D.R. Horton, Inc. (DHI)

DHI 
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DR Horton (DHI)

Q3 2011 Earnings Call

July 28, 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

Megan McGrath - MKM Partners LLC

David Goldberg - UBS Investment Bank

Scott Hamann - KeyBanc Capital Markets Inc.

Kenneth Zener - KeyBanc Capital Markets Inc.

Michael Rehaut - JP Morgan Chase & Co

Josh Levin - Citigroup Inc

Joel Locker - FBN Securities, Inc.

Alex Barron - Agency Trading Group

Robert Wetenhall - RBC Capital Markets, LLC

James McCanless - Guggenheim Securities, LLC

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

Adam Rudiger - Wells Fargo Securities, LLC

Michael Smith - JMP Securities LLC

Joshua Pollard - Goldman Sachs Group Inc.

Presentation

Operator

Good morning, and welcome to the D.R. Horton, America's Builder, The Largest Builder In the United States, Third Quarter 2011 Earnings Release Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Donald Tomnitz. Thank you. Mr. Tomnitz, you may 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.

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 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 statement. 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

We have made many adjustments throughout our company to be competitive and profitable in the current housing environment. Our June results compared to the March quarter demonstrate the progress we are making. Our home closings and gross margin increased. SG&A and interest expense decreased and Financial Services pretax income increased, resulting in net a income of $28.7 million for the quarter.

Our balance sheet and liquidity remain strong, with cash and marketable securities of $1.1 billion and net homebuilding leverage under 20%.

We have also seen normal seasonality return to our business this fiscal year. Sales in the March quarter reflected a significant sequential increase to mark the start of the selling season. And our sales orders in the June quarter were comparable to the March quarter. Our sales order backlog grew throughout the selling season, increasing in March to 5,300 homes and further in June to 5,600 homes.

Closings in the third quarter were greater than the first and second quarters, and we expect fourth quarter closings to be greater than the third. We are now solidly in a position to be profitable for the full fiscal year.

Given the weak macroeconomic and housing conditions, we remain realistic in our expectations. We'll continue to manage our business to compete in the current and future market. We plan to continue to adjust our price points and product offerings to the demand we see in each of our individual markets. Bill?

Bill Wheat

Our home building operations generated pretax income of $22.2 million for the quarter, which included $9.9 million of inventory impairment and lot option charges as well as a $6.5 million loss on early retirement of debt.

Financial Services pre-tax income was $6.7 million, which included $3.5 million of recourse expense.

Our net income for the quarter was $28.7 million or $0.09 per diluted share compared to $50.5 million or $0.16 per diluted share in the prior year quarter. Mike?

Mike Murray

Our third quarter home sales revenues decreased 29% to $975 million on 4,555 homes closed from $1.4 billion on 6,805 homes closed in the year-ago quarter. Our average closing price for the quarter was up 6% compared to the prior year and up 3% sequentially to $213,900. These increases are due to the slight changes in both our product and geographic mix.

Homes closed in the June quarter represented 86% of the beginning backlog compared to 91% in the March quarter. We expect that our backlog conversion rate going forward will continue to average below 90%. Don?

Donald Tomnitz

Net sales numbers for the third quarter were 4,874 homes, down only 1% sequentially, reflecting a typical spring selling season pattern. Net sales orders were also down 1% from the same period last year. However, the average sales price on net sales orders was up 5% year-over-year to $219,000, resulting in a 4% year-over-year increase in the value of our quarterly net sales orders. Our cancellation rate was 27% and our active selling communities were essentially flat sequentially.

Our sales backlog increased 26% from the prior year and 6% sequentially to 5,600 homes or $1.2 billion. Bill?

Bill Wheat

Our gross profit margin on home sales revenues in the quarter was 16.5%, down 70 basis points from the year-ago period. However, our margin increased 30 basis points sequentially, primarily due to improvement in our core margin resulting from our continuing efforts to improve our construction costs, manage our homes and inventory efficiently, and add new communities with higher margins. Stacey?

Stacey Dwyer

In our third quarter impairment analysis, we reviewed all projects in the company and determined that projects with a pre-impairment carrying value of $28.1 million were impaired, which resulted in a $7.8 million impairment charges, the majority of which were in Florida and California. We refer to our projects which have indicators of potential impairment but were not impaired at our watch list, which represents those projects deemed to be at the highest risk for future impairment. After this quarter's impairments, our watch list now totaled $377 million, down from $432 million in March with the largest concentrations in California, Illinois and Arizona.

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