D.R. Horton, Inc. (DHI)

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DR Horton (DHI)

Q2 2013 Earnings Call

April 26, 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

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

Michael A. Roxland - BofA Merrill Lynch, Research Division

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

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

Adam Rudiger - Wells Fargo Securities, LLC, Research Division

Susan Maklari - UBS Investment Bank, Research Division

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

Joel Locker - FBN Securities, Inc., Research Division

Jack Micenko - Susquehanna Financial Group, LLLP, Research Division

Stephen Kim - Barclays Capital, Research Division

Alex Barrón - Housing Research Center, LLC

Megan McGrath - MKM Partners LLC, Research Division

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

Presentation

Operator

Good morning and welcome to the D.R. Horton, America's Builder, the largest builder in the United States, second quarter 2013 earnings release conference call. [Operator Instructions] As a reminder, this conference is being recorded. It is now pleasure to introduce your host, Donald Tomnitz, President and CEO for D.R. Horton. 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, 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 and 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 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

The spring selling season is in full swing, especially for D.R. Horton. Demand for homes has strengthened and the relative available housing supply has shrunk which has created a favorable pricing environment. Our first-time buyer demand remains very strong, and we continue to see improving demand for our move up buyers. We are well positioned to meet the increasing demand across our broad geographic footprint, with our inventory of homes available for sale and with the land and lot position we have accumulated over the past 3 to 4 years.

Our team of operators across the country delivered an outstanding second quarter. They generated significant sales and revenue growth along with substantial improvements in profit margins and returns, which resulted in our pretax income more than tripling last year's levels. Overall, the first half of fiscal year 2013 was nothing short of phenomenal, and we expect the second half to be even better. Bill?

Bill W. Wheat

In the second quarter, our consolidated pretax income increased 236% to $142.1 million from $42.3 million in the year-ago quarter. Our pretax income, as a percentage of consolidated revenue, was 9.9%, an increase of 550 basis points from 4.4% 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 $127.4 million from $34.6 million, and financial services pretax income increased to $14.7 million from $7.7 million.

Net income for the second quarter increased 173% to $111 million or $0.32 per diluted share, compared to $40.6 million or $0.13 per diluted share in the year-ago quarter. Our net income for the quarter included a noncash tax benefit of $18.7 million from a reduction of the valuation allowance on our deferred tax asset. Mike?

Mike Murray

Our second quarter home sales revenues increased 47% to $1.4 billion on 5,643 homes closed, up from $930.6 million on 4,240 homes closed in the year-ago quarter. Our average closing price for the quarter was $242,500, up 10% compared to the prior year, driven primarily by pricing power and, to a lesser extent, by a larger average home size. Don?

Donald J. Tomnitz

The value of our net sales orders increased 52% from last year due to increased volume and home prices. Our net sales orders increased 34% to 7,879 homes, on a 15% increase in active selling communities. Our average sales price on net sales orders of $253,400 increased 14% compared to the year-ago quarter. The cancellation rate for the second quarter was 19%, compared with the 22% in the year-ago quarter.

The value of our backlog increased 76% from a year ago to $2.4 billion, with an average sales price per home of $249,800. Homes in backlog increased 54% from the prior year to 9,553 homes. Our backlog conversion rate for the quarter was 77%, compared to 94% in the prior year quarter. We expect this rate to continue to revert closer to historical seasonal norms. For the third quarter, we expect our conversion rate to be in the low 70% range. We have continued to see a solid sales pace . Stacey?

Stacey H. Dwyer

Our gross profit margin on home sales revenue in the second quarter was 20.4%, up 280 basis points from the year-ago period. 210 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 was due to lower amortized interest and property taxes, and 30 basis points was due to lower estimated costs for warranty and construction defect claims, add the percentage of home sales revenue. Sequentially, our gross margin on home sales revenue improved 160 basis points, of which 30 basis points was due to improving market conditions. The additional 130 basis points of the increase was due to lower relative cost for warranty and construction defect claims, as a percentage of home sales revenue, with approximately 40 basis points of the 130, due to a higher level of cash reimbursements of previously incurred litigation cost received during this quarter, as compared to our Q1. We expect to see continued improvement in our home sales gross margin from improving market conditions for the rest of the year. For the third quarter, we expect a home sales gross margin of approximately 20%. Mike?

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