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CompanyName:D.R.HortonIncCompanyTicker:DHISector:IndustrialGoodsIndustry:Materials&Construction
EventDescription:Q22016EarningsCallMarketCapasofEventDate:11.60BPriceasofEventDate:31.2
©2014TheStreet,Inc.Al l R ightsReserved Page1of21
DRHorton(DHI)EarningsReport:Q22016ConferenceCallTranscriptThefollowingDRHortonconferencecalltookplaceonApril21,2016,10:00AMET.Thisisatranscriptofthatearningscall:
CompanyPart icipants
JessicaHansen;D.R.HortonInc;VPofIRDavidAuld;D.R.HortonInc;President&CEOMikeMurray;D.R.HortonInc;EVPandCOOBillWheat;D.R.HortonInc;EVP,CFO
OtherPart icipants
PaulShibelski;Evercore;AnalystKennethZener;KeyBancCapitalMarkets;AnalystAlanRatner;Zelman&Associates;AnalystEricBosshard;ClevelandResearchCompany;AnalystNishuSood;DeutscheBank;AnalystStevenKim;BarclaysCapital;AnalystBobWetenhall;RBCCapitalMarkets;AnalystMichaelRehaut;JPMorgan;AnalystJackMicenko;SusquehannaFinancialGroup/SIG;AnalystSusanMcClary;UBS;AnalystWillRandow;Citigroup;AnalystJohnLovallo;BoAMerrillLynch;AnalystMikeDahl;CreditSuisse;AnalystJadeRahmani;Keefe,Bruyette&Woods,Inc.;AnalystJayMcCanless;SterneAgeeCRT;Analyst
MANAGEMENTDISCUSSIONSECTION
Operator :
Welcometothesecondquarter2016earningsconferencecallofD.R.Horton,America'sbuilder,thelargestbuilderintheUnitedStates.
(Operatorinstructions)
Asareminder,thisconferenceisbeingrecorded.
ItisnowmypleasuretointroduceyourhostJessicaHansen,VicePresidentofInvestorRelationsforD.R.Horton.Pleasegoahead.
JessicaHansen (VPofIR):
Thankyou,Operator.Goodmorning.WelcometoourcalltodiscussourresultsforthesecondquarterofFY16.
Beforewegetstarted,today'scallmayincludecommentsthatconstituteforward-lookingstatementsas
CompanyName:D.R.HortonIncCompanyTicker:DHISector:IndustrialGoodsIndustry:Materials&Construction
EventDescription:Q22016EarningsCallMarketCapasofEventDate:11.60BPriceasofEventDate:31.2
©2014TheStreet,Inc.Al l R ightsReserved Page2of21
definedbythePrivateSecuritiesLitigationReformActof1995.AlthoughD.R.Hortonbelievesanysuchstatementsarebasedonreasonableassumptions,thereisnoassurancethatactualoutcomeswillnotbemateriallydifferent.
Allforward-lookingstatementsarebaseduponinformationavailabletoD.R.Hortononthedateofthisconferencecall,andD.R.Hortondoesnotundertakeanyobligationtopubliclyupdateorreviseanyforward-lookingstatements.
AdditionalinformationaboutissuesthatcouldleadtomaterialchangesinperformanceiscontainedinD.R.Horton'sannualreportonForm10-K,andourmostrecentquarterlyreportonForm10-Q,bothofwhicharefiledwiththeSecuritiesandExchangeCommission.
Foryourconvenience,thismorning'searningsreleasecanbefoundonourwebsiteatInvestor.DRHorton.com,andweplantofileour10-Qnextweek.
AftertheconclusionofthecallwewillpostupdatedsupplementaryhistoricaldatatoourinvestorrelationssiteonthepresentationsectionsunderNewsandEventsforyourreference.Thesupplementaryinformationincludeshistoricaldataonourhomebuildingreturnoninventory,grossmargins,changesinactivesellingcommunities,productmix,andourmortgageoperations.
NowIwillturnthecallovertoDavidAuld,ourPresidentandCEO.
DavidAuld (President&CEO):
Thankyou,Jessica.Goodmorning.InadditiontoJessica,I'mpleasedtobejoinedonthiscallbyMikeMurray,ourExecutiveVicePresidentandChiefOperatingOfficer;andBillWheat,ourExecutiveVicePresidentandChiefFinancialOfficer.
ThespringsellingseasonatD.R.Hortonisinfullswing,andourteamdeliveredastrongsecondquarter.
Ourconsolidatedpre-taxincomeincreasedto$301millionon$2.8billionofrevenue,andourpre-taxprofitmarginimproved130basispointsto10.9%.Ourhomessoldincreased10%comparedtothesecondquarterof2015,drivenbyimprovingabsorptions.TheseresultscontinuetoreflecttheconsistentsolidperformanceofourcoreD.R.Hortoncommunities,andourEmeraldHomesandExpressHomesbrands.
Wearestrivingtobetheleadingbuilderineachofourmarketsandtocontinuetoexpandourindustry-leadingmarketshares.Weplantomaintainbroadproductdiversitywithourthreebrandsoverthelong-term.Ourcontinuedstrategicfocusistoproducedouble-digitannualgrowthinbothourrevenueandpre-taxprofitswhilegeneratingpositivecashflowsandincreasingreturns.
DuringthesixmonthsendedMarch,wegenerated$27millioncashfromoperations--ontracktomeetourtargetof$300millionto$500millionofpositivecashflowsfortheyear.Ourreturnoninventory,definedashomebuildingpre-taxincomedividedbyaverageinventory,improvedto13.8%forthe12months,upfrom10.7%ayearago.Withasalesbacklogof13,695homesattheendofMarchandawell-stockedsupplyofland,lots,andhomes,wearewell-positionedfortheremainderof2016.
Mike?
MikeMurray(EVPandCOO):
Netincomeforthesecondquarterincreased32%to$195million,or$0.52perdilutedsharecomparedto$148millionor$0.40perdilutedshareintheyear-agoquarter.Ourconsolidatedpre-taxincomeincreased31%to$301milliontointhesecondquarter,comparedto$230millionintheyear-agoquarter,andhomebuildingpre-taxincomeincreased36%to$283millioncomparedto$209millionintheprior
CompanyName:D.R.HortonIncCompanyTicker:DHISector:IndustrialGoodsIndustry:Materials&Construction
EventDescription:Q22016EarningsCallMarketCapasofEventDate:11.60BPriceasofEventDate:31.2
©2014TheStreet,Inc.Al l R ightsReserved Page3of21
yearquarter.
Oursecondquarterhomesalesrevenuesincreased16%to$2.7billionon9,262homesclosed,upfrom$2.3billionon8,243homesclosedintheyear-agoquarter.Ouraverageclosingpriceforthequarterwas$290,000,up3%comparedtotheprioryear,andflatsequentiallyfromourfirstquarter.
Thisquarterentry-levelhomesmarketedunderourExpressHomesbrandaccountedfor23%ofhomesclosedand16%ofhomesalesrevenue.Ourhomesforhigher-endmove-upandluxurybuyers,pricedgreaterthan$500,000,accountedfor7%ofourhomesclosedand17%ofourhomesalesrevenue.Bill?
BillWheat (EVP,CFO):
Thevalueofournetsalesordersinthesecondquarterincreased13%fromtheyear-agoquarterto$3.6billion,andhomessoldincreased10%to12,292homesonarelativelyflat,activesellingcommunitycount.
Ouraveragesalespriceonnetsalesordersinthesecondquarterwas$290,900.Thecancellationratefromthesecondquarterwas19%,consistentwiththeyear-agoquarter.Thevalueofourbacklogincreased14%fromayearago,to$4.1billion,withanaveragesalespriceperhomeof$296,700,andhomesinbacklogincreased12%to13,695homes.
Mike?
MikeMurray(EVPandCOO):
Ourgrossprofitmarginonhomesalesrevenueinthesecondquarterwas19.9%,consistentwiththefirstquarterandup20basispointsfromthesecondquarteroflastyear.Theconsistencyinourgrossmarginreflectsthestabilityofmostofourmarketstoday.
Weareraisingpricesorreducingincentiveswhenpossibleincommunitieswhereweareachievingourtargetedabsorptions,andwearealsoworkingtocontrolcostincreases.Ourgeneralgrossmarginexpectationsremainunchanged.
Inthecurrenthousingmarketwecontinuetoexpectouraveragehomesalesgrossmargintogenerallybearound20%,withquarterlyfluctuationsthatmayrangefrom19%to21%duetoproductandgeographicmixandtherelativeimpactofwarrantyandinterestcosts.Asareminder,ourreportedgrossmarginsincludeallofourinterestcosts.
David?
DavidAuld (President&CEO):
Inthesecondquarter,homebuildingSG&Aexpensewas$258millioncomparedto$242millionintheprior-yearquarter.Asapercentageofhomebuildingrevenue,SG&Aimproved80basispointsto9.6%comparedto10.4%intheprior-yearquarterasourrevenueincreaseimprovedourleverageoffixedoverheadcost.WeremainedfocusedoncontrollingourSG&Awhileensuringthatourinfrastructureadequatelysupportsourcurrentandexpectedgrowth.
Jessica?
JessicaHansen (VPofIR):
Financialservicespre-taxincomeinthesecondquarterwas$17.4millioncomparedto$21.5millionintheyear-agoquarter.94%ofourmortgageCompany'sloanoriginationsduringthequarterrelatedtohomesclosedbyourhomebuildingoperationsandourmortgageCompanyhandledthefinancingfor53%ofour
CompanyName:D.R.HortonIncCompanyTicker:DHISector:IndustrialGoodsIndustry:Materials&Construction
EventDescription:Q22016EarningsCallMarketCapasofEventDate:11.60BPriceasofEventDate:31.2
©2014TheStreet,Inc.Al l R ightsReserved Page4of21
homebuyers.
FHAandV.A.loansaccountedfor48%ofthemortgageCompany'svolume,comparedto45%intheyear-agoquarter.BorrowersoriginatingloanswithourmortgageCompanythisquarterhadanaverageFICOscoreof717,andanaverageloantovalueratioof88%.
First-timehomebuyersrepresented45%oftheclosingshandledbyourmortgageCompany,comparedto43%inthesecondquarterlastyear.
Bill?
BillWheat (EVP,CFO):
AttheendofMarch,wehad24,600homesininventory,ofwhich1,600weremodels.11,700ofourtotalhomeswerespechomeswith8,400invariousstagesofconstructionand3,300completed.Ourconstruction-in-progressandfinishedhomesinventoryincreasedby$361millionduringthequarter,duetoseasonalconstructionactivityforthespringsellingseason.
Oursecondquarterinvestmentsinlots,land,anddevelopmenttotaled$500million,ofwhich$271millionwastoreplenishfinishlotsandland,and$229millionwasforlanddevelopment.
Weexpectourinvestmentsinlandanddevelopmenttoincreaseinthethirdandfourthquarterscomparedtothesecondquarterthisyear.
David?
DavidAuld (President&CEO):
AtMarch31,2016,ourlandandlotportfolioconsistedof189,000lots,ofwhich112,000areowned,and77,000arecontrolledthroughoptioncontracts.69,000ofourtotallotsarefinished,ofwhich31,000areownedand38,000areoptioned.
Our189,000totallotsownedandcontrolledprovideusastrongcompetitiveadvantageinthecurrenthousingmarket,withasufficientlotsupplytosupportsolidgrowthatsalesandclosingsinfutureperiods.
Althoughourhousinginventorieswillfluctuateaswemanageeachofourcommunitiestooptimizereturns,weexpectourlandandlotinventoriestoremainrelativelystablein2016.Wealsoexpecttogeneratepositivecashflowsfromoperationsforthesecondconsecutiveyear,throughincreasedprofitabilityanddisciplinedinventorymanagement.DuringthesixmonthsendedMarch,wegenerated$27millionofoperatingcash,animprovementof$196millioncomparedtothesameperiodlastyear.
Bill?
BillWheat (EVP,CFO):
Duringthesecondquarter,werecorded$2.8millioninlandoptionchargesforwrite-offsofearnestmoneydepositsandhisdue-diligencecostsforprojectsthatwedonotintendtopursue.Wealsorecordeda$3.2millioninventoryimpairmentchargeinourEastRegionrelatedtoalong-heldinactivelandparcelthatwesoldduringthequarter.
Wewillcontinuetoevaluateourinventoriesforpotentialimpairment,whichmayresultinfuturechargesbutthetimingandmagnitudeofthesechargeswillfluctuate.Ourinactivelandheldfordevelopmentof$194millionattheendofthequarterrepresents10,100lots,down22%fromayearago.
Wecontinuetoworkthrougheachofourremaininginactivelandparcelstoimprovecashflowsand
CompanyName:D.R.HortonIncCompanyTicker:DHISector:IndustrialGoodsIndustry:Materials&Construction
EventDescription:Q22016EarningsCallMarketCapasofEventDate:11.60BPriceasofEventDate:31.2
©2014TheStreet,Inc.Al l R ightsReserved Page5of21
returns,andweexpectthatourlandheldfordevelopmentwillcontinuetodecline.
Mike?
MikeMurray(EVPandCOO):
AtMarch31,ourhomebuildingliquidityincluded$1.2billionofunrestrictedhomebuildingcash,and$884millionofavailablecapacityonarevolvingcreditfacility.Ourgrosshomebuildingleverageratioimproved580basispointsfromayearagoto33.6%.ThebalanceofourpublicnotesoutstandingatMarch31was$3.2billion.
OnApril15,werepaid$373millionofseniornotesattheirmaturity,andwehavenodebtmaturitiesinthenext12months.AtMarch31isourshareholders'equitywas$6.2billion,andbookvaluepersharewas$16.85,up14%fromayearago.
Jessica?
JessicaHansen (VPofIR):
WeareupdatingourexpectationsforourFY16profitabilitybasedoncurrenthousingmarketconditionsandourfinancialperformanceto-datethisyear.Aswenotedinourpressreleasethismorning,weareincreasingourannualguidanceforconsolidatedpre-taxprofitmarginsby20basispointstoarangeof10.7%to11.2%forFY16.
WearealsoupdatingourannualguidanceforhomebuildingSG&Atoarangeof9%to9.2%ofhomebuildingrevenuesfromthepreviousrangeof9.2%to9.4%.Alsoasoutlinedinourpressreleasethismorning,wearereaffirmingourpreviouslyissuedoutsideguidancefor2016asfollows.
Consolidatedrevenuesofbetween$12millionand$12.5billion.Homesclosedbetween39,500and41,500homes--ahomesalesgrossmarginforthefullyearof2016inthehigh19%sto20%,andannualfinancialservicespre-taxprofitmarginof30%to33%;anincometaxrateforthefullyearofbetween35%and36%.Andannualdilutedsharecountofapproximately375millionsharesand$300millionto$500millionofpositivecashflowfromoperationsforFY16.
Specifically,forthethirdquarterofFY16,weexpectournumberofhomesclosedwillapproximateabeginningbacklogconversionrateinarangeof76%to80%.Weanticipateourthirdquarterhomesalesgrossmarginwillbeinthehigh19%sto20%consistentwiththefirsthalfoftheyear,andweexpectourSG&Ainthethirdquartertobeintherangeof8.9%to9.1%ofhomebuildingrevenues.
David?
DavidAuld (President&CEO):
Inclosing,oursecondquartergrowthinsales,closings,andprofits,andtheimprovementinourpre-taxprofitmarginaretheresultofthestrengthofourpeopleandouroperatingplatform.Weremainexcitedandarelookingforwardtotheopportunitiesahead.
Weremainfocusedongrowingbothourrevenueandpre-taxprofitsatadouble-digitannualpace,whilecontinuinggeneratepositivecashflows,andimprovedreturns.Wearewell-positionedtodosowithoursolidbalancesheet,industry-leadingmarketshare,broadgeographicfootprint,diversifiedproductofferingsacrossourD.R.Horton,Emerald,andExpressbrands,attractivefinishedlotandlandposition,andmostimportantly,ourtremendousteamacrossthecountry.
WewouldliketothankourentireD.R.Hortonteamfortheircontinuedhardwork,andwelookforwardtoworkingtogethertocontinuegrowingandimprovingouroperation.Let'skeepthemomentumgoing
CompanyName:D.R.HortonIncCompanyTicker:DHISector:IndustrialGoodsIndustry:Materials&Construction
EventDescription:Q22016EarningsCallMarketCapasofEventDate:11.60BPriceasofEventDate:31.2
©2014TheStreet,Inc.Al l R ightsReserved Page6of21
weekbyweek,flagbyflag,throughoutthisyear.
Thisconcludesourpreparedremarks.Wewillnowholdquestions.
DavidAuld (President&CEO):
Thankyou,Iwillbeconductingyourquestionandanswersession.
QUESTIONS&ANSWERS
(OperatorInstructions)
StevenEastfromEvercoreISI.
PaulShibelski(Analyst-Evercore):
ThankyouthisisactuallyPaulShibelskionforSteven.Youknow,impressedwiththefirsthalfcashflowgenerationgiven,butthatistypicallyyouknowaperiodofheavyspend.Whatisthesustainabilityofthat,goingout?Iknowyouarelookingforthe$300millionto$500millionfortheyear,butshouldweexpectfirsthalfcashgenerationinoutyears?
DavidAuld (President&CEO):
YouknowthatishardtosayinfutureyearsPaul.ForthisyearweareontrackbasedonourcurrentplansforFY16togenerate$300millionto$500millionforthefullyear.WewouldnotbesurprisedifinQ3weusedcashbecausewearebuildingoutourbacklog,buildingoutourhomesinconstruction,andaswestatedwedoexpectourlandandlotinventory--investmentstobehigherinQ3andQ4thanitwasinthisquarter.Butweareontrackfor$300millionto$500million.
Ourexpectationsforfutureyearsis,ourbusinessmodelisdesignedtocontinuetogeneratepositivecashflowsfromoperationswhilegrowingatadouble-digitpace.Atexactlywhatlevelthatmightbeineachyear,we'lldetermineaswegetbettervisibilityintotheyear.
PaulShibelski(Analyst-Evercore):
Okayandthenforfollow-up.Ihaveheardrumblingsthatyouknow,youarelookingatexpandingnotsomuchtheExpressnamebuttheExpressbusinessmodeltohigherpricepoints?Youknowbasically,everything'sincluded.Doyouhaveanycoloronthat?
DavidAuld (President&CEO):
Wellyouknow,wearelearningalotwiththeExpressrollout,thatefficiencyandvalueisabig-timedriverinsales.Andyes,Imean,aswecreateoperationalefficienciesinExpressthattranslateintotheD.R.Horton,wearemovingthatway.
Nowwewillalwaysbealocallycontrolledbusiness.Wearedecentralized.Ouroperatorsinthefieldwillrespondtothemarket.Andifitisavalue-basedmarket,theyaregoingtohavetodrivemoreefficienthomes.Ifitisa-youknow,acustom-basedpricepoint,thenwearegoingtocontinuetomodifyplansandintroduceplansatthelocallevel.
PaulShibelski(Analyst-Evercore):
Thankyou.Appreciateit.
Operator :
CompanyName:D.R.HortonIncCompanyTicker:DHISector:IndustrialGoodsIndustry:Materials&Construction
EventDescription:Q22016EarningsCallMarketCapasofEventDate:11.60BPriceasofEventDate:31.2
©2014TheStreet,Inc.Al l R ightsReserved Page7of21
NextquestioniscomingfromKenZenerwithKeybanc.
KennethZener (Analyst-KeyBancCapitalMarkets):
Goodmorning.Iwonder,nottogettoospecificinparticularmarkets,butitisusefultotheExpresshomewhereIthinkyouguyshaveopenedupfiveorsixnewExpresscommunities.CanyoutalkaboutthekindoftrendsyouareseeinginDenver?Astheexistinghomesalestightenupthereeitherduetolackofsupply,Imeanyouguysseemtobegrowingwhereasothersarenotseeingthattypeofacceleration.Couldyougiveusalittlemarketdynamiconhowthatproductinthatmarketisworking?
MikeMurray(EVPandCOO):
IthinkweopenedupExpressinDenveroverthepastyear.Theteamuptherehasdoneagreatjobgettingthatonline.Itshowsthatthereisarealneedforaffordablehousinginthatmarket,andwearedeliveringavalueproducttothemarket,andit'sbeingabsorbedandpeopleareveryhappywithit.Weareveryhappywecandoitandlookingforwardtotrytodomoreofit.
DavidAuld (President&CEO):
AndKen,itiskindofconsistentwithwhatwe'veseeninothermarkets.Alotofpent-updemandwhenweopen.Absorptionshavecomeuphigherthanweexpected.Itisapowerfultoolinwhatweareaccomplishing.
JessicaHansen (VPofIR):
(Multiplespeakers)SorryKen.Wearein51marketsand17statestoday.Wearecontinuingtoseethatexpansionaswemovethroughouttheyear.
KennethZener (Analyst-KeyBancCapitalMarkets):
Right,andthenIguessrelativetotheideaofpace.Theideaofpaceandprice,I'mnotabigfanofthatnotion.Butareyouconstrainingyourpace?Orareyoureallyacceptingasmanysalesaswillwalkinthedoor?Canyoudescribethatdynamic,broadlyspeaking?Thankyou.
DavidAuld (President&CEO):
YouknowKen,wehavebeentryingandsuccessfullysettingabsorptiontargetsoncommunitiesbaseduponwhatwethinkisasustainabledemandinthatsub-market.Andwearebuildingandsellingtothatpace.
Operator :
AlanRatnerfromZelman&Associates.
AlanRatner (Analyst-Zelman&Associates):
Goodmorning,congratulationsonanotherstrongquarter.David,youknow,IguessonthepricepointconversationobviouslyyouguyshavedoneagreatjobwiththeExpressandIthinkthatatleastintheinvestmentcommunitythereisthisperceptionthatentrylevelisacceleratingnicelywhereasmaybethehigher-endluxurysegmentisseeingsomesoftness.YouguyshavebeenexpandingEmeraldaswell.Idon'tthinkitisasmuchofatopicofconversation,butIwaswonderingifyoucouldgivesomeupdatedcolorontheluxuryandhowthatcomparestothe--obviouslythestrengthyouhavebeenseeinginExpressandhowyouthinkaboutallocatingdollarsgoingforwardbetweenthesegments?
DavidAuld (President&CEO):
CompanyName:D.R.HortonIncCompanyTicker:DHISector:IndustrialGoodsIndustry:Materials&Construction
EventDescription:Q22016EarningsCallMarketCapasofEventDate:11.60BPriceasofEventDate:31.2
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Wellfromanallocationofdollars,youknow,itisamarketbymarketprogram.Themarketswheretheupperendiscontinuingtostaystrong,wewillbeputtingmoremoneyinit.Butwhat'sreallydrivingthegrowthrightnow,andtheimprovementinreturns,isthelowerend,eitherExpressorthelowerHortonpricepoints.
AlanRatner (Analyst-Zelman&Associates):
Andwouldthatbetrueonthemarginsideaswell?ObviouslyIthinkyouprobablygointoitthinkingthatExpressisgoingtogeneratealowermargin,butseemslikethepricingpowerhasbeenstrongerthere.WhatdoesthespreadlooklikebetweentheEmeraldandtheExpressbrandsrightnow?
MikeMurray(EVPandCOO):
Rightnowitisinaprettytightrange.BothareverynearourCompanyaverage.Obviouslywiththepent-updemandinExpressandreallynotenoughsupplyoutthere,we'veseenbettermarginsthatweoriginallyunderwrotethedealsto.Rightnowitisinaprettytightrange.
AlanRatner (Analyst-Zelman&Associates):
Greatthanksalot.IfIcouldsneakinonemoreonthelandsupply,aprettybigspikeinoptionlotsthisquarter,ifIheardthatnumbercorrectly,andIthinkyouarelookingatover40%controllotsareoptionedrightnow.Curiouswhatyouareseeinginthelandmarket,ifthatisallowingyoutopursuethatstrategy?Obviouslyittiesintoyourfocusoncashgeneration.IsthatafunctionofmoreAD&Ccapitalavailabletothedevelopersorsomethingelseyouhavebeenfocusingontodrivethatnumberhigher?
MikeMurray(EVPandCOO):
Ithinkwehavebeenfocusingheavilyondeveloperrelationshipsandworkingwiththemwherewecan.Thereisalsoalittlebitofatimingfunctionalitytothat,inthatitcanbeveryhighinthemiddleofaquarter,comedownalittlebitasyouarebuyinglandorlotsthroughthequarterandatthisquarterendwehadalittlebitmorethanwemighthaveatpriorquarterends.Butithasbeenafocusforus.Wearepleasedwiththeresultswearegettinginbeingabletocontrolmoreofourfuturelotsupplywithoptions,andwithdevelopers.Wearegoingtocontinuetofocusonthat.Youareright,itisakeypartofourcashgenerationstrategy,andweareveryexcitedabouttheresultswehaveseen.
DavidAuld (President&CEO):
But,no,wearenotreallyseeingtheA&Denvironmentwiththebanksimprovemuch.Thisisreallytheresultoftakingtheverybestofthebestdevelopersandtryingtoimproveourrelationshipswiththem.
AlanRatner (Analyst-Zelman&Associates):
Gotit.Thanksalotandgoodluck.
Operator :
Thankyou.EricBosshard.
EricBosshard (Analyst-ClevelandResearchCompany):
Curiousaboutthestrategymovingforwardofgrowingcommunitycounts,andthenalsolookingatyourgrowthrelativetothemarketintotal.Lastyearyougrewfasterthanthemarket,reallyrollingoutExpress.Butasyoulookatwheredemandisandwheretrendsareinthemarket,justcuriousabouthowyou
CompanyName:D.R.HortonIncCompanyTicker:DHISector:IndustrialGoodsIndustry:Materials&Construction
EventDescription:Q22016EarningsCallMarketCapasofEventDate:11.60BPriceasofEventDate:31.2
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thinkaboutinvestingingrowingcommunitiesandacceleratinggrowth,howyouarefeelingaboutthat?
DavidAuld (President&CEO):
Well,youknow,wearein51marketsrightnowwithexpress.Sowehave,Ithink,runwaythere.WearerelativelynewwiththeExpressbrandinanother15,20marketsthatwethinkwecancertainlygainmarketshareinthosemarkets.Imean,we'reprettymuchtrackingjobgrowth,andwheretheeconomyissupportinghousing,that'swherewe'relookingtoexpandourinvestments.
EricBosshard (Analyst-ClevelandResearchCompany):
Intermsofthepaceoftheoverallgrowth,areyousatisfiedwithwhatyouareseeing?Isthereadesiretoinvestmoretogrowfaster?Oristhiskindofwhatyouaretargetingandwhatyouwouldliketosustain?
DavidAuld (President&CEO):
Youknow,wethinkasolid,consistentdouble-digitgrowthbothtop-line,bottom-line,willcontinuetocreateseparationfromotherbuildersintheindustry.Andtodayweareveryhappywiththatstrategy.
JessicaHansen (VPofIR):
Andwebelieveourcurrentlotpositionissufficienttosupportthatdouble-digitgrowthpace.
EricBosshard (Analyst-ClevelandResearchCompany):
Okay.Perfect,thankyou.
Operator :
NishuSoodfromDeutscheBank.
NishuSood (Analyst-DeutscheBank):
Thankyou.ThisquarteryouhadaterrificSG&Aperformance,andsojustamarketimprovement,justontrend,andoverlastyear.Yourgrossmarginshavealsobeenveryconsistent.Youareonlytakingupyourpre-taxrangebyabout20basispoints,sojustwantedtomakesureIunderstoodthat.DoesthatmeanthatthereweresometemporaryfactorsthatmayhavedepressedSG&A?What--whywouldyouexpectseeminglyterrificperformancetoreverse?Orisitsomethingongrossmarginsidefortherestoftheyear?
BillWheat (EVP,CFO):
Nishu,wedidn'tseeanythingunusualthisquarter.Wediddeliverastrongbacklogconversion.WedeliveredalittlebitaboveourguidancerangeonoutclosingsthisquarterandthathelpedleverageourSG&Aabitfurther.ButwewereverypleasedwiththeleveragewesawonSG&A.
Wearetrackingtoabetterpace,abetterratiofortheyearthanwehadoriginallyguidedto.WewereguidingtosomeimprovementinSG&A.Nowwe'vesimply--showingbetterimprovementonthat.Andcertainlyaswegetfurtherintotheyear,anddependingonwhatourdeliveriesarelaterintheyear,thereispotential,wecouldleverageitabitbetterthanwhatwehaveguidedtohere.Ifweweretobeatthehigh-endofourvolumerange,thenperhapswehaveachanceofbeatingthelowendofourleveragerange,ourSG&Aleveragerange.
Butrightnowwearecomfortablewiththerangeweguidedto.Nothingunusual,nodecliningordegradationinourSG&Aperformanceisexpected.
CompanyName:D.R.HortonIncCompanyTicker:DHISector:IndustrialGoodsIndustry:Materials&Construction
EventDescription:Q22016EarningsCallMarketCapasofEventDate:11.60BPriceasofEventDate:31.2
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NishuSood (Analyst-DeutscheBank):
Gotit.Gotit.AndkindoffollowinguponAllen'squestionfromearlier,youfolks,aswellasmanyoftheotherbuilders,havebeenscalingbacklandpurchases.Allendiscussedobviouslytheincreaseduseofoptions.Iwasjustwonderingwiththestepbackthatmanyofthebuilders,includingyourselves,havetaken,haveyouseenpricingease?Youknow,theoptionswouldarguethatitisalittlebiteasiertogetyouknow,terms--likeoptiontake-downs.Butwhatareyouseeingintermsoftheavailabilityandpricingofdealsasthesteppingbackofthepubliceasethelandpricepressuresthathavebeendiscussedsomuchinthelastcoupleofyears?
MikeMurray(EVPandCOO):
Nishu,wearelookingtocontinueourlandinvestment.Infact,we'llbeincreasingourinvestmentthisyearfromwhatwedidlastyear,justtoreplenishlotsandthenprobablyalittlemore.Tobringitupalittlebit.Wedidseeanincreaseinouroptionlotpositioninthecontrolpipeline.Someofthatwillbelandwewillpurchase.That'srepresentedasoptionlotstoday,that'slandthatiscontrolledundercontractsthatwewillpurchaseaslandanddothedevelopmentourselves.
Othercontractswithinthatportfoliowouldbewherewewillbeacquiringfinishedlots,orsuperpadsifyouwill,insomecases,fromthirdpartydevelopers.Butwefeelthattherearestillverygoodopportunitiesoutthereforlandacquisitionforwell-capitalizedbuildersandforwell-capitalizeddeveloperstoworkthrough.Itishardtoquantitativelylookandsaywhat'shappeningwithlandpricingglobally.Iwouldtellthatitseemslikewearegettinganecdotallyasecondlookatafewmoredeals,somethingsseemtocomebackaround,whichisgoodforus.Welikethat.
NishuSood (Analyst-DeutscheBank):
Greatthanks.Appreciatethecolor.
Operator :
Thankyou.StevenKimfromBarclays.
StevenKim(Analyst-BarclaysCapital):
Thanksverymuch,guys.Letmeaddmycongratulationsonastrongquarter,andjustaremarkthatyourSG&A,ifyouactuallydodoalittlebetterinyourrange,IthinkifI'mnotmistaken,that'sanall-timerecordfortheCompany,sothatisprettyencouraging.
IguessmyfirstquestionrelatestoM&Aandtheopportunityforit.Youknow,obviouslythere'sbeen,andtherestillis,aprettybigdisparityinvaluationsbetweenthelargeandthesmallbuilders,andyouallareprettymuchleadingthepack.Iguessmyquestionis,doyouseethiskindofdisparitymirroredintheprivatemarket?Andyouknow,particularlywheresomeofthesmallercappublicsaretradingatbookvalueorbelow.Areyouseeingthatkindofvaluationmirroredintheprivatemarketinexpectations?Andcanyoutalkaboutwhetherornotyouthinkthisgenerallyistherighttime,oryouwouldbeamenabletoacquiringassetsinthatkindofway,M&A?Giventhefactyourstrategicfocusisonreducingyourlandinvestmentrelativetoyourrevenuesrightnow?Thanks.
MikeMurray(EVPandCOO):
Weare,youarecorrectSteven.Wedohaveastrategicfocustoimproveourratioofrevenuestoourlandinvestmenttoday.Alwayslookingtodothat,thatmakesusabetterstewardofthecapitalweareentrustedwith.
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WedolookatM&Aasanopportunitytoacquirelots,acquireassets,andacquirepeopleinoperatingplatformsandteams,andwedolookatseveralopportunities.Theycanbeverygoodifbuyerandsellerexpectationsarealignedandsomethingcanworkthat'saccretivetoboth.SowewillalwaysbelookingatM&Aopportunitiestogrowthebusiness.Butthere'salotofexpectationgapssometimesbetweenwhatsomepeoplethinkwhattheirflatformshouldfetchandwhatthebuyersarewillingtoactuallytransactfor.Sothere'snotbeenasmanytransactions,Ithink,assomepeopleexpectedtooccur.
DavidAuld (President&CEO):
Steven,thisisDavid.I'llalsoadd,wearegoingtolookatalot.Youknow,anybodyoutthere,wearegoingtotakealookat.Andtrytoseeiftheyfit,culturally.Strategically,withinourCompany.Butit'sgottobeaverygoodCompanyforittomakesensetous.Weare--welikewhereweare,welikewhatweareaccomplishing,andwereallydon'twanttojumpoutthereanddoanythingthat'sgoingtobreakthatfocus.
StevenKim(Analyst-BarclaysCapital):
Okayfairenough.Yes.GoodluckfindinganotherCompanyasstrongasyouguysarethough.
MikeMurray(EVPandCOO):
Welltheyarethere.They'rethere.Therearesomesmalloperators,orevenmid-sizedoperators,thataredoingagreatjob.Ifyoulookbackatthefouracquisitionswe'vemade,wehavelearnedandbecomebetterwitheveryoneofthose.
StevenKim(Analyst-BarclaysCapital):
Sure.Yesthat'safaircomment.
MikeMurray(EVPandCOO):
WetakewhattheyaredoingandintegrateitintoourCompany.
StevenKim(Analyst-BarclaysCapital):
Great.Iguessmysecondquestionrelatestotheroleofmasterplannedcommunities,andsomeoftheopportunitiesthatthoselargerparcelsprovide--couldpotentiallyprovideforyou.Iwaswonderingifyoucouldgiveussomehandleonwhatpercentofyourbusinessyouthinkiscomingfrommasterplannedcommunitiestodayandwhereyouthinkthatcouldgoto?Andasafollowontothat,wouldyougenerallythinkthat,insomeoftheselargerparcels,youhavetheabilitytomaybetakeonalittlebitofmulti-familyconstruction?Oreven,like,commercialopportunitieslonger-term?
DavidAuld (President&CEO):
ThemasterplansIwouldsayisprobably10%,15%ofourbusiness,andthat'sjustaguessreally.Itisnotsomethingwehavebrokendown.Andyes,Ithinkaswegetbiggerorcontinuetogetbigger,thatpercentageisgoingtogrow.It'sjustalotmoreefficienttodelivermorehousesoutofonelocationthanitismultiplelocations.
JessicaHansen (VPofIR):
Andthen,Steve,asyouknow,wealwaysinvestigatenewbusinesslinesiftheycouldcomplementourbusiness.Sowehavebuiltfor-rentonlandweownonalimitedbasiswhenitmakesbusinesssense,andwedocurrentlyownafewlargeprojectswithparcelsthatarezonedmulti-familythatweareevaluating
CompanyName:D.R.HortonIncCompanyTicker:DHISector:IndustrialGoodsIndustry:Materials&Construction
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orareintheprocessofbuildingapartmentson.Butwewouldn'texpectthattohaveanyfinancialimpactonour2016results.
StevenKim(Analyst-BarclaysCapital):
Fairenoughthanksverymuchguys.Goodjob.Thankyou.
Operator :
BobWetenhallfromRBC.
BobWetenhall(Analyst-RBCCapitalMarkets):
Youguysarecrushingit.Nicejob.
JessicaHansen (VPofIR):
ThanksBob.
BobWetenhall(Analyst-RBCCapitalMarkets):
Thatisatechnicalterm.TalktomeaboutASPappreciationduringthebalanceoftheyear.Howdoyouthinkthatplaysout?Whatkindofgrowthrates,youknow,shouldwebeexpecting?AndI'mreallytryingtothinkaboutthisinthecontextofnotincludingmix.Ifyoutooklikeforlikeandblendittogether,whatdoyouseegoingoninthenextcouplequarters?
JessicaHansen (VPofIR):
Wewouldexpecttocontinuetosee,ifyouarelookinglikeforlike,someabilitytomovepriceup.We'vecontinuedtoseeourrevenuespersquarefootoutpaceourstickandbrickpersquarefootnow,oncewegotthatbackincheckacoupleofquartersago.Verypositiveonthatfrontanddefinitelystilltheabilitytopushprice.IntermsthoughofouroverallASP,wedidseeonoursalesfrontthatreallykindofflattenoutsequentially.Whichisn'tsurprisingbecauseoftheheaviermixthatcontinuestocomefromExpress.
BobWetenhall(Analyst-RBCCapitalMarkets):
Gotit.Butyouarestillgettingtheoperatingleverageoffthatwhichoffsetstheweakermix.Butyouifyouhadtosay,onalikeforlikebasis,wouldyouexpectlowsingle-digitormid-single-digit?
JessicaHansen (VPofIR):
Yeslowsingledigits.
BobWetenhall(Analyst-RBCCapitalMarkets):
Allright,that'shelpful.Andthenjustkindofthinkingabout,like,TexasandCalifornia,youknow,someofyourmajormarketswhereyouarealeader.Wouldyousaythatthetrendsyousawthisquarterwereinlinewithyourexpectationsacoupleofmonthsago?Orwouldyousaythatinyourcoremostimportantmarkets,thatdemandisstrongerandbetterthanyouhadanticipated?I'mjusttryingtounderstandalittlebitbetter.Ifyouaregaugingstrengthofdemandinyourmostimportantmarkets,isitcomingoutaheadofyourexpectations?Thanksandgoodluck.
MikeMurray(EVPandCOO):
ThankyouBob.Kindofamix.LikeTexas,atleastinmymind,Houstonhasprobablyunderperformedmyexpectationsoverthelastcoupleofquarters.Butit'sbeenoffsetbyanoverperforminAustin,Dallasand
CompanyName:D.R.HortonIncCompanyTicker:DHISector:IndustrialGoodsIndustry:Materials&Construction
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FortWorth,andSanAntonio.Thebalanceofthestateisdoingincrediblywell.
DavidAuld (President&CEO):
Andoverall,weexpectedagoodspringandweareseeingagoodspring.SooverallIthinkitisinlinewithourexpectationsforagood,solid,consistentmoderatelygrowingmarketwithvariationsfrommarkettomarket.
JessicaHansen (VPofIR):
Ourabsorptionshavepickedupthemostinthesoutheastandsouthcentralregions,whichiswhatyouhaveheardussay.ReallykindofTexasacrosstoFloridaandupintotheCarolinasisabigpieceofourbusinessthatweexpecttobeveryrobust.Andwe'veseenaverygoodlevelofdemandinthosemarketsandagoodreturnonourinventoryinvestments.
DavidAuld (President&CEO):
Bob,wedohave--youknowus,wedohaveveryhighexpectationsatalltimes.Andwearepleasedwithwheretheresultsofthespringhavecomeoutandreallyacrosstheboardinallofourmarkets.
BobWetenhall(Analyst-RBCCapitalMarkets):
Greatexecutionguys,youarekillingit.Goodlucknextquarter.
DavidAuld (President&CEO):
ThankyouBob.
Operator :
MichaelRehautfromJPMorgan.
MichaelRehaut (Analyst-JPMorgan):
Thanks,goodmorningeveryone,andI'lladdmycongratsonthequarteraswell.Firstquestionjustonthesalespace.Youknow,continuedexpansionthere,wehaveitroughlyup8%.Justwanttomakesureintermsofthedriversthere,seemslikeprimarilythat'sduetothecontinuedexpansionofExpressaspartofyourbusiness.Justwanttomakesurethatthatstillisthecase,ineffect.Andyouknow,wouldyouexpect--itseemslikethereisstillmoreroomtogo.WasthatsomethingthatyouwouldexpecttocontinuetobenefityourresultsevenintoFY17?
DavidAuld (President&CEO):
Yes.Imean,weare--Iwouldsayfullyrolled-outinTexasandtheCarolinasontheExpressmodel.Stillgotroomtogrowinalltheothermarkets.SoIthinkwearegoingtobenefitfromthatbrandandthatinitiative.Forthisyear,nextyear,andtheyearafterthat.Wearefullyintegrated,fullyrolledout.
MichaelRehaut (Analyst-JPMorgan):
Andyouknow,justisitfairtosaythatthat'sreallythe--thelet'ssaybiggestdriveroftheimprovementinyouroverallsalespaceasreportedthisquarter?
DavidAuld (President&CEO):
Iwouldsayitisamajorcontributor.Theotherbrandsaredoingwellalso.Butthere'sjustawholelotlesscompetitionatthatentrylevel.
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MichaelRehaut (Analyst-JPMorgan):
Right.
DavidAuld (President&CEO):
Thereforemorepent-updemand,anditiseasiertodriveabsorption.
MichaelRehaut (Analyst-JPMorgan):
Right.Certainly.Secondquestion,justontheimprovedSG&Aguidancethatyourolledoutthisquarter,thathelpsyourpre-taxby20BPsnowyouhaveexpandedthatguidance.Youknow,giventhatyoustillkindofhavesimilarexpectationsontheunits,anditseemsliketheASPs,itwouldkindofsuggestthatyouarenotnecessarilyexpectingbetter--thattheimprovedleverageisn'tcomingoffofimprovedvolumesperse.AnditseemslikeExpressandyouroverall,again,toplineseemstobecominginasexpected.SoarethereotherthingsintheSG&Alineitemthat'shelpinghereintermskindofconcreteitems,aroundperhapsadvertisingorothertypesofSG&Acontrollablesthatarecominginbetterthanexpected?Oristhisjusttheoverallmodelineffect--justtheoverallefficiency,justbeingthatmuchbetterevenwiththesametypeofclosingsthatyouexpected3monthsago?
JessicaHansen (VPofIR):
Mikeyouknow,itisreallyjustaresultofouroverallfocusonSG&A.It'snotanyonething.It'salwaysbeenahallmarkofourbusinessandsomethingweareveryfocusedon.Weseta9.6%SG&AinFY15,whichwasthebestSG&AwehadhadotherthantwoyearsintheCompany'shistorywhenwehada9handleaswell.Andwe'venowguidedto9.0%to9.2%.AndIwouldjustsayitisafocus,andsomethingthatallofourguysinthefieldarelookingat,ishowcanwerunthebusinessmoreefficientlyandleverageouroverheadbetterthanwehaveinthepast?
DavidAuld (President&CEO):
Michael,thisisDavid.Wegetupeverydayandtrytofigureouthowtomakeitalittlebiteasiertobuildahouse,alittlebiteasiertosellahouse,andalittlebiteasiertogetthehouseclosed.Andweworkonthateverysingleday.Becausethatisa--thatisasustainablecompetitiveadvantage.Andthatis--that'swhatwetrytobe.
MichaelRehaut (Analyst-JPMorgan):
No,that'sgreatandobviouslyit'sgreattosee,astherecoverycontinues.Onelast,quickquestionifIcould.Communitycountnowflattishforabout4quarters.Isthatsomethingyouwouldexpecttoreaccelerateatsomepoint?Maybeintothe,youknow,mid-single-digitorhighsingle-digitgrowthintonextyear?Orshouldwejustcontinuetoexpectsalespaceoverthenextcoupleofyearstodrivethebus?
DavidAuld (President&CEO):
Mike.Forthisyear,westatedweexpectourcommunitycounttobeinthatlowsingledigitorrelativelyflatthisyearwiththeimprovementinsalescomingfromimprovedabsorptionsandcertainlytheExpressrolloutisadriverofthat.Ithinkitwillcontinuetobeadrivernextyear,asExpressmatures,ifyouarelookingoverthenextyearortwo,youwouldnaturallyexpecttogrowatthedouble-digitpace.Youwouldseeastrongercommunitycountgrowthoverthelongerterm.Wedon'treallyhavethevisibilityfullyfor2017yettomakeanyspecificcommentsonthatthough.
Rightnow,Michael,wearereplacingcommunitieseveryquarter,everymonth.Andyouknow,ifyoutrade
CompanyName:D.R.HortonIncCompanyTicker:DHISector:IndustrialGoodsIndustry:Materials&Construction
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acommunitythat'sdrivinganabsorptionlevelof2or3foranewcommunitythatisanExpressmodelthatisdriving6or8,flatcommunitycount,thereisalotofefficienciesandabsorptionimprovement.Soyes,butovertime,wewillbeexpandingourcommunitycounttomeetthemarket.
MichaelRehaut (Analyst-JPMorgan):
Greatveryhelpful.Thanksagain.
Operator :
JackMicenkofromSIG.
JackMicenko (Analyst-SusquehannaFinancialGroup/SIG):
Goodmorning.HeyfirstquestionforBill,youknowyouaregeneratingatonofcash.Itsoundslikethattrendisgoingtocontinueinthenextyearandyearsbeyond.Yourleveragelevelsaregettingtothelowerendof,Ithink,probablyoptimal.Youknowyourlandstrategy'schangedabit,anditsoundslikeyouknow,youaregoingtokeepitaboutthesamepointeventhoughthemixisgoingtochangefromanabsolutelevel.Iguessthequestionis,whatdoyoudowiththecash?
Iknowinthepasttherehasbeensharerepurchase,therehasbeendebtrepurchase.Youknow,whatdowethinkaboutyouknow,longertermgoalswiththecash?Beyondsortofsecond-halfspend,thatsortofthing,aroundcapitalmanagement?
DavidAuld (President&CEO):
Certainlythisyear,Jack,wearegenerating$300millionto$500millionandwearepayingoffover$500millionofdebtthisyear.ForFY16itisessentiallydebtretirementandcontinuingtoinvestinthebusiness.WedocontinuetolookatM&Aopportunities,we'vedoneseveraldealsoverthelastseveralyears.Totheextentthatweseegooddealsthatareagoodfitforusaswedescribedearlier,thatwillbeapriorityaswell.Andthenbeyondthat,wewanttostayopportunistic.Wearenotgoingtotieourselvesdowntoanythingspecificbeyondthisyear.Butrightnow,wearefocusedon,youknow,debtretirement,beingopportunistic,investinginthebusiness,andthenwe'llassessfurtheraswegetvisibilityinto2017.
JackMicenko (Analyst-SusquehannaFinancialGroup/SIG):
Okayandmyfollow-upquestionyouknow,throughourtravels,Ithinkoneofthethingsthatwe'veseenisyouknow,theExpress-typeproductisappealingtoabuyergroupmaybebeyondtheentryorfirst-timebuyer.Andreallywearesurprisedatthetrade-downemptynester.Everybodythinksoftheactiveadultassortofmaybeamid-toupper-endproduct,butweareseeingalotinthelowerpricepointsaswell.Areyouseeingthatinameaningfulway?HasitchangedthetrajectoryorthedirectionoftherolloutoftheExpressproductormaybeevenlocation?Whatcanyousharewithusaboutthatdynamic?
DavidAuld (President&CEO):
Iwouldn'tsaythatit'schangedthedirection.Wehaveseenthattakeplace.EspeciallyinFlorida.Itsurprisedmeaswell.Whereyouknow,whenwelaunchedExpressinFlorida,40%,45%wereactuallythepeoplebuyingtheirlasthome,nottheirfirsthome.Andthat'ssomethingwearetakingnoteof.Andmakingsurethatweareinapositiontoaccommodatethosebuyers.
JackMicenko (Analyst-SusquehannaFinancialGroup/SIG):
Okaythanks.
Operator :
CompanyName:D.R.HortonIncCompanyTicker:DHISector:IndustrialGoodsIndustry:Materials&Construction
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SusanMcClaryfromUBS.
SusanMcClary(Analyst-UBS):
Goodmorning.Myfirstquestionisgoingbacktoyourthirdquarterguidanceintermsoftheconversionrate,Ibelieveyousaid76%to80%.Thatjustfeelsalittlelight,relativetowhereweweremodelingourexpectations.Wouldyousaythatyousawanypullforwardindemandinthesecondquarter?Perhapsmaybeduetotheoverallbetterweatherthatmostofthecountrysaw?
JessicaHansen (VPofIR):
Youknow,Sue,notnecessarilythatweareattributingittobetterweather.ButouroperatorsdidconverttheirbacklogatahigherratethanweanticipatedandthanwhatwetoldyouforQ2.WhenwelookatourbusinessplanforQ3,whichweareexpectingtodeliveron,itisrightinthatheartofthat76%to86%rangewehaveguidedtoforQ3.
MikeMurray(EVPandCOO):
Thetimingofdeliveriesthroughtheyearisafunctionofreallytheroll-upofallofourcommunitiesandthetimingofwhencommunitiescomeonlineandwhenhousingstartsgetstarted,andrightnowthewayitisrollingup,divisionbydivision,pointstothatrange.Butstillfortheyear,pointstothesamerangewegaveatthestartoftheyear.
JessicaHansen (VPofIR):
Historically,wetypicallydoseeatickdowninourconversionratefromQ2toQ3.Thatisanormalseasonaltrendforus.
SusanMcClary(Analyst-UBS):
Okay.Andthenlookingatyourspeclevels,seemslikethosearecontinuingtosortoftrenddownovertime.Canyoujusttalkalittlebitaboutwhat'scontributingtothat?Andwhatshouldwemakeofthat?
MikeMurray(EVPandCOO):
Ithinkwecanattributeittoaverystrongdemandinthemarketplacerightnow.Andthatwearestartingspecsandgettingthemoutthereandgettingthemsoldearlyintheconstructionprocess.Youhavetostartmorehouses,soyougetthosestartedandyougetthosesold.Inaddition,wearestartingsomehousestobebilledjobsaswell.Ouroverallmixofbuildversusspecisstayingthesame,wearejustseeingstrongdemandinthemarketplace.Moreefficientwiththeturningofourhomesisoneofthekeydriversofourcashflowgeneration.Doingmorerevenue,moreclosings,withthesamenumberofhomesunderconstructionatanypointintime
SusanMcClary(Analyst-UBS):
Okaythankyou.
Operator :
WillRandowfromCitigroup.
WillRandow(Analyst-Citigroup):
Goodmorningandcongratsonthequarter.
JessicaHansen (VPofIR):
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Thankyou.
WillRandow(Analyst-Citigroup):
BacktoSusan'squestion.Whenyoulookatyourcurrentpercentageofclosings,thatarespec,couldyoutalkaboutthat?Andhowyoufeelgoingintokindofthepeakconstructionperiodinregardstopotentiallaborinflationand/ordelays?
JessicaHansen (VPofIR):
Sointermsofourspecsthatweclosedinthequarter,itwasinournormalrange,whichiseveryquarteris70%to80%ofwhatweareclosingisaspec.Andsowhenyoulookatourreportedgrossmarginyouareessentiallyseeingourspecgrossmargin,intermsoflabor.
MikeMurray(EVPandCOO):
Wearenotseeingatremendousamountoflaborinflation.Infact,wehavebeenabletostayaheadofthecostincreaseswehaveseenonstickandbrick,which,anycostincreasesthathavecomethroughhavebeenmorelabor-orientedversusthematerialsandthecommoditiestoday,butwehaven'tseenatremendousamountofpressure.Andintermsofshortagesaffectingdelays,ourcycletimeshaveremainedveryconsistentandwehavenothad,asevidencedbyourbacklogconversionratelastquarter,wehavenothadareallaborconstraintwidespreadthathasaffectedclosings.
DavidAuld (President&CEO):
Again,asyoudrivehigherabsorptioninacommunity-by-communitybasisyoutakealotofpressureoffthetradebase.Becauseit's--alotoftheirtimeisjustgoingfromcommunitytocommunity.Ifwecangetthemouttothecommunityandkeepthemtheretheycanmakemoremoney,alotlesspressureonpricing.
WillRandow(Analyst-Citigroup):
Andjustasafollow-up,youmentionedyourstickandbrickpricesarefairlystable.Anywayyoucouldparsedownonthecategoriesintermsofthemovements?Forexample,lumberandhowyouthinkaboutthatgoingthroughtheyear?
JessicaHansen (VPofIR):
Intermsofoverall,ourrevenuepersquarefootyear-over-yearwasupabout4%andourstickandbrickwasupabout2.5%.Sequentiallyitwasclosertobothbeingupabout1%.Themajorityofthecostinflation,asMikementioned,wecontinuetoseeisonthelaborside,notthematerialsside.Andtolumberspecifically,Iwouldn'tsaywe'veseenanythingunusualinlumberprices.Theytendtofollowaseasonaltrend,andwehaven'tseenanythingunusualthisyear.
WillRandow(Analyst-Citigroup):
Thankyouandcongratsagain.
DavidAuld (President&CEO):
Thankyou.
Operator :
Thankyou.JohnLovallofromMerrillLynch.
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JohnLovallo (Analyst-BoAMerrillLynch):
Thankyoufortakingthecall,guys.Firstquestion,lastquarterIbelieveyoumentionednotheavilyreinvestinginHoustonatthispoint,butkindoftakingmoreofareplenishingstrategy.Wasthatthecaseinthesecondquarter?Anddidanythinghappeninthequarterwhereyoumighthave,mightchangethatstrategygoingforward?
DavidAuld (President&CEO):
Thatwouldstillbethecaseinthesecondquarter.Itmaychangeinthefuture,asyouknow,we've--wearepositionedtotakeadvantageofopportunisticbuys.Andasstressgetsputonamarket,sometimesthatcreatesanopportunityforus.
JohnLovallo (Analyst-BoAMerrillLynch):
Okaythat'shelpful.Thenintermsofthecashflowguide,$300millionto$500million,itisafairlywiderange.Canyoujustreminduswhatwouldkindofdrivetheupperendoftherangeversusthelowerend?
BillWheat (EVP,CFO):
Itreallycomesdowntoouroverallrevenuevolume,ourclosingsvolume.Themaindriverweexpectthepredominanceofthatcashflowtocomeinourfourthquarter.Whenwehaveourlargestclosingsquarter.Thenitisessentially--thenthewiderangeisattributablealittlebittheunpredictabilityonthetimingofwhenlandpurchaseswillclose.Aswegetalittleclosertotheendoftheyearwemightbeabletotightenthatabit.Butthereissomeunpredictabilityinthetimingofwhenlanddealswillclose.
JohnLovallo (Analyst-BoAMerrillLynch):
Okaygreat.IfIcouldstickonehousekeepinginhere,theflatcommunitycountyouguystalkedabout,wasthatyear-over-yearorwasthatsequentially?
JessicaHansen (VPofIR):
Yeswementionedthatouryear-over-yearcommunitycountwasessentiallyflat.Itwasactuallydownslightly,andreallywhenwelookatthatgoingforwardwewouldexpect,youknow,nomorethanalowsingle-digitmovement.Eitherway.Itcouldbeupordowninthelowsingledigitpercentagehereoverthenextcoupleofquarters.
JohnLovallo (Analyst-BoAMerrillLynch):
Great.Thanksverymuch.
Operator :
MikeDahlfromCreditSuisse.
MikeDahl(Analyst-CreditSuisse):
Thanksfortakingmyquestionsandnicequarter.
DavidAuld (President&CEO):
Thankyou.
MikeDahl(Analyst-CreditSuisse):
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WantedtogobacktosomeofthecommentsandobviouslyalotofquestionsandremarksabouttheExpressside.Butjustfroma,youknow,madeacommentaboutjustseeingalotlesscompetitionthere.Andclearly,youhavehadaperiodof--anumberofquartersofsuccess,competitorshavetakennotice.Feelslikethemarket,ingeneral,thereisamorepositivetoneontheentrylevelandsomeacknowledgementthatitseemslikethatdemandispushingoutward.SoI'mjustcurioustohearyourtakeonyouknow,we'vekindofheardthatsomeotherbuildersarestartingtoexploresimilarthings,maybenotquitethesame.Butasyouarelookingatnewlanddeals,areyourunningupagainstmorecompetitionthanyouwouldhaveseen6,9,12monthsago?Orhowdoyouthinkyouarepositioned?Whatdoyouthinkthattheyaredoingdifferently?
DavidAuld (President&CEO):
Wetendtofocusalotonwhatwearedoing,andwedoseesomecompetitiononthelandfront.It's,youknow,constantoutthere,anditismarketbymarketanditvaries.Youknowwhatothersaregoingtodowiththeirentrylevelentrants,Ihaveheardofotherscomingtomarket.Thereissomeofitoutthere.Butbroadly,wearenotseeingwidespread,heavycompetitiontoday,withusflagbyflag.Certainlytherearepocketswherethereismorecompetition,butgenerally,wearenotseeingit.Howotherstendtoapproachthatmarket,thatwillbeuptothem.Wearefocusedonprovidingagreatvalueforthehomebuyersoourcustomercanbeintheirhouse,theycanbeinthereatagoodpricetheycanafford,andaplacefortheirfamily.
BillWheat (EVP,CFO):
Butasentry-levelgrowswedoexpectmorecompetitiontocomeandwe'recertainlypreparedtodealwiththatasitcomes.
MikeDahl(Analyst-CreditSuisse):
Okay,great,thankyou.
Operator :
JadeRahmaniwithKBW.
JadeRahmani(Analyst-Keefe,Bruyette&Woods,Inc.):
Yes,hi,thanksfortakingmyquestion.Justwantedtoask.Regardingleverageatthispointinthecycle,isthereaplantoretirenear-termdebtmaturitiesaswasindicatedinthepressrelease,toreduceleverage?Ordoyouplantoeventuallyreplacethosematuritieswithsimilar-sizeddebtofferings?
BillWheat (EVP,CFO):
We'llalwayslookatthedebtmarkets,andwe'llremainopportunisticthere.Therearecertainly,itisafavorablemarketrightyounow.Butwherewesittoday,withourcashposition,withourexpectationsforcashflows,werightnowdonotexpecttobeinthedebtmarketintheshort-term.Wehavealreadypaidoffthe$373millionthatcamedueonApril15th,wepaidthatoutofcash.Andwebelieveourcashposition,ourliquidityavailableonourrevolverandourcashflowsaresufficientfortheremainderoftheyearaswesitheretoday.
JadeRahmani(Analyst-Keefe,Bruyette&Woods,Inc.):
Andjustregardingotherincome,canyoucommentonwhatdrovethespikeinthesecondquarter?
BillWheat (EVP,CFO):
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Yeswedidhave,wesoldaninvestmentthatwehadindebtsecurities.Youcanlookbackinour10-Qs,therehasbeenadisclosurearoundthatinvestment.Wehadsomedebtsecuritiesthatwehadacquiredawhilebackthatgaveusaccesstosomeland,thatwehavenowacquiredthelandandareactivelydevelopingit.Andwewereabletorestructurethosedebtsecuritiesandreselltheminthemarketandsowehadagainonthatsaleof$4.5million,whichwasanimprovementinourOtherIncomelinethisquarter.
JadeRahmani(Analyst-Keefe,Bruyette&Woods,Inc.):
Thanks,justlastly,thecapitalmarketsuncertaintyandspreadwideningthatwehaveseenthisyear,youmayhavealludedtoitonthelandside,thesecondlookyoureferredto.Buthaveyounoticedanyimpactoneitherthelandmarketorsalestrendsduetothevolatility?Thanksalot.
BillWheat (EVP,CFO):
Hardtoattributeittoanyonefactor.Justacompetitiveenvironment,dealbydealisdifferent.Weareseeingafewmoresecondlooks,sothat'sbeenverypositiveforus.
JadeRahmani(Analyst-Keefe,Bruyette&Woods,Inc.):
Thanks.
BillWheat (EVP,CFO):
Thankyou.
Operator :
Thankyou.NextquestiontodayiscomingfromJayMcCandlessfromSterneAgee.
JayMcCanless (Analyst-SterneAgeeCRT):
Goodmorningeveryone.Firstquestion,IknowHoustonisasmallermarketforyouguys.Butifyoucouldupdateusonwhat'shappeningonthegroundthereandwhatyouthinkyouaregoingtoseeintermsofdelaysforeitherlaborormaterialstogethomesfinished?
JessicaHansen (VPofIR):
YouknowJay,it'sbusinessasusual.WefeelforthepeopleandwhattheyaregoingthroughinHoustonrightnowwiththehorrendousflooding,butouroperationsarefine.Andwedon'texpectany,anynoticeableimpactonourbusinessinHouston.Clearlythemarkethasjustsoftenedduetotheloweroilprices.Butwecontinuetoseeveryconsistent,steadydemandatpricepointsbelow$300,000.
DavidAuld (President&CEO):
WeliketheHoustonmarket.Bigbelieversinit,long-term.Andyouknow,ifitbecomes,ifweseeanopportunitytobuysomethingataveryadvantageousprice,wearegoingtobealloverit.
JayMcCanless (Analyst-SterneAgeeCRT):
Gotit.ThesecondquestionIhad,therewasasmallorderdeclineintheeastgeographythisquarter.Couldyoutalkaboutwhat'sgoingon,inthatmarket?
BillWheat (EVP,CFO):
YestheeastforusistheCarolinasandnorth.SoitisreallymoreNortheast,forus.WeweredownI
CompanyName:D.R.HortonIncCompanyTicker:DHISector:IndustrialGoodsIndustry:Materials&Construction
EventDescription:Q22016EarningsCallMarketCapasofEventDate:11.60BPriceasofEventDate:31.2
©2014TheStreet,Inc.Al l R ightsReserved Page21of21
believe2%insalesunits.Ourcommunitycountinthatregionwasactuallydown,soourabsorptionswereactuallyupmid-single-digits.Reallyjustreflectsprobablyafewfewerinvestmentsoverthelastfewyearsmanifestingitselfinthecommunities.
DavidAuld (President&CEO):
WearekindofgoingthrougharesetupintheNortheast.Welikewhereweareheaded.Butit'snotgoingtobeastellarperformancethisyear.
JayMcCanless (Analyst-SterneAgeeCRT):
Great.Thankyou.
Operator :
Thankyou.Wehavereachedtheendofourquestion-and-answersession.Iwouldliketoturnthefloorbackovertomanagementforanyfurthercomments.
DavidAuld (President&CEO):
Thankyou,Operator.Weappreciateeveryone'stimeonthecalltodayandlookforwardtospeakingwithyouagaininJulytoshareourthirdquarter.Iwouldalsoliketo,onceagain,thanktheentireD.R.Hortonteam.Youaretrulythebestintheindustry,andyourquarter-to-quarterconsistentperformanceprovesthatout.Thankyou.
Operator :
Thankyou,thatdoesconcludetoday'steleconference.
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