D.R. Horton, Inc. (DHI)

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DR Horton Inc. (DHI)

Q2 2010 Earnings Call Transcript

August 03, 2010 10:00 am


Don Tomnitz - President and CEO

Bill Wheat - EVP and Chief Financial Officer

Stacey Dwyer - EVP and Treasurer


Michael Rehaut - JPMorgan Chase & Co.

Josh Levin - Citigroup

Alex Barron - Housing Research Central

Dave Goldberg - UBS

Carl Reichardt - Wells Fargo Securities

Joshua Pollard - Goldman Sachs

Stephen East - Ticonderoga Securities

Timothy Jones - Maloney Securities

Nishu Sood - Deutsche Bank

Jonathan Ellis - Bank of America Merrill Lynch

Megan McGrath - Barclays Capital

Dan Oppenheim - Credit Suisse

Jade Rahmani - KBW

Joel Locker - FBN Securities

Jay McCanless - Guggenheim Partners

Michael Smith - JMP Securities



Greetings and welcome to the DR Horton American Builder, the largest builder in the United States third quarter 2010 earnings release conference call. (Operator Instructions) As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Mr. Don Tomnitz, President and CEO for DR Horton. Thank you. Mr. Tomnitz, you may now begin.

Don Tomnitz

Thank you and good morning. Joining me this morning are Bill Wheat, Executive Vice President and CFO; and Stacey Dwyer, Executive Vice President and Treasurer. As usual before we get started, Stacey?

Stacey Dwyer

Some comments made on this call may constitute forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Although DR 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 DR Horton on the date of this conference call, and DR 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 DR Horton’s current report on Form 8-K dated February 8, 2010, which updated our annual report on Form 10-K and our most recent quarterly report on Form 10-Q, all of which are filed with the Securities and Exchange Commission. Don?

Don Tomnitz

Thank you Stacey. We want to thank all of our DHI team members for generating an operating profit for the third consecutive quarter. Congratulations to each of you. We successfully competing in a difficult housing market. We are three quarters of the way to our goal of profitability in each any every quarter but we still have a very challenging quarter in front of us.

So far this year has unfolded as we expected. We saw strong sales through April and we just had our strongest third quarter homes closed in three years. We entered the year expecting the second half of the calendar year to be more challenging because of the flow forward effect of the federal tax credit combined with normal seasonality and a continued week economy.

Consequently, we began slowing our construction starts at the end of March quarter in anticipation of a drop off in demand. We will continue to be realistic on our expectations and we will adjust our business to compete now and in the future. Stacey?

Stacey Dwyer

Our net income for the quarter was $50.5 million or $0.16 per diluted shares compared to a net loss of $143.8 million or $0.45 per diluted shares in the prior year quarter. Pretax income was $37.4 million which included $30.3 million of inventory impairments and lot option charges and an $8.3 million loss on early retirement of debt. Financial service pretax income was $8.9 million which included $3.1 million of recourse expense. Bill?

Bill Wheat

Our third quarter home sales revenues increased 54% to $1.4 billion on 6,805 homes closed from $896.6 million on 4,240 homes closed in the year ago quarter. Our average closing price for the quarter was down 4% to $202,500. The timing of our revenues and earnings so far this year have been driven by the timing of tax credits instead of normal seasonality and we believe our operating strategy of having specs available to close by June 30 let us capture more of the available tax credit demand.

While the September quarter would typically be our strongest for closing volume and profitability our June quarter will be our strongest quarter in fiscal year 2010. Don?

Don Tomnitz

As we expected sales have slowed significantly after the April 30 deadline for signing the home purchase contract to qualify for the federal tax credits. As a result net sales orders for the third quarter were down slightly 3% from the prior year at 4,921 homes. Our sales in April were extremely strong followed by a sharp decline in May, a 20% sequential increase in June and then an approximate 10% increase in July. As we look at our sales comps for the next three quarters it will be difficult to achieve year-over-year increases, since each of the quarters saw strong sales volume driven by the various tax credits in effect.

While we remain focused on gaining market share for us to significant sustainable sales growth we need to see improvement in the overall economy, the jobs landscape and the consumer confidence. In the June quarter our average sales price or net sales orders in the quarter was essentially flat at $280,400. Our cancellation rate was 28%. Our active selling TMTs were up 7% sequentially. 39% of our net sales came from communities opened in fiscal year 2009 or later. Our sales backlog decreased to 18% from the prior year to 4430 homes or $954.4 million. Stacey?

Stacey Dwyer

Our gross profit margin on home sales revenues in the third quarter were 17.2%, up 590 basis points from our home sales margin in the year ago period and down 80 basis points sequentially from our March quarter. Our gross margins have been in the 17% to 18% range in each of the first three quarters this year with some volatility within the range. Our core margins increased 50 basis points from Q2 to Q3 as the average cost of our homes declined by more than our average selling prices. This was more than offset by the sequential gross margin impact from typical changes in estimates for development and construction completion costs and warranty and litigation accruals which were magnified when quarterly revenues fluctuated significantly, as they have this year.

A contributing factor to our core margin improvement was that 35% of third quarter closings were from new deals that were put under contract in fiscal 2009 or later. Margins on closings in our new projects were approximately 200 to 300 basis points higher than all the remainder of our closings. Our goal is to maintain our gross margins in the 17% to 18% range, or higher. However if current market conditions persist, we could see margins pressure in future quarters. Bill?

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