A, came in a little better than we expected.

  • Is it possible to talk about the SG&A of the individual brands, specifically Express and Emerald?

  • Given that Emerald is relatively a new market, new biotype for you, as you gain experience in producing that product, I think you actually sold a few million dollar homes in Texas last quarter.

  • Have you been able to more effectively leverage your volume with Emerald?

  • Mike Murray - EVP & COO

  • We don't track the SG&A by brand.

  • One of the strategies we've looked to do is to leverage our operational platform to serve new customer segments, and so that doesn't require a repeat of all the infrastructure to support these different operations.

  • So we haven't tried to parse out what the home building SG&A burden is to those individual brands.

  • But I would say that, as we have anniversary and more than that, the rolls outs of these things, we have gotten better, our execution has improved.

  • We have had some of the inefficiencies that just comes along with starting something new are behind us, and so I do think that we're gaining efficiencies and certainly as the volumes increase it helps to absorb the SG&A costs as well.

  • Mike Roxland - Analyst

  • Got it.

  • Thank you for four the color.

  • Good luck for the balance of the year.

  • David Auld - President & CEO

  • Thank you.

  • Operator

  • That is all the time we have for questions.

  • I would like to turn the floor back over to management for any additional or closing remarks.

  • David Auld - President & CEO

  • Thank you, Manny.

  • We appreciate everyone's time on the call today.

  • And look forward to speaking with you again in April to share our second-quarter results.

  • Have a great day.

  • Operator

  • Ladies and gentlemen this does conclude today's teleconference.

  • You may disconnect your lines at this time and thank you for your participation.