D.R. Horton, Inc. (DHI) Q2 2010 Earnings Call Transcript
Published at 2010-04-30 20:05:12
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 Bill Wheat - Chief Financial Officer, Principal Accounting Officer, Executive Vice President, Director and Member of Executive Committee
David Goldberg - UBS Investment Bank Joshua Pollard - Goldman Sachs Nishu Sood - Deutsche Bank AG Stephen East - Ticonderoga Securities LLC Jade Rahmani - KBW Michael Rehaut - JP Morgan Chase & Co Kenneth Leon Josh Levin - Citigroup Inc Daniel Oppenheim - Crédit Suisse First Boston, Inc. Alex Barron - Agency Trading Group James Wilson - JMP Securities LLC Buck Horne - Raymond James & Associates Jonathan Ellis - BofA Merrill Lynch
Welcome to the D.R. Horton America's Builder, The Largest Homebuilder in America, Second Quarter 2010 Earnings Release Conference Call. [Operator Instructions] It is now my pleasure to introduce your host, Don Tomnitz, President and CEO for D.R. Horton. Thank you. Mr. Tomnitz, you may begin.
Thank you, Melissa, and thank you for joining us this morning. Good morning. Joining me this morning are Bill Wheat, Executive Vice President and CFO; and Stacey Dwyer, Executive Vice President and Treasurer. Before we get started, Stacey?
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 statements. Additional information about issues that could lead to material changes in performance is contained in D.R. Horton's current report on Form 8-K dated February 8, 2010, which updated our annual report on Form 10-K and our most recent quarterly report on Form 10-Q, all of which are filed with the Securities and Exchange Commission. Don?
Thank you, Stacey. It's all about sales. One of our Hortonisms is nothing happens until we sell something. Well, there were and are a lot of good things happening at DHI. We want to thank all of our DHI team members for generating an operating profit for the second consecutive quarter. Congratulations to each of you. You are successfully competing in a challenging housing market. Your success, securing new lot positions at attractive prices, your tremendous control of construction and overhead costs and your terrific sales efforts this spring have positioned DHI to produce strong profits and market share gains this year. It also provides us the privilege of telling the public about your accomplishments in this conference call. Stacey?
Our net income for the second quarter was $11.4 million or $0.04 per diluted share compared to a net loss of $108.6 million or $0.34 per share in the prior-year quarter. Our continued goal this year is to be profitable in each quarter and for the entire fiscal year. We achieved profitability in the second quarter by delivering a record 103% of our beginning backlog and improving our home sales gross margin to 18%. We continue to expect our strongest deliveries and net income in the June quarter, which is different from the usual seasonality of realizing our strongest deliveries and net income in the September quarter. As a substantial portion of our current backlog in April sales are scheduled to close by June 30, deliveries and profitability in the September quarter will largely be dependent on future sales. Bill?
Net sales orders for the second quarter were 6,438 homes, up 55% from the same quarter in the prior year. The increase was due primarily to improved absorptions as our act of selling communities were up by low single digits, both sequentially and year-over-year. Our average sales price on net sales orders in the quarter increased approximately 1% from the year-ago quarter to $204,700. Our cancellation rate was 21%. Our sales backlog increased 38% from the prior year to 6,314 homes or $1.3 billion. Our second quarter home sales revenue increased to $894.8 million from $770.7 million in the year-ago quarter. Our average closing price for the quarter was $210,000. Don?
Our gross profit margin on home sales revenues in the second quarter was 18.0%, up 470 basis points from our home sales margin in the year-ago period, and up 90 basis points sequentially from our December quarter. The sequential increase was primarily due to the average cost of our homes declining by more than our average selling prices, partially due to our success constructing and closing homes on recently acquired finished lots in new communities. 25% of our second quarter closings were from new deals that were put under contract in fiscal 2009 or later. Margins on closings on our new projects are approximately 200 to 300 basis points higher than on the remainder of our closings. Bill?
As we indicated in our year end and first quarter calls, we expect lower impairments in 2010 than in 2009. As we saw an increase in our home sales gross margin to 18% and great sales volume this quarter, we continue to expect lower impairments in 2010 if our sales prices, sales absorptions and expected margins stay at the current levels. During our second quarter impairment analysis, we reviewed all projects in the company and determined if projects with a pre-impairment carrying value of $8.5 million were impaired. We recorded inventory impairments of $2.3 million as a charge to cost of sales. We refer to our projects which had indicators of potential impairment but were not impaired as our watch list, which represents those projects that are deemed to be the highest risk for future impairments. Our watch list is currently $525.3 million, up slightly from $478.7 million at December 31. The largest concentrations in our current watch list are in Illinois, California and Florida. We will continue to evaluate sales demands, sales prices and expected margins in each of our markets as well as levels of job creation or losses of broader economy and their effects on the valuations of our assets. Our inventory impairment process in the June and September quarters will incorporate any changes in market conditions and any adjustments we make in our business. Don?
Our consistent focus on controlling SG&A has been a key to our return to profitability. We have leveraged our SG&A structure to focus on opportunities in our existing markets with our current division operations. Ongoing SG&A expense for the quarter, which includes all corporate overhead, was $128.7 million or 14.3% of homebuilding revenues compared to 16.4% in the year-ago quarter. SG&A increased only $1.8 million or 1% on a 19% increase of homes closed. We will continue to actively manage our SG&A levels relative to our expected number of home closings. Bill?
We recorded $22.7 million in homebuilding interest expense during the quarter. We are required to expense a portion of our interest incurred as interest expense while our homebuilding debt level exceeds our active inventory. Financial services pretax income for the quarter was $1 million compared to a pretax loss of $12.4 million in the year-ago quarter. 92% of our mortgage company's business was captive during the quarter. Our companywide capture rate was approximately 61%. Our average FICO score was 714, and our average combined loan-to-value was 91%. Our product mix in the quarter was essentially 100% agency eligible, with government loans accounting for 60% of our volume. Stacey?
During our March quarter, we received the tax refund of approximately $352 million related to our taxable loss in fiscal 2009. Our current $29 million income tax receivable is expected to be received from state and federal tax refunds in future periods. Our deferred tax asset is now $894.1 million and is fully reserved at March 31. Bill?
Our total inventory increased by approximately $178.7 million during the second quarter. We reduced our residential land and lots and land held for development by $70 million while we increased our homes and inventory to support the demand we experienced in the spring selling season. Our homes in inventory at the end of March totaled 13,900, of which 1,200 were models, 7,300 homes were speculative, and 2,900 of these specs were completed. Our speculative homes as a percentage of our total homes inventory declined to 53% at March 31 from 63% at December 31 due to the strong sales volume we saw on our March quarter. We continue to manage our total homes in inventory relative to our expectations of our sales demand, and we all prospect homes, primarily to accommodate our first-time homebuyers who represented 58% of the second quarter closings scheduled by our mortgage company. Don?
Our land and lot acquisition investments remain controlled, and we continue to evaluate our land development plans based on current sales trends. We have been actively contracting for finished lots to supplement our existing land positions and increase our gross margins. In the second fiscal quarter, we invested approximately $200 million, primarily in finished lots. Our spending on finished lots will remain largely dependent on our sales pace while our spending on land and development costs will continue to be at low levels. Bill?
Our supply of homes, land and lots at March 31, 2010, is approximately 88,500 lots, of which approximately 21,000 are finished. We control an additional 22,000 lots through option contracts, and our net earnest money deposit balance for these lots is only $8.7 million. We are focused on managing our supply of owned finished lots in line with our sales demand in a low-risk capital-efficient manner. Stacey?
Cash flow from operations for the March quarter totaled $208 million, exclusive of our $352 million federal income tax refund we received during the quarter. We used $145 million of cash in operation. The main operating use of our cash in the quarter was the 21% increase in homes in inventory from December. We ended the quarter with approximately $1.8 billion of unrestricted homebuilding cash and marketable security. During the quarter, we repaid $130.9 million of our 4 7/8% senior notes which matured in January, and we redeemed the remaining $95 million of our 5 7/8% senior notes due 2013 in February. We also repurchased approximately $139.4 million of our outstanding notes in the open market. The balance of our public notes outstanding at March 31 was $2.5 billion. Subsequent to quarter end, we have repurchased $6.5 million of our outstanding notes. Our remaining note maturities in fiscal 2010 totaled $69.7 million. Our board recently increased our debt repurchase authorization to $500 million effective through November 30, 2010. At March 31, our homebuilding leverage ratio, net of cash and marketable security, were 22.2%, a 1,200 basis point improvement from a year ago. This improvement in leverage compared to the prior year is due primarily to the increase in our cash balances, continued reductions in outstanding debt and to a lesser extent, the issuance of our convertible senior notes. Don?
In summary, our financial performance this quarter demonstrates the progress our company has made toward building sustainable profitability, balance sheet strength and market share gains in this challenging and uncertain housing market. Our most important accomplishments this quarter include: We are profitable for the second consecutive quarter, with a pretax income of $12.1 million; we saw 55% increase on our sales with our ASP up slightly year-over-year; our fully loaded homebuilding SG&A, which again includes all corporate overhead as a percentage of revenues, was 14.3%, up only $1.8 million or 1% on a 19% increase in homes closed. We have reduced our homebuilding debt this fiscal year to date by $524.8 million. We improved our gross margin further to 18.0% this quarter as we continued to improve the cost and design of our products and as we continued to open new communities on recently acquired lots at higher margins. There are still challenges in the homebuilding industry: Rising foreclosures, significant existing home inventory, high unemployment, tight mortgage lending standards, the expiration of certain government support for the housing and mortgage markets and weak consumer confidence. However, new home inventory remains low. Interest rates are favorable, and housing affordability is near record highs. We will continue our focus on providing affordable homes for the first-time homebuyer, controlling our costs, contracting for new communities with attractively priced finished lots and maintaining our strong balance sheet. Again, we want to thank all of our DHI team members who continue to outsell and outperform the industry. Keep up the great work. D.R. Horton is leading the industry into the housing recovery with a superior business model. This concludes our presentation, and we'll host any questions you may have.
[Operator Instructions] Our first question is from Stephen East with Ticonderoga Securities. Stephen East - Ticonderoga Securities LLC: You talked about the third quarter, it being the strongest revenue quarter. I assume that's because of the tax credit sales coming through. If you look at the fiscal second quarter, what percentage of sales do you think that the people actually take advantage of the tax credit? And then sort of what's your game plan for how you deal with that once the credit expires?
The best indication, Stephen, of the percentage of our buyers that may have used the homebuyer tax credit is still going to be our first-time homebuyer percentage, which was 58% in the quarter. That is the percentage of first-time homebuyers that actually closed their homes through DHI Mortgage. We don't actually have visibility into who then subsequently files for the tax credit.
As far as after the tax credit, we believe that we're in a preeminent position. We have opened, worked new communities than any other builder. Our cost structure, we believe is the best in the industry, and we're prepared to compete in the industry with or without any government tax credits. Stephen East - Ticonderoga Securities LLC: And then sort of a combined question here, your watch list went up a little bit even though your gross margin went up. So I guess, I'm intrigued by why that would happen? And then your gross margin expectations as you -- one, where do you take your new communities as a percentage of total and what's that sort of do for your gross margin assumptions looking out?
Well, in terms of the watch list, Stephen, as you know, the watch list is compiled really on individual project basis, and there are always some projects that are performing better and some projects that may not be performing as strongly. So it's simply a compilation of those projects. Given still some uncertainty and challenging conditions in the markets, we did not expect to see our watch list drop too much yet even though we did see improvement overall in our gross margins. Of course, a portion of those gross margin improvements are because of new communities. And so the watch list does not have any new communities on it. But we'll continue to evaluate those projects. We'll see what the market looks like here later in the year. And as we get better visibility into the market, I would expect to see those projects begin to resolve themselves on the watch list, either drop off the watch list or be addressed if market conditions justify valuation adjustment.
Our next question is from Michael Rehaut with JPMorgan Securities. Michael Rehaut - JP Morgan Chase & Co: Just on the order growth, which was really impressive, I noticed you still, I think, ahead of your peers in terms of community count. Most of your peers are down still 20% or more community count year-over-year. And you said you're up low single digits. I was wondering if you could give us some direction as to where that's going to be perhaps by the end of this year and then the next few years? What are your plans for community count growth? And also regionally, where did you see strength from an order perspective?
Well, we anticipate our community growth to continue to increase. We're actively working finished lot deals across the country. And clearly, we have entered into more finished lot deals than anyone else in the industry because we feel like that's a good supplement to our core margins. Higher would be my answer.
And in terms of regional strength, Mike, we saw sales increases in each of our individual regions. So generally, year-over-year especially, we saw strong results in each of our regions in most of our markets. Michael Rehaut - JP Morgan Chase & Co: Just going back to the watch list question, if I can ask it from a different angle, what we've been hearing is that most regions continue to stabilize, at least in terms of their pricing trends. Sequentially, things aren't getting worse. Things, if anything, are getting a little bit better in terms of sequential pricing. So I was wondering if you could kind of talk to how the watch list increased, and granted it wasn't a large increase but if that was driven by certain regions and certain pricing trends in certain regions and maybe just speak more broadly to what you're seeing in terms of price in the markets that you compete.
We're seeing good price stability in most of our markets today. We're seeing some price increases in the California market, as you have read. But in general, I think what we're doing is looking at -- I know what we're doing is we're looking at specific projects. And a project may become a good, better project or weaker project just based upon the existing competition on that particular market or how quickly we want to work our way through that existing deal.
And overall, in terms of using broad market information on the watch list, that certainly does color things a bit, but we are only two quarters into the year. We're not totally finished with the spring selling season. There's still more sales to achieve and still a little more visibility that we need to resolve how we might approach some things on a broader level. And really, the only thing to call out in terms of the change in the watch list this quarter is, as you'll note on our concentrations, Illinois is a larger portion of the watch list. Again, it comes down to individual projects and then there are couple of projects that are on the watch list now that weren't before.
And Chicago, quite frankly, entered into the downturn later than most, all of our other markets. So basically, we're seeing weakness in Chicago at a later stage just simply because of where they are in their cycle. But again, we're one of the few builders who share our watch list with you. I don't know if anyone else does.
The only builder, so we're comfortable.
Our next question is from Jonathan Ellis with Bank of America. Jonathan Ellis - BofA Merrill Lynch: You mentioned that 25% of sales on your newer lots purchased, can you help us understand any differences in that number by region, and there are some regions where that percentage is higher and others where it tends to be lower?
Yes, clearly, in our operating regions, we won't discuss the financial regions.
Yes, in terms of the financial regions, the largest percentages you will see are in our South Central and our Southeast regions. We were seeing greater community growth there, and that's reflected somewhat in the sales growth that you see as well.
And Jonathan, just to clarify, the 25% was actually our closings number.
And in terms of sales, I don't believe we have said that. But our sales during the quarter, 35% of our sales during the quarter came from communities that were contracted in fiscal '09 or later. Jonathan Ellis - BofA Merrill Lynch: And then just in terms of pricing, as you think about over the course of this year, I guess, is your sense that the tax credit-driven demand is potentially having more of an impact on price, given mix, meaning more value-oriented buyers and that perhaps ASPs could trend higher in the back half of the year, albeit though on lower deliveries or do you not get the sense that the tax credit is really having as much of an influence on pricing as it is on sales velocity?
Jonathan, if you looked at our Q1 delivery, over 60% were to first-time homebuyers, and our sales process just north of $200,000. This quarter, we had a lower percentage of first-time homebuyers and a higher ASP. And I think that may be, again, what you see in the June quarter. I mean, we'll have to see how it evolves. But if you have a lower mix of the first-time buyers with a concentration in the closings in any given quarter, you could see a higher average sales price in that part of the year.
And our pricing in almost all of our communities is compelling, very competitive with foreclosures. So as a result, I think we're beginning to see other than first-time homebuyers obviously coming to our subdivisions and take advantage of compelling pricing.
Our next question is from Josh Levin with Citigroup. Josh Levin - Citigroup Inc: You said you had terrific order growth during the quarter. As you look into your backlog, is there any sense that you had to trade a bit of gross margin to get that order growth?
Well, in terms of our overall gross margin, we're continuing to see that stabilize and improve. So on a global level, I think the answer would have to be no. Individual communities, that may vary some. Josh Levin - Citigroup Inc: And over the past year, how has demand changed for homes that you're selling which customers know will not be able to close by the June 30 tax credit deadline?
We're more focused, quite frankly, on what our sales are going to be on May 1 and May 2, and not sure we're really tracking that. I mean, the answer to your question, our sales are still solid in the last week.
We have seen strong sales in April, in the month of April.
Our next question is from Nishu Sood with Deutsche Bank. Nishu Sood - Deutsche Bank AG: I had a question on your mix of land and your investment. I mean, you folks were arguably the first big builder out there buying land last year. And obviously, that was a great decision in retrospect given how things have evolved. So now we see obviously a lot of your peers kind of catching up in terms of that and accelerating in the second half of the year. So the gap between, let's say, your land purchases, you're aggressive as to land purchases, and your peers is shrinking. At the same time you mentioned that you're going to continue to minimize the development of your current owned lots that aren't fully developed. So I was wondering when might we see some shift if the landmark it return a little bit more towards normal with full participation from all of the builders? At what stage do you begin to develop, put more money into developing the 75% of your lots that aren't fully developed already?
First of all, I'd like to clarify something, we're not out buying land, we're out optioning land and putting it up very low earnest money amounts to secure the right to purchase those lots on a go forward basis. So we have purchased very little land other than, as I said, optioning a lot of different subdivisions across the country. The other thing I would say to you is as the market becomes more competitive in some of our peers, once again try to copy our business model, but not effectively implement it, is it that we are out in the subdivisions and have been there for quite sometime and many communities and many cities proving to the land sellers and the banks that we're willing to put spec inventory on the ground to a piece first time homebuyers. And as a result, even though we peg out more competition if you're a seller of lots today then you're going to choose D.R. Horton because we've got a more active business model putting spec inventory on the ground and working them through their lots at a faster pace than builders who are focusing on a build-to-order model. Nishu Sood - Deutsche Bank AG: That's a key thing to point out to the extent that there is noise or color that people are hearing regarding our land purchases. You have to keep in mind our volume. We have a significant sales volume, we have a significant size of operation and we are simply purchasing lots on option contracts in line with the sales demand we are seeing. But on a global level, our land an inventory continues to decline. Our dollars and land continue to decline. Nishu Sood - Deutsche Bank AG: What about the shift to developing lots that are not fully developed? You folks mentioned that you're going to continue to not spend money much money on land development?
Right now, our focus is on any deal we do that we won our capital back in 12 months post that investment, and that's the way we're going to approach land development deals on a go forward basis. Our window might increase from 12 months to 18 months to 24 months, but that's not the criteria today. So as we approach, the days when we're going to have to begin developing more of our own land and lots, we're going to operate with a much more conservative strategy than what we have in the past i.e. we're going to win our capital back in a much shorter period of time.
And it's that we're not doing developments. We are currently, selectively developing lots that we own. We're just evaluating the use of our capital for development versus the opportunities that we find on option lots, which typically may take less capital upfront.
Most of our inventory increase this quarter was a function of building more homes. It was all our traction of progress.
Our next question is from David Goldberg with UBS. David Goldberg - UBS Investment Bank: Question is actually kind of a follow-up on Nishu's question before. And Don, I was wondering if you could give me some more color. I understand what you're saying about the banks and land sellers willing to work with the guys, because you move to the land positions faster. I think that make sense, but the question I king of trying to get my hands around is what's stopping you're competitors from saying, okay look that model is better, we'll do exactly the same thing. I mean the market share gains I think you're taking today is really sustainable?
Well, I don't know whether they are, but clearly we're outperforming everyone else in the industry and use an old adage, a bird in the hands worth two in the bush. And I would say to you that we proven beyond any reasonable doubt that we are going to put spec inventory on the ground, and work the seller of lots do their lots at a faster pace. If I were the seller and I have been a seller of lots because we develop lots and sold them to other builders, I'm going to choose the person who has a proven track record as opposed to someone, verbally, tell me what they're going to do with my land and lot position. So we look forward to let them come on. David Goldberg - UBS Investment Bank: I know it's a little bit different just go with the mix shift and that the low level percentage for entry-level this quarter, but I'm wondering if you could talk about the FICO and loan devalued characteristics on kind of the like-to-like basis. Do you think that buyers that are coming in today have similar or better maybe or worse kind of quality than maybe buyers of say three, six, nine months ago?
I don't know that we would be able to do this change this thing as much between buyers three, six and nine months ago. There has been some continued tightening of credit, but nothing significant. And if you look at our FICO scores over the last three or four quarters, I don't think you're going to see much differential in our cumulative loan-to-value it's been relatively consistent below 90% range.
Our next question is from Alex Barron with Housing Research Central. Alex Barron - Agency Trading Group: One of my big question I'm wondering, I see a lot of, I guess would like to call the dividends tax has ended, USDA funding, or 100% financing has ended. FHA is racing from what I year, down payment requirements to 5% sometime this summer, and their contribution from sellers from proven cost is also going down. So I'm kind of wondering our you guys are thinking about all that, and how much do you think it's going to affect your demand going forward?
First of all I said to you, we continually in this company, adapt to one of our market conditions are. And prior to this downturn, four years ago, five years ago, we had a major percentage, or equal percentage of second time more buyers versus first time homebuyers it is our decision three years ago to appeal to the first time homebuyers and we worked our product line and re-worked our product, both size and finish outs just simply because the fact that we believe that this people we had existing homes, second time, third time homebuyers, we're going to have a difficult time selling their existing home to homebuyer. First home so we focused on that the first time homebuyer. I would also say to you that this quarter, clearly, we have fewer first time homebuyers than we had in the first quarter, so we have the flexibility in this company to adapt to our business model or product line, and our offerings to whatever the market is. Please don't worry about our ability to meet the market because we have met the market for 27-lot years and we'll continue to do so. Alex Barron - Agency Trading Group: And my second question I guess I've seen in the communities, I've visit your's obviously in three or numbers. Do you expect much higher than most other builders and really this quarter, that helped? I'm wondering if going forward, you guys plan on maintaining kind of a similar rate, or are you going to pullback somewhat on the specs that you have per community?
First of all, I'd like to say our business model is very good. We focused on having a spec inventory out there to a piece, to the first time homebuyer because those people who are coming to our models and they were qualified and may want the close very quickly. As we move forward, we have set specific spec targets for each one of our regions, and as we move forward to the more uncertain marketable and the tax credit goes away, we're adjusting our spec levels as we speak. So our specs have been one of the real strengths of this company and have never been excessive, but we specs out there to satisfy those first time homebuyers and also to appeal the realtors who are being buyers into our models who want to close more quickly than a built off just going to take anywhere from three to four months.
Our next question is from Joshua Pollard with Goldman Sachs Company. Joshua Pollard - Goldman Sachs: First question and I have a follow-up Is on specs. There was a point in 2007, 2008 where you're actually getting higher margin on specific that you were on your third sales. Is that the case now and there seems to be a lot of concern out there amongst investors, about whether or not specs need to be discounted after that tax credit expires. I'd take the others that are opinion. There is much of a need for kind to cash flow by builders right now that it have inventory out there, but I love to hear your thoughts?
The key an operating specs strategy is all in the execution to the extent that you were able to sell a spec home, wireless under construction or shortly after it's completed, there's virtually no difference in the margin between the spec and a build-to-order home to the extent that they expect is completed and begins to age, and there are some impacts on the margins. So overall, since were always a few specs like that, overall, our spec differential in margin versus build to order is a little over 200 basis points on average, but in terms of the ability to execute specs strategy, there's is really no difference on margins to the extent that you're selling and close to completion, given the improvement in our margin over the last year or so, I think that demonstrates that we have the ability to execute on our strategy and manage our specs affectively.
And we focus on our age inventory as clearly our specs hadn't been completed and unsold for a period greater than the year, it was last quarter and it's a minimal number. So as a percentage of our inventory we're focusing on the specs strategy and most importantly managing the aged spec inventory. And we're focused on keeping our margins at a sustainable levels in the range where we are today. Joshua Pollard - Goldman Sachs: And could you also answer the question what percentage of your deliveries, as well as your sales that were from spec? And along that same line, I'd love to hear your updated thoughts on the conversion rates. You talked about being able to deliver it in excess of 100% this quarter and potentially next. You did that, but can you talk about the rest of fiscal 2010? And even if you have a few minutes, I love to here what your longer term thoughts are whether it's in line with History since you've historically been a spec builder? Or is it could be a little higher given the changes you've made within that business?
In terms of our total closings that were originally specs, it's been around 80% here for the last few quarters, and that was consistent this quarter. In terms of our backlog conversion we did achieve a record backlog conversion of 103% this quarter, so clearly, that was an unprecedented performance. We would certainly help in the current market with where our backlog is today, with the dynamics in the market that we should be able to achieve a very high backlog conversion in the coming quarter. And then beyond that, visibility is a little more clouded, so we'll have to just to react to the market and adjust our strategy accordingly as we get later in the 2010 and beyond.
Our next question is from Bose George with Keefe, Bruyette & Woods. Jade Rahmani - KBW: This is Jade Rahmani from KBW on for Bose George. I was wondering if you comment on your cancellation rate which declined in the quarterly. And given the strong growth and orders we would have expected it to have been flat sequentially or even up. And what this might suggest about whether your sales people could be more aggressive in generating potentially, even higher order growth? And a related question is what would you consider a normal can rate to be?
Well first of all, our can rate was down in the quarter because I believe we have compelling pricing on our subdivisions. And clearly, supplementing that was the expiration of the tax credits. So as the result, people have an incentive boost from a compelling pricing scenario, plus also the incentive on the tax credit to close. But we anticipate that we would fewer cancellations this quarter.
Historical can rate for us, during the normal times it's typically in the 16% to 20%, or 21% range. So we are actually close to where we would've been historically. During the downturn, we had spikes during different quarters that were generally correlated with some economic happening. And during this quarter there wasn't really anything that caused the disruption in the mortgage markets or in the healthy markets.
And then secondly on your markets, can you provide any additional color on what contributed the most to growth in the quarter, for example, the East and Southeast were particularly strong. Can you provide any detail in which states or markets were strongest there?
I think we'd like to the fact that all of our regions were up and all of our regions performed well. I would also say in the in the South Central or on the Southeast that basically we open more communities in those markets. So as a result, our sales and closings should've been up.
Our next question is from Dan Oppenheim with Credit Suisse. Daniel Oppenheim - Crédit Suisse First Boston, Inc.: Don, I was wondering if you can elaborate a bit more, you're talking about the specs how you're adopting and testing the specs a little as we speak, business expectations, and so saying the orders we're strong during the month of April. Can you tell us, did your orders in April exceed the starts so that the spec level came down as months went on. Can you give us an update at the end of April?
I would tell you, I don't have the specific number to give you Dan, but we do expect our spec level at the end of April to be lower as we move through the quarter and deliver a lot of those homes though, we would expect our spec level to move back up from where it was at April.
Dan I would tell you overall, our spec inventory we're very comfortable with where it is. It's in line with where we hit plans to operate this spring. We continue to sell strong on those specs through the month of April. So we're very comfortable with where we are. And then depending on what we see in the sales environment, as we move through the summer, then we'll adjust. If we see strong sales, we will probably put some more specs out there to meet that demand. If still is weaker, then we won't. Daniel Oppenheim - Crédit Suisse First Boston, Inc.: And then you talked about during the core of the closings, 58% being first time buyers. Any sense of that increased slightly in April here again in the credit in terms of the orders that is.
We don't have that information for April yet.
Our next question is from Jim Wilson with JMP Securities. James Wilson - JMP Securities LLC: I'm wondering on if you can discuss your new deals basis having 200 and 300 basis points higher margins, I would guess and given you also sort of 35 of sales basis ponts margins, I would guess, and given you also said the 35% of sales came from those new communities. We are talking apples-to-apples there and new deals that the same one that you're talking about anything 2009 or 2010?
Yes we are. James Wilson - JMP Securities LLC: So the 200 and 300 basis points a third of it so sounds like most, or basically, the margin improvement you saw, the 100 basis points really from that mix of new communities. In the total of that, is it fair to say it's supposed to anything else incentives or anything else rolling off materially.
No, I would say that the only other big component in there is really the continued improvement that we see in our construction cost on a first quarter foot basis and our homes relative to sales price first quarter, but we've obviously seen sales price stabilization over the last year, and we continue to work on our cost of our homes, so that is a major contributing factor, along with the improvements in the increase in our new communities.
Yes. We certainly want to give our purchasing managers and our construction managers in field same could give our sales team that is a done a tremendous job driving down our costs across the board. James Wilson - JMP Securities LLC: And then I guess just in the $200 million that you spend in Q1, would you kind of characterize it the best that you can tell and likely having similar margins to the yield you've picked up prior to this?
[Operator Instructions] Our next question is from Ken Leon with Standard and Poor's.
My first question is in any of our markets where your concern either about the impact of rising foreclosed homes or the banks with shadow inventory, I'm sure you have comments on those.
Well, we're dealing with foreclosures in every market. Some markets have some more than others clearly. Our goal as a company has been to price our new homes competitively with the foreclosure prices in each respective markets. So as a result, we can give the buyer a compelling purchase with the new home for essentially of the same price that they can buy a foreclosure, and further smooth and more transparent process because as you know on the short sales and the foreclosures just because you want to buy one of them, doesn't mean you're going to be able do it in a short period of time.
Also, with a rising market and rising demand, this question probably isn't come up in some time, just about your supply chain. Any issues related to either labor or material cost?
Well, clearly with the volume that we're doing in each one of our markets, our labor is not an issue at all. As a matter of fact we still have plenty of excess labor in most of our markets and our subs are really appreciating the opportunity to be able to grow their businesses again, and to build homes for us, as opposed to the other builders who are not building much inventory out there are sold not only labor out there but with the labor on a very compelling price simply because we are the most active builder, in virtually every one of our markets
And my last question is the loss of the businesses, as it ramps up, what are you doing in terms of sales of marketing in terms of personnel.
We will continue to hire sales people. And as one of our strengths in this company clearly is our quality of our sales force. But we continue to upgrade our sales force. We believe because we do have inventory on our subdivisions that are just sales people should be outperforming the competition. So as a result, we're constantly looking for those people who are not outperforming or performance after our expectations so we constantly to upgrade our sales force. But currently, I think we have upgrade sales force in the industry.
Our next question is from Buck Horne with Raymond James. Buck Horne - Raymond James & Associates: I was wondering if you could talk a little bit about the land acquisition or the lots you're putting under options geographically. I'm just wondering if you could give us some color on -- are these lots weighted more towards the typical Sunbelt Home Building markets where you got other public peers in there? Or these lots maybe more weighted towards the secondary and tertiary markets where you may be the only public builder in town?
Now, clearly, we're entering into most of our contracts are in the East, Southeast and south Central Divisions, as parts of the country. As to where we're entering into those contrast, our division presidents know that they need to enter into rolling option contracts in order for them to have a sustainable business model in their respective markets. So our focus has been across the country, whether you're in Chicago, whether you're in Seattle that your focus as the division president is how do you secure option contracts so that we can continue to increase our market share in each one of our markets. Buck Horne - Raymond James & Associates: And also, are you seeing any increase in potential deal flow from banks? Or is the land available still mostly from developers and other types of sellers.
It's a combination of both, and we're beginning to see more deals from banks. It depends upon the part of the country. It seems like most of our deals were seeing from smaller and medium-sized financial as opposed to the larger institutions. And we expect the larger institutions to begin to free up some of their OREO assets on a go forward basis because certainly there are a number of banks that would like to sell those assets. But mostly it's the small and medium-size regional banks that we're attracted to us. They know as well, and we're a proven entity in their backyard, and we're doing more construction than any other building in the marketplace. So we are a sought-after builder to help them work their ways to their OREO assets.
Our final question is from Michael Rehaut with JPMorgan Securities. Michael Rehaut - JP Morgan Chase & Co: Just to follow up with regard to your last comments about where you're more active in land contracts and you kind of thinking about that. And also the fact that you said you're seeing pricing across the country at this point, more being led by California and in the quarter, California kind of lagged some of the other regions in terms of order growth. So I was just wondering if you could talk about your level of activity in California right now in terms of land deals, and if that's lagging as well and what are your thoughts in terms of possibly stepping it up there or is it just that the pricing on the land is getting a little bit away from you?
I think California has been and always will be a difficult market to operate in. It's characterized by expensive lots and typically all cash transactions are certainly higher earnest money deposits than most other parts of the country. Clearly, we think California is a very important state to us. Currently we're still operating, they're operating, we're operating California under the same criteria as we are the rest of the divisions in the country. So to the extent that Californians is more difficult to do business with for us with our current operating parameters, we may relax those some that were certainly focusing on where can we put our capital and get the best return and the quickest return on our capital.
Despite that, we feel like our operations in California are performing very well. Our West region net home sold this quarter increased 17% in our West region. So while that might not be inline with our overall increase, that's still a very solid increase in a challenging market.
Thank you, ladies and gentlemen, that's all the time we have for question and answer. And at this time, I'd like to turn the floor over to Mr. Tomnitz for any closing comments.
Thank you for joining us today, and once again, I want to thank all the DHI team members who once again, we outperformed everyone else in the industry. And I want to make sure that our purchasing managers, our construction managers, our superintendents and our salespeople are all equally to be really thanked for outstanding performance. But we look forward to a great third quarter, and to continuing the lead the home building industry into the recovery and business model that we think is a superior in the industry. Thank you.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.