D.R. Horton, Inc. (DHI)

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DR Horton (DHI)

Q2 2011 Earnings Call

April 29, 2011 10:00 am ET

Executives

Mike Murray - VP and Controller

Bill Wheat - Chief Financial Officer, Principal Accounting Officer, Executive Vice President, Director and Member of Executive Committee

Stacey Dwyer - Executive Vice President, Treasurer and In Charge of Investor Relations

Donald Tomnitz - Vice Chairman, Chief Executive Officer, President and Member of Executive Committee

Analysts

Daniel Oppenheim - Crédit Suisse AG

Stephen East - Ticonderoga Securities LLC

Nishu Sood - Deutsche Bank AG

David Goldberg - UBS Investment Bank

Kenneth Zener - KeyBanc Capital Markets Inc.

Josh Levin - Citigroup Inc

Michael Rehaut - JP Morgan Chase & Co

Joel Locker - FBN Securities, Inc.

Alex Barron - Agency Trading Group

Robert Wetenhall - RBC Capital Markets, LLC

Adam Rudiger - Wells Fargo Securities, LLC

Michael Widner - Stifel, Nicolaus & Co., Inc.

Michael Smith - Oppenheimer

James McCanless - Guggenheim Securities, LLC

Jade Rahmani - Keefe, Bruyette, & Woods, Inc.

Joshua Pollard - Goldman Sachs Group Inc.

Jonathan Ellis - BofA Merrill Lynch

Presentation

Operator

Good morning, and welcome to the D.R. Horton America’s Builder, The Largest Builder in the United States, Second Quarter 2011 Earnings Release Conference Call. [Operator Instructions] It is now my pleasure to introduce your host, Don Tomnitz, CEO and President of D.R. Horton. Thank you. Mr. Tomnitz, you may now begin.

Donald 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, Vice President and Controller. 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'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 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 Tomnitz

The fundamental drivers of demand for the homebuilding industry, the overall economy, job growth and consumer confidence are still weak. National new home sales have remained at a low level subsequent to the expiration of the tax credit in April 2010. However, our net sales orders this quarter reflected traditional seasonality increasing 47% sequentially from the December to the March quarter. Our backlog of 5,281 homes at March 31, 2011, is higher than our backlog at the beginning of the fiscal year. And as a result, we expect our closings and pretax profitability to be higher in the second half of fiscal 2011 than on the first half. Given the weak macroeconomic conditions, higher levels of existing homes for sale and tight mortgage availability, we still remain cautious and realistic in our expectations and we will adjust our business to compete in current market conditions. We plan to continue to aggressively open new communities and adjust our price points and product offerings to the demand we see in each of our individual markets. Mike?

Mike Murray

Our Homebuilding pretax loss was $32.4 million, which included $14.3 million of inventory impairment and lot-option charges. Financial Services pretax income was $1.6 million, which included $2.5 million of recourse expense. Our net income for the quarter was $27.8 million or $0.09 per diluted share, compared to $11.4 million or $0.04 per diluted share in the prior-year quarter. Net income for the quarter included a $59.2 million noncash tax benefit from a reduction in our unrecognized tax benefit reserve. During the quarter, we received a favorable result from the IRS on a ruling request concerning the capitalization of inventory cost. This ruling request and related potential tax benefit have been disclosed in prior quarterly SEC filings. Bill?

Bill Wheat

Our second quarter home sales revenues decreased 18% to $733 million on 3,516 homes closed from $894.8 million on 4,260 homes closed in the year ago quarter. Our average closing price for the quarter was down 1% compared to the prior year and essentially flat sequentially at $208,500. Homes closed in the March quarter represented 91% of the beginning backlog compared to 88% in the December quarter. We expect that our backlog conversion rate going forward will remain around or below 90% as we return to more normal conversion rates this year. Don?

Donald Tomnitz

Net sales for the second quarter increased 47% sequentially to 4,943 homes, reflecting a seasonal increase from the spring selling season. However, sales orders were down 23% from the same period last year when we saw a 55% year-over-year increase as buyers were signing contracts to meet the April 30 sales deadline on the federal homebuyer tax credit.

In the March quarter, our average sales price on net sales orders was up 1.5% year-over-year to $207,700. Our cancellation rate was 25% and our active selling communities increased 4% sequentially. Our sales backlog decreased 16% from the prior year but increased 37% sequentially to 5,281 homes or $1.1 billion. We expect another difficult year-over-year net sales order comparison next quarter since our third quarter fiscal 2010 sales of 4,921 homes included extremely strong demand in April period from the tax credit, a positive comparison would require that we sell approximately the same number of homes or greater in the June quarter than we sold in the March quarter. Stacey?

Stacey Dwyer

Our gross profit margin on home sales revenue in the quarter was 16.2%, down 180 basis points from the year ago period, reflecting the weaker housing market we continue to experience since the expiration of the federal homebuyer tax credit. However, our margin increased 60 basis points sequentially, primarily due to improvement in our core margin. Mike?

Mike Murray

In our second quarter impairment analysis, we reviewed all projects in the company and determined that projects with a pre-impairment carrying value of $59.4 million were impaired, which resulted in $13 million of impairment charges, the majority of which were in Hawaii, Florida and California. We referred to our projects, which have indicators of potential impairment, but were not impaired, as our watch list, which represents those projects deemed to be at the highest risk for future impairments. After this quarter's impairments, our watch list now totals $432 million, up from $408 million at December, with the largest concentrations in California, Illinois and Florida. Our inventory impairment process in future quarters will incorporate any changes in market conditions and any adjustments we make in our business. Bill?

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