D.R. Horton, Inc. (DHI)

DHI 
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DR Horton (DHI)

Q4 2011 Earnings Call

November 11, 2011 11:00 am ET

Executives

Mike Murray - VP and Controller

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

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

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

Analysts

Steven Bachman - RBC Capital Markets, LLC, Research Division

David Goldberg - UBS Investment Bank, Research Division

Michael Rehaut - JP Morgan Chase & Co, Research Division

Nishu Sood - Deutsche Bank AG, Research Division

Stephen F. East - Ticonderoga Securities LLC, Research Division

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

Daniel Oppenheim - Crédit Suisse AG, Research Division

Adam Rudiger - Wells Fargo Securities, LLC, Research Division

Stephen Kim - Barclays Capital, Research Division

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

Alex Barrón - Housing Research Center, LLC

James McCanless - Guggenheim Securities, LLC, Research Division

Jack Micenko - Susquehanna Financial Group, LLLP, Research Division

Jordan Hymowitz - Philadelphia Financial

Presentation

Operator

Good morning, and welcome to the D.R. Horton, America's Builder, the largest builder in the United States, Fourth Quarter and Fiscal Year 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. Don Tomnitz, President and CEO. Thank you, sir. 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, Vice President and Controller.

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 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 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 J. Tomnitz

For the past several years, we have been focused on the basics of the Homebuilding business, with the singular goal of returning to profitability. We supplemented our existing land positions with newer, finished lot positions which enhanced our gross margin. We limited our investment in land and lot inventory, which benefited operational cash flow. We adjusted our overhead structure, which reduced our SG&A expenses, and we reduced our outstanding debt significantly, which improved our balance sheet leverage and resulted in less interest expense.

In fiscal 2011, we realized the benefits of these strategies and have achieved operational profitability, this time without a tax credit. We closed 16,695 homes, 8 fewer than 2 years ago in fiscal 2009. However, our bottom line results were greatly improved versus fiscal 2009, as our pretax income increased $569 million. $362 million of the increase was due to reductions in inventory impairment and land option cost write-offs, and $35 million was due to reductions in mortgage recourse and reinsurance expenses in fiscal 2011 compared to 2009. The remaining pretax income increase of $172 million reflects true operational improvement on essentially flat volume, a combination of reduced SG&A, improved gross margins and less interest expense. We'd like to thank all of the D.R. Horton team members for helping us achieve profitability in fiscal year 2011, and most importantly, we look forward to another year of profitability in fiscal year 2012. Bill?

Bill W. Wheat

Our Homebuilding operations generated pretax income of $27.4 million for the quarter, which included $12.8 million of inventory impairment and lot option charges. Financial services pretax income for the quarter was $6.4 million, which included $3.9 million of recourse expense. Our net income for the quarter was $35.7 million or $0.11 per diluted share, compared to a net loss of $8.9 million or $0.03 per diluted share in the prior year quarter. For the fiscal year, our net income was $71.8 million or $0.23 per diluted share. Mike?

Mike Murray

Fourth quarter home sales revenues increased 17% to $1.1 billion on 4,987 homes closed from $921.1 million on 4,281 homes closed in the year-ago quarter. Our average closing price for the quarter was flat compared to the prior year and up 1% sequentially to $215,300. Our home sales revenues for the fiscal year were $3.5 billion on 16,695 homes closed, down from $4.3 billion on 20,875 homes closed in fiscal 2010. Our average closing price for the year was up 3% from the prior year to $212,200. Don?

Donald J. Tomnitz

Net sales orders for the fourth quarter were up 7% from last year to 4,241 homes on a 2% increase in active selling communities. In the September quarter, our average sales price on net sales orders was up 6% compared to the prior-year quarter and flat sequentially at $218,700. Our cancellation rate for the fourth quarter was 29%.

Net sales orders for fiscal 2011 were 17,421 homes and our average sales price was up 3% from last year to $214,000. Our cancellation rate for the fiscal year was 27%. Our sales backlog at September 30, 2011, increased 18% from the prior year to 4,854 homes or $1 billion, a great start to achieving our goal of profitability in the first quarter of fiscal 2012. Stacey?

Stacey H. Dwyer

Our gross profit margin on home sales revenue in the fourth quarter was 16.1%, down 90 basis points from the year-ago period due to increased incentives and discounts and warranty costs, partially offset by a decrease in amortized interest. Sequentially, incentives and discounts were flat; however, our gross margin declined 40 basis points due to increased warranty costs, partially offset by a decrease in amortized interest. Our gross profit margin on home sales revenue for fiscal 2011 was 16.1%, down 120 basis points from fiscal 2010, primarily due to increased incentives and discounts, but our gross margin on home sales revenue has improved 300 basis points from fiscal 2009. Mike?

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