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D.R. Horton, Inc. (



F1Q2011 Earnings Call Transcript

January 27, 2011 10:00 am ET


Don Tomnitz – Vice-Chairman, President and CEO

Stacey Dwyer – EVP and Treasurer

Mike Murray – VP and Controller

Bill Wheat – EVP and CFO


Steven East – Ticonderoga Securities

Josh Levin – Citigroup

Michael Rehaut – JPMorgan Chase

Jonathan Ellis – Bank of America/Merrill Lynch

Carl Reichardt – Wells Fargo Securities

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Nishu Sood – Deutsche Bank

Joshua Pollard – Goldman Sachs

Mike Widner – Stifel Nicolaus

John Benda – SIG

Dan Oppenheim – Credit Suisse

Joel Locker – FBN Securities

Alex Barron – Housing Research Center

Jade Rahmani – KBW

Ken Zener – KeyBanc

David Goldberg – UBS Financial

Michael Smith – JMP Securities



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Good morning, and welcome to the D.R. Horton, America’s Builder, the largest builder in the United States, first quarter 2011 earnings release conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Don Tomnitz, CEO and President of D.R. Horton. Thank you. Mr. Tomnitz. You may now begin.

Don Tomnitz

Thank you, and good morning. Joining me this morning are Bill Wheat, Executive Vice President and CFO; and Stacey Dwyer, Executive Vice President and Treasurer; and Mike Murray, Vice President and Controller. Before we get started, Stacey?

Stacey Dwyer

Some comments made on this call may 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, which is filed with the Securities and Exchange Commission. Don?

Don Tomnitz

Thank you, Stacey. As we expected, our first quarter was challenged. The fundamental drivers of demand for the homebuilding industry, the overall economy, job growth, and consumer confidence are still weak even though recent reports show some small improvements nationally.

Our year-ago comps for both sales and closing were very strong due to the original expiration date of the federal homebuyer tax credit. Our divisions worked hard to generate sales and closings during this seasonally slow quarter. And our backlog conversion rate was historically high at 88%, but was below the near 100% or better conversion rates we achieved while the tax credits were in place.

We are hopeful that we will see a good seasonal increase in sales demand in the upcoming spring season. However, given the weak macroeconomic conditions, high levels of existing homes for sale and tight mortgage availability, we remain cautious and realistic in our expectations, and we will adjust our business to compete in the current market conditions. We are prepared for the spring season. We plan to continue to open new communities, adjust our price points and product offerings to the demand we see in each of our individual markets. Mike?

Mike Murray

Our net loss for the quarter was $20.4 million or $0.06 per diluted share compared to net income of $192 million or $0.56 per diluted share in the prior year quarter. Homebuilding pretax loss was $24.1 million, which included $8.4 million of inventory impairment and lot option charges. Financial services pretax income was $4.2 million, which included $1.8 million of recourse expense. Bill?

Bill Wheat

Our first quarter home sales revenues decreased 31% to $761.1 million on 3,637 homes closed from $1.1 billion on 5,529 homes closed in the year-ago quarter. Our average closing price for the quarter was up 4% from the prior year and down 3% sequentially to $209,300. Don?

Don Tomnitz

Net sales orders for the first quarter were down 17% from last year to 3,363 homes. The net sales orders in the prior year quarter included strong demand in October from the first time homebuyer tax credit that was in effect last year. Based on current sales demand and the fact that tax credits were supporting sales last year through April, we expect that achieving positive sales comparisons in the next two quarters will be difficult.

While we remain focused on opening new communities and gaining market share for us to see significant sustainable sales growth, we need to see improvements in the overall economy, the jobs landscape, and consumer confidence. In the December quarter, our average sales price on net sales orders was essentially flat year-over-year at $209,800. Our cancellation rate was 28%. Our active selling communities were up 3% sequentially. Our sales backlog decreased 7% from the prior year to 3,854 homes or $795.4 million. Stacey?

Stacey Dwyer

As we mentioned on our year-end conference call, we expected gross margin pressure in fiscal 2011, as we continued to adjust to the prevailing markets in each of our communities. This was evident in our first quarter results, as our gross profit margin on home sales revenue in the first quarter was 15.6%, down 150 basis points from a year ago period and down 140 basis points sequentially. The margin decline reflected the weaker housing market we continued to experience during the second half of the calendar year. Mike?

Mike Murray

In our first quarter impairment analysis, we reviewed all projects in the company and determined that projects with a pre-impairment carrying value of $26.2 million were impaired, which resulted in $6.4 million of impairment charges, the majority of which were in California and Arizona. We referred to our projects, which have indicators of potential impairment, but were not impaired as our watch list, which represents those projects deem to be of the highest risk for future impairments.

After this quarter’s impairments, our watch list now totals $408.1 million, up from $346.7 million at September with the largest concentrations in California, Illinois, and Florida. Our inventory impairment process in future quarters will incorporate any changes in market conditions and any adjustments we make in our business. Stacey?

Stacey Dwyer

In the first quarter, we reduced our homebuilding SG&A expense, which includes all corporate overheads, both year-over-year and sequentially, to $118.9 million. However, with the decrease in homes closed, SG&A expense increased to 15.5% of homebuilding revenues compared to 11.6% in the year-ago quarter. We will continue to actively manage our SG&A levels relative to our expected number of homes closed. Bill?

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