霍頓房屋 (DHI) 2015 Q4 法說會逐字稿

Greetings, and welcome to the D.R. Horton, Inc., America's Builder, the largest builder in the United States, fourth-quarter and year-end FY15 conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

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

Please go ahead, Jessica.

Thank you, Kevin, and good morning.

Welcome to our call to discuss our fourth-quarter and FY15 financial results.

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

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

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

Additional information about issues that could lead to material changes in performance is contained in D.R. Horton's Annual Report on Form 10-K and our most recent quarterly report on Form 10-Q, both of which are filed with the Securities and Exchange Commission.

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

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

After the conclusion of the call, we will post updated supplementary historical data on the presentations section of our Investor Relations site for your reference.

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

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

Thank you, Jessica, and good morning.

In addition to Jessica, I'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.

Our D.R. Horton team finished this year with an outstanding fourth quarter.

Pre-tax income increased to $339 million, on $3.2 billion of revenue, and our fourth-quarter pre-tax operating margin improved 60 basis points, to 10.7%.

Our sales absorptions continued to improve this -- during this quarter, as homes sold increased 19% on a relatively flat community count.

This reflects solid performance of our core D.R. Horton communities, and our Emerald Homes and Express Homes brands, which are enabling us to expand our product offering and industry-leading market share.

For the year, while demand for new homes across most of our markets remained relatively stable to moderately improved, we generated growth of 30% or greater in both our home-sales revenues and Homebuilding pre-tax income by successfully leveraging our platform as the nation's largest and most geographically diverse homebuilder.

Our consolidated pre-tax income for 2015 increased 38%, to $1.1 billion, on $10.8 billion of revenue and 36,648 homes closed.

Our continued strategic focus is to produce double-digit annual growth in both our revenue and pre-tax profits, while generating positive cash flows and increasing our returns.

During the fourth quarter, we generated $512 million of cash from operations, bringing our total cash generated by operations for the year to $700 million.

Our return on inventory, defined as Homebuilding pre-tax income divided by average inventory, improved 170 basis points in 2015, to 12.8%.

With a sales backlog of 10,662 homes at the end of September, solid sales trends in October, and a well-stocked supply of land, lots, and homes, we are well positioned for 2016.

Mike?

Net income for the fourth quarter increased 44%, to $239 million, or $0.64 per diluted share, compared to $166 million, or $0.45 per diluted share, in the year-ago quarter.

Our consolidated pre-tax income increased 35%, to $339 million in the fourth quarter, compared to $251 million in the year-ago quarter.

And Homebuilding pre-tax income increased 27%, to $302 million, compared to $237 million in the prior-year quarter.

Our fourth-quarter home sales revenues increased 27%, to $3.1 billion, on 10,576 homes closed, up from $2.4 billion on 8,612 homes closed in the year-ago quarter.

Our average closing price for the quarter was $288,600, up 3% compared to the prior year, due to an increase in our average sales price per square foot.

Bill?

The value of our net sales orders in the fourth quarter increased 22% from the year-ago quarter, to $2.5 billion, and homes sold increased 19%, to 8,477 homes, while our community count remained relatively flat.

Our average sales price on net sales orders in the fourth quarter increased 3%, to $289,500.

The cancellation rate for the quarter was 27%, down from 28% in the year-ago quarter.

The value of our backlog increased 10% from a year ago, to $3.1 billion, with an average sales price per home of $295,100.

And homes in backlog increased 8%, to 10,662 homes.

Our backlog conversion rate for the fourth quarter was 83%, within the range we guided to on our third-quarter call.

Jessica?

We are experiencing solid demand, revenue growth, and profitability in our D.R. Horton-branded communities, which accounted for the substantial majority of our sales and closings this quarter.

Emerald Homes, our brand for higher-end, move-up, and luxury communities, is available in 46 markets across 18 states.

In the fourth quarter, homes priced greater than $500,000 accounted for 17% of our home-sales revenue and 7% of our homes closed.

For the year, homes priced greater than $500,000 accounted for 16% of our home-sales revenue and 7% of our homes closed.

Our Express Homes brand, targeted to the true entry-level buyer -- focused primarily on affordability -- is being offered in 48 markets and 15 states, with a significant majority of our Express sales and closings to date coming from Texas, Florida, and the Carolinas.

This quarter, Express accounted for 22% of our homes sold, 21% of homes closed, and 14% of home-sales revenue.

The average closing price of an Express home in the fourth quarter was $191,000.

For the year, Express accounted for 18% of our homes sold, 15% of homes closed, and 10% of home-sales revenue.

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

Mike?

Our gross profit margin on home-sales revenue in the fourth quarter was 19.9%, flat with the third quarter.

The consistency in our gross margin this year reflects the stability of most of our markets today and the normalization of housing market conditions.

We are raising prices or reducing incentives, when possible, in communities where we are achieving our targeted absorptions.

And we're also working to control cost increases.

All of these factors have enabled our gross margins to stabilize within our normal historical range.

Our general expectation for FY16 is that gross margins will remain relatively stable with FY15 levels.

In the current housing environment, we continue to expect our average home-sales gross margin to generally be around 20%, with quarterly fluctuations that may 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 first quarter of FY16, we expect our home-sales gross margin will be in the high 19%s to 20%, consistent with our margins during FY15, which were in the high 19%s the entire year.

Bill?

In the fourth quarter, SG&A expense as a percentage of Homebuilding revenues improved 100 basis points, to 8.9%, compared to 9.9% in the prior-year quarter.

Homebuilding SG&A for the full fiscal year also improved 100 basis points, to 9.6%, compared to 10.6% in FY14 as our increased revenues this year improved the leverage of our fixed overhead costs.

We are pleased that our Homebuilding SG&A in FY15 was 40 basis points below our long-standing target of 10%, and we expect further improvement in our SG&A leverage for FY16.

Jessica?

Financial Services pre-tax income in the fourth quarter increased to $37.3 million, from $14.2 million in the year-ago quarter.

And, for the year, Financial Services pre-tax income increased to $105.1 million, from $45.4 million in FY14.

Increases in our Financial Services profits for the fourth quarter and fiscal year were primarily due to improved loan sale execution, higher average loan amounts, and leverage of fixed overhead costs.

89% of our mortgage company's loan originations during the fourth quarter related to homes closed by our Homebuilding operations, and our mortgage company handled the financing for 52% of our home buyers.

FHA and VA loans accounted for 50% of the mortgage company's volume, compared to 42% in the year-ago quarter.

Borrowers originating loans with our mortgage company this quarter had an average FICO score of 715, and an average loan-to-value ratio of 89%.

Bill?

At the end of September, we had 19,800 homes in inventory, of which 1,600 were models.

9,700 of our total homes were spec homes, with 6,300 in various stages of construction and 3,400 completed.

Our construction-in-progress and finished-homes inventory decreased by $314 million during the quarter, and our number of homes in inventory decreased by 7%, a normal seasonal trend after our strongest home-closings quarter of the year.

Our completed specs decreased by 6% during the quarter.

Our fourth-quarter investments in lots, land, and development totaled $590 million, of which $305 million was to replenish finished lots and land, and $285 million was for land development.

Our residential land and lot inventory increased by $54.5 million during the quarter.

David?

At September 30, 2015, our portfolio consisted of 174,000 lots, of which 118,000 are owned, and 56,000 are controlled through option contracts.

67,000 of our total lots controlled are finished with -- of which 33,000 are owned, and 34,000 are optioned.

Our 174,000 total lots owned and controlled provide us a strong competitive advantage in the current housing market, with a sufficient lot supply to support solid growth in sales and closings in future periods.

In 2016, we expect our total owned land and lot inventory balance to be in line with, or slightly higher than 2015.

And we also plan to increase our optioned land and lot position.

In 2015, we invested $2.2 billion in land, lots, and development.

And, in 2016, we expect that our investment level will increase by more than 20%.

Mike?

Our inactive land held for development, of $202 million at the end of the year, represents 11,100 lots, down 13% from June and down 21% from a year ago.

We continue 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 continue to decline.

During the fourth quarter, we recorded $5.1 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 $21.2 million of inventory impairment charges, of which $12.2 million were in our East region and $9 million were in our West region.

These charges related to two long-held inactive part land parcels that we sold during the quarter, and one long-held project in production.

Each of these actions resulted in improved returns and redeployment of capital into more productive assets.

We will continue to evaluate our inventories for potential impairment, which may result in future impairment charges, but the timing and of these charges will fluctuate, as they have in the past.

Also, during the fourth quarter, we recorded a goodwill impairment charge of $9.8 million related to one of our operating divisions in our Southeast region.

Our total goodwill balance after this impairment is $87.2 million.

Bill?

At September 30, our Homebuilding liquidity included $1.4 billion of unrestricted Homebuilding cash and $865 million available capacity on our revolving credit facility.

We had no cash borrowings, and $110 million of letters of credit outstanding on the revolver.

Our gross Homebuilding leverage was 36.1% and our Homebuilding leverage ratio net of cash was 25.1%.

The balance of our public notes outstanding, at September 30, was $3.3 billion.

And we have a total of $543 million of senior note maturities in FY16.

At September 30, our shareholders' equity balance was $5.9 billion, and book value per share was $16, up 14% from a year ago.

Based on our solid balance sheet, liquidity, and current and expected levels of profitability and cash flow, our Board of Directors increased our quarterly cash dividend by 28% from the most recent dividend paid, to $0.08 per share.

Jessica?

Looking forward, we would like to highlight some of our expectations for next year.

They are consistent with what we shared on our call in July and are based on the current relatively stable to moderately improved market conditions.

In FY16, we still expect to generate a consolidated pre-tax margin of 10.5% to 11%.

We also expect to generate consolidated revenues of between $12 billion and $12.5 billion, and to close between 39,500 and 41,500 homes.

We anticipate our home-sales gross margin for the full year of FY16 will be in the high 19%s to 20%, with potential quarterly fluctuations that may range from 19% to 21%.

We estimate that our annual Homebuilding SG&A expense will be in the range of 9.2% to 9.4% of Homebuilding revenues, with the first two quarters of the year higher than this range, and the third and fourth quarters below the range.

We expect our annual Financial Services operating margin to range from 30% to 33%.

We are forecasting our FY16 income tax rate to be between 35.5% and 36% and our diluted share count to be approximately 375 million shares.

We also continue to expect to generate $300 million to $500 million of positive cash flow from operations.

Our FY16 results will be significantly impacted by the spring selling season, and we will update our expectations each quarter as our visibility to the spring and the full year becomes clearer.

For the first quarter of FY16, we expect that our number of homes closed will approximate a beginning backlog conversion rate in a range of 75% to 78%.

We anticipate our first-quarter home-sales gross margin will be in the high 19%s to 20%, and we expect our Homebuilding SG&A in the first quarter to be in the range of 10.5% to 10.9% of revenues.

David?

In closing, 2015 was our third consecutive year to generate 30% or greater increases in both home-sales revenues, and Homebuilding pre-tax income.

While significantly growing the business, we also generated $700 million of positive cash flow from operations.

And our annual return on inventory improved 170 basis points, to 12.8%.

This is a result of the strength of our people and our operating platform, and we are excited about the opportunities ahead.

We remain focused on growing both our revenue and pre-tax profits at a double-digit annual pace, while continuing to generate positive cash flows and improve returns.

We are well positioned to do so, with our solid balance sheet, industry-leading market share, broad geographic footprint, diversified product offering across our D.R. Horton, Emerald and Express brands, attractive finished lot and land position, and, most importantly, our outstanding team across the country.

We'd like to thank all of our employees for their great work and tremendous accomplishments this year, and we look forward to working together to continue growing and improving our operations in 2016.

This concludes our prepared remarks.

We will now host questions.

(Operator Instructions)

Bob Wetenhall, RBC Capital Markets.

This is Colin filling in for Bob.

So prices were up about 3.4% on a consolidated basis.

I was wondering if you could give us a little bit more color on what prices were going on a brand basis and how much of a headwind the change in the product mix was?

In general, across the board, it's community by community is where we're seeing pricing, on a brand basis mix is a big factor.

On our Express brand as we been rolling it out into more markets, the more recent markets we've rolled into are at a higher ASP, so we have seen an increase in our average ASP in Express as we've expected to see.

On the Emerald brand, again as we're rolling that out across the country, we've seen that have a fair amount of fluctuations from quarter to quarter, but in the current quarter we're in the mid-500 range.

Colin, this will be in the supplemental information we'll put out after the call, but our closing ASP for the quarter on a sequential basis was up across all brands.

It was mix that brought the overall down sequentially slightly.

And then on a year-over-year basis, we were essentially flat in Emerald, but up substantially in Express and Horton.

Great.

Thank you and as you look forward into 2016, how do you see your portfolio on a brand by brand basis as a percentage of total deliveries?

And what are your expectations on gross margin for this?

We continue to expect to both Express and Emerald to grow as a percentage of the business as they did this year.

As we roll them out into further markets we would expect by the end of FY16 that we would have Express into most of the markets that we expect it to be in.

And in terms of percentage of revenues, certainly could be nearing the 20% level.

And Emerald in terms of percentage of revenues would start moving up further up into the higher single-digits.

Great.

Thank you very much.

Stephen Kim, Barclays.

Strong quarter.

Good job in the quarter.

Thank you.

Had two questions for you.

First of all, seemed like your cash flow guide was a little low and your cash balance at the end of the year is a little high.

By my reckoning even if your land spend were to increased 25%, I think you said more than 20% is what you thought, your cash flow could still be pretty similar to what we saw in 2015 if my numbers are right.

And I think you've got about $550 million or something that we're looking for in debt pay-down next year, which is going to leave your cash balance pretty elevated.

So I was curious, first of all if you could talk about why your cash guidance is so much lower than what you did this year.

And then secondly, where you feel comfortable with your cash balance residing.

As we look forward, Steve, this is Bill, a lot of the level in which we will reinvest or the level in which we will invest depends on what we see in the sales environment in the spring this next year.

So at this point as we look forward we feel comfortable that a $300 million to $500 million range will occur, even with the reinvestment level in north of 20%.

It's possible we might invest even higher than that if we see sufficient strength in the market or the need.

But if we stay at around that 20% level, yes, your calculations are in the ballpark, that we could be at the higher end or maybe even above that range on cash flow.

But we're certainly in a flexible position and we'll adjust our investment decisions based on what we see in the market as we get into calendar 2016.

Okay.

Great.

So my next question relates to M&A.

We did an analysis and it looked like over the last 15 years, Horton's pretty much, you guys are the only ones that have really grown your business outside of acquisitions or at least grown your market share outside of acquisitions.

And at the same time it's a pretty wide gap in price-to-book valuations among the public builders and my question is, what's your opinion on the M&A opportunity that you see over the next year?

And is there any reason you might prefer private or publics when you look at the opportunity set?

Steve, this is David.

We're continuing to look at opportunities.

We are in the position we're in because we've been disciplined about it.

And trying to fit, find the right cultural fit when we do combine.

If you look at our history of merger and acquisitions, the culture and fit has typically been more important than the assets that we're acquiring.

So we're going to be disciplined and opportunistic, but yes, we are looking at it continuously and believe that where we find a good fit at the right price, it's an additive to our Company.

Got it.

Thanks very much, guys.

Good job.

Thank you, Steve.

Stephen East, Evercore ISI.

Congratulations on a nice quarter.

Just to follow on Steve's question a little bit, you will have a lot of cash sitting on the balance sheet, Bill, even in your scenario in paying down the debt.

So if you could talk a little bit about with that excess cash, what you would like to do within a bit more generally your capital allocation for 2016?

You gave the land spend guidance, but where's it happening?

And what percentage of these communities are 24 months or less?

Is that still a big focus for you?

And where you expect that community growth to be next year?

Sure.

The level of community growth.

Sure.

Steve, this is Bill.

I'll start at the back end, we are still working with our 24 month cash return as our base underwriting guidelines.

And vast majority of the land we're buying will fit within that.

We're certainly in a flexible position and occasionally, strategically we might go outside that box but vast majority of the time we're staying within 24 month cash return.

In terms of community count growth, we've stated we expect it to be relatively flat to slightly up, low to mid single-digits would be probably the top end of the growth expectations.

Really, we're looking across our business.

We've seen significant increases in the south southeast over the last couple of years.

But we're seeing a few markets perhaps starting to show some signs of life further north and in the Southwest as well that perhaps we could, it may be time to show some growth there.

So, really looking across the breadth of our business.

As we look at our cash flow expectations for the year, of course we did announce an increase in our dividend, 28% increase in that so that's already out there as far as the use of our cash.

We are going to remain flexible and opportunistic around investments in the business.

Great position to be in, with $1.3 billion, $1.4 billion of cash today heading into the spring, and we want to see what the spring demand is and decide our level of reinvestment in the business there, but still feel comfortable with that to still be able to generate $300 million to $500 million of free cash flow next year.

The debt maturities of $543 million is certainly a priority for us.

Again, flexible position, we certainly have the cash to be able to pay it all in cash if we were to so choose.

Our current expectations is that we would refinance a portion of that and pay off a portion of that in cash, so that our net balance would decrease a bit.

Past that, really our mantra is remain opportunistic while remaining disciplined.

And all things could be on the table, but we want to keep our options open.

Okay.

Thanks.

Very thorough there.

And then if you look at what all the other builders have been talking about, the labor, the cost, et cetera, maybe you all could frame how much costs are up year over year both labor and on the land side?

And then what you're seeing on the labor side, some of your peers have said they expect it to get a lot worse before it gets better.

And what you all are seeing and how you're going to offset it moving forward?

Stephen, this was the first quarter that we did see on a year-over-year basis our revenues tick up in, per square foot in excess of our stick and brick costs which would be both our labor and materials.

Our revenues per square foot were up about 4%, whereas our stick and brick per square foot was up 3.5%.

The sequential trend was good as well.

Our revenues outpaced our stick and brick.

You didn't see that flow through as an increase to our margin because we do have slightly higher land costs today.

But as we mentioned, our margin is stable in spite of higher land, labor and material costs and we were able to offset the majority of that with pricing this quarter.

So we've been working on that this entire year to get that back in check and happy to say that we got there by the end of the year.

In terms of labor, I think David will probably speak to how we feel about labor overall.

Stephen, David, no question.

Labor is tight.

Reports coming out of other builders, we're not immune to it.

I think we have mitigated it, by having the best operating team in the industry.

And the relationships that our people have with vendors, suppliers, put us at the front of the line.

So it flows back to the time, with the Company time in the market.

And what I believe is our number one competitive advantage which is our people.

David, do you expect it to get worse in 2016?

I don't think it's going to get any better.

Okay.

I do think we're approaching -- the market continues to improve.

The latest jobs report did show 30,000-plus construction jobs being added.

Why it's taken this long to start adding those jobs, I'm not sure.

But hopefully that's a trend of something that's going to take place.

And we will re-staff our production so that we can get back to a normal, national building environment.

All right.

Thank you.

Mike Dahl, Credit Suisse.

Wanted to go back to some of the market discussion.

I think Bill, you mentioned there may be some areas that are showing some signs of life and maybe deserve some more investment.

So I guess, if you guys could give us a little more color on where some of those markets are and just the overall cadence that you're seeing in some of the key markets in your footprint?

Because you've described it as relatively stable, just slightly improving.

I think some of your peers have seen a bit more volatility as of late.

So any color there?

And also if you could quantify October sales being solid, what does that actually mean relative to what we were seeing this quarter?

Mike, going backwards, October sales were, we're happy with our October sales level in line with our expectations.

But as we've always said, one month does not a quarter make.

And looking at individual markets, we've been very happy with our Texas performance, which is our South Central external region primarily.

Continue to see good performance in the southeastern part of the country and as build sets in the communities we've invested in there, we built a great presence.

And perhaps some of the markets out west, in Arizona, are starting to show some encouraging signs as well.

But it's hard to really quantify market by market when we look at this.

Got it.

Okay.

Then second question, just around the goodwill impairment, so in the Southeast, just curious, is that related to a legacy position or is that one of the more recent acquisitions?

Can you talk about the factors that drove that and if there are any other implications we should be thinking about on a g- forward basis, whether it's what that means for margins or sales out of that region?

That related to one division within our Southeast region, that was the Huntsville market that we entered as a result of the Breland acquisition in 2012.

And that's a result of some challenging market conditions in Huntsville.

And I don't look for any read-through to any other markets or margin effect anywhere else.

And Huntsville's a relatively small division in terms of our overall platform.

Right.

Okay.

Thank you.

Ken Zener, KeyBanc.

David, wrapping up this year, I wonder if you could comment obviously under your tenure, you've started disclosing information a little differently than Don did in the past.

So the question I have for you is, about seasonality in your business because you guys with the release that you give after this conference call, we can see the trailing three year seasonality in orders.

And when you look at your year-over-year results, what it shows is a increasing absorption, but actually occurred all in the first quarter, seasonally.

You didn't go down like you normally did.

Can you talk to or address when you think about the cadence of your business, which I assume you look at it seasonally, do you still expect that slightly higher absorption rate which is new to last few years, to unfold in that first quarter or do you expect it to go down like it did historically about 20%?

Seems like you guys changed the cadence of the business a little bit in recent years.

We would still expect to see normal seasonality in the business, which would infer a decline in Q1.

Sales, we don't guide to sales for a reason.

It's really hard for us to estimate what our sales are going to be.

We did give guidance for the full year on closings, so clearly we have to sell at least that many homes if not more.

So we do feel like we're going to close between 39,500 and 41,500 homes for the full year.

But as you saw, in Q4, and as we've talked about, it's not -- we're not going to be at a 30% growth rate moving forward.

We did that for three years straight.

And going to be hard to do that again.

But we do think our consolidated revenues will be up 10% to 15%, and Q1's typically our softest quarter and we do expect to see normal seasonality in Q1 and really, not know what the year holds until we get to the spring.

Ken, this is David.

I'll also say that weather did impact the process last year.

And we had a great year because we have great people.

But tight labor and weather conditions are a reality in this industry.

So that made some things shift around a little bit.

But yes, we are a seasonal business.

We plan to build, sell and close based upon what the historical seasons have been.

Good.

I appreciate that.

I was asking because the last two years in the first quarter your pace actually went up modestly, so I wanted to understand how you thought about that.

But it sounds like it's somewhere between what we had in the last few years and usually down 18% sequential pace, somewhere in that range.

Can you talk David, you said you don't expect labor to get better, but you are I believe the largest homebuilder.

And it would seem that the issue would impact you most.

But closings et cetera, et cetera you've been able to navigate it.

Is it that you're paying people more?

Perhaps?

Because it really, all the smaller builders' issues would seem to be magnified.

Can you give that a little bit more because it really does seem to require a little more explanation how the largest person is navigating this issue while smaller guys can't do it.

I don't think we're paying people more, actually I think we got a lot of efficiencies and benefit from our overall market share and presence.

You guys are going to get tired of me saying this, but it really is the people.

We've got one of the toughest markets, toughest weather conditions, toughest labor markets is our Dallas-Fort Worth area.

And those two guys, because they have been in the market for 20-plus years, because they have a direct relationship with the vendors and suppliers, make a call and get people to show up.

And you just can't put a, you can't quantify that and put it in a model.

And they're both also perfect examples of where local market share and building specs on a consistent basis really comes into play.

So that, coupled with their experience, is really why we think we've been able to not have that show up as much in our results as it has in others.

But it's not just there, we've got people like that in every market.

Okay.

Could you comment on the gross margin between spec and backlog if that's relevant now?

Thank you, very much.

We're at about our normal relationship between spec and overall spec margins are a bit below 100, 200 basis points below the Company average, which is about normal.

There are about 200 basis points below build jobs.

So the Company average is slightly --

We fill about 70% of what we closed this quarter was a spec, so the margin we reported is essentially a spec margin.

Thank you, very much.

Michael Rehaut, JPMorgan.

Also nice quarter.

Thank you, Michael.

First question I had was on guidance.

And wanted to make sure, it appeared that essentially you reiterated all the components of FY16 guidance with perhaps the exception of giving a little more clarity to SG&A, before I think you said below 9.5% of consolidated revenue and now you're saying 9.2% to 9.5%.

Do I have that right?

Mike, we actually on our last call only gave the consolidated pretax margin as official guidance.

We had some side bars as we got into the Q&A, but our official guidance in July was just for the 10.5% to 11% consolidated pretax margins, so we did reiterate that on this call.

And then our SG&A guidance for FY16, which this is the first time we're giving what we would consider to be our official SG&A guidance, is for 9.2% to 9.4% of home building revenues.

Right.

And then I appreciate, I think that sounds right.

Some of that was on the Q&A I guess.

And just to be clear also on the SG&A, you're talking about the home building revenue inclusive of land sales?

Is that right?

And that's also how you're describing it for 1Q?

Is there a way for us to get a sense of what you're anticipating land sales to be?

No.

As you indicated to me earlier today, our land sales are choppy and we do know that.

But when we look at our SG&A we look at it all in as a percentage of our total home building revenues and that lines up with our income statement, with total home building revenues is actually our line that is inclusive of both home sales revenue and land sales revenue.

Okay.

Just, obviously creates a slight incremental challenge with modeling, but I guess we can talk about that later.

Also, on the FY16 outlook, I think Bill, you mentioned expecting community count to be up low to at most mid-single.

I would presume, given that it looks like at least from a trend perspective, Express 4Q activity stronger than the full fiscal year, that, that would -- FY16 should have a higher proportion of Express versus FY15, would that then result in sales pace improvement of at least 5% to 10% just from that continued shift alone?

Yes.

Obviously with our guidance of 10% to 15% revenue growth, with low to mid single-digit community count, where we are anticipating incremental absorption improvement and part of that, one driver of that is the continued rollout of Express.

As it has been this year as a contributor to some absorption improvement, we do expect further absorption improvement driven by Express, as well as our efforts to continue to be more efficient across all of our brands, across all of our communities in the Company.

Great.

One last one if I could, on the land investment north of 20%, obviously a pretty strong number and certainly we're not at mid-cycle levels yet, although I would think that at this point, at least from your peers, maybe not growing that incremental investment as aggressively, not all have reported that yet, but when you talk about the 20% plus growth, is that reflective of more development versus finished lot type of takedowns?

Or just from a bigger picture perspective, you're also talking about lots growing.

I would assume not at the same rate as the 20% plus?

So just give us a sense of what's the drivers there?

Because obviously there are other builders out there that are maybe taking a slightly, I would presume slightly more conservative view as you get deeper into the cycle.

Mike, there is a distinguishment we need to make between the level of investment we're going to make versus the level of our inventory balance, our land inventory balance and our balance sheet.

We do expect to grow our spending, our investments by more than 20%.

We do expect some increase in our development spend in that expectation.

And then some increase in our absolute spending for land acquisition.

Our percentage of our land acquisition spend has been pretty consistent at around half of that spend has been for finished lots, and we would expect that to continue especially as we increase our option lot position and continue to add to that and buy finished lots there.

So there's still a very strong element of finished lot purchases in that.

But even with an increase in our spending, our investment level of greater than 20%, we only expect our balance sheet, our land inventory balance to be relatively stable to slightly grow.

So what we're essentially doing is replenishing our lot position and that's kind of what we've been doing for the last year to two years, is essentially replenishing our owned lot position, but you do that at an increased closings level requires an increase in investment.

Perfect.

That's very helpful.

Appreciate it, guys.

Nishu Sood, Deutsche Bank.

I wanted to ask about the backlog conversion ratio which you guided for, for the first quarter.

I think you said 72% to 74%, low to mid-70%s.

Hang on a second.

We guided to 75% to 78%.

Okay.

Sorry.

I just wanted to make sure everybody got that and didn't write down your 72% to 74%.

Sure.

Appreciate that.

You folks have had eight quarters in a row of your backlog turnover ratio being higher on a year-over-year basis.

I mean, that's a terrific achievement in light of the factor that the industry has been facing and obviously been discussed here in the Q&A already.

This would be the first quarter where you would be down on a year-over-year basis.

So I just want to understand that a little bit better.

Are there, is this just a reflection of the issues that you were discussing, the delivery and the labor challenges, are you changing in terms of the units that you're building, less specs maybe, just wanted to understand the drivers of it being lower year over year.

Nishu, I think you hit on it.

We did touch on some of the factors that are affecting us.

It rained in a lot of places.

Not making any excuses for that, but we still looking for next year as a full year, to revenues to be up 10% to 15%.

And we're going to see our first-quarter conversion rate we believe to be a little lower than it was last year.

I think there were 24 inches in our major markets in Texas in May.

And so we lost about two months of start and that's -- we were able to drive the conversion at the end of the year because those houses were started.

But right now today, if we had more houses we would have a higher conversion rate.

Got it.

It's more temporary issues as opposed to changes to operating procedures, such as let's say building less specs or --

Absolutely.

Our primary goal is to continue to improve the efficiency metrics of this industry and of our Company.

And conversion rate is a major goal for us.

Which is why it was improved four -- eight quarters in a row.

Got it.

Appreciate that.

The second question, and Jessica I won't say the number because I'll probably get it wrong again -- I think you guided to in the low 30%s on a margin basis.

A lot of folks expected at the beginning of this year, margins in that business being very high for them to converge back to normal.

From your 4Q, which was very strong it certainly doesn't look like that's the case, but what are you thinking about when you guide to the Financial Services margins being down, year over year?

Doesn't seem like any of the momentum has been lost there.

Is that just the view that look longer-term this doesn't look to be sustainable?

Are you seeing anything in your business now which led to that low 30s expectation?

And what are your thoughts behind that?

Sure.

A couple of things, Nishu.

Our Financial Services team has done an outstanding job the last couple of years.

And really longer than that.

But the last few years they've seen outsized operating margins as what we would have expected from them historically.

They continue to have just better loan sale execution and higher loan amounts this year which helped them leverage their SG&A better.

But we also had a slightly unusual item this year in terms of a $10 million reduction in our loan loss reserve.

We were actually successful in some negotiations with mortgage purchasers for amounts lower than we originally anticipated, so we did lower our reserve amount in Q4.

And the full year amount was $10 million.

So that was a slight pickup to the margin this year which aren't expected to repeat in 2016.

Coupled with, we just don't know if we're going to be able to sustain the higher operating margins that they've been running for the last few years, so they'll continue to operate as efficiently as they can.

And do as well as they can and as we move throughout the year we'll update that guidance if that 30% to 33% doesn't look right.

Thanks.

Appreciate the thoughts.

Eric Bosshard, Cleveland Research.

Two things.

First of all, I think Jessica you pointed out that the revenues per foot ahead of the cost per foot ex land for the first time in a while, two questions on that.

What's changed within that and is that sustainable?

That's the first thing I wanted to ask.

We'll see if it's sustainable.

We are guiding to essentially flat gross margins next year.

So that would infer that we do expect labor to continue to be a challenge.

But our goal next year is going to be to continue to keep those in line.

If we're able to get more pricing and improve our margin as we move throughout the spring, we will.

But where we sit today in November, we feel pretty comfortable that we can offset any labor and material and land increases with our sales prices.

Now, the progress with sales price moderated through the year and I understand there's moving parts within mix.

Is there a belief that with a better demand environment there's more of an opportunity with price in 2016 than you experienced within 2015?

In an improved demand environment, I would say yes, but where demand conditions are today we feel comfortable at our absorptions, at our community levels and so we have kind of a balance, if you will, an equilibrium at the community level we're comfortable guiding to right now.

In terms of our overall ASP, obviously as Express continues to become a bigger mix we're not going to expect our ASP to continue to climb at the same rate, because we do have mix impact impacting that as well.

Okay.

And then the second question, I appreciate your comment you want to wait to see the spring to determine some of the land spend and some of the overall spend.

Also talking about growing 20%.

I guess from a bigger strategic picture at this point in the cycle, are you still trying to grow the overall inventory or are you trying to match the spend to what you sell, or are you trying to spend a little less than what you sell, where are you in terms of this point of the cycle in terms your investment relative to what you're selling through?

I would say, we still think that there's legs left in this cycle.

We're not opposed to what is a historical demand.

So we're trying to be very judicious and value the capital we have.

So I'd say some kind of balance, one quarter.

It may look like we didn't buy enough, the next quarter it may look like we bought too much.

It's a balanced approach to drive efficiency throughout the entire Company.

We don't want too much land.

We don't want too little land.

I think Eric, to follow on what David said, that we would expect that to be at a replenishment level to slightly higher, but all the while looking to be more efficient with our capital, more efficient with our inventory to drive a higher turn.

A higher backlog conversion, a higher rollover of our assets, to be better stewards of that capital to drive the return on our invested inventory up.

One of our major goals is to substantially increase our option land position.

We're at a balance today at 68% owned.

Obviously our long-term, we'd love to be much closer to 50-50 split there, and so to the extent that we can increase our option position much more efficient with our capital, lower risk as well, we'd like to do that.

Still a goal.

That's helpful.

Thank you.

Susan Maklari, UBS.

You guys have talked a lot about how you have already expanded Express and the future of that brand.

And yet it sounds like the bulk of that business remains focused in Texas and the Carolinas and Florida.

As you think about it moving further and getting into increasingly more markets, should we expect that the core will remain focused in those areas, or to what extent do you expect to diversify to these other markets?

Well, we opened 24 new markets with Express in FY15.

That puts us at 48 markets out of the 70-plus we operate in.

Florida was a major entrance this year.

And as we add to other markets, we're starting to add markets in the West.

Now, that's adding to our presence, that starts to change the mix a bit.

And we'll diversify a bit from where we are, but I think still our long-term expectation is really Texas across the Southeast including the Carolinas and Florida, will still remain the core of Express might even remain the majority of our overall volume, but we do continue to diversify as the rollout continues.

Okay.

And then you saw very strong order trends in the southeast.

Was a lot of that's driven by Express or can you talk a little bit about what you saw there?

A lot of it was driven by Express, Sue.

We've opened a lot of new communities because of a lot of new investments all across the southeast in all of our brands.

So we saw a very nice pickup in our absorptions, coupled with an increase in our community count that really drove their order increase this quarter.

When we look at our home sales revenue on a year-over-year basis across all three of our brands, all three of our brands increased at a strong double-digit pace.

Clearly as we've expanded Express and Emerald they've grown at a higher percentage as we rolled them out.

But all three of our brands grew at a strong double-digit pace.

Okay.

Thank you.

Jack Micenko, SIG.

Wondering if you can put a little context around the absorptions, obviously you've seen a company-wide improvement, but if I were to think about Express versus Horton versus Emerald, how should we think about community absorption per brand?

Is it 8,4,2?

Is it 10,6?

Is there a way you can, rule of thumb, give us some context on how to think about that on the follow-up to the prior question, given Express is driving such order growth and absorption improvement?

It's less about brand than it is about return on investment.

And the pace of absorption to drive the highest return.

It's a balance of margin, sales pace, and delivery.

So that's something we look at project by project, market by market, and maximize the return of the Company and the shareholders.

Okay.

We have Horton projects doing significant absorption.

And it's really is all across the board.

Okay.

So community by community, not brand by brand?

Right.

Yes, sir.

Just as follow-up to some of the, it looks like you're going to probably de-lever further next year.

You talk about a cash number that sounds conservative potentially next year and then you're increasing your option versus your own mix, presumably as well.

Saw the dividend raise this quarter.

Where is the right leverage ratio?

I know you bought back stock in the past to offset some dilution.

What do you think about buybacks?

Where do you think the balance sheet and capital looks like a year from now from a leverage ratio, and what else do you do with your cash?

We do expect incremental improvement on our leverage.

I think as we move each year into the cycle we think that's prudent, and a prudent management of our balance sheet.

So what that gives us is a lot of flexibility and it gives us the potential to be very opportunistic.

So to the extent that a great opportunity comes along, we've got plenty of room on our balance sheet and plenty of liquidity to be able to take advantage of it.

So from our standpoint that's really what we're trying to maintain, the flexibility and ability to be opportunistic.

I talked earlier in one of the responses to a previous question about our priorities for cash flow, around we increased our dividend, we're going to continue to invest in the business and we'll adjust that based on what we see next year, we do expect incremental reduction in our debt and then past that, our mantra is opportunistic but disciplined.

We certainly have done some limited share repurchases in the past.

I would say that's not near the top of our list right now, given the opportunities that we see to invest in our business and generate a strong return in our business.

At this point in the cycle, we believe having flexibility and liquidity is a good thing.

And will give us an opportunity to take advantage of investments that will be the only one bidding.

So we like that environment.

Okay.

You guided to 375 million on the share count next year, is that the right number?

Yes.

Okay.

Great.

Thank you.

Jade Rahmani, KBW.

This is actually Ryan Tomasello on for Jade.

Thanks for taking my questions.

Going back to the labor costs, I was wondering if you could provide a little more a bit more color on what trades in particular that you have been seeing the most pressures in?

And if these labor constraints have been more concentrated to certain markets than others?

Ryan, it's David.

It depends on the market, framing labor, sheet rock labor, electricians, AC, every major trade in certain markets have been stretched very, very tight.

This is the last weather comment I'll make, but when you can't start a house for two months, the concrete, labor and material becomes very, very tight.

So it's a market by market, trade by trade.

Great.

Thanks.

And on the land market, you got it to the 20% plus incremental spending.

Can you give a bit more color on the growth in the level of competition?

We've heard certain peers saying that competition has been decreasing slightly.

What markets are currently more attractive than others?

And have the labor constraints caused you to change your underwriting on new land purchases?

Thanks.

The labor is not going to impact -- we're going to deal with labor.

And we are better positioned to deal with it than anybody else.

So that's an advantage to us.

Where we are going to invest where we're looking at, it changes quarter to quarter.

Right now today we have markets we're underinvested in.

And are working hard to drive, to get a level of investment there that allows us to grow at what we think the market will give us.

Great.

Thanks.

Susan Berliner, JPMorgan.

Just one quick question.

Jessica and Bill, you may laugh, but after reporting a quarter like this and seeing your ratios, can you update us with your conversations at least with S&P and Fitch with regards to an IG rating?

Certainly.

We have active communications with them, and in person meetings with them as well and certainly the progress that we're making in our business, the improvement we're showing in our liquidity and our leverage are all positive things that rating agencies love to see.

From our standpoint if we continue to improve, and continue to show the progress and do what we've said we're going to do, we certainly believe that our metrics and the way we're operating our Company are consistent with an investment grade rating.

The actual decision and timing of when that will be is certainly out of our hands.

From our standpoint though, the decision point or the goal of being investment grade isn't the end.

What our goal is, is to be in position and once it has been achieved then it can be sustained over the long-term, through the cycles.

And so from our standpoint when it happens, doesn't really matter.

It will happen and it will be sustained.

Great.

Thank you very much.

Thanks, Sue.

Thank you.

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

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

Thank you, Kevin.

We appreciate everyone's time on the call today.

And look forward to speaking with you again in January to share our first-quarter results.

And to the D.R. Horton team listening in out there, congratulations on an outstanding year.

You are the best in the industry.

Thank you for what you do every day.

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.