Q2 2025 D. R. Horton Inc Earnings Call
Speaker Change: Good morning and welcome to the second quarter 2025 Earnings Conference call for D.R. Horton, America's Builder. At this time, all participants are in the Sononi Build. A question and an intercession will follow the formal presentation. Thank you very much.
Speaker Change: If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the call over to Jessica Hansen, Senior Vice President of Communications for D.R. Horton.
Thank you Paul and good morning.
Speaker Change: Welcome to recall to discuss our financial results for the second quarter of fiscal 2025.
Speaker Change: Before we get started, today's call includes forward-looking statements as defined by the Private Security's 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.
Speaker Change: 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.
Speaker Change: Additional information about factors that could lead to material changes in performance is contained in D.R. Horton's annual report on Form 10K and its most recent quarterly report on Form 10Q, both of which are filed with the Securities and Exchange Commission.
Speaker Change: This morning's earnings release can be found on our website at investor.dearhorton.com, and we plan to file our 10Q next week. After this call, we will post updated investor and supplementary data presentations to our investor relations site on the presentation section under news and events for your reference.
Paul Romanowski: Now, I will turn the call over to Paul Romanowski, our president and CEO . Thank you, Jessica, and good morning. I am pleased to also be joined on this call by Mike Murray, our Executive Vice President and Chief Operating Officer. Thank you.
Paul Romanowski: and Bill Wheat, our Executive Vice President and Chief Financial Officer.
Paul Romanowski: For the second quarter, the D.R. Horton team delivered solid results, highlighted by earnings of $2.58 per diluted share. Our consolidated pre-tax income was $1.1 billion on $7.7 billion of revenues with a pre-tax profit margin of 13.8%. The D.R. Horton team delivered solid results, highlighted by the D.R. Horton team delivered solid results.
Paul Romanowski: We remain focused on improving capital efficiency to generate substantial operating cash flow and deliver compelling returns to our shareholders.
Paul Romanowski: Our home building pre-tax return on Inventory for the 12 months ended March 31st was 24.3%. Return on equity was 17.4%. And return on assets was 12.2%. [inaudible]
Although home builders are generally thought of as being capital intensive businesses. [inaudible]
Paul Romanowski: Yes, our return on assets ranks in the top 15% of all S&P 500 companies for the past three, five, and ten year periods.
Paul Romanowski: Demonstrating that our discipline returns focused operating model produces sustainable results. Over the past 12 months, we have returned all of the cash we generated to shareholders through repurchases and dividends.
Paul Romanowski: This year's spring selling season started slower than expected, as potential home buyers had been more cautious due to continued affordability constraints and declining consumer confidence.
Paul Romanowski: In the second quarter, our net sales orders and home building revenues decreased 15%
Paul Romanowski: are tenured operators of responding appropriately to market conditions by carefully balancing pace versus price to maximize returns.
resulting in a home sales gross margin of 21.8%
Paul Romanowski: We're necessary. We have increased sales incentives to drive traffic and incremental sales. Our weekly sales in March and to date in April have outpaced our February rate. [inaudible]
Paul Romanowski: Additionally, our cancellation rate remains at the low end of our historical range. Indicating the buyers in today's market are able to qualify financially and are committed to their home purchase despite the volatility and elevated uncertainty of the current economic environment.
Paul Romanowski: We expect our incentive levels to remain elevated and increase further, the extent to which will depend on market conditions and changes in mortgage interest rates.
Paul Romanowski: With 58% of our second quarter closings, also sold in the same quarter, our sales, incentive levels, and gross margin are generally representative of current market conditions.
Paul Romanowski: We will continue to adjust our product offerings, sales incentives, and number of homes in inventory based on the level of demand for new homes in each of our local markets. [inaudible]
Paul Romanowski: We are well positioned, offering our customers an attractive value proposition with quality homes at affordable price points.
Paul Romanowski: Mike, earnings for the second quarter of fiscal 2025 were $2.58 per duty share compared to $3.52 per share in the prior year quarter. Net income for the quarter was $810 million on consolidated revenues of $7.7 million. $10 million.
Paul Romanowski: Our second quarter home sales revenues were $7.2 billion on 19,276 homes closed compared to $8.5 billion on $22,548 homes closed in the prior year quarter. Our second quarter home sales revenues were $7.2 billion on 19,276 homes closed in the prior year quarter.
Paul Romanowski: Our average closing price for the quarter was $372,500, down 1% both sequentially and year over year, Bill.
Paul Romanowski: Our net sales orders for the second quarter, decreased 15% from the prior year to 22,437 homes, and order value, decreased 17% to $8.4 billion.
Paul Romanowski: Our cancellation rate for the quarter was 16 percent, down from 18 percent sequentially and up from 15 percent in the prior year quarter. [inaudible]
Paul Romanowski: Our average number of active selling communities was up 5% sequentially and up 10% year over year.
Paul Romanowski: The average price of net sales orders in the second quarter was $372,500. [inaudible]
Paul Romanowski: which was essentially flat sequentially and down 2% from the prior year quarter. [inaudible]
Jessica.
Paul Romanowski: Our gross profit margin on home sales revenues in the second quarter was 21.8% [inaudible]
Down 90 basis points sequentially from the December quarter.
Paul Romanowski: Due to higher incentive costs and in line with our expectations. On a per-square-foot basis, home sales revenues and stick-and-brit costs were both relatively flat sequentially, while a lot cost increased approximately 3%.
Paul Romanowski: We expect our incentive cost to increase further over the next few months, so our home sales gross margin will likely be lower in the third quarter compared to the second quarter.
Bill Wheat: Our actual incentive levels and home sales gross margin for the second half of the fiscal year will be dependent on the strength of demand during the remainder of the spring and summer in addition to changes in mortgage interest rates and other market conditions. Bill?
Bill Wheat: In the second quarter, our home building SGNA expenses increased by 4% from last year, and home building SGNA expense as a percentage of revenues was 8.9%. Up 170 basis points from the same quarter in the prior year.
Bill Wheat: Our increased SGNA costs are primarily due to the expansion of our operating platform. Our employee count is up 5% from a year ago. Our community count is up 10% and our market count has increased 6% to 126 markets in 36 states. [inaudible]
Bill Wheat: The investments we have made in our team in platform position is to continue producing strong returns, cash flow, and market share gains. Paul, we started 20,000 homes in the March quarter and ended the quarter with 36,900 homes in inventory.
Bill Wheat: For homes we closed in the second quarter, our construction cycle times improved a few days from the first quarter, and approximately three weeks from a year ago. Our improved cycle times position us to turn our housing inventory faster.
Bill Wheat: and we will continue to manage our homes and inventories and starts pace based on market conditions. Mike, our home building lot position at March 31st consisted of approximately 613,000 lots. [inaudible]
Bill Wheat: of which 25% were owned, and 75% were controlled through purchase contracts. [inaudible]
Bill Wheat: We remain focused on our relationships with land developers across the country to allow us to build more homes on lots developed by others, which enhances our capital efficiency, returns and operational flexibility.
Bill Wheat: Of the homes we close this quarter, 64% won a lot developed by either Forstar or a third party, up from 62% in the prior year quarter.
Bill Wheat: Our second quarter home-building investments in lots, land, and development total $2 billion. Of which $1.2 billion was for finished lots, $700 million was for land development, and $100 million was for land acquisition. Paul?
Speaker Change: In the second quarter, our rental operations generated $23 million of pre-tax income on $237 million of revenues from the sale of 519 single-family rental homes and 300 multi-family rental units.
Speaker Change: We continue to operate a merchant build model in which we construct and sell purpose-built rental communities.
Speaker Change: Our rental operations provide synergies to our home building operations by enhancing our purchasing scale and providing opportunities for more efficient utilization of trade labor and absorption of our land and law pipeline. [inaudible]
Speaker Change: During the last several quarters, we have been successful monetizing some of our single family rental communities prior to leasing stabilization, resulting in higher returns on these sales. We remain focused on improving the capital efficiency and returns of our rental operations. [inaudible]
Rental Property Inventory at March 31st was $3.1 billion. $3.2 billion.
which consisted of 813 million dollars of single family rental properties. [inaudible]
Speaker Change: Forsthar's owned and controlled lot position at March 31st was 105,900 lots.
Speaker Change: 64% of four stars owned lots are under contract with or subject to a right of first offer to D.O. Horton. $270 million of our finished lots purchased in the second quarter were from four stars.
Speaker Change: Forster had approximately $790 million of liquidity at quarter end with a net debt-to-capital ratio of 29.8%.
Speaker Change: Our strategic relationship with Forstar is a vital component of our returns focused business model.
Speaker Change: Forester Strong, Separately Capitalized Balance Sheet, Substantial Operating Platform, and Lot Supply position them well to consistently provide essential skills, managed lots to the home building industry, and aggregate significant market share. Mike?
Speaker Change: Financial Services earned $73 million of pre-tax income in the second quarter on $213 million for revenues, resulting in a pre-tax profit margin of 34.3%. During the second quarter, our mortgage company handled the financing for 81% of our home buyers.
Bill Wheat: Barrowers, originating loans at the H.I. mortgage, this quarter had an average price score of $7.23 and an average loan to value ratio of 89% First time home buyers represented 63% of the closings handled by a mortgage company, this quarter Bill
Bill Wheat: Our capital allocation strategy is disciplined and balanced to support an operating platform that produces compelling returns and substantial operating cash flows. [inaudible]
Bill Wheat: We have a strong balance sheet with low leverage and healthy liquidity which provides us with significant financial flexibility to adapt to changing market conditions and opportunities. Thank you very much.
Bill Wheat: During the quarter, Moody's upgraded our credit rating to A3 and we now have an A rating from two of the three credit rating agencies. [inaudible]
Bill Wheat: During the first six months of the year, home building cash provided by operations was $876 million and consolidated cash provided by operations was $211 million.
Bill Wheat: At March 31st, we had $5.8 billion of consolidated liquidity consisting of $2.5 billion of cash and $3.3 billion of available capacity on our credit facilities.
Bill Wheat: In February , we issued $700 million of home building senior notes, due in 2035.
Bill Wheat: Debt at the end of the quarter, total $6.5 billion, with $500 million of home-building senior notes maturing in the next 12 months.
Bill Wheat: Our consolidated leverage in March 31st was 21.1%, and we plan to maintain our leverage around 20% over the long term.
Bill Wheat: At March 31, our stockholder's equity was $24.3 billion, and book value per share was $78.82, up 9% from a year ago.
Bill Wheat: For the trailing 12 months, Ended March 31, our return on equity was 17.4% and our consolidated return on assets was 12.2% [inaudible]
Bill Wheat: During the quarter, we paid cash dividends of 40 cents per share, totaling $126 million, and our board has declared a quarterly dividend at the same level to be paid in May.
Bill Wheat: We repurchased 9.7 million shares of common stock during the court for $1.3 billion. And our fiscal year-to-date stock repurchases were $2.4 billion, which reduced our outstanding share count by 7% from the prior year.
We have increased our near-term capital allocation for Sherry Purchases.
Bill Wheat: and our board recently approved the new Share Repurchase Authorization, totaling $5 billion. $1.
Bill Wheat: Jessica? Working forward to the third quarter, we currently expect to generate consolidated revenues in the range of $8.4 to $8.9 billion and Hums closed by our humbling operations to be in the range of $22,000 to $22,500 Hums.
Bill Wheat: We expect our home sales gross margin for the third quarter to be in the range of 21% to 21.5% and our consolidated pre-tax profit margin to be in the range of 13.3% to 13.8%
Bill Wheat: Our results for the second half of Fiscal 2025 will be largely dependent on the strength of our sales during the remainder of the spring and into the summer.
Bill Wheat: For the full year, we now expect to generate consolidated revenues of approximately $33.3 to $34.8 billion and homes closed by our home building operations to be in the range of $85,000 to $87,000 homes. [inaudible]
Bill Wheat: We still forecast an income tax rate for fiscal 2025 of approximately 24 percent.
based on our fiscal year-to-date share reproaches activity. [inaudible]
Bill Wheat: Strong Financial Position, and expected operating cash flows of greater than $3 billion. We now plan to repurchase approximately $4 billion of our common stock in fiscal 2025, which is more than double the amount we purchased in fiscal 2024.
Bill Wheat: We also continue to expect anal dividend payments of around $500 million. Paul? In closing, our results and position reflect our experienced teams, industry leading market share, broad geographic footprint, and focus on delivering quality homes at affordable price points.
Bill Wheat: All of these are key components of our operating platform that support our ability to generate substantial operating cash flows and return capital to shareholders while continuing to aggregate market share. [inaudible]
Bill Wheat: We acknowledge the significant current volatility and uncertainty in the economy and will continue to adjust to market conditions in a discipline manner in our operations and capital allocation to enhance the long term value of our company by providing compelling returns to our shareholders.
Bill Wheat: Thank you to the entire D.R. Horton family of employees, land developers, trade partners, vendors, and real estate agents for your continued efforts and hard work. This concludes our prepared remarks. We will now host questions.
Thank you. Thank you.
Bill Wheat: Thank you. At this time, we will be conducting a question and answer session. In the interest of time, we ask the participants limit themselves to one question and one follow-up on today's call.
Bill Wheat: If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. [inaudible]
Bill Wheat: For participants using speaker recruitment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we pull for questions.
Speaker Change: And the first question today is coming from Stephen Kim, from Evercore ISI. Stephen, your line of life.
Stephen Kim: Thanks very much guys and congratulations and tough market you guys are really executing well. I wanted to ask a bigger picture question start, you know in the past.
Stephen Kim: The primary metric that the company prioritizes anymore. And this can also combine with your significant sharey purchases.
Stephen Kim: You know, it seems to crystallize some important changes in the company's management approach over the, you know, called last five to ten years.
Stephen Kim: I'm wondering if you'd care to articulate what's behind these changes at the company, particularly with respect to volume. And if there's one metric that investors should focus on for Horton going forward, what would that be?
Yes, Stephen. You know, we have certainly, you know...
Stephen Kim: seeing a market that was below our expectations and have responded accordingly.
Stephen Kim: Balancing, you know, pace and price across all of our communities throughout the...
Stephen Kim: Throughout our footprint and you know remaining focused on providing significant support.
Stephen Kim: operating cash flows, and then as we have with share repurchases, you know, providing returns to our share repurchase and increased dividends. You know, we're going to maintain. You know, we're going to maintain.
Stephen Kim: A focus on a return based business, and continue to balance based on that market. We have certainly reached...
Stephen Kim: A significant scale and it continues to be challenging to put new communities in front of us.
Stephen Kim: and we're going to balance our pace and price to drive returns and consistent operating cash for us. [inaudible]
Speaker Change: So would you say the maybe consistent operating cash flow is the primary metric that we should be focused on? [inaudible]
Stephen Kim: The combination of returns and consistent cash flows, we believe those two are hand in hand.
Stephen Kim: And so we do believe we are well positioned over the long term to continue to sustain our position as the largest builder in the United States and aggregate significant market share. In short term periods, we're going to do what we need to do to maximize returns and that could differ, but we do believe we're positioned over the long term to remain the largest builder. Thank you for your time.
Gotcha.
Stephen Kim: Okay, and then I'm going to turn my attention to S-GNA, you know, another notable difference from the past.
Stephen Kim: is your SG&A rate, which historically that was a real point of pride for the company I recall when I first visited the company. I think folks told me that D.R. wanted them to use paper clips instead of staples, because he couldn't reuse staples.
Stephen Kim: But it's up a lot over the last couple of years and in two cues specifically. So I'm wondering maybe some staplers have found their way into the company. Okay.
Speaker Change: Are we to appreciate your questions, Steve? Obviously, keeping a low cost operating model is still very important. It's still a very important part of our culture. And we're still very focused on being very efficient throughout our operations, including in our SG&A.
Speaker Change: We have made investments over the last two to three years which have expanded our footprint. Our market count has increased significantly just 6% in the last year on what was already the largest footprint in the industry. Our community count is up 10%. We felt like those investments were important to position ourselves to continue to aggregate share over the longer period of time. [inaudible]
Speaker Change: Obviously, for this year, those were in place with an expectation for a bit higher growth rate than the market is giving us right now, but we still feel like those are investments. It's not a change in our focus or a change in our importance and efficiency of SGNA, but at this point in time with where volumes are and we're balancing pace and price, we're not getting the same leverage on SGNA today. But we would expect over time, we would expect our SGNA to be lower than it is today. [inaudible]
Great. Appreciate that. Thanks, guys. Thank you
Speaker Change: Thank you. The next question will be from John Lovallo from UBS. John , your line is live.
Good morning guys, thanks for taking my questions.
Speaker Change: The first one is, you know, the third quarter gross margin of 21 to 21.5 is definitely better than the expectations that we had heard in the market. And I think that that's encouraging. [inaudible]
If we think about the walk sequentially...
Speaker Change: You know, it sounds like stick and brick costs could be fairly flat, land maybe low single digits and the big sort of delta. So, let's go.
Speaker Change: or Unknown Being the Incentives. Is that the right way to think about it and if incentives were actually flat sequentially would you would that hit the higher end of the target? [inaudible]
Speaker Change: I think you're thinking about it exactly right, John , and certainly if, instead of we're flat, we could do towards the higher end of that range. It's just hard to know. Little bit of rate volatility last week just creates some challenges for prediction.
Speaker Change: Yeah, understood. And then if we think about sort of the playbook for tariffs, I mean obviously there's a lot of noise and uncertainty here. Curious what you're hearing from your suppliers in terms of, you know, potential incremental price increases. And maybe more importantly, how you guys feel that you stack up in these negotiations and your ability to sort of push back, you know, some of that pressure throughout the value chain. Yeah.
Speaker Change: John , there's so much noise around tariffs today and it's changing day to day, sometimes hour to hour, hard to figure out exactly where that lands but over the last several years our suppliers have done a good job of having to respond to supply chain challenges.
Speaker Change: and feel like we're in a good position to do that. Our suppliers are in a good position to do that. We do feel that our strength and size and scale across our markets. [inaudible] and scale across our markets and scale across
Speaker Change: Will put us in a good position to hold those costs and see the lower end of any impact from tariffs wherever they land. But feel very good about our supply chain today and about our labor force today. And we'll just take whatever comes out of the tariffs as it comes at us once it settles down. And we'll just take whatever comes at us once it settles down. And we'll just take whatever comes at us once it settles down.
Yeah, makes a lot of sense. Appreciate it.
Speaker Change: The next question will be from Alan Ratner from Zelman & Associates. Alan, your line is live.
Alan Ratner: Hey guys, good morning. Thanks for all the detail so far.
Alan Ratner: The question just about the start pace, your spec count, your spec count from looking at this correctly is at the lowest levels we've seen in about almost four years, and your starts are down about 15% year over year. So I know a lot of people have been concerned about rising spec counts across the industry. You're clearly moving in the opposite direction, which I'm sure is supporting the gross margin. [inaudible]
Alan Ratner: I guess my question is as you start to think about 26, and I know it's early for that, but-
Alan Ratner: Presumably growth is still in the company's target, or you'd like to grow soon in the market, gives you a favorable backdrop. So, should we expect starts to ramp here over the next quarter to position Horton for growth in 26 or...
Alan Ratner: Should we think about any potential changes to the sales strategy? I know you've talked about potentially getting back into BTO at some point. Just kind of curious to think about how low that that spec counts can go while still positioning your company for growth next year. [inaudible]
Speaker Change: Yeah, and our starts are certainly lower than they have been, but our cycle times are also at their historical efficiency. And so we don't have to carry as many homes.
Speaker Change: in Inventory, to be able to respond to demand in the market.
Speaker Change: As it flexes up or down, we can respond in kind with our star space. We'll see what we've done. We'll see what we've done.
Speaker Change: We are in position and would expect that our starts will accelerate into the third quarter and based on the remainder of the spring and summer selling season that continue into the fourth and we feel good about our position with our existing.
Speaker Change: Speck Inventory, we watch very closely our completed Speck Inventory. We've reduced that by 2000 units just in the last quarter and that allows us to turn our inventory more efficiently.
Speaker Change: which ties into, again, maintaining strong operating cash flow. We feel good about our ability to start homes and respond to the market and put us in a position which we have, you know, always continue to stay focused on growth. [inaudible]
Speaker Change: And we feel like we're in a good position to achieve our current guide, and the market will tell us how to respond from there.
Great, I appreciate the detail there.
Second, just in terms of as we...
Speaker Change: As we think about, you know, the tariff environment, and then I know you mentioned the kind of weight and sea, but I'm just curious within the gross margin guide. You know, we've started to see some price increase announcements coming from suppliers, whether there's any contemplation of because you increase it there because you mentioned your stickier cost of it in pretty flat quarter or quarter. [inaudible]
Speaker Change: Yeah, I don't think we're going to see any impact of that come through until we get 26 closings raised upon. Anything we see, and we haven't seen anything substantial coming across in the way of price increases today. Again, it's early days on understanding where things will fall out with the impact of the tariffs, but from what we've seen in the conversations we've had with our suppliers, we're not expecting material changes at this point. [inaudible]
Okay, thanks a lot.
Speaker Change: The next question will be from Carl Reichardt from BTIG, Carl Earline's Life. [inaudible]
Karl Reichart: Thanks more than everybody. I wanted to ask about, sorry, if we slice and dice the orders, this particular quarter, are you seeing a better performance from A, the markets that you've gone into more recently where you might have fewer public peers, and B, while you're perceived to be, you know, all entry level builder, we know you've got a number of communities that are, that are sort of more, first move up or even higher in the matter differentiated. Can you talk about a difference in performance among the more entry level? Thank you very much.
communities versus others, let's say.
Karl Reichart: So I think we've seen with 63% of our buyers this quarter at the mortgage company being first-time home buyers, we're still seeing strong demand.
Karl Reichart: for the first time home buyer. The affordability is a pressure point for that buyer. There's no doubt about it, and we are seeing, you know, frankly pretty good demand, or you did through the quarter of that move up buyer, or second move up, and we're not heavily positioned. Thank you very much.
Karl Reichart: For that particular biotype, but we do have a fair number of flags, just an absolute terms.
Karl Reichart: That have done very well. And in terms of markets that are performing well, it's those markets that you can see that are more supply constrained.
Karl Reichart: Both from new and existing homes where there have been more significant restrictions on development of new communities. [inaudible]
Karl Reichart: Those markets are much more rationed or allocated to the supply that comes into the market and demand is still very strong in those markets.
Stephen Kim: Thanks, Mike. And we've talked about changes in price and balancing pace in price with incentives. And maybe it's two sides of the same coin. But are your operators starting to focus a little bit more on effectively price cuts as opposed to incentives related to interest rates? Are you starting to see a move in that direction? And if so, are you seeing some traction with that? Thanks.
Stephen Kim: Not really in any significant manner, the focus still has been on rates and rate buy downs and keeping consistency of that. If we see a little weakness in a market or buy community, we may adjust.
Stephen Kim: Further down, but still more advantageous to the buyer and the cost is less to you know increase the rate by down then to cut the price. [inaudible] I'm sorry, I'm sorry, I'm sorry
You know, our price is held relatively stable.
Stephen Kim: Certainly we have communities if we aren't hitting with the incentives we have in place and we need to cut the price to drive activity and increase traffic and sales. [inaudible]
Stephen Kim: Will do that, but that's a community by community position and our operators are doing a great job in the field of managing inside of their own submarkets and across there. Thank you.
Stephen Kim: their division platforms to drive what they need to at a community level.
Stephen Kim: To Paul's point, from a year ago, our number of buyers utilizing a rate by down on a percentage basis is up, and so when we talk about higher incentive costs, it is just more buyers taking advantage of that rate by down. Which is reflected in our financials as a reduction in the sales price of Alan.
Yeah. Okay. Great. Thanks a lot. Appreciate it, guys. Thanks a lot.
Speaker Change: Thank you, the next question will be from Sam Reid from Wells Fargo. Sam, your line is live.
Sam Reid: Awesome, thanks so much. I'm going to touch on 2026 again here and obviously understand you're not providing guidance.
Speaker Change: But at what point in the current year would you start to assess your community count for the following year? [inaudible]
Speaker Change: I guess, you know, just kind of saying it differently, you know, if demand were to remain soft and Q3 and Q4, you know, would you be biased toward holding community counts, flat in 26? Thanks.
Speaker Change: Or is there a scenario where you potentially shrink community count? And then how much flex is there in your operating plans to make downward adjustments, if necessary?
Speaker Change: Yeah, so Sam, that's like everything we talk about, community by community and so it's going to be dependent on salesplaces in local markets.
Speaker Change: and where we're closing out of communities and it makes sense to open the next market. Those plans are happening years out in terms of our lot position. You've heard us talk a lot about how it's not getting any easier to finish lots on the ground. You've heard us talk a lot about how it's getting easier to finish on the ground.
Speaker Change: So to accelerate community starts is much harder than to slow them down. So in terms of what we actually ultimately grow or not grow community count wise in fiscal 26, it'll be a function of local market conditions and the sales face that we're seeing in each of our markets.
Thank you.
Speaker Change: That's helpful, Jessica. And then wanted to touch on the geographic composition, potentially, of where you're taking delivery expectations and start slower. Are you making sharper cuts to areas like Florida and Texas, just known pressure points?
Speaker Change: Or would you characterize some of your reduction in delivery guide to perhaps more broad-based cuts? Just would love some additional context there.
Speaker Change: I think you look at our concentration in Texas and through Florida and certainly when those markets are a little softer, it's going to cause us to have fewer starts in those markets in response to market conditions. Thank you very much.
Speaker Change: As Bill had mentioned earlier, we have expanded our geographic footprint and have some newer markets that are seeing
Speaker Change: Good, stable activity, without much supply, and we're expecting some of those markets to grow potentially beyond our expectations, so it really is a balance, but it is market to market and community, community across
Speaker Change: Thank you for watching. If you liked this video, please subscribe. Also, check out my other videos.
They call Pettinari.
Speaker Change: Thank you. The next question will be from Michael Rehaut from J.P. Morgan. Michael, your line is live.
Michael Reholt: I wanted to start off just trying to understand the balance, and obviously as...
Michael Reholt: you know, you say it's community by community, but trying to understand, you know, where you are from an incentive standpoint versus the rest of the market.
Michael Reholt: You know, looks like your gross margins are holding up relatively well. And I was curious, you know, when you think about incentives as a percent of sales, where you are today versus...
Michael Reholt: You know, three months ago and maybe even versus a year ago? No.
and more specifically over the last few months. [inaudible]
Michael Reholt: How would you say your incentives are holding relative to the rest of the market because? [inaudible]
Michael Reholt: You know, it would appear maybe on a first glance that...
Perhaps you're holding price a little bit more.
Michael Reholt: and allowing volumes to slide. So I'd love to hear your thoughts around those.
Michael Reholt: Around that metric and again kind of comparing the incentives for yourself as well as the market. Thank you very much for your time.
Michael Reholt: You know, we compete every day in each of our markets.
Michael Reholt: and watch closely what's going on across all of our competitors.
You know, and when you get down to a...
Michael Reholt: Market and sub-market level, you know, we have different competitors in each of those and so, you know, that's why we rely heavily on our local operators to measure their market, respond and react on a daily basis to drive the returns that we're looking for in each of our communities.
Michael Reholt: So I think we compete favorably, and we respond in kind to what we're saying, and although we've seen our sales.
Michael Reholt: Revenue number per unit, remain relatively flat. Our size of home has reduced. And so that, you know, changes the inputs. I think that's some of where you've seen some of the strength in our margin is a response to the market with a house that meets the buyer with what they can afford on market purposes.
Thank you. Bye.
Speaker Change: So just kind of parsed that out a little bit and appreciate the response that I know is obviously hard to do market by market but would you say overall your incentive levels are holding relative to the market or maybe holding up a little stronger in other words holding price a little bit more than the average competitor? Yeah.
Speaker Change: We can, you know, encourage and guide them to recognize the fact that in a given some market where you may have a very deep lock position. That's...
Speaker Change: Easily replaceable, then probably more volume makes sense there. And where you have one where the lots are scarce or harder to get on the ground, it's going to be more of a price thing and that's going to maximize. [inaudible] I'm sorry, I'm sorry, I'm sorry
Speaker Change: The overall returns produced from Portfolio and it's every day we are out there seeking to be competitive in the marketplace.
Speaker Change: and be sure we're getting attention from the buying community on the value we're providing. And then have the ability, once we get somebody in the community to sit down and discover what they need in their housing, that...
Speaker Change: Housing Options, and meet that knee with the pain that they can afford, and so whether that's a combination of...
You know, very close-in cost incentives or rate buy downs. It's-
Speaker Change: It's working with that individual buyer to understand what it takes to get them to commit to the transaction. [inaudible]
Speaker Change: Mike, it's also hard for us to say, because Builders Zone all disclose every metric the same way from an incentive perspective, but I do think we feel that we have a very strong competitive advantage with very strong financial services. [inaudible]
Speaker Change: Hartner, and a high capture rate that works very closely with our builder to make sure we're managing our incentive as tightly as we can and capture as much by our traffic out there as possible.
Thank you.
Appreciate that.
Speaker Change: and thanks to the additional caller. I guess, you know, second question, more just a quick one on lumber, you know, with all the tariff noise. Thank you very much.
and, you know, concerns with, you know, [inaudible]
Speaker Change: different types of tariffs that would hit Canada. I was wondering if you could kind of just review your exposure to Canadian softwood lumber. [inaudible]
Speaker Change: number one, what, you know, percent of your homes, you know, are built with that, and number two, historically, if you have seen, you know, movements in price on Canadian lumber, does that typically flow through
Speaker Change: to price changes more broadly across the US or in certain regions and what would that look like? [inaudible]
Speaker Change: Yeah, Michael overall, you know, we've seen lumber holding pretty steady, and about 20% of the lumber that we use in our homes is through Canada. You know, should we see tariffs, you know, accelerator hold up at a higher level, we'll look to adjust that. [inaudible]
Speaker Change: But again, I think with where we are today, you won't see those lumber prices come through really towards the end of this fiscal year and end to 26.
Great. Thanks so much.
Speaker Change: Thank you. The next question is coming from Eric Bosshard from Cleveland Research. Eric, your line is live.
Speaker Change: Thanks, two things if I could. First of all, I'm in the event that tariffs do manifest themselves in inflation.
Speaker Change: How do you manage that? I know it sounds like that's not an issue in 25, it might be in 26. Any event that the supply chain can't manage that on their own and they have to raise his price. How do you manage that or adjust for that or digest that?
Speaker Change: I think that's a combination of things, right? The input of the items that will be covered by a tariff are only part of our cost input. We have labor, we have our vendor partners and labor partners that look at their level of profit. I think we're all going to have to come to the table and adjust.
Speaker Change: to deliver a house that the market finds compelling and kind of for. And I know that's not a direct answer, but I don't think there is one other than we're just going to have to see how this plays out and work with our supply partners and vendors to figure it out together.
Speaker Change: I guess there's, you can raise price, you can take gross margin or you can build a lower cost house to offset it. Is there an initial mindset of this is the path to choose in this market?
Speaker Change: I think it's all of the above at a community level that we'll have to make those decisions. And tariffs are not, we do expect to be able to continue to leverage our relationships in our scale to navigate the cost environment better than smaller builders.
Speaker Change: Okay, fair point. And then secondly, you certainly have a great partner with Forstar. I'm curious for Forstar and other relationships you have like that.
Speaker Change: When you end up starting 20% less homes, when you end up taking less land, does this create an opportunity for you to get concessions from them, or price support from them?
Thank you.
Speaker Change: It's the same time that this also creates strain on those players who have bought land expecting to deliver and when the timing changes, does that have a meaningful impact on those businesses. [inaudible]
Thank you.
Speaker Change: We communicate pretty early on with our development partners about what we're seeing in the marketplace and they're very aware of what's happening in their communities as well. [inaudible]
Speaker Change: and getting to meet the market on a just-in-time basis. I mean, it's never a perfect thing, but you're seeking it. But there are times when we will work with them to restructure the takedowns.
Speaker Change: of a given community to potentially slow a lot of takes and work through, you know, maybe going a little faster in one deal that's running faster and going a little slower in another deal. Let that really work with them on. It's a lot of puts and takes.
Speaker Change: You know, in the context of a long-term relationship that folks who work with are very seasoned, they're not new to this business and they understand the business goes up and down and they're prepared for those days like we are. Our vetting process are our developers.
Gerda, thank you
Speaker Change: Thank you, the next question will be from Matthew Bouley, from Barclays. Matthew, your line is life.
Matthew Bowie: Good morning, everyone. Thank you for taking the questions. So just I guess addressing the elephant in the room around overall policy uncertainty and consumer confidence. I guess what are you seeing from home buyers from a traffic perspective over these past few weeks and maybe even into April as we got that tariff news, anything changing around conversions of that traffic or what you need to do to incentivize conversions?
Thank you.
Matthew Bowie: We've still seen pretty good traffic. You know, we've had to incent a little more to get them off the fence and, you know, into contract and working towards their home ownership. Yep.
Matthew Bowie: and hence the guide on our margins, but you know we have...
Matthew Bowie: Have seen March and in April , sales pace better than what we saw in February , and traffic is still pretty good, but there is certainly uncertainty, and people watch that. I think when you look at our...
Matthew Bowie: maybe a little less impacted with the markets because they just don't have the portfolio to worry about. They're more focused on getting into their first home. And it ties really to their comfort in their job and their income on a go forward basis than it does the market for that buyer demographic.
Matthew Bowie: Got it. Okay. That's helpful. And then maybe zooming into the delivery outlook for the second half. Thank you very much.
Speaker Change: I think you're implying something like, you know, 48,000 homes over the entire...
Speaker Change: Second half, I think you've got about 37,000 homes in inventory right now.
Speaker Change: And so that ratio is maybe a little bit higher than what we've historically seen with D.R. Horton. So I think you made a comment earlier, and correct me if I'm wrong about starts accelerating going forward. So just wanted to kind of double click on that and get a sense on what you're assuming. [inaudible] it's a little bit higher than what we've seen with D.R. Horton.
Speaker Change: around the ability to kind of hit that new delivery guide. Thank you.
Speaker Change: It's two things. Some more recent uptick we've seen in the sales space is given us more competence for starts.
Speaker Change: and so we'll be increasing our starts pace over the March quarter.
Speaker Change: Combined with the fact that we've gotten a much better control of our construction build times, and so we've been able to compress the timeframe between start and a home ready for delivery to a customer. [inaudible]
Speaker Change: which allows us to be more nimble in responding to demand in a given community. And so that's giving us, you know, the confidence to run with a lower level of specumentary, of home inventory, then we historically have, so we'll be able to deliver numbers in a subsequent portal.
All right, thanks guys. Good luck.
Thank you.
Speaker Change: Thank you. The next question will be from Rafe Jadrosich from Bank of America. Rafe, your line of life. Rafe, your line of life. Rafe, your line of life.
Speaker Change: Hi, good morning. Thanks for taking my questions. Just on the land cost, you said it was up 3% quarter of a quarter. Can you just talk about what the year over year was? [inaudible]
Speaker Change: and then you've pulled back on starts here and the markets a little bit softer. Have you seen any relief there on land that is being contracted today and when would that potentially, if so, like when would that flow through your cost of goods?
Speaker Change: The landing lot costs, they were up 3%, sequentially 10% year over a year. [inaudible]
Speaker Change: And as we look forward, we don't expect land costs to pull back. We do expect further inflation there. We have not seen any significant change in land cost or land prices. So we've said many times it's still very difficult to bring communities online. Still not an excess number of things. Lots in the market. So we have not seen a big adjustment there. But to the extent it's far as timing from the time we buy a lot, typically we're going to see that rolling through our cost of goods in the next two to three quarters. Thank you very much.
with our construction cycle times and our inventory turns.
Speaker Change: Okay, that's helpful. And then on the SG&A, you made a comment to an earlier question that you'd expected lower as a percent of sales longer term. Is that just an improvement on delivery growth that will get you leverage? Or is that like if the, you know, the market slow remains soft, you would reduce spending. And if it is about like reducing spending, like when would you start to make that that adjustment? [inaudible]
Speaker Change: He's going to correct itself in the near term, and they make adjustments on all of those factors in their business.
Thank you very much. Thank you. Thank you.
That's helpful, thank you.
Speaker Change: Thank you, the next question will be from Trevor Alanson from Wolf Research, Trevor Your Line of Life. [inaudible]
Trevor Allenson: Hi, good morning. Thank you for taking my questions. For someone to follow up on the pace versus price topic, and I appreciate these decisions are being made at the community level, but it appears you guys are being more balanced than what many were expecting. Thank you very much.
Speaker Change: There's clearly a lot of uncertainty right now, more so than there was just a few weeks ago. So if the man were to slow even more forward than what you currently expect, should we exit those impacts? Thanks.
Trevor Allenson: Be primarily reflected in fewer closings and orders right now than you currently expect, or would that be more so reflected in gross margin?
Speaker Change: Yeah, Trevor, we certainly have been watching the market closely, and our second quarter, the March quarter is the early part of the spring selling season, and we've watched that pace week to week and have...
Speaker Change: Pulled back a little bit on our absorption expectations and our starts expectations, and we'll see what the spring and into the summer brings to us.
Speaker Change: We are anticipating, we're going to continue to see consistent sales activity and that's what we have. [inaudible]
Speaker Change: Had put forth in our guide, we'll respond to that as it comes. We do have volume numbers that we'd like to hold on to, and we'll adjust accordingly based on what the market tells us.
Okay, I appreciate that color and then...
Speaker Change: Second, just some way to develop and spend, again, given all the uncertainty, closing expectations down some here, just share repo expectations have gone up.
Speaker Change: Perhaps could imply that maybe you're pulling back a little bit on landed developments then you were previously anticipating, I guess, is that the correct interpretation? And then if that is, could you provide some color on perhaps what you're expecting in terms of landed developments then now? Well, I'm just going to wrap it up for you briefly. Thanks.
David Auld, Michael Murray, Paul Romanowski, Jessica Hansen
Thank you.
Speaker Change: Very helpful, thanks for all the color and good luck moving forward.
Thank you.
Speaker Change: Thank you for the next question from Anthony Pettinari from City. Anthony, your line of life.
Good morning.
Anthony Petnari: If I look at your closings here to date, the total homes closed in the north and the east are actually up your rear and you know understanding that's not the biggest company, I'm just that increase in closings just a function of you know lack of inventory market or is there anything from a perspective or maybe entering the markets that we should be thinking about. [inaudible]
What do you think about that Europe , your growth?
Anthony Petnari: I don't think there's been a few new markets entered in those regions, but it's been, those are areas that have seen probably more supply constraint. [inaudible]
Anthony Petnari: is historically and so the demand is just not been satisfied and so as we're as we're able to bring neighborhoods to market.
Anthony Petnari: and get houses started there. There's very strong demand from the local populations for the houses. The North has been running a higher increase in community count as well, so they're just continuing to drive additional absorption out of those new communities. Thank you.
Anthony Petnari: Got it, got it. And then looking at the cost environment, I was wondering what level of labor inflation might be baked into your outlook. And then have you seen anything from a labor cost or labor of availability perspective, you know, talking to your contractors or subcontractors that is kind of different than what you might have expected at the beginning of the year? [inaudible]
Anthony Petnari: I think when we look at labor, we're assuming that that remains relatively flat. We have good labor base across pretty much all of our markets and that's been a big part of the reduction in our construction cycle times.
Anthony Petnari: So our vendors and labor partners out there are ready willing and able if we need to move up the start space on which we will be this quarter to satisfy that pace. And we feel really good about our position with the Labor State.
Okay, but that's helpful. I'll turn it over.
Speaker Change: Thank you. The next question will be from Ken Zener from the Seaport Research Partners. Can your line of life?
Thank you. Morning, all. Good evening.
Um...
Speaker Change: Thinking about your gross margin, which if you just comment, I think it includes about 3% outside commission, just you know.
I'm interested in how that's trending, but most importantly, [inaudible]
Speaker Change: As we see another large builder leveraged its improving whip turns and falling land intensity. And I'm asking you specifically within the context that your order pays. And I'm asking you specifically within the context that your order pays.
Speaker Change: which was about 4.7 and 24, looks to be sub 4, perhaps this year. Thank you for joining us today.
Speaker Change: But it was 3.7 in 1819 and 2.6, that's pays, in 1516. So how do you, given that kind of structural lift, where do you think that plays into your focus on returns and cash flow?
Um.
Speaker Change: That's obviously the East Side versus the Margin, thank you.
Speaker Change: Okay, I'll start with commissions and then I'll see which one of the guys wants to answer the latter part of your question. You're right, roughly 300 basis points on total closings. We're probably looking at closer to about 270 basis points in our gross margin. Okay, then.
Speaker Change: But we have seen a slight decline in the number of closings that have a realtor associated with them. That was about 83% of the homes we closed this quarter at an average commission of about 3.3%, which is down slightly from a year ago. It was flat sequentially. But on overall closings about 270 basis points of impact. That was about 3.3%. That was about 3.3%. That was about 3.3%.
Ciao.
Speaker Change: And in terms of, you know, the pace or a floor in pace, and can I always say this a lot, but it truly is in each community.
Price.
Speaker Change: Margin, and then depending on how things go, when we open the community, then we adjust from there. But we are focused on hitting our pace in each community. [inaudible]
Speaker Change: You threw out some of the stats from the pre-COVID period and then more recent years, we did see accelerated absorptions during the COVID years from 20 to 22. As we started to see those absorptions start reverting back to more normal levels while we have focused on the last couple of years increasing our community count. So we could still keep the scale of our operations, continue aggregating market share through community count increases with an anticipation that absorptions per community that pace community would probably revert back
Michael Wheat, David Auld, Michael Murray, Paul Romanowski, Jessica Hansen
Speaker Change: But there's also a balance. There's not return without margin either. So each community you're going to strike a balance in between pace and margin.
Speaker Change: Good, and I guess, you know, the biggest question I get with investors, you know, is...
Pretty aside, stockball utilities are the company. [inaudible]
Speaker Change: is the industry different. So if you're even had kind of a 10% [inaudible]
Speaker Change: Pre-COVID rate, you know, a bit lower in 15-16 verse, right before pre-COVID. If you turn that two times years, that's still the basic floor. [inaudible]
Speaker Change: on returns that you think is acceptable, and then do you guys expect inventory units to be down year-of-year and for you? Thank you.
Speaker Change: I think our inventory units, we expect to be about flat from...
Year over year at the end of the fiscal.
Speaker Change: That'll depend a bit on market and whether it's a little above or a little below, but it's going to be somewhere in that ballpark. And we're continually looking to increase our turns historically that have been running to, we had a few years, we did better than two on the units, and we expect we're going to do better than two this year on units and in the next year on units as well. Just taking advantage of our compressed construction times.
and focus on that part of our operation.
Thank you
Speaker Change: Thank you. The next question will be from Jay McCandless from Whitebush Securities. Jay, your line is live.
Jay McCanless, your line of slides, please go ahead.
Jay McAnlis: Oh, sorry, thanks. So looking at finished facts, it looks like you guys had 8,400 this year versus roughly 7,300 last year. I guess maybe to do square up that increase in inventory with what I think Billy said you guys are going to start to increase starts this quarter.
Holmes and inventory, but we're going to turn them faster.
Jay McAnlis: Buyers want that certainty of rate and ability to take advantage of the rate lock.
Jay McAnlis: Thanks. And then the second question I had, congrats on keeping the cancelation rate. [inaudible]
Jay McAnlis: A pickup in spring traffic are committed to the process and so when they get on paper and they get the right contract they've done their homework, they likely prequalified with the mortgage company and they are following through on that process. So there's we actually would always encourage our division presidents. If you think you have a contract that's not going to make a customer is not going to get there with the contract.
Jay McAnlis: It's better to know that sooner rather than later I think the cancellation early so you can sell that house and not have a spec.
Jay McAnlis: Back in your inventory.
Jay McAnlis: So I think you know from the cancellation or I think to me, that's a little bit of a sign of the strength of the underlying buyers and the commitment they have to the process right now.
Jay McAnlis: Okay. That's great. Thanks for taking my questions.
Speaker Change: Thank you and the next question will be from Susan Mcclary from Goldman Sachs. Susan Your line is live.
Susan Mcclary: Thank you good morning, everyone.
Susan Mcclary: My first question is on the the rental segment of the business changing topics a bit it was nice to see that the margin actually came up a bit year over year, even though you're still seeing some pressure. There can you just talk generally about how the change in the macro has perhaps impacted that business thing and any thoughts on the outlook there.
Susan Mcclary: Yeah. So we're still dealing with a lot of the markets, where we've seen the much much written and talked about buildup in inventory. So we have still seen pretty good rent pace, we've had to add a little more concessions in the process, depending again similar to our wholesale market the competitive environment.
Susan Mcclary: Market by market, but we.
Susan Mcclary: We still feel pretty good about that business I would say that the macro environment hasn't done a lot to change either the pace or the concessions as much as has been the availability of inventory in the market. We are moving through that inventory in a lot of the markets in our starts pace has been down on apartments quite a bit. So we feel feel good about the position.
Susan Mcclary: And the.
Susan Mcclary: Communities that we have under development today, and I think on the single family for rent side, we've been successful in transitioning several of those two.
Susan Mcclary: More of a forward sale in other words selling those prior to lease stabilization.
Susan Mcclary: And in doing so that's that's.
Susan Mcclary: Created higher returns for those sales.
Speaker Change: Okay, that's good to hear.
Speaker Change: And it's nice to see increasing the buyback for this year, even with all the pressures that you're that you're obviously operating under can you just talk about how youre thinking about the potential for any further upside to that as things perhaps change out there and then also other uses of cash maybe you know, perhaps M&A opportunities or anything else that.
Speaker Change: You are seeing.
Speaker Change: Sure Sue.
Speaker Change: We have taken advantage of the flexibility that we have on our balance sheet and our liquidity to to increase our near term allocation for share repurchases $1 $3 billion this quarter to four year to date.
Speaker Change: We've increased our guide to $4 billion for the year, which would be more than double than we did a year ago. So so we do see that as a compelling opportunity for utilization of our cash in the near term. However, we're still approaching it in a disciplined manner, we are willing to balance our utilization to keep our liquidity at a healthy level, where it has been.
Speaker Change: And keep our consolidated leverage are around 20%. So that's the constraint is ultimately the cash flow that we generate in the business and then where our balance sheet and liquidity levels are there. There's obviously further flexibility depending on where the business is and what we see in terms of our our need for capital in the business there could be further flex.
Speaker Change: Ability beyond the current guide, but that will be dependent on what we see in the business what we see in our cash flow and ER and then what we see in the stock over the next couple of quarters.
Speaker Change: Okay.
Speaker Change: Beyond.
Speaker Change: Oh, Yeah, you mentioned beyond share repurchase I mean, we constantly see and have conversations with potential builders, who are looking to to sell assets.
Speaker Change: But we haven't had nothing to close this quarter and would expect anything that we do do to continue to be small private operations.
Speaker Change: Yeah. Okay. Thank you for all the color good luck.
Speaker Change: Thank you and that does conclude today's Q&A session I will now hand, the call back to Paul Roehm and asking for closing remarks.
Speaker Change: Thank you Paul we appreciate everyone's time on the call today and look forward to speaking with you again to share our third quarter results on Tuesday July 22nd.
Speaker Change: Congratulations to the entire D. R. Horton family on producing a solid second quarter. We are honored to represent you on this call and greatly appreciate all that you do.
Speaker Change: Okay.
Speaker Change: This does conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation.