DR Horton Earnings Call Nuggets: Trends and Gross Margins

On Monday, DR Horton Inc (NYSE:DHI) reported its fourth quarter earnings and discussed the following topics in its earnings conference call. Take a look.


Kenneth Zener – KeyBanc Capital Markets: Questions. Obviously you are not really (indiscernible) guidance but at least you have kind of talked about growth (indiscernible) which required roughly 26,000 (indiscernible) kind of 35%, can you say your past trends changed as you walk into 2013?

Donald J. Tomnitz – VC, President and CEO: No, Ken. We wouldn’t necessarily say that anything is changed. We are certainly trying to make sure we are in a strong position to support whatever growth the market will allow next and we are certainly focused on gaining market share in 2013. So we plan to do that through increasing our community count and we’re also going to make sure that our homes and inventory position is in a strong position to capture the growth.

Stacey H. Dwyer – EVP and Treasurer: One thing that we’re very cognizant about, if you take our 13,000 homes multiply by 2, you came up with 26,000. From an inventory perspective, we think we are well-positioned that we can deliver that. However, it’s going to take the demand side of the equation as well. So, we’re ready for the demand, but we do need to see the demand to be able to meet those deliveries.

Bill W. Wheat – EVP and CFO: Then we’ll continue to add homes and adjust our spec inventory and our lot inventory based on the demand we see.

Donald J. Tomnitz – VC, President and CEO: And to help Stacey manage expectation, recall that our 13,000 units also included 1,000 models. So, we actually have 12,000 units that are worth of sale and closeable.

Kenneth Zener – KeyBanc Capital Markets: I got that. I guess another way to think about it. As the downturn progressed and you had more speculative units which reflected first-time buyers, you said your spec count was kind of just mere your first-time buyers. If they were 49%, do you expect that will kind of change in 2013 related to your community mix and offerings?

Donald J. Tomnitz – VC, President and CEO: We’ll see it. It depends on demand. Right now, it’s right in line with our first time homebuyers. We’re at 49% specs and I believe we had 49% first-time home buyers this quarter. We certainly have a strong first time homebuyer business and we plan on continuing to build on that. As the move-up part of the business and the build-to-order part of the business grows, that could result in a lower spec percentage, but we’ll really just adjust with what we see in the market.

Bill W. Wheat – EVP and CFO: Please don’t recall or please recall that our spec inventory has a tendency to increase specifically in December, January and February as we prepare for the selling season. So, it’s not unusual for our spec percentage to increase somewhere up in the mid 50% to 60% level.

Gross Margins

Michael Rehaut – JPMorgan: The first question I had was around gross margins. You’ve had nice improvement this year, particularly on a year-over-year basis and you also mentioned that you expect first quarter to be in the low 18% range, so maybe in and around where it’s been the last couple of quarters, maybe a few bps higher. Some of your peers have had pretty good sequential improvement in the September quarter versus the June quarter as they have seen continued benefits from pricing and reduced incentives. How do you see that come through in your own numbers? I guess you’ve had kind of steady gross margin sequentially, perhaps if you could kind of discuss your pricing over the last two, three quarters, how it’s gone and also to the extent that some of that’s perhaps potentially been offset by higher land costs or material labor costs?

Donald J. Tomnitz – VC, President and CEO: Clearly, I would say to you that we are seeing pricing power as we move from market-to-market-to-market. Also, with the extraordinarily low 4.5 month supply of new homes available for purchase today, we believe that purchasing power will continue to increase. We also had 160 basis points, as we indicated, improvement in our gross margins of which 120 basis points was due to fewer incentives.

Stacey H. Dwyer – EVP and Treasurer: Mike, I think, another thing you’re seeing in our margins in particular is we began refreshing our inventory and (tying out) finished lot contracts way back in 2009 and so the mix of our closings that have been coming from those newer communities last year was already right around 50%. That continues to improve this year, but our margins should already reflect some of that repositioning effort in a year-over-year comparison.

Donald J. Tomnitz – VC, President and CEO: As we continue to pursue new land and lot deals and (afford) them, we are still finding those deals meeting our underwriting guidelines, which is, 20% or equal to gross margins and our return of cash within 24 months. So, we do not see a lack of high margin lot deals out there. We’re now replacing our currently lot position with less than 20% gross margin deals.

Bill W. Wheat – EVP and CFO: When we put it altogether we do expect margins to probably improve slightly here in the fourth quarter, the low 18% range and we do expect further improvement as we move through fiscal 2013 based on what we can see right now.

Michael Rehaut – JPMorgan: The second on the community count. You mentioned that it was flat and I am sure if that was sequentially or year-over-year, maybe you could clarify that. But looking into ’13 you expected community count to be up 5% to 10% and just want to also clarify on that if that’s an average growth of community count for ’13 versus ’12 which potentially might imply – I mean, maybe we can just establish whether or not that growth would be kind of similar throughout the year or if community count would be rising throughout the year that you would end the year, let’s say, 4Q ’13 over 4Q ’12 at a 10% type number?

Bill W. Wheat – EVP and CFO: Sure. The flat community count was a year-over-year comparison. On a sequential basis, our community count, our selling communities were up 3% sequentially. As we look at the year for fiscal 2013, the 5% to 10% range is a general range that we would expect to characterize the full year of fiscal 2013. Our communities are growing right now and we would expect right now for that to continue to grow, but part of that’s going to be based on the demand we see during first 2013. So, we feel like the 5% to 10% is a fair range based on what we can see today. Is it possible that if demand continues to improve we continue to invest and open new communities, that we could be 10% or better this time next year? That’s certainly possible.

Donald J. Tomnitz – VC, President and CEO: Clearly, our goal is to continue to increase our market share and our footprint and we are not seen a lack of good deals out there in the marketplace. We’re seeing plenty of good deals to continue to replace our lot positions as we roll off from existing land and lot deals.