D.R. Horton Inc (DHI) — Q4 2015 Earnings Call Transcript

Thank you, Kevin, and good morning. Welcome to our call to discuss our fourth quarter and fiscal 2015 financial results. Before we get started, today's call may include comments that 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 can lead to material changes in performance is contained in D.R. Horton's Annual Report on Form 10-K and our most recent Quarterly Report on Form 10-Q, both of which are filed with the Securities and Exchange Commission. For your convenience, this morning's earnings release can be found on our website at investor.drhorton.com, and we plan to file our 10-K next week. After the conclusion of the call, we will post updated supplementary historical data on the Presentations section of our Investor Relations site for your reference. The supplementary information includes historical data on gross margins, changes in active selling communities, product mix, and our mortgage operations. Now I will turn the call over to David Auld, our President and CEO.

Thank you, Jessica, and good morning. In addition to Jessica, I'm pleased to be joined on this call by Mike Murray, our Executive Vice President and Chief Operating Office; and Bill Wheat, our Executive Vice President and Chief Financial Officer. Our D.R. Horton team finished this year with an outstanding fourth quarter. Pre-tax income increased to $339 million on $3.2 billion of revenue. And our fourth quarter pre-tax operating margin improved 60 basis points to 10.7%. Our sales absorptions continued to improve during this quarter as homes sold increased 19% on a relatively flat community count. This reflects solid performance of our core D.R. Horton communities and our Emerald Homes and Express Homes brands, which are enabling us to expand our product offering and industry-leading market share. For the year, while demand for new homes across most of our markets remained relatively stable to moderately improved, we generated growth of 30% or greater in both our home sales revenues and home building pre-tax income by successfully leveraging our platform as the nation's largest and most geographically diverse homebuilder. Our consolidated pre-tax income for 2015 increased 38% to $1.1 billion on $10.8 billion of revenue and 36,648 homes closed. Our continued strategic focus is to produce double-digit annual growth in both our revenue and pre-tax profits while generating positive cash flows and increasing our returns. During the fourth quarter, we generated $512 million of cash from operations, bringing our total cash generated by operations for the year to $700 million. Our return on inventory, defined as homebuilding pre-tax income divided by average inventory, improved 170 basis points in 2015 to 12.8%. With a sales backlog of 10,662 homes at the end of September; solid sales trends in October; and a well-stocked supply of land, lots, and homes, we are well-positioned for 2016. Mike?

Net income for the fourth quarter increased to 44% to $239 million or $0.64 per diluted share, compared to $166 million or $0.45 per diluted share in the year-ago quarter. Our consolidated pre-tax income increased 35% to $339 million in the fourth quarter, compared to $251 million in the year-ago quarter, and homebuilding pre-tax income increased 27% to $302 million, compared to $237 million in the prior-year quarter. Our fourth quarter home sales revenues increased 27% to $3.1 billion on 10,576 homes closed, up from $2.4 billion on 8,612 homes closed in the year-ago quarter. Our average closing price for the quarter was $288,600, up 3% compared to the prior year due to an increase in our average sales price per square foot. Bill?

The value of our net sales orders in the fourth quarter increased 22% from the year-ago quarter to $2.5 billion, and homes sold increased 19% to 8,477 homes, while our community count remained relatively flat. Our average sales price on net sales orders in the fourth quarter increased 3% to $289,500. The cancellation rate for the quarter was 27%, down from 28% in the year-ago quarter. The value of our backlog increased 10% from a year ago to $3.1 billion, with an average sales price per home of $295,100, and homes in backlog increased 8% to 10,662 homes. Our backlog conversion rate for the fourth quarter was 83%, within the range we guided to on our third quarter call. Jessica?

We are experiencing solid demand, revenue growth, and profitability in our D.R. Horton-branded communities, which accounted for the substantial majority of our sales and closings this quarter. Emerald Homes, our brand for higher-end, move-up, and luxury communities, is available in 46 markets across 18 states. In the fourth quarter, homes priced greater than $500,000 accounted for 17% of our home sales revenue and 7% of our homes closed. For the year, homes priced greater than $500,000 accounted for 16% of our home sales revenue and 7% of our homes closed. Our Express Homes brand, targeted at the true entry-level buyer focused primarily on affordability, is being offered in 48 markets in 15 states, with the significant majority of our Express sales and closings to date coming from Texas, Florida, and the Carolinas. This quarter, Express accounted for 22% of our homes sold, 21% of homes closed, and 14% of home sales revenue. The average closing price of an Express home in the fourth quarter was $191,000. For the year, Express accounted for 18% of our homes sold, 15% of homes closed, and 10% of home sales revenue. We're striving to be the leading builder in each of our operating markets with all of our brands. And we plan to maintain consistent, broad product diversity over the long term. Mike?

Our gross profit margin on home sales revenue in the fourth quarter was 19.9%, flat with the third quarter. The consistency in our gross margin this year reflects the stability of most of our markets today and the normalization of housing market conditions. We are raising prices or reducing incentives when possible in communities where we are achieving our targeted absorptions. And we're also working to control cost increases. All of these factors have enabled our gross margins to stabilize within our normal historical range. Our general expectation for fiscal 2016 is that gross margins will remain relatively stable with fiscal 2015 levels. In the current housing environment, we continue to expect our average home sales gross margin to generally be around 20%, with quarterly fluctuations that may range from 19% to 21%, due to product and geographic mix and the relative impact of warranty and interest cost. As a reminder, our reported gross margins include all of our interest cost. For the first quarter of fiscal 2016, we expect our home sales gross margin will be in the high 19%s to 20%, consistent with our margins during fiscal 2015, which were in the high 19%s the entire year. Bill?

In the fourth quarter, SG&A expense as a percentage of homebuilding revenues improved 100 basis points to 8.9%, compared to 9.9% in the prior-year quarter. Homebuilding SG&A for the full fiscal year also improved 100 basis points to 9.6%, compared to 10.6% in fiscal 2014, as our increased revenues this year improved the leverage of our fixed overhead costs. We are pleased that our homebuilding SG&A in fiscal 2015 was 40 basis points below our long-standing target of 10%, and we expect further improvement in our SG&A leverage for fiscal 2016. Jessica?

Financial services pre-tax income in the fourth quarter increased to $37.3 million from $14.2 million in the year-ago quarter. And for the year, financial services pre-tax income increased to $105.1 million from $45.4 million in fiscal 2014. Increases in our financial services profits for the fourth quarter and fiscal year were primarily due to improved loan sale execution, higher average loan amounts, and leverage of fixed overhead costs. 89% of our mortgage company's loan originations during the fourth quarter related to homes closed by our homebuilding operations, and our mortgage company handled the financing for 52% of our home buyers. FHA and VA loans accounted for 50% of the mortgage company's volume, compared to 42% in the year-ago quarter. Borrowers originating loans with our mortgage company this quarter had an average FICO score of 715, and an average loan-to-value ratio of 89%. Bill?

At the end of September, we had 19,800 homes in inventory, of which 1,600 were models. 9,700 of our total homes were spec homes, with 6,300 in various stages of construction and 3,400 completed. Our construction in progress and finished homes inventory decreased by $314 million during the quarter, and our number of homes in inventory decreased by 7%, a normal seasonal trend after our strongest home closings quarter of the year. Our completed specs decreased by 6% during the quarter. Our fourth quarter investments in lots, land, and development totaled $590 million, of which $305 million was to replenish finished lots and land and $285 million was for land development. Our residential land and lot inventory increased by $54.5 million during the quarter. David?

At September 30, 2015, our portfolio consisted of 174,000 lots, of which 118,000 are owned and 56,000 are controlled through option contracts. 67,000 of our total lots controlled are finished, of which 33,000 are owned and 34,000 are optioned. Our 174,000 total lots owned and controlled provide us a strong competitive advantage in the current housing market with a sufficient lot supply to support solid growth in sales and closings in future periods. In 2016, we expect our total owned land and lot inventory balance to be in line with or slightly higher than 2015. And we also plan to increase our optioned land and lot position. In 2015, we invested $2.2 billion in land, lots, and development. And in 2016, we expect that our investment level will increase by more than 20%. Mike?

Our inactive land held for development of $202 million at the end of the year represents 11,100 lots, down 13% from June and down 21% from a year ago. We continue to work through each of our remaining inactive land parcels to improve cash flows and returns, and we expect that our land held for development will continue to decline. During the fourth quarter, we recorded $5.1 million in land option charges for write-offs of earnest money deposits and due diligence costs for projects that we do not intend to pursue. We also recorded $21.2 million of inventory impairment charges, of which $12.2 million were in our East region, and $9 million were in our West region. These charges related to two long-held inactive land parcels that we sold during the quarter and one long-held project in production. Each of these actions resulted in improved returns and redeployment of capital into more productive assets. We will continue to evaluate our inventories for potential impairment, which may result in future impairment charges, but the timing and magnitude of these charges will fluctuate, as they have in the past. Also, during the fourth quarter, we recorded a goodwill impairment charge of $9.8 million related to one of our operating divisions in our Southeast region. Our total goodwill balance after this impairment is $87.2 million. Bill?

At September 30, our home building liquidity included $1.4 billion of unrestricted homebuilding cash and $865 million available capacity on our revolving credit facility. We had no cash borrowings and $110 million of letters of credit outstanding on the revolver. Our gross homebuilding leverage was 36.1%, and our homebuilding leverage ratio net of cash was 25.1%. The balance of our public notes outstanding at September 30 was $3.3 billion. And we have a total of $543 million of senior note maturities in fiscal 2016. At September 30, our shareholder's equity balance was $5.9 billion, and book value per share was $16, up 14% from a year ago. Based on our solid balance sheet, liquidity, and current and expected levels of profitability and cash flow, our board of directors increased our quarterly cash dividend by 28% from the most recent dividend paid to $0.08 per share. Jessica?

Looking forward, we would like to highlight some of our expectations for next year. They are consistent with what we shared on our call in July and are based on the current relatively stable to moderately improved market conditions. In fiscal 2016, we still expect to generate a consolidated pre-tax margin of 10.5% to 11%. We also expect to generate consolidated revenues of between $12 billion and $12.5 billion and to close between 39,500 and 41,500 homes. We anticipate our home sales gross margin for the full year of fiscal 2016 will be in the high 19%s to 20%, with potential quarterly fluctuations that may range from 19% to 21%. We estimate that our annual homebuilding SG&A expense will be in the range of 9.2% to 9.4% of homebuilding revenues, with the first two quarters of the year higher than this range and the third and fourth quarters below the range. We expect our annual financial services operating margin to range from 30% to 33%. We are forecasting our fiscal 2016 income tax rate to be between 35.5% and 36%, and our diluted share count to be approximately 375 million shares. We also continue to expect to generate $300 million to $500 million of positive cash flow from operations. Our fiscal 2016 results will be significantly impacted by the spring selling season, and we will update our expectations each quarter as our visibility to the spring and the full year becomes clearer. For the first fiscal quarter of 2016, we expect that our number of homes closed will approximate a beginning backlog conversion rate in a range of 75% to 78%. We anticipate our first quarter home sales gross margin will be in the high 19%s to 20%, and we expect our homebuilding SG&A in the first quarter to be in the range of 10.5% to 10.9% of revenues. David?

In closing, 2015 was our third consecutive year to generate 30% or greater increases in both home sales revenues and homebuilding pre-tax income. While significantly growing the business, we also generated $700 million of positive cash flow from operations. And our annual return on inventory improved 170 basis points to 12.8%. This is a result of the strength of our people and our operating platform, and we are excited about the opportunities ahead. We remain focused on growing both our revenue and pre-tax profits at a double-digit annual pace while continuing to generate positive cash flows and improved returns. We are well-positioned to do so with our solid balance sheet; industry-leading market share; broad geographic footprint; diversified product offerings across our D.R. Horton, Emerald, and Express brands; attractive finished lot and land position; and, most importantly, our outstanding team across the country. We'd like to thank all of our employees for their great work and tremendous accomplishments this year, and we look forward to working together to continue growing and improving our operations in 2016. This concludes our prepared remarks. We will now host questions.

Sorry. This is Collin filling in for Bob. Thank you for taking my questions. So prices were up by about 3.4% on a consolidated basis. I was wondering if you could give us a little bit more color on what prices were doing on a brand basis and how much of a headwind the change in the product mix was.

In general, across the board, community-by-community is where we're seeing pricing. On a brand basis, mix is a big factor. On our Express brand, as we've been rolling it out into more markets, the more recent markets we've rolled it into are at a higher ASP. So we have seen an increase in our average ASP in Express, as we've expected to see. On the Emerald brand, again, as we're rolling that out across the country, we've seen that have a fair amount of fluctuations from quarter to quarter. But in the current quarter we're in the mid-$500,000 range.

Collin, this will be in the supplemental information we'll put out after the call, but our closing ASP for the quarter on a sequential basis was up across all brands. It was mix that brought the overall down sequentially slightly. And on a year-over-year basis, we were essentially flat in Emerald but up substantially in Express and Horton.

Great. Thank you. And then as you look forward into 2016, how do you see your portfolio on a brand-by-brand basis kind of as a percentage of total deliveries? And what are your expectations on gross margin for this?

We continue to expect both Express and Emerald to grow as a percentage of the business, as they did this year. As we roll them out into further markets, we would expect by the end of fiscal 2016 that we would have Express into most of the markets that we expect it to be in. And in terms of percentage of revenues, certainly could be nearing the 20% level. And Emerald, in terms of percentage of revenues, would start moving up further into the higher single digits.

Great. Thank you very much.

Hey, guys. Strong quarter. Good job in the quarter.

Thank you.

Yeah. Had two questions for you. First of all, it seemed like your cash flow guide was a little low and your cash balance at the end of the year was a little high. By my reckoning, even if your land spend were to increase 25% – I think you said more than 20% is what you thought – your cash flow could still be pretty similar to what we saw in 2015, if my numbers are right. And I think you got about $550 million or something that we're looking for in debt paydown next year, which is going to leave your cash balance pretty elevated. So I was curious, first of all, if you could talk about why your cash guidance is sort of so much lower than what you did this year. And then, secondly, sort of where you feel comfortable with your cash balance residing?

As we look forward – Steve, this is Bill – a lot of the level in which we will reinvest or the level in which we will invest depends on what we see in the sales environment in the spring this next year. So at this point, as we look forward, we feel comfortable that a $300 million to $500 million range will occur even with a reinvestment level north of 20%.

Yeah.

It's possible we might invest even higher than that if we see sufficient strength in the market or the need. But if we stay at around that 20% level, yes, your calculations are in the ballpark that we could be at the higher end or maybe even above that range on cash flow. But we're certainly in a flexible position, and we'll adjust our investment decisions based on what we see in the market as we get into calendar 2016.

Okay. Great. So my next question relates to M&A. We did an analysis, and it looked like over the last 15 years, that Horton's pretty much – you guys are the only ones that have really grown your business outside of acquisitions or at least grown your market share outside of acquisitions. And, at the same time, there's a pretty wide gap in price-to-book valuations among the public builders. And my question is, what's your opinion on the M&A opportunity that you see over the next year? And is there any reason you might prefer privates or publics when you look at the opportunity set?

Steve, this is David. We're continuing to look at opportunities. We're in the position we're in because we've been disciplined about it and trying to find the right cultural fit when we do combine. If you look at our history of mergers and acquisitions, the culture and fit has typically been more important than the assets that we're acquiring. So we're going to be disciplined and opportunistic. But, yes, we are looking continuously and believe that where we find a good fit at the right price, it's an additive to our company.

Got it. Thanks very much, guys. Good job.

Thank you.

Thank you, Steve.

Thank you, Steve.

Thank you, and congratulations on a nice quarter. Just to follow on Steve's question a little bit. You will have a lot of cash sitting on the balance sheet, Bill, even in your scenario and paying down the debt. So if you could talk a little bit about, with that excess cash, what you would like to do with it, and a bit more generally your capital allocation for 2016. You gave the land spend guidance. But where is it happening, and what percentage of these communities are 24 months or less? Is that still a big focus for you? And just where you expect that community growth to be next year?

Sure. Stephen, this is Bill. I'll start at the back end. We are still working with our 24-month cash return as our base underwriting guidelines. The vast majority of the land we're buying will fit within that. We're certainly in a flexible position, and occasionally strategically we might go outside that box. But the vast majority of the time we're staying within 24-month cash return. In terms of community count growth, we've stated we expect it to be relatively flat to slightly up. Low to mid-single digits would be probably the top end of the growth expectations. Really, we're looking across our business. We've seen significant increases in the Southeast over the last couple of years, but we're seeing a few markets perhaps starting to show some signs of life further north, and in the Southwest as well, that perhaps we could – it may be time to show some growth there. So really looking across the breadth of our business. As we look at our cash flow expectations for the year, of course, we did announce an increase in our dividend, a 28% increase in that, so that's already out there as far as the use of our cash. We are going to remain flexible and opportunistic around investments in the business. Great position to be in with $1.3 billion, $1.4 billion of cash today heading into the spring. And then we want to see what the spring demand is and decide our level of reinvestment in the business there, but still feel comfortable with that and still be able to generate $300 million to $500 million of free cash flow next year. The debt maturities of $543 million are certainly a priority for us. Again, flexible position. We certainly have the cash to be able to pay it all in cash if we were to so choose. Our current expectations is that we would refinance a portion of that and pay off a portion of that in cash, so that our net balance would decrease a bit. Past that, really, our mantra is to remain opportunistic while remaining disciplined. And all things could be on the table, but we want to keep our options open.

Okay. Great. So my next question relates to M&A. We did an analysis, and it looked like over the last 15 years, that Horton's pretty much – you guys are the only ones that have really grown your business outside of acquisitions or at least grown your market share outside of acquisitions. And, at the same time, there's a pretty wide gap in price-to-book valuations among the public builders. And my question is, what's your opinion on the M&A opportunity that you see over the next year? And is there any reason you might prefer privates or publics when you look at the opportunity set?

Steve, this is David. We're continuing to look at opportunities. We're in the position we're in because we've been disciplined about it and trying to find the right cultural fit when we do combine. If you look at our history of mergers and acquisitions, the culture and fit has typically been more important than the assets that we're acquiring. So we're going to be disciplined and opportunistic. But, yes, we are looking continuously and believe that where we find a good fit at the right price, it's an additive to our company.

Got it. Thanks very much, guys. Good job.

Thank you.

Thank you, Steve.

Thank you, Steve.

Thank you, and congratulations on a nice quarter. Just to follow on Steve's question a little bit. You will have a lot of cash sitting on the balance sheet, Bill, even in your scenario and paying down the debt. So if you could talk a little bit about, with that excess cash, what you would like to do with it, and a bit more generally your capital allocation for 2016. You gave the land spend guidance. But where is it happening, and what percentage of these communities are 24 months or less? Is that still a big focus for you? And just where you expect that community growth to be next year?

Sure. Stephen, this is Bill. I'll start at the back end. We are still working with our 24-month cash return as our base underwriting guidelines. The vast majority of the land we're buying will fit within that. We're certainly in a flexible position, and occasionally strategically we might go outside that box. But the vast majority of the time we're staying within 24-month cash return. In terms of community count growth, we've stated we expect it to be relatively flat to slightly up. Low to mid-single digits would be probably the top end of the growth expectations. Really, we're looking across our business. We've seen significant increases in the Southeast over the last couple of years, but we're seeing a few markets perhaps starting to show some signs of life further north, and in the Southwest as well, that perhaps we could – it may be time to show some growth there. So really looking across the breadth of our business. As we look at our cash flow expectations for the year, of course, we did announce an increase in our dividend, a 28% increase in that, so that's already out there as far as the use of our cash. We are going to remain flexible and opportunistic around investments in the business. Great position to be in with $1.3 billion, $1.4 billion of cash today heading into the spring. And then we want to see what the spring demand is and decide our level of reinvestment in the business there, but still feel comfortable with that and still be able to generate $300 million to $500 million of free cash flow next year. The debt maturities of $543 million are certainly a priority for us. Again, flexible position. We certainly have the cash to be able to pay it all in cash if we were to so choose. Our current expectations is that we would refinance a portion of that and pay off a portion of that in cash, so that our net balance would decrease a bit. Past that, really, our mantra is to remain opportunistic while remaining disciplined. And all things could be on the table, but we want to keep our options open.

Okay. Great. So my next question relates to M&A. We did an analysis, and it looked like over the last 15 years, that Horton's pretty much – you guys are the only ones that have really grown your business outside of acquisitions or at least grown your market share outside of acquisitions. And, at the same time, there's a pretty wide gap in price-to-book valuations among the public builders. And my question is, what's your opinion on the M&A opportunity that you see over the next year? And is there any reason you might prefer privates or publics when you look at the opportunity set?

Steve, this is David. We're continuing to look at opportunities. We're in the position we're in because we've been disciplined about it and trying to find the right cultural fit when we do combine. If you look at our history of mergers and acquisitions, the culture and fit has typically been more important than the assets that we're acquiring. So we're going to be disciplined and opportunistic. But, yes, we are looking continuously and believe that where we find a good fit at the right price, it's an additive to our company.

Got it. Thanks very much, guys. Good job.

Thank you.

Thank you, Steve.

Thank you, Steve.

Thank you, and congratulations on a nice quarter. Just to follow on Steve's question a little bit. You will have a lot of cash sitting on the balance sheet, Bill, even in your scenario and paying down the debt. So if you could talk a little bit about, with that excess cash, what you would like to do with it, and a bit more generally your capital allocation for 2016. You gave the land spend guidance. But where is it happening, and what percentage of these communities are 24 months or less? Is that still a big focus for you? And just where you expect that community growth to be next year?

Sure. Stephen, this is Bill. I'll start at the back end. We are still working with our 24-month cash return as our base underwriting guidelines. The vast majority of the land we're buying will fit within that. We're certainly in a flexible position, and occasionally strategically we might go outside that box. But the vast majority of the time we're staying within 24-month cash return. In terms of community count growth, we've stated we expect it to be relatively flat to slightly up. Low to mid-single digits would be probably the top end of the growth expectations. Really, we're looking across our business. We've seen significant increases in the Southeast over the last couple of years, but we're seeing a few markets perhaps starting to show some signs of life further north, and in the Southwest as well, that perhaps we could – it may be time to show some growth there. So really looking across the breadth of our business. As we look at our cash flow expectations for the year, of course, we did announce an increase in our dividend, a 28% increase in that, so that's already out there as far as the use of our cash. We are going to remain flexible and opportunistic around investments in the business. Great position to be in with $1.3 billion, $1.4 billion of cash today heading into the spring. And then we want to see what the spring demand is and decide our level of reinvestment in the business there, but still feel comfortable with that and still be able to generate $300 million to $500 million of free cash flow next year. The debt maturities of $543 million are certainly a priority for us. Again, flexible position. We certainly have the cash to be able to pay it all in cash if we were to so choose. Our current expectations is that we would refinance a portion of that and pay off a portion of that in cash, so that our net balance would decrease a bit. Past that, really, our mantra is to remain opportunistic while remaining disciplined. And all things could be on the table, but we want to keep our options open.

Okay. Great.

In closing, 2015 was our third consecutive year to generate 30% or greater increases in both home sales revenues and homebuilding pre-tax income. While significantly growing the business, we also generated $700 million of positive cash flow from operations. And our annual return on inventory improved 170 basis points to 12.8%. This is a result of the strength of our people and our operating platform, and we are excited about the opportunities ahead. We remain focused on growing both our revenue and pre-tax profits at a double-digit annual pace while continuing to generate positive cash flows and improved returns. We are well-positioned to do so with our solid balance sheet; industry-leading market share; broad geographic footprint; diversified product offerings across our D.R. Horton, Emerald, and Express brands; attractive finished lot and land position; and, most importantly, our outstanding team across the country. We'd like to thank all of our employees for their great work and tremendous accomplishments this year, and we look forward to working together to continue growing and improving our operations in 2016. This concludes our prepared remarks. We will now host questions.

Sorry. This is Collin filling in for Bob. Thank you for taking my questions. So prices were up by about 3.4% on a consolidated basis. I was wondering if you could give us a little bit more color on what prices were doing on a brand basis and how much of a headwind the change in the product mix was.

In general, across the board, community-by-community is where we're seeing pricing. On a brand basis, mix is a big factor. On our Express brand, as we've been rolling it out into more markets, the more recent markets we've rolled it into are at a higher ASP. So we have seen an increase in our average ASP in Express, as we've expected to see. On the Emerald brand, again, as we're rolling that out across the country, we've seen that have a fair amount of fluctuations from quarter to quarter. But in the current quarter we're in the mid-$500,000 range.

Collin, this will be in the supplemental information we'll put out after the call, but our closing ASP for the quarter on a sequential basis was up across all brands. It was mix that brought the overall down sequentially slightly. And on a year-over-year basis, we were essentially flat in Emerald but up substantially in Express and Horton.

Great. Thank you. And then as you look forward into 2016, how do you see your portfolio on a brand-by-brand basis kind of as a percentage of total deliveries? And what are your expectations on gross margin for this?

We continue to expect both Express and Emerald to grow as a percentage of the business, as they did this year. As we roll them out into further markets, we would expect by the end of fiscal 2016 that we would have Express into most of the markets that we expect it to be in. And in terms of percentage of revenues, certainly could be nearing the 20% level. And Emerald, in terms of percentage of revenues, would start moving up further into the higher single digits.

Great. Thank you very much.

Hey, guys. Strong quarter. Good job in the quarter.

Thank you.

Yeah. Had two questions for you. First of all, it seemed like your cash flow guide was a little low and your cash balance at the end of the year was a little high. By my reckoning, even if your land spend were to increase 25% – I think you said more than 20% is what you thought – your cash flow could still be pretty similar to what we saw in 2015, if my numbers are right. And I think you got about $550 million or something that we're looking for in debt paydown next year, which is going to leave your cash balance pretty elevated. So I was curious, first of all, if you could talk about why your cash guidance is sort of so much lower than what you did this year. And then, secondly, sort of where you feel comfortable with your cash balance residing?

As we look forward – Steve, this is Bill – a lot of the level in which we will reinvest or the level in which we will invest depends on what we see in the sales environment in the spring this next year. So at this point, as we look forward, we feel comfortable that a $300 million to $500 million range will occur even with a reinvestment level north of 20%.

Yeah.

It's possible we might invest even higher than that if we see sufficient strength in the market or the need. But if we stay at around that 20% level, yes, your calculations are in the ballpark that we could be at the higher end or maybe even above that range on cash flow. But we're certainly in a flexible position, and we'll adjust our investment decisions based on what we see in the market as we get into calendar 2016.

Okay. Great. So my next question relates to M&A. We did an analysis, and it looked like over the last 15 years, that Horton's pretty much – you guys are the only ones that have really grown your business outside of acquisitions or at least grown your market share outside of acquisitions. And, at the same time, there's a pretty wide gap in price-to-book valuations among the public builders. And my question is, what's your opinion on the M&A opportunity that you see over the next year? And is there any reason you might prefer privates or publics when you look at the opportunity set?

Steve, this is David. We're continuing to look at opportunities. We're in the position we're in because we've been disciplined about it and trying to find the right cultural fit when we do combine. If you look at our history of mergers and acquisitions, the culture and fit has typically been more important than the assets that we're acquiring. So we're going to be disciplined and opportunistic. But, yes, we are looking continuously and believe that where we find a good fit at the right price, it's an additive to our company.

Got it. Thanks very much, guys. Good job.

Thank you.

Thank you, Steve.

Thank you, Steve.

Thank you, and congratulations on a nice quarter. Just to follow on Steve's question a little bit. You will have a lot of cash sitting on the balance sheet, Bill, even in your scenario and paying down the debt. So if you could talk a little bit about, with that excess cash, what you would like to do with it, and a bit more generally your capital allocation for 2016. You gave the land spend guidance. But where is it happening, and what percentage of these communities are 24 months or less? Is that still a big focus for you? And just where you expect that community growth to be next year?

Sure. Stephen, this is Bill. I'll start at the back end. We are still working with our 24-month cash return as our base underwriting guidelines. The vast majority of the land we're buying will fit within that. We're certainly in a flexible position, and occasionally strategically we might go outside that box. But the vast majority of the time we're staying within 24-month cash return. In terms of community count growth, we've stated we expect it to be relatively flat to slightly up. Low to mid-single digits would be probably the top end of the growth expectations. Really, we're looking across our business. We've seen significant increases in the Southeast over the last couple of years, but we're seeing a few markets perhaps starting to show some signs of life further north, and in the Southwest as well, that perhaps we could – it may be time to show some growth there. So really looking across the breadth of our business. As we look at our cash flow expectations for the year, of course, we did announce an increase in our dividend, a 28% increase in that, so that's already out there as far as the use of our cash. We are going to remain flexible and opportunistic around investments in the business. Great position to be in with $1.3 billion, $1.4 billion of cash today heading into the spring. And then we want to see what the spring demand is and decide our level of reinvestment in the business there, but still feel comfortable with that and still be able to generate $300 million to $500 million of free cash flow next year. The debt maturities of $543 million are certainly a priority for us. Again, flexible position. We certainly have the cash to be able to pay it all in cash if we were to so choose. Our current expectations is that we would refinance a portion of that and pay off a portion of that in cash, so that our net balance would decrease a bit. Past that, really, our mantra is to remain opportunistic while remaining disciplined. And all things could be on the table, but we want to keep our options open.

Okay. Great.

In closing, 2015 was our third consecutive year to generate 30% or greater increases in both home sales revenues and homebuilding pre-tax income. While significantly growing the business, we also generated $700 million of positive cash flow from operations. And our annual return on inventory improved 170 basis points to 12.8%. This is a result of the strength of our people and our operating platform, and we are excited about the opportunities ahead. We remain focused on growing both our revenue and pre-tax profits at a double-digit annual pace while continuing to generate positive cash flows and improved returns. We are well-positioned to do so with our solid balance sheet; industry-leading market share; broad geographic footprint; diversified product offerings across our D.R. Horton, Emerald, and Express brands; attractive finished lot and land position; and, most importantly, our outstanding team across the country. We'd like to thank all of our employees for their great work and tremendous accomplishments this year, and we look forward to working together to continue growing and improving our operations in 2016. This concludes our prepared remarks. We will now host questions.

Sorry. This is Collin filling in for Bob. Thank you for taking my questions. So prices were up by about 3.4% on a consolidated basis. I was wondering if you could give us a little bit more color on what prices were doing on a brand basis and how much of a headwind the change in the product mix was.

In general, across the board, community-by-community is where we're seeing pricing. On a brand basis, mix is a big factor. On our Express brand, as we've been rolling it out into more markets, the more recent markets we've rolled it into are at a higher ASP. So we have seen an increase in our average ASP in Express, as we've expected to see. On the Emerald brand, again, as we're rolling that out across the country, we've seen that have a fair amount of fluctuations from quarter to quarter. But in the current quarter we're in the mid-$500,000 range.

Collin, this will be in the supplemental information we'll put out after the call, but our closing ASP for the quarter on a sequential basis was up across all brands. It was mix that brought the overall down sequentially slightly. And on a year-over-year basis, we were essentially flat in Emerald but up substantially in Express and Horton.

Great. Thank you. And then as you look forward into 2016, how do you see your portfolio on a brand-by-brand basis kind of as a percentage of total deliveries? And what are your expectations on gross margin for this?

We continue to expect both Express and Emerald to grow as a percentage of the business, as they did this year. As we roll them out into further markets, we would expect by the end of fiscal 2016 that we would have Express into most of the markets that we expect it to be in. And in terms of percentage of revenues, certainly could be nearing the 20% level. And Emerald, in terms of percentage of revenues, would start moving up further into the higher single digits.

Great. Thank you very much.

Hey, guys. Strong quarter. Good job in the quarter.

Thank you.

Yeah. Had two questions for you. First of all, it seemed like your cash flow guide was a little low and your cash balance at the end of the year was a little high. By my reckoning, even if your land spend were to increase 25% – I think you said more than 20% is what you thought – your cash flow could still be pretty similar to what we saw in 2015, if my numbers are right. And I think you got about $550 million or something that we're looking for in debt paydown next year, which is going to leave your cash balance pretty elevated. So I was curious, first of all, if you could talk about why your cash guidance is sort of so much lower than what you did this year. And then, secondly, sort of where you feel comfortable with your cash balance residing?

As we look forward – Steve, this is Bill – a lot of the level in which we will reinvest or the level in which we will invest depends on what we see in the sales environment in the spring this next year. So at this point, as we look forward, we feel comfortable that a $300 million to $500 million range will occur even with a reinvestment level north of 20%.

Yeah.

It's possible we might invest even higher than that if we see sufficient strength in the market or the need. But if we stay at around that 20% level, yes, your calculations are in the ballpark that we could be at the higher end or maybe even above that range on cash flow. But we're certainly in a flexible position, and we'll adjust our investment decisions based on what we see in the market as we get into calendar 2016.

Okay. Great. So my next question relates to M&A. We did an analysis, and it looked like over the last 15 years, that Horton's pretty much – you guys are the only ones that have really grown your business outside of acquisitions or at least grown your market share outside of acquisitions. And, at the same time, there's a pretty wide gap in price-to-book valuations among the public builders. And my question is, what's your opinion on the M&A opportunity that you see over the next year? And is there any reason you might prefer privates or publics when you look at the opportunity set?

Steve, this is David. We're continuing to look at opportunities. We're in the position we're in because we've been disciplined about it and trying to find the right cultural fit when we do combine. If you look at our history of mergers and acquisitions, the culture and fit has typically been more important than the assets that we're acquiring. So we're going to be disciplined and opportunistic. But, yes, we are looking continuously and believe that where we find a good fit at the right price, it's an additive to our company.

Got it. Thanks very much, guys. Good job.

Thank you.

Thank you, Steve.

Thank you, Steve.

Thank you, and congratulations on a nice quarter. Just to follow on Steve's question a little bit. You will have a lot of cash sitting on the balance sheet, Bill, even in your scenario and paying down the debt. So if you could talk a little bit about, with that excess cash, what you would like to do with it, and a bit more generally your capital allocation for 2016. You gave the land spend guidance. But where is it happening, and what percentage of these communities are 24 months or less? Is that still a big focus for you? And just where you expect that community growth to be next year?

Sure. Stephen, this is Bill. I'll start at the back end. We are still working with our 24-month cash return as our base underwriting guidelines. The vast majority of the land we're buying will fit within that. We're certainly in a flexible position, and occasionally strategically we might go outside that box. But the vast majority of the time we're staying within 24-month cash return. In terms of community count growth, we've stated we expect it to be relatively flat to slightly up. Low to mid-single digits would be probably the top end of the growth expectations. Really, we're looking across our business. We've seen significant increases in the Southeast over the last couple of years, but we're seeing a few markets perhaps starting to show some signs of life further north, and in the Southwest as well, that perhaps we could – it may be time to show some growth there. So really looking across the breadth of our business. As we look at our cash flow expectations for the year, of course, we did announce an increase in our dividend, a 28% increase in that, so that's already out there as far as the use of our cash. We are going to remain flexible and opportunistic around investments in the business. Great position to be in with $1.3 billion, $1.4 billion of cash today heading into the spring. And then we want to see what the spring demand is and decide our level of reinvestment in the business there, but still feel comfortable with that and still be able to generate $300 million to $500 million of free cash flow next year. The debt maturities of $543 million are certainly a priority for us. Again, flexible position. We certainly have the cash to be able to pay it all in cash if we were to so choose. Our current expectations is that we would refinance a portion of that and pay off a portion of that in cash, so that our net balance would decrease a bit. Past that, really, our mantra is to remain opportunistic while remaining disciplined. And all things could be on the table, but we want to keep our options open.

Okay. Great.

In closing, 2015 was our third consecutive year to generate 30% or greater increases in both home sales revenues and homebuilding pre-tax income. While significantly growing the business, we also generated $700 million of positive cash flow from operations. And our annual return on inventory improved 170 basis points to 12.8%. This is a result of the strength of our people and our operating platform, and we are excited about the opportunities ahead. We remain focused on growing both our revenue and pre-tax profits at a double-digit annual pace while continuing to generate positive cash flows and improved returns. We are well-positioned to do so with our solid balance sheet; industry-leading market share; broad geographic footprint; diversified product offerings across our D.R. Horton, Emerald, and Express brands; attractive finished lot and land position; and, most importantly, our outstanding team across the country. We'd like to thank all of our employees for their great work and tremendous accomplishments this year, and we look forward to working together to continue growing and improving our operations in 2016. This concludes our prepared remarks. We will now host questions.