D.R. Horton, Inc. (DHI)

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D.R. Horton, Inc. (DHI)

F4Q2010 Earnings Call Transcript

November 12, 2010 10:00 am ET

Executives

Don Tomnitz – Vice Chairman, President and CEO

Stacey Dwyer – EVP and Treasurer

Bill Wheat – EVP and CFO

Analysts

Michael Rehaut – JPMorgan

Megan McGrath – Barclays Capital

Josh Levin – Citi

David Goldberg – UBS

Jade Rahmani – KBW

Joshua Pollard – Goldman Sachs

Ken Zener – KeyBanc

Dan Oppenheim – Credit Suisse

Jonathan Ellis – Bank of America-Merrill Lynch

Nishu Sood – Deutsche Bank

Stephen East – Ticonderoga

Carl Reichardt – Wells Fargo Securities

Jack Micenko – SFG

Jay McCanless – Guggenheim

Michael Smith – JMP Securities

Ken Leon – Standard & Poor's

Presentation

Operator

Good morning, and welcome to the D.R. Horton, America’s Builder, the largest builder in the United States, 2010 fiscal year end earnings release conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Donald J. Tomnitz, President and CEO for D.R. Horton. Thank you. Mr. Tomnitz, you may 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. 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 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 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

Fiscal 2010 was a year of the tax credit. This calls volatile sales and closings, but the year was consistent with our expectations and preparations. While the federal tax credit was in place, we experienced strong sales demand through the April 30, the sales contract deadline, especially from first time home buyers.

Our closings were strong through the June 30 closing deadline for the tax credit. However, after the tax credit expired sales demand dropped sharply in May. From June through August, our sales trend showed sequential improvement, and then we began experiencing a normal seasonal slowdown in September and October.

Overall, housing demand is weak. Even with significant fluctuations in the level of demand for our new homes in fiscal 2010, our approach was very consistent, manage our homes in inventory to current demand, generate cash, reduce debt, position ourselves for profitability and maintain a strong balance sheet to be positioned to take advantage of opportunities.

As we look to fiscal 2011, we continue to be realistic in our expectations, and will adjust our business to compete in the current market conditions. We expect another very challenging year for the homebuilding industry, as the fundamental drivers of demand, the overall economy, job growth, and consumer confidence are still very weak. In addition, we do not expect any stimulus in fiscal 2011 similar to the federal tax credits that were in effect last year.

All of these factors make it likely that our sales and closing volumes will be below our volumes in fiscal 2010. However, we plan to continue to gain market share by opening new communities and adjusting our price points and product offerings to the demand we see in each of our individual markets.

I want to congratulate each member of the D.R. Horton team for turning in a strong performance on fiscal 2010, despite continued difficult industry conditions. We appreciate very you’re your efforts. Stacey?

Stacey Dwyer

Our net loss for the quarter was $8.9 million or $0.03 per diluted share compared to a net loss of $234.9 million or $0.74 per diluted share in the prior year quarter. Homebuilding pre-tax loss was $6.5 million, which included $30.8 million of inventory impairment and lot option charges.

Financial services pre-tax income was $4.8 million, which included $2.1 million of recourse expense. Our fourth quarter income tax provision was $7.2 million, due primarily to an increase in our tax reserves. Bill?

Bill Wheat

Our fourth quarter home sales revenue decreased 9% to $921 million on 4,281 homes closed from $1 billion on 4,810 homes closed in the year ago quarter. Our average closing price for the quarter was up 2% from the prior year, and up 6% sequentially to $215,200. The sequential increase was primarily due to a higher percentage of our closings coming from the west region in the fourth quarter versus the third quarter. Don?

Don Tomnitz

Net sales orders for the fourth quarter were down 21% from last year to 3,979 homes. The net sales orders in the prior year quarter included demand from the first time home buyer tax credit that was in effect last year.

Based on current sales demand and the fact that the tax credits were supporting sales demand last year, we expect sales in the next two quarters to be lower than last year. While we remain focused on opening new communities and gaining market share for us to see significant sustainable sales growth, we need to see improvements in the overall economy, the jobs landscape, and consumer confidence.

In the September quarter, our average sales price on net sales orders was essentially flat year-over-year at $205,500. Our cancellation rate was 31%. Our active selling communities were up 6% sequentially. 49% of our net sales came from communities opened in fiscal year 2009 or later. Our sales backlog decreased 27% from the prior year to 4,128 homes or $850.8 million. Stacey?

Stacey Dwyer

Our gross profit margin on home sales revenue in the fourth quarter was 17%, up 450 basis points from our home sales margin in the year ago period. A contributing factor to our margin improvement from last year was that 39% of fourth quarter closings were from new deals that were put under contract in fiscal 2009 or later. Margins on closings in our new projects are approximately 200 to 300 basis points higher than on the remainder of our closings.

Our margin decreased 20 basis points sequentially from the third to the fourth quarter, reflecting the weaker housing market we had experienced during the second half of this year.

Although our gross margins have been in the 17% to 18% range each quarter this fiscal year, we expect to experience gross margin pressure over the next few quarters as we continually adjust to the prevailing market in each of our communities. Bill?

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