DR Horton's CEO Discusses Q2 2012 Results - Earnings Call Transcript

DR Horton (DHI)

Q2 2012 Earnings Call

April 23, 2012 10:00 am ET


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

Mike Murray -

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


Adam Rudiger - Wells Fargo Securities, LLC, Research Division

David Goldberg - UBS Investment Bank, Research Division

Michael Rehaut - JP Morgan Chase & Co, Research Division

Daniel Oppenheim - Crédit Suisse AG, Research Division

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

Nishu Sood - Deutsche Bank AG, Research Division

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

Anto Savarirajan - Goldman Sachs Group Inc., Research Division

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

Joel Locker - FBN Securities, Inc., Research Division

Megan McGrath - MKM Partners LLC, Research Division

James McCanless - Guggenheim Securities, LLC, Research Division

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

Stephen Kim - Barclays Capital, Research Division

Alex Barrón - Housing Research Center, LLC

Unknown Analyst

Timothy Jones

Jack Micenko - Susquehanna Financial Group, LLLP, Research Division



Good morning, and welcome to D.R. Horton, America's Builder, the largest builder in the United States, Second 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 J. Tomnitz, President and CEO. Thank you, Mr. Tomnitz. 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 recently -- recent quarterly report on Form 10-Q, both of which are filed with the Securities and Exchange Commission. Don?

Donald J. Tomnitz

Thank you. The spring selling season did arrive this year and it is still in full swing. Our net sales orders were up 55% sequentially from the December quarter and up 19% from our second quarter last year. Our average sales price increased to $222,700 during the quarter and the value of our net sales orders increased 28% compared to the year-ago quarter.

We've also seen continued sales strength into April. Our sales this quarter resulted in a 17% year-over-year increase in our backlog units, which puts us in a strong position for increased revenue and profitability in the second half of fiscal 2012.

In response to our improving sales, we have increased our homes under construction while reducing our spec percentage to 50%, which is the lowest level in recent history. We are also evaluating and selectively investing in land acquisition and development.

We're using our strong operating position and our solid balance sheet to profitably grow our business in the current housing environment. We are demonstrating our ability to leverage our fixed costs while increasing production in response to stronger demand in our communities, even though macroeconomic and housing conditions remain soft.

We see uneven improvement across our operating markets with some markets experience in increases in demand and others remaining weak. However, we are finding opportunities to take market share and existing markets while evaluating the attractive new sub-markets. We continue to dominate the entry-level market while expanding our product offerings for move-up buyers. We are optimistic for the remainder of fiscal year 2012, after recording net income of $68.3 million for the first 6 months. Mike?

Mike Murray

In the second quarter, our Homebuilding operations generated pretax income of $34.6 million and our Financial Services operations generated pretax income of $7.7 million. Our net income for the quarter increased 46% to $40.6 million, or $0.13 per diluted share from $27.8 million or $0.09 per diluted share in the prior-year quarter.

Bill W. Wheat

Our second quarter home sales revenues increased 27% to $931 million on 4,240 homes closed, up from $733 million on 3,516 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% sequentially to $219,500. Don?

Donald J. Tomnitz

Net sales orders for the second quarter were up 19% from last year to 5,899 homes on a 6% decrease in our active-selling communities. In the March quarter, our average sales price on net sales orders of $222,700 was up 7% compared to the prior quarter and up 3% sequentially. Our cancellation rate for the second quarter was 22%, which is very close to our historical pre-downturn cancellation rate range of 17% to 21%. Our sales backlog at March 31, 2012, increased 17% from the prior year to 6,189 homes. The value of the backlog increased 25% to $1.4 billion from $1.1 billion a year ago. Stacey?

Stacey H. Dwyer

Our gross profit margin on home sales revenue in the second quarter was 17.6%, up 140 basis points from the year-ago period. 80 basis points of the increase was due to cost improvements and decreased incentives and discounts. 50 basis points of the decrease was due to reduction in amortized interest and property taxes. Also contributing 10 basis points was a decrease in the estimated cost for warranty and construction defect claims as a percentage of home sales revenues. Sequentially, incentives and discounts were flat. However, our gross margin improved 80 basis points from the first quarter due to the decrease in the estimated costs for warranty and construction defect claims as a percentage of home sales revenues. This largely reflects a higher level of insurance recoveries received than in the first quarter, including a $2.4 million reimbursement of costs related to Chinese drywall. Bill?

Bill W. Wheat

Homebuilding SG&A expense for the quarter, which includes corporate overhead, was $128 million, up only 3% from the year-ago quarter on a 21% increase in homes closed. As a percentage of Homebuilding revenues, SG&A was 13.6%, down 320 basis points from 16.8% a year ago, reflecting both the improvement in volume and our continued efforts to control costs.

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