The operator introduces the First Quarter 2024 Earnings Conference Call for D.R. Horton, America's Builder. Jessica Hansen, Senior Vice President of Communications, discusses forward-looking statements and the company's Annual Report. Paul Romanowski, President and CEO, is joined by Mike Murray, Executive Vice President and COO, and Bill Wheat, Executive Vice President and CFO.

D.R. Horton had a successful first quarter with earnings of $2.82 per diluted share and a pretax profit margin of 16.1%. They saw a 6% increase in revenues and a 35% increase in net sales orders. The company is well positioned for the Spring selling season with a large inventory of homes and a focus on consolidating market share. Net sales orders and order value both saw significant increases compared to the prior year quarter.

In the first quarter, the company's average number of active selling communities increased and the average price of net sales orders decreased. To adjust to market conditions, the company has increased the use of incentives and reduced home prices and sizes. This has led to a decline in gross profit margin on home sales revenues, but the company expects it to improve in the second quarter due to declining mortgage rates. The full year's gross margin will depend on market conditions and mortgage rates.

In the first quarter, the company's home building SG&A expenses increased by 14% due to expansion and stock-based compensation. The company has a strong inventory position for the upcoming Spring selling season and has improved construction cycle times. Their home building lot position at the end of the quarter consisted of 607,000 lots, with 24% owned and 76% controlled through purchase contracts. The company's investments in lots, land, and development totaled $2.4 billion in the first quarter.

In the first quarter, Romanowski's rental operations generated $31 million in pre-tax income on $195 million in revenues from the sale of 379 single family rental homes and 300 multifamily rental units. The rental property inventory at the end of the quarter was $3 billion. Forestar, the majority owned residential lot development company, reported revenues of $306 million and pretax income of $51 million. They currently have a lot position of 82,400 lots and a strong balance sheet. The financial services sector earned $66 million in pretax income on $193 million in revenues, with the mortgage company handling financing for 78% of home buyers.

The mortgage company's volume was mostly made up of FHA and VA loans, with borrowers having an average FICO score of 724 and loan to value ratio of 88%. First time home buyers accounted for 56% of the closings. The company maintains a strong balance sheet and liquidity, with no senior note maturities in fiscal 2024. They paid dividends and repurchased shares during the quarter. For the second quarter, they expect to generate revenues of $8.1 billion to $8.3 billion and close 20,000 to 20,500 homes.

The company expects strong financial performance in the second quarter, with high margins and profits in all of its operations. They anticipate continued market share growth and have set goals for revenue, home closings, and cash flow for the full year. The company also plans to repurchase stock and pay dividends while maintaining strong liquidity and leverage. The company credits its success to its experienced teams, market share, geographic reach, and product offerings.

The company will continue to invest capital to improve long-term value and will return capital to shareholders through dividends and share repurchases. The call will now open for questions. The first question is about the impact of rate buy downs on gross margin, which was about 100 basis points. The company expects flat gross margin in the second quarter compared to the first quarter. This is the first time the impact of rate buy downs has been significant.

The company has adjusted its hedging positions due to the significant volatility in rates during the quarter, resulting in a charge. Excluding this charge, the company would have met their gross margin guidance. The company has sufficient cash, with $3 billion coming in and $2 billion already allocated for buybacks and dividends. The remaining $1 billion could potentially be used for land investment and rental properties. The company's land investment has been flat for the past three years and it is uncertain if it can be reduced further.

The company plans to maintain its production velocity by controlling more land and acquiring finished lots from other developers. They also plan to invest in rental inventory in fiscal 2024. The company is focused on maintaining conservative leverage and will potentially pay off a debt maturity in cash. Analysts are interested in discussing the company's SG&A expenses.

Bill Wheat explains that the increase in SG&A this quarter is due to a 14% increase in average selling community and a timing factor related to equity and stock-based compensation. He expects SG&A to come back down to historic levels as revenues grow. Carl Reichardt asks a bigger picture question to Paul about the recent acquisition of a domestic homebuilder by an offshore player and Horton's history of acquisitions.

Paul Romanowski, CEO of Horton, says that the company is still open to acquisitions, but is primarily focused on smaller tuck-in builders that can add to their market share. They do not anticipate any major acquisitions in the near future. During the first quarter, their gross margin was impacted by hedging, but they expect it to be flat in the second quarter as they continue to sell homes with incentives and lower margins.

The company expects to hold margins around current levels, excluding hedging, due to lower incentive costs. Lot costs were up low double digits on a year-over-year basis, but would moderate in the future. The gross margin charge was not specified, but it did not affect deductions from revenue. The company does not expect any further impact on margins from interest rate changes, but a 50 to 100 basis point drop could result in a 100 basis point impact.

The company incurred a charge of $65 million due to changes in interest rates during the quarter, which affected their hedging position. This allows them to offer lower rates to customers, but also exposes them to potential losses in times of sudden volatility. The significant movements in interest rates during the quarter led to a more severe mark-to-market adjustment than usual. The $65 million charge is reflected in cost of goods sold and not in revenue. The company aims to manage their hedging position, but there is always some exposure to sudden changes in interest rates. The speaker appreciates the transparency provided by the company.

The company expects to see flatness in their cost side in the next quarter, but there may be some increase in costs due to potential increase in starts from competitors. SG&A has been negatively impacted by community count and stock comp, and this trend may continue for the first couple of quarters before flattening out. Sales incentives and broker commissions are included in COGS.

The company only provides specific guidance for SG&A one quarter out, but expects to eventually return to similar levels as last year. There may be a slight headwind in Q2 due to community count market growth and a tailwind from equity compensation. Gross margins are expected to get back to Q1 levels excluding hedging impact, as rates have come down and orders taken in mid-January may have lower buy down costs. The company has guided for a 22.6% to 23.1% GAAP margin in Q2, with early quarter closings at the lower end of the range and improving later in the quarter due to lower buy down costs.

The company expects margins to balance out to 22.6% to 23.1% in the second quarter, but the strength of the Spring selling season and mortgage rates will impact the final numbers. They typically sell a large portion of homes inter-quarter and will have better visibility as the Spring selling season continues. The company is taking a wait-and-see approach with core incentives and not disrupting demand or momentum ahead of the Spring selling season.

Romanowski and Hansen discuss the consistency of activity in the market and how they will respond to changes in rates. They also mention that their best incentive is the rate buy down and consistency of payment to buyers. They explain that their closings guidance has been increased due to improved cycle times and inventory, and that they are focused on creating a consistent starts plan to ensure they have enough lots for their neighborhoods.

The company has made significant progress in reducing cycle times and has a strong finished lot position, allowing for reduced inventory and a target of at least two times the beginning of the year housing terms. The company also has good relationships with trade partners and suppliers. The biggest constraint for the industry is finished lots, but the company is focused on building out their lot position and relationships with third-party developers. The company is seeing favorable trends in the Spring and has a high percentage of first-time buyers. There is strength in certain price points and products, but also some areas that are below average.

Murray and Paul discuss the consistency of their company's offerings and their focus on first-time homebuyers and affordability. They mention using interest rate buy downs and feeling encouraged by early trends in January. Eric asks about their product and price point focus with lower rates, to which Paul responds that they have made adjustments and feel comfortable with their trajectory. They will continue to provide affordable opportunities across all their platforms. Alan asks about the spec versus build to order dynamic in the industry.

The speaker discusses how being a spec builder gave the company an advantage during the pandemic due to the tight resale inventory and extended cycle times. However, with the industry improving and competition from build-to-order builders, the company is still focused on selling inventory and maintaining consistent production. They also aim to compete against existing home sales rather than just other new home providers. The timing of their sales has also been able to move up earlier in the construction process.

The company is not restricting the sale of completed homes and expects to have houses available for quick delivery in January for the Spring selling season. They are comfortable selling and locking in rates earlier in the production process due to shorter cycle times. The charge on the hedge is similar to other builders who have experienced situations where the market fell below the pool they had purchased. The company typically buys forward commitment pools for the next few weeks of deliveries.

The company has seen a strong demand for build-to-rent homes from institutional buyers, despite a volatile market last year. They plan to continue delivering projects throughout the year to derisk their land positions and monetize their land portfolio.

The company is seeing good demand for their product, with strong rental and lease-up activity. They have been offering buy-downs to buyers, with an increasing take rate. The company plans to continue using this incentive to stay competitive in the market. Inventory returns and returns on inventory are also important factors for the company.

The company's returns are in line with their plans and their divisions are executing on their start plans. They expect to see consistent and sustainable starts expansion over the next few quarters, with a goal of turning inventory two times. The past year's starts have been inconsistent due to market conditions and cycle times, but the company hopes to improve cycle times and increase starts in the future.

The company plans to maintain its current inventory level and increase its starts consistently over the rest of the year. They hope to grow their inventory and turnover in fiscal 2025 compared to fiscal 2024. The company also aims to provide affordable homes to first-time homebuyers and families in smaller markets where other builders may have capital constraints. This strategy has been successful in new markets and the company plans to continue targeting this customer base.

The speaker talks about the company's cash generation and balance sheet, stating that they are comfortable with their current cash balance and plan to incrementally increase it as they scale up. They also mention increasing share repurchases and dividends this year and expect an improvement in build cycles in 2024. They were just over four months this quarter and are looking to improve this with supply chain improvements.

The company has seen a significant improvement in their historical norm of four months from start to complete, with an additional time from complete to close. This is down from seven months a year ago and has improved by 10 days sequentially. The company expects further improvements but not large ones, as they hope to get below four months. They are seeing encouraging signs for the Spring season, with good home buyer traffic and conversion. In terms of the land market, the company is set in terms of consistent delivery of lots into their starts plan, and they are not concerned about land development costs and lot costs increasing.

The speaker discusses the lack of reduction in development costs due to the shortage of lots in the industry. They mention sticking to a plan and feeling good about their lot position in the near future. They also mention that buyers have been responsive to product selection and buying smaller homes to make payments work. The speaker concludes by thanking everyone for their time and congratulating the company on a solid first quarter.

This summary was generated with AI and may contain some inaccuracies.