D.R. Horton, Inc. (DHI)

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DR Horton (DHI)

Q1 2013 Earnings Call

January 29, 2013 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 and Treasurer

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

Mike Murray

Analysts

Daniel Oppenheim - Crédit Suisse AG, Research Division

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

Michael A. Roxland - BofA Merrill Lynch, Research Division

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

Adam Rudiger - Wells Fargo Securities, LLC, Research Division

Joel Locker - FBN Securities, Inc., Research Division

David Goldberg - UBS Investment Bank, Research Division

Megan McGrath - MKM Partners LLC, Research Division

Nishu Sood - Deutsche Bank AG, Research Division

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

Stephen Kim - Barclays Capital, Research Division

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

Buck Horne - Raymond James & Associates, Inc., Research Division

Alex Barrón - Housing Research Center, LLC

Jack Micenko - Susquehanna Financial Group, LLLP, Research Division

Robert C. Wetenhall - RBC Capital Markets, LLC, Research Division

Presentation

Operator

Good morning, and welcome to the D.R. Horton America's Builder, the largest builder in the United States, First Quarter 2013 Earnings 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 for D.R. Horton. Thank you, sir. 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, Senior Vice President. As usual, 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's 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 day 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?

Donald J. Tomnitz

D.R. Horton is off to a great start in fiscal 2013. This quarter, we saw a broad improvement in demand in most of our markets, which has given us the ability to raise prices in more of our communities. Both the entry-level and move-up segments of our business are strong. We're anticipating a good spring selling season and have added homes and communities to capture this increasing demand. We continue to find opportunities to expand our business in our existing markets, as well as new submarkets. We put a significant amount of capital work this quarter by increasing our investments in homes under construction, finished lots, land and land development. D.R. Horton is in the best position it has ever been in its 35-year history. Bill?

Bill W. Wheat

In the first quarter, our consolidated pretax income increased 270% to $107.9 million from $29.2 million in the year-ago quarter. As a percentage of consolidated revenue, our pretax income margin was 8.5%, an increase of 530 basis points from 3.2% in the prior year quarter, reflecting significant improvement in both our homebuilding and financial services operations. Compared to the year-ago quarter, homebuilding pretax income increased to $90.2 million from $25 million and financial services pretax income increased to $17.7 million from $4.2 million. Our effective tax rate for the quarter was 38.5%, which resulted in income tax expense of $41.6 million in the current quarter, compared to $1.5 million in the prior year quarter. Net income for the first quarter increased to $66.3 million or $0.20 per diluted share compared to $27.7 million or $0.09 per diluted share in the year-ago quarter. Our diluted share count this quarter included 38.6 million shares related to our convertible senior notes. We expect these shares to be included in our diluted share count in most future quarters. Stacey?

Stacey H. Dwyer

Our first quarter home sales revenue increased 38% to $1.2 billion on 5,182 homes closed, up from $884.3 million on 4,118 homes closed in the year-ago quarter. Home sales revenues increased by double-digit percentages in all of our operating region. Our average closing price for the quarter was $236,100, up 10% compared to the prior year, driven primarily by pricing power and a larger average home size. Don?

Donald J. Tomnitz

The value of our net sales orders increased 60% from last year to the increased volume in home prices. Our net sales orders increased 39% to 5,259 homes on a 9% increase in active selling communities. Our average sales price on the net sales orders of $249,900 increased 15% compared to the year-ago quarter. The average sales price on our net sales orders for the quarter increased by double-digit percentages in all of our operating regions. The cancellation rate for the first quarter was 22% compared to 26% in the year-ago quarter. The value of our backlog increased 80% from a year ago to $1.8 billion with an average sales price per home of $240,400. Homes and backlog increased 62% from the prior year to 7,317 homes. Our increased backlog is providing greater visibility to our future revenues. We expect that our backlog conversion rate will continue to revert closer to historical seasonal norms. For the second quarter, we expect our conversion rate to be around 70%. We've continued to see strong sales through January. Mike?

Mike Murray

Our gross profit margin on home sales revenue in the first quarter was 18.8%, up 200 basis points from the year-ago period. 170 basis points of the margin increase was due to improving market conditions resulting in reduced incentives and higher average selling prices in excess of cost increases. 40 basis points of the margin increase was due to lower amortized interest and property taxes. These increases were partially offset by a 10 basis point decrease from higher estimated costs for warranty and construction defect claims as a percentage of home sales revenue. Our expectation for our second quarter home sales gross margin is in the high-18% range, consistent with the first quarter. Stacey?

Stacey H. Dwyer

Homebuilding SG&A expense for the quarter was $140.8 million compared to $119 million in the prior year quarter. As a percentage of homebuilding revenues, SG&A improved 200 basis points to 11.4% from 13.4%. We are leveraging our fixed cost structure, while at the same time, building our sales and production capabilities where necessary to meet increasing demands. In the second quarter of 2013, we expect our SG&A as a percentage of homebuilding revenues to continue to improve on a year-over-year basis. However, sequentially, the absolute dollars and percentage will likely be higher in the second quarter than the first quarter due to seasonal cost increases. We expect our SG&A as a percentage of homebuilding revenues to be lower throughout fiscal 2013 as compared to fiscal 2012. The improvements in our gross profit and SG&A percentages, and a decrease in our direct interest expense, expanded our homebuilding pretax margins to 7.3% in the current quarter, an increase of 450 basis points from 2.8% in the year-ago quarter. Bill?

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