DR Horton (DHI)

Q3 2012 Earnings Call

July 27, 2012 10:00 am ET

Executives

Donald J. Tomnitz - Vice Chairman, Chief Executive Officer, President and Member of Executive Committee

Stacey H. Dwyer - Executive Vice President, Treasurer and In Charge of Investor Relations

Bill W. Wheat - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Mike Murray

Analysts

Daniel Oppenheim - Crédit Suisse AG, Research Division

Michael Rehaut - JP Morgan Chase & Co, Research Division

David Goldberg - UBS Investment Bank, Research Division

Stephen Kim - Barclays Capital, Research Division

Kenneth R. Zener - KeyBanc Capital Markets Inc., Research Division

Will Randow - Citigroup Inc, Research Division

Adam Rudiger - Wells Fargo Securities, LLC, Research Division

Joshua Pollard - Goldman Sachs Group Inc., Research Division

Jade J. Rahmani - Keefe, Bruyette, & Woods, Inc., Research Division

Nishu Sood - Deutsche Bank AG, Research Division

Alex Barrón - Housing Research Center, LLC

Stephen F. East - ISI Group Inc., Research Division

Joel Locker - FBN Securities, Inc., Research Division

Michael Rybak

Michael R. Widner - Stifel, Nicolaus & Co., Inc., Research Division

Presentation

Operator

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Good morning, and welcome to D.R. Horton, America's Builder, the largest builder in the United States, Third Quarter 2012 Earnings Release Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Donald Tomnitz, President and CEO. Thank you, you may begin.

Donald J. Tomnitz

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

Stacey H. 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 and our most recent quarterly report on Form 10-Q, both of which are filed with the Securities and Exchange Commission. Don?

Donald J. Tomnitz

D.R. Horton posted its highest quarterly pretax income since the second quarter of fiscal 2007, the highest in the industry, earning $72 million this quarter and $144 million year-to-date. Our pretax operating profit margin for the third quarter was 6.3%, the highest since the fourth quarter of fiscal 2006. For the 10th consecutive year, we are the largest builder in the United States based on homes closed.

Our net sales orders improved 25% from our third quarter last year and 3% sequentially from the March quarter. Our average sales price increased during the quarter, driving a 32% increase in the value of net sales orders compared to the year-ago quarter. We've seen solid positive year-over-year sales comparisons continue into July.

Our sales this quarter resulted in a 31% increase in our backlog units and a 40% increase in backlog value compared to the prior year, which puts us in a strong position for increased revenue and profitability in the fourth quarter of fiscal 2012.

In response to our sales growth, we're putting our liquidity to work by increasing our investments in homes under construction, finished lots, land and lot development. These investments are fueling our profitable growth even though macroeconomic conditions remain soft and overall housing demand is at historically low levels.

We are finding opportunities to take market share in existing markets while evaluating attractive new submarkets. Our entry-level business remains strong while we continue to expand our product offerings for move-up buyers. Bill?

Bill W. Wheat

In the third quarter, our homebuilding operations generated pretax income of $58.3 million compared to $22.2 million in the year-ago quarter. Our financial services operations generated pretax income of $13.9 million compared to $6.7 million in the year-ago quarter.

Our net income for the quarter increased to $787.8 million or $2.22 per diluted share, which included a noncash tax benefit of $716.7 million from a reduction of the valuation allowance for our deferred tax asset. We will discuss the valuation allowance reduction in more detail later in our prepared remarks.

Our diluted share count this quarter included 38.3 million shares related to our convertible senior notes. When these shares are dilutive, they are added to the diluted EPS denominator, and the associated interest expense and amortized issuance costs are added back to net income to calculate diluted EPS. For these shares and the related costs to be included in our diluted EPS in the fourth quarter, we estimate that our net income would need to be approximately $85 million. Mike?

Mike Murray

Our third quarter home sales revenue increased 14% to $1.1 billion on 4,957 homes closed, up from $974.5 million on 4,555 homes closed in the year-ago quarter. Our average closing price for the quarter was up 5% compared to the prior year and up 2.5% sequentially to $225,000. In the fourth quarter, we expect that our backlog conversion rate will be in the high 70s to 85% range. Don?

Donald J. Tomnitz

Net sales however for the third quarter were up 25% from last year to 6,079 homes, a 5% decrease in active selling communities. Our average sales price on net sales orders of $232,300 was up 6% compared to the prior year quarter and up 4% sequentially.

Our cancellation rate on the third quarter was 23%, which is very close to our predownturn cancellation rate range of 17% to 21%. Our sales backlog at June 30, 2012, increased 31% from the prior year to 7,311 homes. The value of the backlog increased 40% to $1.7 billion from $1.2 billion a year ago.

The 7,311 homes in backlog and continued year-over-year improvement in sales through the first part of July, we expect stronger closings and pretax profits in the fourth quarter both sequentially and compared to the prior year. Bill?

Bill W. Wheat

Our gross profit margin on home sales revenues in the third quarter was 18%, up 150 basis points from the year-ago period. 130 basis points of the increase was due to decreased incentives and discounts and increased average selling prices, and 50 basis points of the increase was due to lower amortized interest and property taxes. These increases were partially offset by a 30 basis point decrease due to higher estimated cost for warranty and construction defect claims as a percentage of home sales revenue. Our expectation for fourth quarter home sales gross margin is around 18%, consistent with the third quarter. Stacey?

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