Jessica Hansen – VP, Communications David Auld - President and CEO Michael Murray - EVP and COO Bill Wheat - EVP and CFO.

Stephen Kim - Barclays Capital Kenneth Zener - KeyBanc Capital Markets Michael Rehaut - JPMorgan Stephen F.

East – International Strategy & Investment Group Adam Rudiger – Wells Fargo Securities Robert Wetenhall – RBC Capital Markets David Goldberg – UBS Michael Roxland - Bank of America/Merrill Lynch Eric Bosshard – Cleveland Research Company Nishu Sood – Deutsche Bank Michael Dahl - Credit Suisse Jade Rahmani – Keefe, Bruyette & Woods Megan McGrath - MKM Partners Alex Barron - Housing Research Center.

Good morning and welcome to the Fourth Quarter 2014 Earnings Conference Call of D.R. Horton America’s Builder, the largest builder in the United States. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder this conference is being recorded.

I will now turn the conference over to, Jessica Hansen, Vice President of Investor Relations for D. R. Horton. Please go ahead, Jessica..

Thank you, Kevin. Good morning and welcome to our call to discuss our fourth quarter and fiscal 2014 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 upon reasonable assumptions, there is no assurance that actual outcomes will not be materially different. All forward-looking statements are based upon information available to D.R. Horton on the date of this conference call and D.R.

Horton does not undertake any obligation to publicly update or revise any forward-looking statements. Additional information about issues that could lead to material changes in performance is contained in D.R.

Horton’s 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 within the next week.

Also after the conclusion of our call we will be posting some supplementary historical data that is not readily available on our public filings on the Investor Relations section of our website for your reference. 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 am pleased to be joined on this call by Mike Murray, recently promoted to Executive Vice President and Chief Operating Officer and Bill Wheat, Executive Vice President and Chief Financial Officer; Before we review our business and financial results with you I’d like to take a minute to recognize Don Tomnitz on his recent retirement and thank him for his leadership, advice and support over the years.

On behalf of the entire D.R. Horton team I’d like to congratulate him on an outstanding carrier of 31 years with the company, 15 years as our CEO. During Don’s tenure we grew to become the largest homebuilder in the United States and have maintained that position for over 12 years.

We look forward to still working with Don in a consulting role as he continues to be involved in a number of areas of our operations. Now onto our results.

In 2014 while demand for new homes across most of our markets remained relatively stable we generated greater than 20% growth in both revenue and pre-tax income by successfully leveraging our platform as the nation’s largest and most geographically diverse homebuilder. Our national market share is the largest in company history.

We have closed 46% more homes than any other builder in the recently reported 12 month period and we are positioned to generate further growth. In the fourth quarter our homes sold and closed increased 38% and 25% respectively and we had another good quarter of profitability with $250.8 million of pre-tax income and a 10.1% pre-tax operating margin.

Our increase community count, well stocked supply of land, plots and homes provide us with a strong competitive position. Based on a 29% increase in the value of our sales backlog and our October sales growth that exceeded 20% on a year-over-year basis we expect further double-digit growth in home closings, revenues and pre-tax profits in 2015.

Our continued strategic focus is to leverage our competitive position to generate double-digit growth in both revenue and pre-tax profits while improving our cash flow and increasing our returns.

Mike?.

Net income for the fourth quarter increased to 19% to $166.3 million or $0.45 per diluted share compared to $139.5 million or $0.40 per diluted share in the year ago quarter.

Our consolidated pre-tax income increased 24% to $250.8 million in the fourth quarter compared to $202.8 million in the year ago quarter and home building pre-tax income increased 25% to $236.6 million compared to $189.4 million.

Our fourth quarter home sales revenues increased 33% to $2.4 billion on 8,612 homes closed, up from $1.8 billion on 6,866 homes closed in the year ago quarter.

Our average closing price for the quarter was $279,100, up 6% compared to the prior year, primarily driven by a 4% increase on our average home size and a small increase on our average sales price per square foot.

Bill?.

The value of our net sales orders in the fourth quarter increased 41% from the year ago quarter to $2 billion and homes sold increased 38% to 7,135 homes on a 10% increase in average active selling communities. Our average sales price on net sales orders in the fourth quarter increased 2% to $281,700.

The cancellation rate for the quarter was 28%, down from 31% in the year ago quarter. The value of our backlog increased 29% from a year ago to $2.9 billion with an average sales price per home of $289,100 and homes in backlog increased 21% to 9,888 homes. Our backlog conversion rate for the fourth quarter was 76%.

We expect backlog conversion rate for the first quarter of fiscal 2015 to be around 75%, which is higher than our long-term first quarter average. We also expect our home closings for the full year of fiscal 2015 to increase 20% to 30% compared to fiscal 2014 based on the current relatively stable housing market conditions.

Please note that percentage changes in our average active community counts and our quarterly net sales orders by region for fiscal 2013 and ‘14 will be included in the supplementary data we referenced earlier which can be found on the Investor Relations section of our website after this call. Jessica..

We continue to experience strong growth in profitability in the heart of our business in our D.R. Horton branded communities which accounted for the substantial majority of our sales and closings this quarter. We are also pleased with the progress and performance of the rollouts of our Express Homes and Emerald Homes brands.

Our Express Homes brand, which is targeted at true entry level buyer focused primarily on affordability is now being offered in 24 markets and eight states, with the significant majority of our Express sales and closings to-date coming from Texas and the Carolinas.

This quarter Express accounted for 10% of our homes sold, 6% of homes closed and 4% of home sales revenue. The average closing price of an Express Home in the fourth quarter was $169,000. For the year Express accounted for 7% of our homes sold, 5% of homes closed and 3% of home sales revenue.

Customer response to our affordable Express product offerings has been extremely positive and we expect to have Express Homes communities open in the majority of our markets by the end of fiscal 2015. Emerald Homes, our brand for higher end move up and luxury communities is now available in 34 markets across 14 states.

In the fourth quarter 7% of our homes closed were priced higher than $500,000, accounting for 17% of our home sales revenue, up from 5% of homes closed and 13% in revenues in the same quarter last year.

For the year 6% of our homes closed were priced higher than $500,000, accounting for 16% of our home sales revenue up from 4% in homes closed and 10% in revenues in fiscal 2013. We plan to continue to steadily introduce new Emerald Homes communities across more of our markets in fiscal 2015.

Mike?.

Our gross profit margin on home sales revenue in the fourth quarter was 20.5%, down 20 basis points sequentially from the third quarter. The sequential margin decrease was primarily driven by a 70 basis point impact from cost increases in excess of sales price increases and changes in our product mix.

The decrease was partially offset by a margin increase of 30 basis points from lower relative warranty and litigation cost, 10 basis points from lower interest and property tax cost and 10 basis points from a lower purchase accounting impact from acquisitions. Our fourth quarter incentive level was essentially flat with the third quarter.

Compared to the prior year our home sales gross margin decreased 140 basis points primarily to due to the combined effect of cost increases in excess of sales price increases and higher incentives.

As we have discussed on previous calls our incentive levels were extremely low in most markets during fiscal 2013 and early 2014, but incentives returned to normal levels in many markets during the course of 2014 with significant variations across our communities.

With the very strong performance of our express communities so far we expect this brand to grow quickly as a percentage of our product mix which will help us generate strong growth in both revenues and profits. But will likely bring our average gross margin percentage down in fiscal 2015 from our current level.

In the current stable housing environment we generally expect our average home sales gross margin to be around 20% with quarterly fluctuations that can range from 19% to 21% due to product and geographic mix and the relative impact of warranty, litigation and interest cost. As a reminder our reported gross margins include all of our interest cost.

Historical detail on the components impacting our home sales gross margin will be included in the supplementary data on our website after this call.

Bill?.

Home building SG&A expense for the quarter was $241 million compared to $186.6 million in the prior year quarter. As a percentage of home building revenues our SG&A improved 40 basis points to 9.9% this quarter compared to 10.3% in the prior year quarter.

Fiscal 2014 SG&A as a percentage of home building revenues was 10.6% compared to 10.7% in fiscal 2013. During 2014, we made significant investments in our SG&A infrastructure to support our current and expected growth and we expect to leverage these SG&A investments in 2014 and move closer to our annual SG&A goal of 10% of home building revenues.

In the first two quarters of fiscal 2015 we expect our SG&A as a percentage of home building revenues to be seasonally higher than in our third and fourth quarters as we typically deliver fewer homes in the first half of the fiscal year than in the second half.

Jessica?.

Financial services’ pretax income for the quarter increased 6% to $14.2 million from $13.4 million in the year ago quarter. 88% of our mortgage companies loan originations during the quarter related to homes closed by our home building operation.

FHA and VA loans accounted for 42% of the mortgage company volume this quarter down from 45% in the year-ago quarter. Borrowers originating loans with our mortgage company had an average FICO score of 719 and an average loan-to-value ratio of 89%.

Select historical data from our mortgage company including loan product mix will also be included in the supplementary data on our website after this call.

David?.

At the end of September, we had 20,600 homes in inventory, of which 1,500 were models, 11,200 were spec homes and 3,900 of the specs were completed. Our construction in progress and finished homes inventory increased by $159 million during the quarter.

Our fourth quarter investment in lots, land and development totaled $618 million of which $353 million was to replenish finished lots and land, and $265 million was for land development. In 2014 we invested $2.3 billion in land, lots and development.

At September 30, 2014 our lot portfolio consisted of 125,000 owned lots with an additional 59,000 lots controlled through option contracts. 69,000 of our lots are finished with 32,000 owned and 37,000 optioned.

Our 184,000 total lots owned and controlled put us in a strong competitive position in the current housing market, with a sufficient lot supply to support strong growth in sales and closings in future periods.

As we invest in new communities for all three of our brands our main underwriting criteria is a minimum annual pretax return on inventory of 20% defined as pre-tax income divided by average inventory over the life of the community.

We expect each community regardless of brand to achieve this target by optimizing the balance between absorptions, margins and inventory levels that is most appropriate for that community.

For reference our total home building pretax return on inventory has improved 560 basis points over the past two years from 5.5% at 2012 to 11.1% in 2014 and we expect to make further improvement on this metric in 2015, as we improve our pretax profitability and manage our inventory levels efficiently.

Mike?.

During the fourth quarter we recorded $3.2 million in land options charges for write-offs of earnest money and deposits -- for earnest money deposits and due diligence cost for projects that we do not intend to pursue.

We also recorded $18.1 million of impairment charges of which $15.7 million were in our East region primarily related to long held inactive and underperforming projects in the Washington D. C. area that we intend to sale to improve returns by redeploying the capital into more productive assets.

Our inactive land held for development of $332.8 million at the end of the year represents 14,000 loss, down 17% from June and down 33% from year ago. We are proactively working through these older unproductive assets to redeploy the capital, thereby improving the cash flows and returns.

We continue to formulate our operating plans for each of our remaining inactive land parcels and we expect that our land held for development balance will continue to decline during fiscal 2015. We will continue to evaluate our active land parcels for potential impairments.

These evaluations may results in additional impairment charges in future periods but the timing and magnitude of these charges will fluctuate as they have in the past Bill?.

At September 30th our homebuilding liquidity included $632.5 million of unrestricted homebuilding cash and $582 million available capacity on our revolving credit facility. We had $300 million of cash borrowings and $92.7 million of letters of credit outstanding on the revolver.

Our gross homebuilding leverage was 39.4% and our homebuilding leverage ratio net of cash was 34.5%. During the quarter we've repaid $137.9 million of our senior notes at their maturity in September. Our homebuilding debt maturities in fiscal 2015 are $158 million and our public notes outstanding at September 30 totaled $3 billion.

Our fiscal year end shareholders' equity balance was $5.1 billion and book value per share was $14.04, up 12% from a year ago, Jessica?.

Looking forward, we would like to highlight some of our future expectations which are based on the current relatively stable housing market conditions. In fiscal 2015 we expect to close between 34,500 and 37,500 homes and generate consolidated revenues of between $9.5 billion and $10.5 billion.

We anticipate our home sales gross margin for the full year in fiscal 2015 will range from 19.5% to 20.5% with potential quarterly fluctuation outside of this range.

We estimate our homebuilding SG&A expense to range from 10% to 10.3% of homebuilding revenues for the full year with the first two quarters of the year being higher than this range and third and fourth quarters at the low end or below the annual range. We expect our financial services operating margin to range from 25% to 30%.

We are forecasting our fiscal 2015 income tax rate to be between 35% and 36% and our diluted share count to be approximately 370 million shares. For our first fiscal quarter 2015, we expect our number of homes closed to approximate the beginning backlog conversion rate of around 75%.

We anticipate our first quarter home sales gross margin will be around 19.5% to 20% subject to potential fluctuations from product mix warranty and interest cost.

And we expect our homebuilding SG&A in the first quarter to be around 11% of revenues, David?.

In closing our fourth quarter and 2014 growth in sales, closings and profits in relatively stable market is a result of the strength of our operating platform and we are excited about our opportunities ahead.

This quarter, the value of our sales and closings increased by 41% and 33% respectively and we generated another solid quarter of profitability with consolidated pretax income of $250.8 million on $2.5 billion of revenue.

For the year, the value of our sales closings and backlog increased by 27%, 30% and 29% respectively and consolidated pretax income increased 24% to $814.2 million on $8 billion of revenue. We also made considerable progress this year toward our long-term goal of producing positive cash flow from operations.

Whilst still growing the business our cash used in operations of $661 million improved by $570 million from last year's level and we expect further substantial progress in our cash flow performance in 2015.

We remained focused on growing both our revenues and pre-tax profit at a double-digit pace while improving our cash flows and increasing our returns.

We are well positioned to do this with our solid balance sheet, industry leading market share, broad geographic footprint, diversified product offerings across our three brands, attractive finish lots and land position and most importantly our tremendous operational team across the country.

I would like to thank all of our employees for their continued hard work and accomplishments this year and we look forward to working together to continue growing and improving our operations to make 2015 an even better year. This concludes our prepared remarks. We will now host questions..

Thank you. At this time we will be conducting a question-and-answer session. (Operator Instructions). Our first question today is coming from Steven Kim from Barclays. Please proceed with your question.

Hey, guys good results. Wishing you guys a proud Veterans Day. I wanted to ask you a quick question regarding incentives. I think you had indicated that your incentives were flat sequentially, which I think is going to perceived positively by folks who have been concerned that you are going to be ramping your incentives pretty significantly.

You have also talked about increasing the share of your business, your volumes that’s going to be coming from Express and I was wondering if can talk specifically about your strategy around incentives as you have seen Express evolving and whether you see the approach you are going to be using for incentives being different for the Express communities, then for the Emerald or the Horton communities and what that’s is going to mean for incentives going forward?.

Steve it’s David. The market we find the market to be relatively stable and in fact we had significant pricing power last year in Q1, Q2 we saw that slide down, increased incentives but really just back to normal market type conditions and right now we feel pretty good about kind of where we are in the market and what’s taken place out there. .

And in terms of our approach to you know incentives across our brand, Steven we don’t see a significant change from where we have been in the past.

We manage our incentives at community by community level and we go in regardless a brand with our business plan for each community and we look to achieve that and if depending on how the market responds then we adjust our incentive levels. I think that would apply to our approach really across all three of our brands..

Clearly with the Express we are providing a tremendous value to the buyer in the marketplace today and so we are not seeing a significant level of incentives across the board in Express. Community by community we are going to manage to what that market is but within Express we are seeing from market acceptance and a buyer that’s been underserved..

Yeah, that’s great. That’s exactly what we are looking for. The second question relates to the use of speculative building and I think you guys in your prepared remarks gave us some numbers.

I wanted to just generally though speak about or ask about what you are seeing in the marketplace and what’s your intention going forward is with respect to the role of specular building.

Some of your peers have indicated that they are sort expecting to go into the spring selling season with a higher level of spec activity with the hope of capturing those buyers who have chosen to sell their house first before trying to sign a contract for another one and so were looking for quick move in.

I guess A, do you generally believe or agree the presence of this kind of buyer is -- would make having more specs than normal historically a good strategy entering spring selling season? Are you preparing for that and are you seeing your competitors taking steps to prepare for that yet?.

Have not really seen significant competition out in the market from other builders on the spec build program. That has always been what we've done. We've always tried to look at the next quarter out and align ourselves for what we believe demand will be based upon what we're seeing that day.

Spec building is a good consistent way to manage communities and drive absorption that's just something we've always done. .

And as a reminder Steve about 70 to 80% of our closings each quarter are specs. So when you're looking at our reported gross margin that's essentially a spec gross margin. .

Thank you. Our next question today is coming from Ken Zener from KeyBanc. Please proceed with your question..

Kenneth Zener - KeyBanc Capital Markets:.

Good morning Ken..

Good morning Ken. .

So a rather different approach to the forward year this year. The growth that you gave in terms of your closings and I think everyone is going to be happy it sounds like that you are disclosing community count, is that accurate. .

We're not actually disclosing absolute community count but we are giving you two years of historical data of what our community counts done in percentage terms at a regional level. .

Okay.

Then what is the underlying, and I apologize if I missed it with all the numbers you're giving but the 34,500 to 37,000 unit closing what does that imply for community count growth?.

In terms of community count growth we actually expect the increase in our community count we’re at 10% this quarter we expect that to moderate in to 2015 and we could be relatively flat on year-over-year basis for the whole year.

Any increases would be more in the mid to single digit range but clearly our expectation, as we have shown in the last couple of quarters is for improvement in our absorptions per community and that’s really what we plan to drive the 20% to 30% increase in our closings next year. .

Interesting. So that's actually largely coming from absorption.

So related to that and David we had talked about this earlier in the year with the success you guys have been having with Express because it’s going to be rising as a percent of orders and closings, if you could highlight the kind of the dynamic between the volume you're seeing and the revenue.

So I think you basically said it was like 5% in closings, 3% of revenue.

How does one think about the incremental flow through of you get the volumes but since it's less ASP the margins can be the same but you're pulling less dollars through? I mean do you think this 1.5 million starts certain share as it relates to single family homes, is this going to happen at a lot lower price point that Express is a characteristic of?.

Well I can tell you our model, our thought process us we're going to grow every brand. Now the Express brand is going to grow faster because we're introducing a new product into an underserved market across the country and there is a tremendous amount of pent-up demand that we're picking up with that brand.

We're not growing Express at the expense of Horton. The Horton brand will continue to grow and the Emerald brand really were just rolling out still. I mean it's got a lot upside..

Yes, I think you're heading to a sweet spot there.

Is that -- the average price, is it kind of saying, did you talk about how much you think the price is down given the business, the product mix for next year?.

I think we're looking going forward Canada at a flat ASP hard to predict because the potential changes in mix that we'll be seeing.

But as David said we're looking to grow all the brands Express growing probably at a faster clip than the other brands but we're still seeing good growth in demand across all brands and still seeing some markets where we have price appreciation which helps to offset a bit of the mix changes. .

Thank you. Our next question today is coming from Michael Rehaut from JPMorgan. Please proceed with your question..

Hi. Thanks. Good morning and nice quarter. .

Thank you..

The first question I had was I guess circling back to Express but asked a little bit of a different way and I think you started to hit on this in talking about community count but with your outlook for growth next year being I guess you're saying primarily driven by an increase in absorption, is that going to be primarily driven by the higher mix of Express or is there going to be perhaps growth in certain regions that maybe have a lower ASP or a faster turn.

Just trying to get a sense because to have absorption up 15%, 20% or more next year I think that’s probably pretty much ahead of the pack right now in terms of how most of the builders are thinking about ’15, if haven’t articulated it explicitly and so just trying to get a sense is that really the Express Homes initiative or is it a regional mix or do you have a view of certain of the markets that’s a little bit different?.

Thank you. This is David, Michael. I think the Express is certainly a factor in it and regional growth is also a factor. We’re very strongly positioned right now in Texas and Carolinas and Florida and those are growth markets.

And so we expect to do well or better there than we have in the past and Express as we continue to roll that out we are seeing high unit absorptions there.

So it’s -- that’s why we think overall we’ll see pricing power in certain markets but the Express brand at that price point as it grows and becomes a bigger percentage is going to keep our average sales price pretty much flat and we think that’s a good thing..

Right, no it makes sense. And I guess just circling back on the incentives for a moment, just wanted to clarify you said that incentives in the fourth quarter were flat sequentially.

I would presume that was on closings not orders so if that’s correct just trying to get a sense of perhaps on an order basis the orders themselves as you are bringing in the new sales over the past three months were the incentives on those order also relatively stable versus the prior quarter and as a result should we infer that the gross margin for next year coming in a little bit is primarily driven by a mix I think as you have stated..

I think that’s a pretty fair characterization of everything Michael. Incentives have been flat on the closings that was correct and we are probably seeing a similar flat trend in the sales line right now. So that has brought us down for the full year margin expectations for next year from where we were in fiscal 2014..

And clearly with Express driving much high absorptions in volume but slightly lower on a gross margin side but as it grows to a bigger mix of our overall business that’s the primary driver for us moderating back to our normal gross margin range of around 20%..

Thank you. Our next question today is coming from Stephen East from ISI. Please proceed with your question..

Thank you. David congratulations on your role..

Thank you, Stephen..

If I look at call it your first six weeks or so a couple of different questions, one where your first focus and actions have been and then when you look out a bit longer what vision do you see for Horton? Everybody has got their own twist on things so how maybe does your vision differ a little bit from DTs as you move out three, five years?.

I guess the initial focus is really getting our handle on this public position role Stephen I have always been behind the curtain kind of guy and being pushed out front is different for me.

Three to five years down the road I think my goal is just to continue the excellence companies had, focus is on consistency really on a day-by-day, subdivision by subdivision execution.

I feel like our position in the industry today is so unique, the fact that we have been the largest for as long as we’ve been the largest, the geographic footprint that we have it really is, if we just execute and do what we can do on a day-to-day basis we should have a great three to five year run..

Okay, I appreciate that. And then different topic if you look at the SG&A, your goal has always been 10% and I guess my question here is most builders yourself included have talked a lot about hey, during the downturn we've gotten a lot more efficient. We've been able to do more with less people et cetera.

Why shouldn't we expect in this, maybe even in 2015 but why shouldn't we expect that SG&A to drop down below the levels you run in previous cycles?.

Well, I'm probably going to get in trouble for this but that is my expectation.

If we do not, because we're more efficient, we do have great operators out there, the launch of the Emerald, Express that we've been through the last couple of years, we did have to build some infrastructure and ramp up and I have told all these guys and all the people out there in the field that our expectation is to leverage that position and become more efficient.

So that is my expectation. The accounts are going to disagree with me..

That might be a little bit longer term view too and not a fiscal '15 call Steven..

Thank you. Our next question today is coming from Adam Rudiger from Wells Fargo Securities. Please proceed with your question..

Hi, good morning. David, you mentioned in your prepared remarks that I think one of the focus was going to be to improve cash flow. Operating cash flow was negative for the past three years.

So I was wondering when or if we should expect an inflection point in that and when you actually plan on starting to generate cash?.

I think right now we expect to be relatively flat this year. If the market remains stable or even gives us a little bit more we could beat that..

And flat even cash flow this next year would be an improvement of $660 million. So that would be a substantial improvement but I think specifically I think we're pretty close to that inflection point..

Yes..

Okay. Second question was there has been some speculation or percolation, I guess on Texas and oil prices and things like that. I was wondering if you had any comments you wanted to share on what you've been seeing recently. I know it's pretty early but just any thoughts there would be helpful..

Texas remains strong for us. I think if oil prices stay down it could soften somewhat but any softening we see in Texas, I think low oil prices should create additional demand in the other markets. So we're Texas based but we're significant in really every market in the country that we want to be in. So it's pretty good balanced for us.

Could actually be beneficial..

Thank you. Our next question today is coming from Bob Wetenhall from RBC Capital Markets. Please proceed with your question..

Hi, good morning and really nice quarter. Just wanted to get some color on the impairment charge of $21 million in the quarter. I know you had one for $57 million in 3Q.

Any color about this would be great and what should we think about charges going forward?.

Well Bob the charges we took this quarter were primarily in our Washington D C area. We had a couple of long lived old projects that we had for a quite well that were inactive and we evaluated the market and had some opportunities to sell those projects and so we're looking to move forward with those, redeploy that capital.

We’ve consistently been working through our older land positions, bringing most of it into production in our home building operations and most of that not requiring an impairment charge when it comes into operations.

So looking forward we're going to continue to evaluate all these projects in the market that we're in and look to make that capital work for the company as quickly as we can.

When we do elect to sell something, when that's the best option for us, that has traditionally produced the bigger impairment charges and hard to predict when or if those things will be occurring..

Okay, that's helpful and I think it's for Bill. You guys had a very robust balance sheet, net debt to home buildings in the mid 30's. You're obviously trying to drive better financial performance with 20% ROI inventory. What's the goal? How should we think about the balance sheet in the context of land spend is going to continue next year.

Looks like you might burn a little cash as you grow the business. What's your target for net home building debt-to-capital? Thanks and good luck..

You bet. Thanks, Bob. From a net debt-to-cap we've consistently said we wanted to stay out or below 40% to 45% range. Clearly we're bit below that right now and we're comfortable in the mid 30's as well and really so as long as we are in a good solid position we have flexibility.

Right now our first priority as we look at our business, look at the opportunities in the marketplace to generate returns in our business and that’s going to be the first priority for our investments of capital. With that being said we feel like we are in a great position in our land position.

So we are not having to grow that position significantly right now.

So right now in terms of land and development expectations, spending expectations for fiscal ’15 we would expect that to be relatively flat with fiscal ’14, right now but that will depend also then ultimately on what we see in the sales environment in the spring, if things are much stronger than we expect in the spring we might expect -- we might wind up investing more than we did in fiscal ’14 but conversely if you go the other way as well.

So first and foremost we are going to look at the business. Secondly, we will continue to handle our debt obligations as we move forward and continue to pay the dividend..

Thank you. Our next question today is coming from David Goldberg from UBS. Please proceed with your question..

Thanks good morning everybody and congratulations David..

Thank you, David..

My first question, I was wondering if you can get a step back and just think a little bit if you guys just kind of take us through the actual procedure to determine what kind of spec you guys want heading into the next year, the spec count now under construction is up 24%-25%. It’s inline with obviously your kind of closing guidance for fiscal ’15.

But if you kind of go through the mechanics of how you get to that number with your local operators I think that will be helpful in terms of the assumptions and kind of puts and close you put into the process..

Well David, I kind of always keep saying this and it gets monotonous but it really does come down to specific demand or expected demand within a community within a sub-market within a division and we build these models for these programs based on our position in that community and what kind of demand or absorption we think it will give us at the margin we want to make.

And so from a very simplistic standpoint and it varies throughout the year but we generally like to have about three months of sales at three various stages of inventory coming out of the ground. So if it’s a community doing till a month that will be carrying six packs in that community, two completed, two at frame and two at slab.

And then sale into that inventory, supplement sales with build out. As you go community by community and add it all up that’s how we get to the numbers we get into. .

That’s very helpful and just as a follow-up question I was wondering if you can talk about the kind of leverage you are seeing in land, on the land acquisition side and what we should expect as you move to more Express series land purchases? I would assume there is little more financial leverage, little bit easier to option that land.

So maybe you could talk about kind of what are seeing in the market and what you think that means for the balance sheet as the [patio] shift a little bit more towards Express is that going to be more free cash flow generative as you move forward, less free cash flow intensive, I guess how we think about it?.

I think on the leverage side I mean when there was nobody out there developing lots we -- and there were finished lots on the ground, that we could buy at very advantageous prices we ended with a lot of owned lots and one of the prior questions was about focus.

One of the things that I think we need to do is move back to our historical 50-50 owned versus option plots and as developers are coming back into the market, one of our primary objective is to maintain develop, maintain and support those relationships.

So that we have people to delivering lots in front of us and the high absorption communities, the high absorption model of Express it is a perfect place to get some body in front of us doing it..

David, we are pretty much down on the 50-50 on our finished lot position and we have made good progress on our overall owned position but we are still not there. We’re about 68% owned, 32% options so we are headed in the right direction to get to that 50-50 split that David mentioned..

We have got some good development partners out there and we are going to try to grow this relationships and strengthen them..

Thank you. Our next question today is coming from Mike Roxland from Bank of America/Merrill Lynch. Please proceed with your question..

Hi, thanks for taking my questions and congrats on your new role David..

Thank you, Mike..

Can you just talk about some of the progress you have made on improving your construction efficiency with respect to the Emerald brand.

Obviously that’s a new brand for you guys and you have experienced, I think from growing pains with the product and just wanted to see where you are in the learning curve and how the efficiency in terms of the construction has improved let’s say quarter over the last couple of quarters?.

I think we are learning that buyer and that market and adjusting different processes and procedures to meet the expectations that, that buyer has and I think our original, some of the original product we put out we probably were building more for ourselves than for the customer and we are adjusting that and really just drilling down and putting into the houses what that buyer really wants.

And I guess it’s going to create efficiency and improve our overall performance of the brand..

Specifically Mike we haven’t measured the -- we don’t have in front of us the production turn times for each by brand. So we really can’t comment any specific changes this quarter versus last..

Got you.

But just suffice to say have you seen an improvement in the margins that you are generating from that product relative to a couple of quarters ago?.

Yes we have. Yes, as we drill down and understand what that buyer wants we are generating higher margins..

Got you. And then just last question, you mentioned that your incentives were flat quarter-over-quarter. I think in last quarter you mentioned that you weren’t happy with the absorption pace as you raise your incentive levels.

Is it fair to say now that you are happy with the absorptions that you are seeing on an aggregate basis and that if these continue there is no need for you to discount any further because you are happy with the sales pace overall?.

We are on plan meeting our absorption targets. So yes we are happy with where we are right now and so that’s….

Yes in total we are certainly pleased with where we are and what we are seeing overall but again we don’t necessarily manage it at a global level. We’re going to manage at each community.

So we have some communities where we may be cutting back on incentives because we are exceeding our absorption targets, some might be right on track, some might be a little short. So we are going to increase incentives. So but in total absolutely a 38% increase we feel like the aggregate result is definitely in line with where we want to be..

Thank you. Our next question today is coming from Eric Bosshard with Cleveland Research Company. Please proceed with your question..

Good morning..

Good morning..

In terms of input cost just curious if you could talk a little bit about the trended land cost where we are as you are working through your inventory, if that is something that’s changing meaningfully? And then also your assumptions in terms of building components and what trends happened there? And then eventually curious on how you think about that how that is matching up with your average selling price expectation for 2015?.

Sure Eric. Our land cost has remained relatively flat as a component of the overall cost going into our house. We called out some of the other things that did impact our margin this quarter but land remained relatively flat..

And in terms of the other input cost on a year-over-year basis we have seen some cost pressures, our stick and brick cost on a per square foot basis were up about 5%. On a year-over-year basis, sequentially they are up about 2%..

As you think about those factors into ’15, a year where I think you talked about no real expected change in ASP, some of that a function of mix how do you think about that balance between those factors?.

I think the mix is probably the biggest driver of the flat average sales price. We do and are experiencing pricing power in a lot of our markets..

Steady as she goes..

Yes, consistency is I guess is kind of a right now, we are seeing a lot of consistency on the market at the subdivision level, at the division level and I think it’s going to be a good year..

Thank you. Our next question today is coming from Nishu Sood from Deutsche Bank. Please proceed with your question..

Thanks and congratulations to David and Mike on your new roles..

Thank you, Nishu..

I wanted to ask first about the October sales trends, obviously a strong number, 20% plus in the context of what we have been seeing from just the industry in general but somewhat of a slowdown from the pace in the September quarter. How should we think about that I mean obviously going into year-end I imagine there is a real push.

So is that just month-to-month volatility maybe around the year end or have you seen some slow down into October?.

Nishu that shows that we get for given more than we normally do on a monthly basis. But we wanted to give a little bit of color but as we always have said a month does not make a quarter.

So we're letting you know that our October sale phase was strong and we feel good with what we've seen thus far even though we're only 11 days into November and greater than 20% in October. As David said earlier we're on plan to deliver what is in our business plan and you'll have to wait till January to see what we deliver for the quarter..

I wouldn't read anything special into whether we accelerated or decelerated in October. I think in general we would still say it's a very good sales environment, still a very good sales month for us. 20% was the floor. .

Nishu, we're looking for consistency, month to month..

Okay and second question the 20% return on inventory metric, the pretax income divided by the average investment in the community over the life of it. That sounds like a local at the divisional level. So I imagine that's not fully loaded with the entire expense structure. So my question is how would we translate that number to the overall D.R.

Horton corporate level and how -- what is your target for that number? I mean let's say that 20% translates to, I don't know to 15ish%, what's your target and when would you expect to get there?.

Nishu, first of all definitionally that 20% is a fully loaded number at that community level. So we look at our project pro formas and performances on a fully burdened basis to drive that 20% average pre-tax return on the inventory investment in that community. So that will translate up as a goal to the total. Obviously we're not there yet.

We’re little over 11% on a consolidated basis, including any impairments we've taken but to get all the way to 20% on a consolidated basis, I don't have a timeline for when it's going to be there? But that is what we're pushing the bar too and that's what we're measuring ourselves against internally. .

Steady consistent improvement in the ROI is the goal when we feel like it's we're doing the things today that should achieve steady improvement..

Thank you. Our next question today is from Michael Dahl from Credit Suisse. Please proceed with your question..

Hi, thanks.

Wanted to ask just as a point of reference if we go back to the mix of communities, thinking about the absorption, could you give us a sense of just how much of a difference in absorption there is between Express, Horton, and Emerald?.

Yeah, in general Mike our Express communities on absorption basis is about double our company average ball park, which is kind of inline with where our expectations would be and then Emerald is certainly lower than our company average but obviously the dollars per home is much greater..

Got it and then I guess on a related topic, than if we think about the margin guide for next year, 19.5% to 20.5%, is that - I mean I guess what's the biggest delta and I guess you did mention it could be higher or lower than that range quarter-to-quarter, what's the biggest driver that you think of that could push it to either the low end or the high end based on what you're seeing today..

I think the fit to low end would be a change in market conditions where right now we've been experiencing stability in the market and slight improvement kind of month-to-month quarter-to-quarter. We had a reset on values at spring which we responded to with additional incentives. But since that we're operating kind of on flat waters right now. .

And then absent a change in market conditions I really feel the product mix changes as we roll out Express, primarily is the wild card in terms of exactly how that translates to margins quarter-to-quarter is probably the biggest driver and is assuming the market stays stable..

Thank you. Our next question today is coming from Jade Rahmani from KBW. Please proceed with your question..

Yes, hi, thanks for taking the question. I was wondering if you can provide some color on what you are seeing in the market, if you are seeing less competition for land parcels, if there is any geographic color on what you find most attractive and maybe just the average size of new deals you are looking at..

Well competition in the market is always there. We had a very [brief of] opportunity in 2011 and ’12, really we were the only ones buying. But since then everybody is back. Right now we are pretty much in a replacement mode mark-to-market. The markets that are generating high levels of sales is where we are putting most of the dollars.

And I don’t remember the third part of the question..

Average size maybe in terms of number of lots?.

Typically we underwrite to a two year cash back program. So it depends on the absorption that we should be generating out of that on an average. So it’s 50 to 100 lots probably..

Great, thanks.

Just secondly, a follow-up on the mix of buyer profiles and I apologize if you gave this earlier in the quarter but do you have the mix of orders, your first and first time move up?.

Sure, Jade and we only have that data from the buyers that use our mortgage company which is about 50% of our buyers this quarter roughly and we were at 39% first time homebuyers for the quarter..

Thank you. Our next question today is coming from Megan McGrath from MKM Partners. Please proceed with your question..

Good morning, thanks.

I guess most of my questions have been answered but did want to ask as a follow-up to that last question any thoughts on the recent news from the FHFA and as a follow-up to that, I know it’s hard to some times to get data on those who didn’t come through the system but any sense of what’s the bigger issue for your buyer, is it down payment typically or is it you know more a DTI issue? Thanks..

In terms of the FHA, FHA clearly there is a lot of talk going on in terms of our assumption as we look at our business. We are not assuming any change in the mortgage environment, just the same current mortgage lending standards. Any changes going forward we will deal with those as they come..

In terms of the biggest issue Megan really anything we tell you is going to primarily anecdotal but we do hear DTI is one of the bigger categories that our buyers struggle with today which is why Express we feel has been very positive for us.

We can’t control our buyers debt level but we can control the sales price of the houses we are selling and so if we can help with that piece of the debt to income metric we have seen a lot of success on that front..

Great, thanks helpful. And I guess just as a follow-up on the balance sheet and capital allocation it feels like going through this earnings season we have seen a bit of a higher level of announcements around share buyback from homebuilders.

Certainly with your announcement on expect to share count, it doesn’t sound like that’s something that you are looking at but maybe give your thoughts on why it’s something that you don’t feel is something you want to pursue?.

Right now we still see tremendous opportunities to invest in our business. We are generating improving returns. We are seeing the opportunity to grow at an improving return. So right now that is our highest priority. We would never rule out buybacks at some point in the future but right now we still see great opportunities in our business..

Thank you. Our final question today is coming from Alex Barron from Housing Research Center. Please proceed with your question..

Thanks and good morning and congratulations on the quarter and everybody in their new roles..

Thank you, Alex..

I wanted to focus a little bit on Express I am sorry if you already covered it and I missed it. But I think you said that deliveries -- or the orders were 10% and the deliveries were l believe 7%.

How do you guys see the what percentage are you guys kind of thinking or aiming at for 2015 and also what kind of sales rates, I guess are you guys thinking or experiencing so far in Express and last question on Express how many communities do you have currently and how many do you expect to have by the end of next year?.

Sure, Alex. As we said for the quarter that Express is 10% of our home sales and 6% of our closing.

For the full fiscal year it was 7% of our home sales and 5% of our closings and we don’t have any set targets for where that’s going to go in fiscal 2015 but we would continue to expect we would continue to expect to ramp-up our community openings in ’15 and have the sales and closings follow.

We have talked about over the next few years we think Express could be everywhere from 25% to 30% of our unit..

And do you guys track the number of [new home] buyers that you have seen so far in this quarter or this year?.

We don’t, Alex..

But do you expect that to be a meaningful size of your buyers I guess through the Express range?.

You know that certainly possible Alex and certainly where we are on the calendar there is more of those that have the potential to come back in to the market but that’s not something we are specifically targeting necessarily..

Thank you. We’ve reached end of our question-and-answer session. I would like to turn the floor back over to management for any further or closing comments..

Thank you, Kevin. We appreciate everyone’s time on the call today and look forward to speaking with you again in January to share our first quarter results. Thank you everybody. .

Thank you. That does conclude today’s teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today..