霍頓房屋 (DHI) 2015 Q2 法說會逐字稿

Good morning, and welcome to the second 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.

It's now my pleasure to introduce your host, Jessica Hansen, Vice President, Investor Relations for D.R. Horton.

Thank you, Jessica.

You may begin.

Thank you, Kevin.

Good morning and welcome to our call to discuss our financial results for the second quarter of FY15.

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's 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 mornings Earnings Release can be found on our website at 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 again post supplementary historical data on the Investor Relations section of our website for your reference.

This supplementary information includes historical data on gross margins, change in active selling communities, product mix, and our mortgage operations updated for this quarter's results.

Now, I'll 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, our Executive Vice President and Chief Operating Officer; and Bill Wheat, our Executive Vice President and Chief Financial Officer.

The Spring selling season is in full swing at D.R. Horton.

During the second quarter, housing market conditions were healthy and relatively stable, with new home demand growing moderately across all our markets.

Our sales absorption improved significantly during this quarter, as our homes sold increased by 30% from a year ago on a 4% increase on active selling communities, with double digit percentage sales increases in all three of our brands.

This reflects strong performance in our core D.R. Horton communities, and growth of our Emerald Homes and Express Homes Brand, enabling us to expand our industry leading market share.

Compared to the year ago quarter, our number of homes sold doubled in our luxury Emerald communities and tripled in our entry level Express communities.

Our homes closed increased by 33%, and we delivered another solid quarter of profitability with $230.1 million in pretax income on $2.4 billion of revenue.

We had a great first half of 2015 and expect the second half to be even better, with a sales backlog of 12,177 homes at March 31, and a well stocked supply of land, lots, and homes.

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

Mike?

Net income for the second quarter increased 13% to $147.9 million, or $0.40 per diluted share, compared to $131 million, or $0.38 per diluted share, in the year ago quarter.

Our consolidated pretax income increased 14% to $230.1 million in the second quarter, compared to $201.9 million in the year ago quarter, and homebuilding pretax income increased 9% to $208.6 million, compared to $191.7 million in the prior year quarter.

Our second quarter home sales revenues increased 38% to $2.3 billion on 8,243 homes closed, up from $1.7 billion on 6,194 homes closed in the year ago quarter.

Our average closing price for the quarter was $281,300, up 4% compared to the prior year, primarily driven by a 3% increase in our average home size.

Bill?

The value of our net sales orders in the second quarter increased 33% from the year ago quarter to $3.2 billion, and homes sold increased 30% to 11,135 homes on a 4% increase in active selling communities.

Our average sales price on net sales orders in the second quarter increased 2% to $284,400.

Cancellation rate for the second quarter was 20%, compared to 19% in the year ago quarter.

The value of our backlog increased 27% from a year ago to $3.6 billion, with an average sales price per home of $293,500, and homes in backlog increased 21% to 12,177 homes.

Our backlog conversion rate for the second quarter was higher than our expectations at 89%.

We expect our third quarter backlog conversion rate to be in the range of 78% to 80%, up from 76% in the third quarter of last year.

Jessica?

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 our Emerald homes and Express homes brands.

Emerald homes, our brands for higher end, move up, and luxury communities is now available in 41 markets across 16 states.

Our Emerald product offerings have been well received by home buyers, and we plan to continue expanding our footprint of higher end communities across the country.

In the second quarter homes priced greater than $500,000 accounted for 15% of our homes sales revenue and 6% of our homes closed.

Our express homes brand, which is targeted at the true entry level buyer, focused primarily on affordability, is now being offered in 44 markets and 13 states, with the significant majority of our express sales and closings to date coming from Texas, the Carolinas, and Florida.

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

This quarter, express accounted for 18% of our homes sold, 13% of homes closed, and 8% of home sales revenue.

The average closing price in an express home in the second quarter was $179,000.

We are striving to be the leading builder in each of our operating markets with all three of our brands, and we plan to maintain consistent broad diversity in our product offerings over the long term.

Bill?

Our gross profit margin on home sales revenue in the second quarter was 19.7%, down 10 basis points from the first quarter and in the middle of the expected range we shared on our last call.

The consistency in our gross margin in the first two quarters reflects the stability of most of our markets today, and the normalization of housing market conditions we have seen over the past year.

While the increases in our average sales price have moderated as we have increased our mix of entry level product, we are raising prices or reducing incentives when possible in communities where we are achieving our target absorptions, and we are working to control cost increases.

These factors have enabled our gross margins to stabilize within our normal historical range.

Our general gross margin expectations remain unchanged from what we shared the past several quarters.

In the current stable housing environment, we continue to expect our average home sales gross margin to generally 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 and interest costs.

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

For the upcoming third quarter, we expect our home sales gross margin will be in the range of 19.5% to 20%, consistent with the first two quarters of the year.

Mike?

Homebuilding SG&A expense for the quarter was $242.4 million, compared to $187.9 million in the prior year quarter.

As a percentage of homebuilding revenues, our SG&A improved 70 basis points to 10.4%, compared to 11.1% in the prior year quarter, as our significant revenue increase this quarter improved our SG&A leverage.

Based on our projected backlog conversion, we expect our SG&A, as a percentage of homebuilding revenues in the third quarter, to be in the range of 9.9% to 10.2%, which would be a year-over-year improvement of 40 to 70 basis points.

Our ongoing annual target for SG&A, as a percentage of homebuilding revenues, is 10%.

Jessica?

Financial Services pretax income in the second quarter increased 111% to $21.5 million from $10.2 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 45% of the mortgage company's volume, compared to 43% 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 88%.

David?

At the end of March, we had 21,300 homes in inventory, of which 1,700 were models, 10,200 were spec homes, and 4,100 of the specs were completed.

Our construction, in progress, and finished home inventory increased by $196 million during the quarter, due to our seasonal home construction activity for the spring selling season.

Our second quarter investment in lots, land, and development totaled $507 million, of which $282 million was to replenish finished lots and land, and $225 million was for land development.

At March 31, 2015, our lot portfolio consisted of 122,000 owned lots, with an additional 55,000 lots controlled through option contracts.

64,000 of our lots are finished, of which 33,000 are owned and 31,000 are auctioned.

Our 177,000 total lots owned and controlled provide us 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 absorptions, margins, and inventory levels.

As our underwriting criteria supports our ongoing goal of continual improvement in the Company's homebuilding pretax return on inventory.

Bill?

During the second quarter, we recorded $4.4 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 $8.1 million of inventory impairment charges primarily related to an expected land sale in our Southeast region.

Our inactive land held for development of $271.3 million at the end of the quarter represents 12, 900 lots, down 7% from December and down 41% from a year ago.

We continued to formulate our operating plans to work through each of our remaining inactive land parcels to improve cash flows and returns, and we expect that our land held for development will decline further this year.

We will also 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.

Mike?

At March 31, our homebuilding liquidity included $665.8 million of unrestricted homebuilding cash and $710 million of available capacity on a revolving credit facility.

We had $175 million of cash borrowings and $90 million of letters of credit outstanding on the revolver.

Our gross homebuilding leverage ratio was 39.6%, and our homebuilding leverage ratio net of cash was 34.7%.

We repaid $158 million of senior notes at maturity in February, and the balance of our public notes outstanding at March 31 was $3.3 billion which includes $500 million of 4% senior notes we issued in February.

We have no debt maturities for the remainder of FY15, and as of today, we have a total of $542.6 million of senior note maturities in the next 12 months.

At March 31, our shareholders equity balance was $5.4 billion, and book value per share was $14.78, which is up 11% from a year ago.

For the fiscal year to date period, our cash used in operating activities was $168.8 million, down from $265.8 million in the year ago period, reflecting our efforts to improve our cash flow from operations.

Jessica?

Looking forward, we would like to update our expectations for the full fiscal year, which are still relatively consistent from the beginning of the year.

As we are well into the Spring selling season and gaining better visibility, we are tightening the ranges that we originally provided.

Our updated expectations continue to be based on the current relatively stable housing market conditions, and we still expect to generate a similar level of profitability and operating margins as our original range.

In FY15, we expect to close between 35,500 and 37,500 homes, and generate consolidated revenues of between $9.8 and $10.5 billion.

We anticipate our home sales gross margin for the full FY15 will range from 19.5% to 20%, consistent with our margins during the first half of the year.

We estimate our homebuilding SG&A expense will range from 9.9% to 10.2% of homebuilding revenues for the full year.

We expect our financial services operating margin to range from 30% to 33%, slightly higher than our original range, and we continue to forecast our FY15 income tax rate to be between 35% and 36%, and our diluted share count to be approximately 370 million shares.

For the third fiscal quarter of 2015, we expect our number of homes closed to approximate a beginning backlog conversion rate in the range of 78% to 80%.

We anticipate our third 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, and we expect our homebuilding SG&A in the third quarter to be in the range of 9.9% to 10.2% of homebuilding revenues.

David?

In closing, our second quarter growth in sales, closings, and profits in a relatively stable market is the result of the strength of our operating platform, and we're excited about the remainder of the year and opportunities ahead.

We remain focused on growing both our revenue and pretax profit at a double digit pace, while improving 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 D.R. Horton, Emerald, and Express brands, attractive finished lot 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 we look forward to working together to continue to grow and improve our operations.

This concludes our prepared remarks.

We will now host questions.

Thank you.

(Operator Instructions)

Our first question today is coming from Stephen East, from Evercore ISI.

Thank you, good morning, guys.

Maybe I'll start out with Express, David.

You've seen some great growth there on it.

Are you all -- a couple different things, there.

Are you seeing more competition, yet, come into the market to serve this customer base?

And then, you all talked a little bit about your growth.

Maybe what we should expect in the timeline, and what type of community openings, etc?

And then, where do we sit with the gross margin with that versus the rest of the Company?

Well Stephen, at this point, we aren't seeing a lot of competition, people trying to come in and compete with us.

We continue to open markets pretty much as fast as we can, so we are seeing good growth in that brand, and expect it to continue.

There seems to be a lot of talk about the lack of first time home buyer coming into the market.

That's certainly not something we're seeing.

Where we have been able to get product on the ground, we have found buyers.

From a margin perspective, it's running below the Company average, but it's in line with our expectations, and in some cases, we are able to push margins up.

Solid margins I would add to that.

Solid margins, and absorptions are very strong, so absorptions are probably a bit higher than our original expectations.

And that then drives the returns in line with our expectations.

We're very happy with it.

Okay, well what we've seen in the field has been amazing response to it, I guess you are.

If we look at Texas more broadly and Houston specifically, I know your numbers are really good.

Can you give us a little bit of color, though, about what you are seeing as a progression month by month?

And maybe what April looked like, particularly in Houston as everybody is concerned about it?

Stephen, I've spent the last month and a half driving our Texas markets including Houston, with the Regional President Rick Horton and his Division Presidents, and you would think the market would be slowing down, but we are seeing consistent performance pretty much across the board.

And our April sales are a continuation of what we saw in the first quarter.

Stephen, our Houston sales were in line with expectations for the quarter.

Our south central region was up 33% in sales, and Houston was pretty much in line with the region, so still strong increases out of that market for us.

I can tell you we aren't seeing a slowdown in our projects.

Okay thanks a lot.

I appreciate that.

Thank you.

Our next question today is coming from Ben Benner, from KeyBanc Capital Markets.

Good morning, Ken Zener here.

Good morning, Ken.

So no good deed goes unpunished here today.

You know, you talked about orders in line with expectations.

From our analysis, while obviously you're up very strong year over year, if I look at pace, it looks as though you're doing normal seasonality, sequentially.

Could you just comment on that, and if that's accurate?

Yes, we would consider it to be in line with normal seasonality.

Our sales were up I want to say right around 50% sequentially, even when you take into account our change in active selling communities, as we've talked about for a little while.

Those increases have moderated, and so our sales were up about 51% from December to March on about a 2% increase in selling communities, so right in line with what we would expect for this time of the year.

It's like seasonality is consistent with what we see, but clearly we took a step up in absorptions this year versus last year, and that is continuing through the Spring.

Correct, and David, I guess it's interesting.

Our view, our thesis is quantity not quality, pointing to actually a lack of supply at the low end being the inhibitor for cyclical growth rather than demand, which would be more loan oriented.

You seem to express that view relative to Express Homes.

Could you talk about why you think it's supply not demand, when so many people are focused on tight loans as the issue?

What are the differences between your Express buyer and traditional Horton?

Thank you.

Well typically the Express buyer is buying their first home.

I think 60% of our Express buyers are first time home buyers, or they are people that are very conservative and looking for a great value.

I'm not sure there's a lot of difference other than their income levels between the people buying the Express Home and people buying a D.R. Horton home.

Based on our experience thus far, where we seeing when we put the product out there at an affordable price for those entry level buyers and the current mortgage environment, there is plenty of demand.

We aren't having any problems selling those houses, so from that standpoint, our evidence would show that we think that any limitations on entry level buyer is supply driven.

The mortgage environment, someone has a decent credit score, decent credit history, they can get a mortgage today.

But you do think housing demand is elastic relative to the home price, is what Express would tell you?

Absolutely.

It's a value driven market.

Thank you.

That's pretty much across the board.

Thank you.

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

Thanks.

First question I wanted to ask was about pricing power.

So you folks are very clear and appreciate the color.

You've described normal demand trends, and you talked about the Spring selling season being normal.

Even toned down your gross margin expectations a little bit, but on the other hand, you've now had I think three or four quarters in a row of nearly 30% quarter growth, your absorptions this quarter being up, what, 25%, 26% year over year, and you've actually taken up your volume expectations.

So how do I reconcile those?

I'd think with those sort of volume increases, you would be seeing greater pricing power, but that doesn't seem to be what you're saying?

So how do I reconcile those two?

Well, I can tell you the way we're looking at it is a return based model, and if we can generate a 20% return at the subdivision level, then it's going to drive significant improvement to our operations and overall returns at the Company.

So where we have the ability to maintain that absorption level and increase pricing, we do, and I can tell you we haven't seen a significant number of our projects where the margins have improved.

We are seeing now that we're hitting the pace and our planned pace in various communities, that we get there and then we feel we have pricing power coming back.

Incentives have not been increasing.

Incentives have been essentially flat for about a year, so we're seeing as pace improves, we will get some pricing power back.

We're seeing it in communities, and we're very happy with getting just stability in our margins.

The other thing, Nishu, to keep in mind is our mix shift.

And so, our average sales price has moderated in terms of increases, but that's with Express Homes now accounting for 18% of our sales this quarter and 13% at closings at an ASP of about $179,000.

So, we are raising prices in many of our communities today, but we do have that express growing mix that's offsetting our overall ASP that you're seeing.

Got it.

Thanks that's very helpful.

And second question, Easter came a couple weeks earlier than it did last year, so I wanted to ask if there was any effect on demand?

Maybe it pushed some orders from March into April?

So I guess maybe if you could comment on March relative to April, to just let us know if there's any affect there?

I believe both year's Easter was in April, both years, slightly earlier this year.

We don't see a big impact there, as David said earlier, April continued the same trends we saw through the March quarter.

Okay, thank you.

Thank you.

Our next question is coming from Stephen Kim from Barclays.

Hello guys, can you hear me?

Good morning.

Good to hear you, Stephen.

Are you there?

Yes.

Okay, sorry about that.

Technical issues.

First question relates to Express and Emerald.

You've been at this now for about a year, or more in the case of Emerald, and I'm curious about how your thoughts are evolving around the product design, and how to refine the product offerings in Express and Emerald?

One of the advantages of course is that you've been kind of early in launching this product.

I imagine when you first came out, you had an expectation for what your customers would be looking for, and I was wondering if you could share directionally what you've found as you've gone out there?

Have you found, for example, at Express people have been looking for not the just really small boxes, but also there's some willingness to maybe move up in terms of size?

And in the Emerald, has there been any preference for maybe a little more design or dirt sales, so that they can customize it more than you initially anticipated when you rolled that product out?

When we first launched Emerald, we were launching a brand that was different than what the perception of D.R. Horton had been in the past.

So, we built really, really nice homes, and I think as we have met with these customers and kind of defined what they're looking for, we're modifying that and ultimately it comes back to the same thing that's on the Express side.

People want a great value at a great location.

So we're simplifying what we're doing on the Emerald side, focusing on location, but delivering a competitive house in that market.

Within the Express product, we have tried to be consistent with the product offering, but we have been sensitive to the markets and where there is demand for greater square footage, we're certainly delivering that and adjusting the mix community by community to meet what that buyer is looking for in that community.

It's not a one-size-fits-all approach, it's not just the smallest house, as you said.

It's driven by a family need.

The bed room counts and square footage that they need, and with the Express efficiencies we gain, we can deliver that value and deliver that square footage at a price they can get the mortgage for.

When you launch Express or Emerald across all of our markets, you're going to learn a lot and make modifications to improve returns through the process, so we're looking at the market.

We're identifying where we can get better, and we're pushing to get better.

So if I could paraphrase what I think I heard you say, is it sounds like in Emerald there's maybe an emphasis to really, if anything, do less customization and maybe a little bit more -- that would lead to a little bit more spec activity, but more of a focus on value, and in Express I hear there's elasticity upwards in terms of the size of the homes.

Did I generally hear that right?

You would be 100% correct.

My second question relates to backlog conversion rate.

I think you'd gave guidance for conversion rate just a little bit higher than where you were last year.

That would represent a deceleration in turnover rate from what you did in the Second Quarter.

Generally speaking, we think of conversion rates or backlog turnover rates going up as you do more spec activity, and what we've seen here from the way we model your spec activity, it's continued to go up, but yet you seem to be looking for a bit of a moderation in your backlog turnover rate.

So I was curious if you could talk a little bit about why that is?

Is there some exogenous factor that we aren't thinking about here?

Or are you just being conservative on your backlog turnover rate?

If you could reconcile that for me, that would be great.

We did exceed our expectations in the second quarter, higher than our range, and a bit higher jump in the backlog conversion from Q1 to Q2 than we've seen in the past.

What we're guiding to for Q3 in the range of 78% to 80%, as you mentioned, is higher than our conversion rate last year, and it's also in line with what we're seeing in our business and in our updated forecasts, really from the community level, up.

So, that's really a large part of what drives our guidance on conversion rate, is what our guys, what our operators are telling us they're going to do.

We have had great sales in Q1, and so our backlog is up significantly, and certainly we are going to be focused on closing every home that we can that's ready to close in whatever period it's ready, but today, based on the plans that we have in our business, the visibility that we have in our business, it lines up with that high 70%'s to 80% conversion rate for Q3.

Steve, if you look at the last five years, we really have seen a slight tic down from Q2 to Q3 in our backlog conversion rate, so what we're projecting is in line with our sequential changes over the last few years.

Yes, got it on seasonality.

Thank you very much guys, appreciate it and good luck.

Thank you.

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

Good morning, and nice quarter.

Just one question for me.

I just wanted to understand your comment.

Obviously you're getting tremendous demand with the entry level product, and from a mix standpoint I think that would drag down your ASP, which continued to increase?

So I'm just trying to understand from a modeling standpoint, whether it's third quarter or fourth quarter.

Does ASP start to turn negative on a year-over-year basis just because you're selling more of the Express Home?

Bob, we've really from the start of the year, we said we did expect our ASP growth to moderate to the low single-digit range, and that's where it is today.

There's a number of factors that offset that, so it's a little difficult to say whether it will continue to be slightly up, flat, or slightly down.

I wouldn't say we have an expectation.

It could be down.

Certainly as Express grows, that does pull the ASP down, but we're seeing good sales in Horton, good sales in Emerald.

We're seeing pricing power in a number of our communities as well, so -- ASP is one of the most difficult things to predict, exactly, where it's going to be, quarter to quarter.

So I think we would stay consistent with what we have said all along this year.

We expect it to continue to moderate, and to the extent it's up, it will be up in the low single digits.

Got it and other question nobody's really touched on.

How are you thinking about land spend and land acquisition, in terms of the cycle and where you're at?

Thanks very much.

I think so far this year we're about consistent in our land spending, and largely looking at a replacement of the lots that we've been delivering.

We feel like we've got a very strong owned and controlled lot position.

Over 170,000 lots available for us, so I don't see a huge growth in our land acquisition spending at the present time, but we do still see opportunities in all of our markets and we're continuing to invest.

I think the key for us right now is, we don't have to buy anything.

We're in a very strong position.

Where we see A-plus deals, then we can, we are moving on those with a lot of energy and a lot of aggression, so.

Just to replenish our lot supply at the level of volume we're at today, there's still significant investment.

We'll be north of $2 billion.

$2.0 billion to $2.3 billion, somewhere in there in land spend for the year, consistent with last year.

Got it.

Thanks very much.

Thank you.

Our next question today is coming from Mike Dahl, from Credit Suisse.

Hi, thank you.

My first question, understand that on a total community basis the community count growth has been fairly modest, but wondering just given the rollouts in Emerald and Express, if you could break down -- you said sales doubled in Emerald, sales tripled in Express.

What was community count growth versus absorption in those two parts, specifically?

You know, Mike we haven't actually disclosed our community count in total or by brand, but clearly, we are growing our Express community count at a faster rate than the rest of the Company.

Note, in absolute terms, the number of homes sold tripled, and then on Emerald, we're growing that, still.

We're growing it at a slightly slower rate than we are Express, but our absorptions are improved dramatically in both of those brands, in addition to having some community count growth as well.

Got it, and then I guess this is my second question, if we think about Express, I know at least the product that we have seen in person, it seems like the strength in absorption is such that the backlog delivery times have stretched out to, call it, five or six months.

And so just wondering, at what point do you think you've maxed out sales velocity, in terms of absorption at Express?

So incrementally, you're likely to just see growth coming from the community rollout versus incremental gains in absorption at Express?

It's a project by project comment.

I will tell you we have a lot of projects out there where we continue to expect absorption per community to increase.

Some we have maxed out.

Some of our bigger Express offerings, we are building everything we can build in it.

And those projects, we're taking margins up.

That comment would be no different in a Horton community or an Emerald community.

That's the case community by community across our country, all the time.

Okay, thank you.

That's a very good problem.

Thank you.

Our next question today is coming from Michael Rehaut, from JP Morgan.

Thanks, good morning, everyone.

Good morning.

First question I had was just, wanted to circle back to the pricing trends during the quarter.

I think, David, in your initial comments you kind of just characterized the market overall as healthy and relatively stable, demand growing moderately, and I think, Jessica, you highlighted as well that you're still raising prices in a bunch of communities.

But overall, how would you characterize the pricing environment?

What we've heard is kind of just stable to maybe slightly increasing, and incentives by and large, incentives/discounts by and large stable.

Obviously market to market that varies, but on a broad basis is that kind of what you're seeing?

That's pretty much the market out there right now.

It's a great market for us because we've got the land, we've got the operating platform, the people in place, so we aren't having to make any investments.

We're just riding the market.

If it jumps up, then labor becomes a bigger issue, and some of the higher priced land that had been bought by others becomes competitive, and we like the way it is right now.

It's a good market for us.

Consistent, absorptions are consistent, margins are consistent.

Just continuing to gain market share.

Certainly, and I guess just a second question here, appreciate all of the detailed guidance for the year, and like you said, kind of tightening the ranges here and there.

One area of focus for many is the gross margins and that did come in a little bit of course on the flip side, you slightly raised the closings and revenue and lowered SG&A, so don't want to exclude that, but people do focus on the gross margins.

The slight lowering of the range or lowering the high end of the range.

Could you just elaborate on what was the driver there?

Is it mix, is it maybe costs coming in slightly higher?

Any color there would be helpful.

Michael, I think we're seeing that we're six months into the year at this point, so we've been through a very good Spring selling season.

We posted two quarters of margin in the 19.7%, 19.8% range, and looking forward we see continued stability around that level.

So, it's not necessarily price pressure that's come into play.

I think we've seen that our pricing relative to our sales price, our cost increases relative to sales prices have moderated, and we're not losing ground there.

We're seeing some stability in our reported margins and probably our go forward margin at this point, so at this point half way through the year at the turn, we're looking to tighten that range down around what we posted.

We're very pleased with that, to find that stable level in our normal range, and obviously we'll work to improve it.

You alluded that mix change does have an impact on this.

Our Express margins, which are making up a bigger percentage of our deliveries, are at a slightly lower margin rates on average with their faster absorptions than the Company average right now.

Fair enough.

Appreciate it.

Thanks guys.

Thank you.

Our next question today is coming from Susan Maklari from UBS.

Good morning.

Good morning, Susan.

First in terms of the Express product, can you talk a little bit about your ability or confidence in realizing the efficiencies that you see in those core three markets where you're currently selling through, as you expand into the rest of your areas?

The Express was designed to be a very efficient product to build, and as we build it more and more times, we're getting better and better at delivering it, and that's across all three of those markets.

Okay, and then in terms of material pricing and any labor constraints, can you just sort of talk to that and if there's anything we should be aware of, there?

Part of what I think is going to be one the big constraints in this cycle is going to be labor, and we are focused on creating efficient plans that will allow us to build more houses with less labor.

And that's been an ongoing effort now for really the last couple years.

Susan as Mike just alluded on one of the previous questions, we have seen our rate of increase in our costs come down a bit, so our stick-and-brick costs per square foot this quarter was up about 4.5% on a year-over-year basis.

That still wasn't in line with our revenues, but it's a smaller increase than we have been seeing and headed in the right direction.

Sequentially, we actually saw our stick-and-brick cost increase per square foot almost essentially in line with what our price per square foot did, so we made a lot of progress on that front, and plan to continue to do so as we move throughout the year.

Okay great.

That's very helpful, thank you.

Our next question today is coming from Will Randow from Citigroup.

Good morning, and thank you for taking my question.

Good morning, Will.

In terms of this cycle versus past cycles, how are you thinking about cash on cash returns, or stated differently, given I wouldn't call it necessarily slowdown, but from a land investment perspective, you're not buying it -- I'll call it the same year-on-year pace you previously were.

Would it make sense to step up the dividend or think about some other capital returns to shareholders?

First as we look at our land supply, we did make a lot of investments early in the cycle, and so we built up our land supply to a sufficient level to support really strong top-line growth for a few years, here.

So we are working into that, so our requirements to increase our land supply are really not there right now, so the pace of spending has slowed, but as we said earlier, our pace will continue to be at a very strong pace in terms of reinvesting in the business.

We're constantly evaluating our opportunities to invest market by market.

We're focused on achieving a 20% ROI, so pretax income over average inventory on every project that we invest in is one of our key investment criteria, and to the extent that we're finding deals that can do that in markets that we feel confident in, we'll continue to invest strongly in our business.

That being said, we do expect, and one of our goals is, to continue to improve our cash flow.

We did see and are seeing improvement in our cash flows from operations.

We've improved year to date $100 million better in terms of cash used from operations this year versus last year, and we believe we'll see significant improvement by the end of the year on a year-over-year basis.

So heading towards a break-even and hopefully positive cash flow position.

We're focused right now on achieving that, and when we achieve that, certainly that opens up a lot of flexibility for us either to invest further in the business, to look at other opportunities, to look at distributions to shareholders as well.

All those things come into play when we get to a stronger cash flow position.

Thanks for that and just a quick follow-up on Texas.

It seems like, from our vantage point, things slowed a little bit in January and February and then snapped back towards the end of March.

I guess from that perspective, what activity have you seen?

And is there a big differentiation point between your higher ASP homes and lower ASP homes?

And thanks again.

I don't think we've seen anything in Texas outside of our expectations, and pretty consistent performance across our price points.

Our exposure in Texas is long and deep.

We've been here a long time.

It's home, and our presence in the markets is very tailored to the individual markets and we have not seen anything outside in Texas that's occurring outside of our expectations right now.

We do watch it closely, but we're very happy with Texas' performance.

We saw normal seasonal trends, Will, in January and February, so our sales cadence in Texas was increasing as we moved throughout January and February, which is what we would expect as we move into the early part of the Spring.

I have been in almost every project, every flag that we have in Texas over the last month and a half, and I can tell you there is no defining point about whether one of them is doing really well or not doing well.

Across the board, they are almost 100% on target and at the price point of the Express or the price point of the Emerald, Texas is a good market for us right now.

Thanks again, I appreciate the time.

Thank you.

Our next question today is coming from Jack Micenko from SIG.

Hi, good morning.

Looking at the regional order trends, we had east up 40%, southeast up mid 30%'s, central up mid 30%'s, and then southwest was below that cluster.

Guessing that's a community count growth driven issue.

Is that a strategic plan, or do you think community count in the southwest will grow, which should help the overall growth rates in coming quarters?

You know, the southwest is one of our smaller regions, it's only made up of a few markets, including Phoenix.

You're right that our community count is impacting their sales rate.

Their community count was down this quarter.

Their absorptions were up, but their absorptions were a little bit slower than the Company average, and I'd really point to Phoenix continuing to be a little bit more of a challenging market for us than other parts of the country that are just growing faster.

Phoenix is a great city.

Phoenix is going to be a great housing market again.

It's not there right now, but we have big expectations for Phoenix down the road.

Okay great and then you've grown Express from 13% to 18% of sales, sequentially.

Lots of talk about getting into more -- most markets by the end of the year.

With your land pipeline and your sort of near-term view, how do we think about Express from a mix?

Is it 20%, 25%, 30%?

How big of a component of the business does it become in the foreseeable future?

Yes, we certainly would expect it to get up into the high 20%'s.

Exactly where that lands for the long term, you know hard to say, but it wouldn't surprise us if it got to the high 20%'s or 30% in terms of units, and that may translate to 20% of revenues, but you really -- we're focused project by project, market by market, expanding where it makes sense, and where locations are good, and then we'll see where it lands.

We're laying out a plan in this kind of thinking about the business long term, we would expect at some point Emerald to be about 20% of our revenue, Express to be about 20% of our revenue, and the core Horton brand to be the balance or 60%.

Great that's helpful.

That implies good balance, gives us coverage in every market, and that's kind of the long-term plan.

Thank you.

Thank you.

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

Hi, thanks for taking the question.

Just quickly on the inventory impairment, can you provide any color on what drove that, and how that split between options, walk away costs, and anything one-time or community specific?

Jade, we had I believe $8 million of impairments this quarter.

That was primarily related to one community in south Florida that we've owned for a long time, that the opportunity came to sell it and we thought that was a better use of the cash to be able to reinvest the cash with some current investment opportunities.

They were about $4 million of option write-offs and earnest money, due diligence costs, that we wrote off during the quarter for projects we aren't pursuing.

And Jade, we've said consistently for a while we are working through actively on our former land held for development or mothballed communities, and that's a source of cash for us, and we're trying to turn those inactive unproductive assets into productive ones.

So, most of the projects that we have pulled out of mothball, we put into production.

We're building houses on and we haven't had any impairment charges, but there are the occasional projects we've had and we may have a few more that the best answer is to sell it, and those have a higher risk or a higher likelihood of having is some impairment charges, but in general our expectations for charges going forward are definitely lower, and we expect fewer charges going forward over the next year than we've seen over the past 12 months.

Great, thanks.

And regarding orders growth, I was wondering if you anticipate a moderation in the year-over-year pace of orders growth from the strong 30% level, just given last year's strong comps in the second half of the year?

You know, Jade, we've really guided to what we expect to do this year in terms of closings.

I don't think we want to make any educated guesses on sales, but clearly we have to drive a good sales pace to hit the closings guidance that we went ahead and updated this quarter.

High 20%'s to 30% is our guidance for year over year, and we have to sell at that pace to close at that pace.

Thank you very much.

Thank you.

Our next question today is coming from Ryan Gilbert from Morgan Stanley.

Hi, good morning.

Good morning.

Just a follow-up on the commentary on land spend.

I think you guys said you're largely looking at replacement land to the land that's being delivered.

Would this indicate a continued deceleration in year-over-year community count openings?

Right now, we would expect it to remain relatively stable.

Our expectations all year have been that we would continue to see relatively stable to slightly up low single digit on community counts, and then I think that continues to be our expectation for the short to medium term.

That's something we're always evaluating as we make our investment decisions.

Okay, great thanks, and then just on the overall absorption level, absorptions have been increasing at very rapid pace over the past three quarters.

Are you getting to a level just Company-wide that you're more comfortable with or do you think there's still room to continue pushing absorption growth higher?

I think we have on some communities, as we talked about before, we do have a limit that we probably hit but there's certainly several communities we have that we identify for increases in absorptions, so we'll continue to look to operate the Company on a community-by-community basis at the right pace for that community to drive the expected returns.

As we look throughout the Company we always find plenty of opportunities to get better and plenty of opportunities to improve, so we'll keep doing that.

Great, thanks.

Thank you.

Our next question is coming from Buck Horne from Raymond James.

Thanks, good morning.

I appreciate the additional color you guys offered on the FHA and VA loan percentages at the mortgage mix.

I was curious though, could you maybe provide any detail on how many of your mortgage closings are coming from 0% down financing, including USDA and/or VA loans?

And just a broader sense, are you seeing a return to the drive-til-you-qualify type mentality among buyers?

You know, what we've seen in terms of VA is pretty consistent.

It tics slightly down, so we will have this in our supplementary data on the investor part of our website after the call, but our VA percentage was 18%.

We also saw a slight decrease in our USDA percentage from what we've been running down to 5%, so those are the two products most likely to have zero down in them.

I don't have stats on just our overall zero down.

In terms of driving to qualify, we're going a little bit further out in some cases for Express to hit that value proposition, and people do still want to seem to do that, but in terms of where our communities are located today compared to kind of back during the boom.

We aren't nearly back out to those areas again, and there may be some of those areas we don't ever go back to.

I appreciate that.

And then my follow-up is just going back to the Texas discussion.

Obviously doesn't look like you're seeing much signs of a slowdown at the entry level in Texas.

A lot of people still migrating into those markets with your numbers, but some competitors have noted maybe some softening at the higher price points, where you may be a move up market or white collar job might be at risk in some of those markets?

Have you guys seen any signs of moderation in Houston or otherwise at some of the higher price points in those markets?

We are in the higher price points, but we are in the higher price points really positioned over the last couple of years, and they're at locations that for us at least today, we aren't seeing slowdown.

Maybe there are areas where people were selling higher priced homes that are seeing a slowdown, but our experience today is that the locations we have chose and entered in the last couple years are still very high demand.

So, when we launched the Emerald brand, we focused on location, and that has been a prudent focus.

All right, thanks very much.

Thank you.

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

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

Thank you, David.

We appreciate everyone's time on the call today, and look forward to speaking with you in July.

I'd like to personally thank our people out there for the outstanding results of the last quarter, and the way you're positioned for the quarter coming up.

We appreciate you.

Thank you.

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.