D.R. Horton, Inc. (DHI)

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DR Horton (DHI)

Q4 2012 Earnings Call

November 12, 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

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

Michael Jason Rehaut - JP Morgan Chase & Co, Research Division

Daniel Oppenheim - Crédit Suisse AG, Research Division

Joel Locker - FBN Securities, Inc., Research Division

Rob Hansen - Deutsche Bank AG, Research Division

Stephen Kim - Barclays Capital, Research Division

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

Megan McGrath - MKM Partners LLC, Research Division

David Goldberg - UBS Investment Bank, Research Division

Alex Barrón - Housing Research Center, LLC

Timothy Jones

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

Jack Micenko - Susquehanna Financial Group, LLLP, Research Division

Presentation

Operator

Good morning, and welcome to the D.R. Horton, America's Builder, the largest builder in the United States, Fiscal Year End and Fourth 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. 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, now Senior 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's financial results in the fourth quarter and fiscal year 2012 were our strongest performance since 2006, reflecting the improving conditions in our housing markets and, most importantly, the effective repositioning of our company over the last 5 years.

For the fourth quarter, pretax income was $99.2 million, the highest of the last 22 quarters. Our quarterly net sales orders improved 24% from last year, and our average sales price contributed to a 35% increase in the value of net sales orders. Our positive year-over-year sales comparisons continued through October and into the first part of November. Our backlog of sales orders increased 49% compared to last year, and our backlog value is up 61%, which puts us in a position for a strong first quarter of fiscal 2013.

Fiscal 2012 was D.R. Horton's most profitable year in the last 6 years with $242.9 million of pretax income. Essentially all of our operating metrics improved in fiscal 2012 compared to fiscal 2011. Our sales, closings and backlog all increased by double-digit percentages.

Our gross margin on home sales revenues increased 160 basis points. Our SG&A as a percentage of homebuilding revenues improved 100 basis points.

In response to our sales growth, we have increased our investments in homes under construction, finished lots, land and land development to position ourselves for future growth. Our increased investments also include the acquisition of the homebuilding assets of Breland Homes during the quarter, the 38th largest homebuilder in the U.S. in 2011 according to Builder magazine.

These investments are fueling our increasing profits even though macroeconomic conditions and outlook remain soft and uncertain. We are finding opportunities to take market share in existing markets while evaluating attractive new submarkets. Our entry-level business remains strong while we're expanding our product offerings for move up buyers.

To fuel our expected growth, we entered into a revolving credit facility during the year and raised $700 million of additional capital through 2 senior note issues, both at very attractive interest rates. Even after these capital raises, our balance sheet remains extremely strong, with net homebuilding leverage of only 21% and gross leverage of 39%.

Bill?

Bill W. Wheat

In the fourth quarter, our homebuilding operations generated pretax income of $85.7 million compared to $27.4 million in the year-ago quarter. Our financial services operations generated pretax income of $13.5 million compared to $6.4 million in the year-ago quarter. Our net income for the quarter increased to $100.1 million, or $0.30 per diluted share.

Our diluted share count this quarter included 38.3 million shares related to our convertible senior notes. When these shares are dilutive, they're 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. In the first quarter of fiscal 2013, we estimate that these shares and the related costs would be included in our diluted EPS only if quarterly pretax income is approximately $140 million or higher, which after applying a 38% income tax rate, would be approximately $87 million of net income.

For fiscal 2012, we generated pretax income of $242.9 million compared to $12.1 million in fiscal 2011. Our net income for the year increased to $956.3 million, which included a tax benefit of $713.4 million, primarily from the reduction in the valuation allowance for our deferred tax assets that we recorded in the June quarter.

Stacey?

Stacey H. Dwyer

Our fourth quarter home sales revenues increased 20% to $1.3 billion on 5,575 homes closed, up from $1.1 billion on 4,987 homes closed in the year-ago quarter. Our average closing price for the quarter was $231,100, up 7% compared to the prior year and up 3% sequentially. We expect that our backlog conversion rate will continue to revert closer to historical seasonal norms. For the first quarter, we expect our conversion rate to be in the mid-60% range.

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