D.R. Horton achieves $1.2 billion in Q4 pre-tax income with strong cash flow, but warns of ongoing affordability constraints impacting future demand.

OPERATOR - (00:00:00)

D.R. Horton on the date of this conference call and does not undertake any obligation to publicly update or revise any forward looking statements. 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. This morning's earnings release and supplemental data presentation can be found on our website at investor.drhorton.com and we plan to file our 10K in about three weeks. Please note that we are now posting our supplementary data presentation at the time of our earnings release. After this call we will also post our updated investor presentation for your reference. Now I will turn the call over to Paul Romanowski, our President and CEO.

Paul Romanowski - President and CEO - (00:00:46)

Thank you Jessica and good morning. I am pleased to also be joined on this call by Mike Murray, our Chief Operating Officer and Bill Wheat, our Chief Financial Officer. Chief Financial Officer this year the D.R. Horton team had the privilege of providing home ownership to nearly 85,000 individuals and families, including approximately 43,000 first time home buyers. In total, our home building and rental operations provided more than 91,200 households a place to call home during fiscal 2025. We work every day to use our industry leading platform, unmatched scale, efficient operations and experienced employees to bring affordable homeownership opportunities to more Americans. New home demand remains impacted by affordability constraints and cautious consumer sentiment. Our teams continued to respond with discipline during the fourth quarter, driving a 5% increase in net sales orders while carefully balancing pace, price and incentives to meet demand. The D.R. Horton team produced solid fourth quarter results to finish the year highlighted by consolidated pre tax income of $1.2 billion on revenues of $9.7 billion with a pretax profit margin of 12.4%. For the year, our consolidated pre tax income was $4.7 billion with a pretax Profit margin of 13.8%. Our home building pretax return on inventory for the year was 20.1%, return on equity was 14.6% and return on assets was 10%. Over the last 10 years, D.R. Horton has delivered a compounded annual shareholder return of more than 20% compared to the S&P 500's compounded annual return of 13.3%. Also, our return on assets ranks in the top 20% of all S&P 500 companies for the past three, five and 10 year periods, demonstrating that our disciplined returns focused operating model produces sustainable results and positions us well for continued value creation. We remain focused on capital efficiency to generate strong operating cash flows and deliver compelling returns to our shareholders. In fiscal 2025, we generated $3.4 billion of cash from operations after making home building investments in lots, land and development totaling $8.5 billion. We leveraged our strong cash flow and financial position to return $4.8 billion to shareholders through repurchases and dividends. Over the past five years, we've generated $11 billion of operating cash flow and returned all of it to shareholders. Over the same time frame. We grew consolidated revenues at an 11% compound annual rate, reflecting consistent, efficient execution and disciplined, balanced capital allocation. We strive to offer our customers an attractive value proposition by providing quality homes at affordable price points. We will continue to tailor our product offerings, sales incentives and number of homes in inventory based on demand in each of our markets to maximize returns. Mike Net income for the quarter was $905.3 million, or $3.04 per diluted share on consolidated revenues of $9.7 billion. For the year. Net income was $3.6 billion, or $11.57 per diluted share on revenues of $34.3 billion. Our fourth quarter home sales revenues were $8.5 billion on 23,368 homes closed. Our average closing sales price for the quarter of $365,600 is down 1% sequentially, down 3% year over year, and is down 9% from our peak sales price of more than $400,000 in 2022. Our average sales price is lower than the average sales price of new homes in the United States by $140,000, or almost 30%. Additionally, the median sales price of our homes is $65,000 lower than the median price of an existing home Bill Our net sales orders in the fourth quarter increased 5% from the prior year quarter to 20,078 homes, and order value increased 3% to $7.3 billion. Our cancellation rate for the quarter was 20%, up from 17% sequentially and down from 21% in the prior year quarter. Our cancellation rate is in line with our historical average. Our average number of active selling communities was up 1% sequentially and up 13% from the prior year. The average price of net sales orders in the fourth quarter was $364,900, which was flat sequentially and down 3% from the prior year quarter.

Jessica - (00:05:53)

Jessica Our gross profit margin on home sales revenues in the fourth quarter was 20%, down 180 basis points sequentially from the June quarter 110 basis points of the decrease in our gross margin from June to September was due to higher incentive costs on homes closed during the quarter and 60 basis points of the decrease was from higher than normal litigation costs. On a per square foot basis, home sales revenues were down roughly 1% sequentially, while stick and brick costs per square foot were flat and lot costs increased 3% for the first quarter. We expect our home sales gross margin to be flat to slightly up from the fourth quarter. We anticipate our incentive levels to remain elevated in fiscal 2026, with both incentive levels and home sales gross margin for the full year dependent on the strength of demand during the spring selling season. Changes in mortgage interest rates and other market conditions.

Bill Wheat - Chief Financial Officer - (00:06:46)

Market conditions bill our fourth quarter home building SG&A expenses were flat with the prior year quarter and Homebuilding SG&A expenses as a percentage of revenues was 7.9% for the year. Homebuilding SG&A was 8.3% of revenues. Our annual SG&A expenses increased 3% primarily due to the expansion of our platform, including a 13% increase in our average community count. The investments we have made in our team and platform position us to continue producing strong returns, cash flow and market share gains and we remain focused on managing our SG&A costs efficiently across our operations. Paul, we started 14,600 homes in the September quarter and ended the year with 29,600 homes in inventory, down 21% from a year ago. 19,600 of our total homes at September 30th were unsold. 9,300 of our unsold homes at year end were completed, including 800 that had been completed for greater than six months. For homes we closed in the fourth quarter, our median cycle time measured from home start to home close, decreased by a week from the third quarter and two weeks from a year ago. Our improved cycle times enable us to hold fewer homes in inventory and turn our housing inventory more efficiently. We expect our sales pace will increase in the first half of our fiscal year in preparation for the spring selling season and we will continue to manage our homes and inventory and starch pace based on market conditions. Mike Our home building lot position at year end consisted of approximately 592,000 lots of which 25% were owned and 75% were controlled through purchase contracts. 78,000 or roughly half of our own lots are finished and the majority of our option lots will be finished when we purchase them over the next several years. We are actively managing our investments in lots, land and development based on current market conditions. We remain focused on our relationships with land developers across the country to allow us to build more homes on lots developed by others. Of the homes we closed during the quarter, 65% were on a lot developed by either forestar or a third party, up from 64% in the prior year. Quarter our fourth quarter home building investments in lots of land and development totaled $2 billion, of which $1.3 billion was for finished lots, $540 million was for land development and $120 million was for land acquisition. For the year, our home building investments in lots, land and development totaled $8.5 billion. Paul in the fourth quarter our rental operations generated $81 million of pre tax income on on $805 million of revenues from the sale of 1,565 single family rental homes and 1,815 multifamily rental units. For the full year, our rental operations generated $170 million of pre tax income on $1.6 billion of revenues from the sale of 3,460 single family rental homes and 2,947 multifamily rental units. Our rental property inventory at September 30 was $2.7 billion, down 7% from a year ago and consisted of $378 million of single family rental properties and $2.3 billion of multifamily rental properties. We remain focused on improving the capital efficiency and returns of our rental operations. Jessica.

Jessica - (00:10:32)

Forestar is our majority owned residential lot development company and our strategic relationship is a vital component of our returns focused business model. Forestar reported revenues for the fourth quarter of $671 million on 4,891 lots sold with pre tax income of $113 million. For the full year, Forestar delivered 14,240 lots generating $1.7 billion of revenues and $219 million of pre tax income. 62% of Forestar's owned lots are under contract with or subject to a right of first offer to deor Horton and and $470 million of our finished lots purchased in the fourth quarter were from Forestar. Forestar's strong separately capitalized balance sheet, substantial operating platform and lot supply position them well to provide essential finished lots to the homebuilding industry and aggregate significant market share over the next several years.

Mike Murray - Chief Operating Officer - (00:11:28)

Mike Financial Services earned $76 million of pre tax income in the fourth quarter on $218 million of bright revenues with a pretax profit margin of 34.7%. For the year, Financial Services earned $279 million of pre tax income on $841 million of revenues with a pre tax profit margin of 33.1%. As we now post the supplemental data presentation to our investor website prior to the call, we will no longer review detailed mortgage metrics during our prepared remarks. Bill Our capital allocation strategy is disciplined and balanced to support an expanded operating platform that produces attractive returns and substantial operating cash flows. 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. During fiscal 2025, we generated $3.4 billion of operating cash flow, representing 10% of our total revenues and 95% of our net income. During the fourth quarter, we repurchased 4.6 million shares of common stock for $689 million. For the full year, we repurchased 30.7 million shares for $4.3 billion, which reduced our outstanding share count by 9% from the prior year end. We also paid cash dividends of $118 million during the quarter and $495 million during fiscal 2020. Our fiscal year end stockholders equity was $24.2 billion, down 4% from a year ago. However, our book value per share was up 5% from a year ago to $82.15. At September 30, we had $6.6 billion of consolidated liquidity consisting of $3 billion of cash and $3.6 billion of available capacity on our credit facilities. We repaid $500 million of our 2.6% senior notes in September, and debt at the end of the quarter totaled $6 billion. We have no senior note maturities in fiscal 2026. Our consolidated leverage at fiscal year end was 19.8% and we plan to maintain our leverage around 20% over the long term. Based on our strong financial position and cash flow. Our board declared a new quarterly dividend of $0.45 per share, a 13% annualized increase compared to the prior year, making fiscal 2026 our 12th consecutive year of dividend growth.

Jessica - (00:14:00)

Jessica Looking forward to fiscal 2026, we expect new home demand to reflect ongoing affordability constraints and cautious consumer sentiment as outlined in our press release this morning. For the full year of fiscal 2026, we currently expect to generate consolidated revenues of approximately $33.5 to $35 billion and homes closed by our homebuilding operations to be in the range of 86,000 to 88,000 homes. We forecast an income tax rate for fiscal 2026 of approximately 24.5%. We expect to generate at least $3 billion of cash flow from operations in fiscal 2026. We currently plan to purchase approximately $2.5 billion of our common stock during fiscal 2026 in addition to paying dividends of around $500 million. For our first fiscal quarter ending December 31, we currently expect to generate consolidated revenues in the range of $6.3 to $6.8 billion and homes closed by our home building operations to be in the range of 17,100 to 17,600 homes. We expect our home sales gross margin for the first quarter to be in the range of 20 to 20.5% and our consolidated pre tax profit margin to be in the range of 11.3 to 11.8%. Finally, we expect our income tax rate for the quarter to be approximately 24.5%.

Paul Romanowski - President and CEO - (00:15:26)

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. All of these are key components of our operating platform that support our ability to aggregate market share, generate substantial operating cash flows and return capital to investors. We recognize the current volatility and uncertainty in the economy and we will continue to adjust to market conditions in a disciplined manner to enhance the long term value of our company. Looking ahead, we have a positive outlook for the housing market over the medium to long term. 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. Let's continue working to improve our operations and provide homeownership opportunities to more individuals and families during 2026. This concludes our prepared remarks. We will now host questions. Thank you. At this time we will be conducting a question and answer session. In the interest of time, we ask that participants limit themselves to one question and one follow up on today's call. If you would 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. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please. While we poll for questions, the first question today is coming from John Lavallo from ubs. John, your line is live. Good morning guys. Thanks for taking my questions. The first one is when we think about the walk from the 20% gross margin in the fourth quarter to the 20 to 20.5 in the first quarter, I mean, how do we sort of think about incentives, land, labor, material costs, and is the warranty litigation cost expected to remain a 60 basis point headwind or how should we sort of think about that piece? Thanks, John. The 60 basis points unusual impact from litigation this quarter is not expected to persist into Q1. Our baseline would be that we have a more normal impact from warranty and litigation going forward. And so if you take our 20.0% reported margin this quarter pro forma for the litigation would be 20.6 this quarter. And so our guide of 20 to 20.5 would be down slightly from Q4 to Q1 gross margin. And that just reflects the environment we're in and the level of incentives that we're seeing. And our exit gross margin at the end of the quarter was a bit lower than we anticipated coming into the quarter. And so that's what was reflected in the Q1 guide. Makes sense. I mean it's also the slowest quarter of the calendar year, so that would make sense. But okay, if we think about the start pace in the quarter, it seems like it was down fairly meaningfully. I mean, rough math, maybe 30% per community, I guess. How quickly can you ramp this to meet demand if it exceeds your expectations even to get to that sort of 87,000 deliveries at the midpoint? John, our starts were lower certainly in the quarter and that was intentional as we look to get our inventory in line with where it is. Also in response to our continued improvement in our cycle times, feel like we don't need to carry as much inventory and also an opportunity for us in a slower starch environment to go into the market with our vendors and try and find reduced stick and brick as we move into the spring season. And we're going to need to increase our starts as we go through the quarter and into the spring, but feel very good about our ability from a labor base and from our positioning of our communities and our lot supply to respond to the market as it comes at us. Yeah, makes a lot of sense. Okay, thank you guys. Thank you. The next question will be from Steven Kim from Evercore isi. Steven, your line is live. Yeah, thanks a lot guys. Appreciate all the color as always. I guess looking at your guide on OneQ it the gross margin, I think you've explained it pretty well here. But the consolidated pre tax still seemed a little lighter for us. I was curious as to whether or not Your outlook in 1Q is anticipating maybe just some seasonal lightness or something in profitability from either rental or four star financial services or is There something else maybe below the home building gross margin line that you might want to call out?

John Lavallo - Equity Analyst at UBS - (00:20:26)

We would expect rental to be a little bit softer quarter. We delivered a lot this year and so rental is lining up to be back end or back half of the year heavier again for us this year. And so that certainly would have an impact on our consolidated op margin. And then to your point, we'll just have less leverage on SGA from the lower closings volume on the homebuilding side.

Steven Kim - Equity Analyst at Evercore ISI - (00:20:49)

Gotcha. That's very helpful. I appreciate that. The second question relates to your free cash flow guide, which was healthy. You had talked about, I think in the past, being able to achieve free cash conversion, I think about 80 to 100%. I just want to make sure that I remember that correctly. Is that kind of in line with what you are looking for still on a go forward basis? Yes, we expect to be more consistent in our cash flow conversion going forward. This year cash flow as a percentage of revenues was between 10 and 11% overall and we expect to be in that range. The guide is roughly in that range as well. Okay, excellent. Thank you so much. Thank you. The next question will be from Sam Reed from Wells Fargo. Sam, your line is live. Awesome. Thanks so much. Quick follow ups on the gross margin. Just want to drill down a little bit deeper on that sequential step up in warranty expense just to make sure I fully understand kind of some of the puts and takes there, why you expect it to normalize into the first quarter. And then I'm sorry if I missed, but could you also just remind us what's embedded in Q1 on lot costs and stick and brick. Thanks. Sure. On the litigation, we had several large settlements that settled this quarter. Nothing outside of the ordinary course of business, but they were larger than normal just in terms of size. And that has an impact on some of the factors that we use in our litigation reserve model. So we had to increase a few of those and so that drove the change in the quarter. Those are elements we don't expect to repeat going into the going into the next quarter. And then as we look at margin going forward, our base expectation is we do expect our lot costs in our home closings to continue to increase incrementally and we're certainly going to be striving to offset that as best we can with stick and brick savings as we move into the year. That helps. And maybe drilling down a bit more detail on the incentive line items, it does look like incentives stepped up sequentially. Can you just break out the difference between step up in price discounting versus rate buy downs. And then I know you do buy down to some very below market rates in certain communities. Units as low as 3.99%. Just curious whether the proliferation of those significantly below market buy down stepped up in Q4. Thanks.

Sam Reed - Equity Analyst at Wells Fargo - (00:23:33)

Yes, Sam, So as we anticipated on our last call, we did expect to lean in more heavily to the offering of 399. That is something that we've been doing and we saw the mortgage rate in our backlog come down. It's actually below 5% today coming into this quarter. And we also saw a slight increase in the percentage of buyers sequentially that received a rate buy down overall. So that accounted for about 73% of our total closings in Q4, which was up from 72% sequentially.

Alan Ratner - Equity Analyst at Zelman & Associates - (00:24:08)

All very helpful. Thanks so much. I'll pass it on. Thank you. The next question will be from Alan Ratner from Zhelman and Associates. Alan, your line is live. Hey guys, good morning. Thank you for all the detail so far and apologies in advance, I got disconnected for a moment. So if I repeat a question, I'm sorry. But first question, just pretty solid order number, especially considering kind of the start pace way down. And just curious if you can kind of talk a little bit about how demand trended through the quarter and whether you feel like that year over year order growth is any indication of maybe a little bit of an improvement in demand as rates were coming down or was there perhaps a little bit of a shift in incentive strategy? I know incentives were up a bit for the quarter. Just curious if you kind of increased them in the back half of the quarter, that might have driven some of that order increase. I think we did see decent demand throughout the quarter. It was choppy as rates were a little bit volatile. And that will push people off the couch and back onto the couch, it seems like with the headlines. But we did lean into the incentives pretty hard in the quarter as we talked about and we expected to. We did start a fair number of homes in our June quarter and those homes were going to sell and close in September. And we have a few more in the backlog that will be closing out as well. But we moderated the start space to reflect a sales environment, as Paul says, to right size. Our inventory position and leaning into our production improvements. The ability to compress the cycle time will allow us to deliver homes faster from start sale to delivery at closing. And so in today's environment, we'd expect our starts in the first half of the year to be up from our recent starts pace that we've had.

Matthew Bouley - Equity Analyst at Barclays - (00:25:55)

Got it. Okay, that makes a lot of sense. And then second question. Just looking at your closing guide for 26 up slightly year on year, obviously your homes under construction are way down. It doesn't feel like there's anything today that would point to 26 being an up year from a demand perspective. So I'm just curious how you're thinking about maybe the upside and downside risks to that closing guidance. Obviously, it'll be dependent on the spring, but is this more you taking a view of, hey, we've got the community, we want to put homes on the ground and kind of keep the machine running, or is that actually your expectation that maybe lower rates a little bit is still solid economy, that you feel a little bit more positive about the demand outlook heading into this year, spring versus last? Alan, I would say that we are absolutely in position to deliver on the units in the guide. When you look at our community count being up 13% and, and that's been increasing double digits for some period of time. So we're not assuming increased absorption per flag to achieve this guide. We have the production capacity throughout the industry, we think, to deliver on that. And we have what I would characterize as solid traffic in our communities today. There's some uncertainty and consumer confidence certainly is keeping people on the fence. So ultimately it's going to depend on the spring selling season and the strength of the market. But we believe we're in position to deliver on our guide and feel good about our positioning today, even with our inventory, total housing inventory at a lower number. That's been purposeful because we believe we have the ability to deliver the units in a timely fashion. Makes sense. Thanks a lot. Thank you. And the next question will be from Matthew Bouley from Barclays. Good morning, everyone. Thank you for taking the questions. I have, I guess a similar question to what Alan just asked, but want to add a little more to it around the gross margin side and so obviously guiding to growth in a housing market that is not growing at the moment. And I hear you loud and clear on the community growth supporting that, but maybe in the context that the gross margins came in a little bit below the guide, even excluding the unusual litigation. So I'm trying to understand if there's any signal there, kind of any conceptual change to that balance between growth and gross margin, and perhaps are you actually willing to maybe sacrifice a little bit of gross margin here in order to drive those volumes higher this year? I think we're continuing to respond to the market that's in front of us on a day to day and week to week basis at each of our communities, the growth in the community count and the lots that are available to us today in our portfolio that are ready to start homes on is probably unprecedented in the company's history. Relative to our outlook for the years, we feel like we have a lot of flexibility to lean into the strength that materializes in the market. And at the same time, you cannot continue to run the machine to a zero profit margin. That makes zero sense whatsoever. Yep, got it. Okay, understood. And then maybe just zooming in to the lot costs. So I guess it sounded like there was still a little bit of inflation sequentially. I'm just curious that kind of the very front end, whether it's development costs or kind of renegotiating with your land counterparties, et cetera, is there an outlook to either flattening or eventually improving lot costs? And when may that begin to benefit you guys? Thank you. I think, Matt, given the mix of our overall lot portfolio and different age, I don't think you're going to see much of a shift in that over the next 12 months. We are seeing on the front end from a development cost perspective some flattening there and some reductions that we expect to take advantage of and new lots that are going on the ground either for us or through our third party developers. Not as much movement on the overall land, but we are seeing favorable opportunity to renegotiate on terms and time to control our lot position and the number of lots that we own based on market conditions. And I think an even better opportunity that we look at in 26 is renegotiating our stick and brick costs. Lot costs continue to be sticky and we're doing everything we can on that front. But we would expect our stick and brick costs to come down as we move throughout the year.

Rafe Jadrasich - Equity Analyst at Bank of America - (00:30:31)

Got it. Thanks guys. Good luck. And the next question is coming from Rafe Jadrasich from Bank of America. Raif, your line is live. Hi, good morning. Thanks for taking my question. I just wanted to ask on the second half, the delivery outlook seems like it's more second half weighted. Can you talk about the start space and community account that you're assuming? How do we think about the cadence of that through the year? I think overall, you know, our starts pace needs to move up, right? I mean at 14,600 starts this quarter, well below what we need to be doing on a quarterly basis. But again, that's been intentional to get our inventory in the pace that we're looking for and feel good about our capacity and ability to start into the market. But our starts are going to have to keep pace with or exceed our sales point pace a little bit as we look at the first and second quarters into this year. And with respect to community count, we've been seeing double digit year over year increases in community count. We do expect that to moderate at some point more to the mid to high single digit. But right now as we go into the year we are up double digits. So that positions us well to not have to plan for higher absorptions in order to achieve our volume and our business plan. Thank you. And then just following up on the last question, can you just tell us what the year over year increase is on lot cost and then what you'd expect that to be through 2026? Yeah, I think we were up 8% on a year over year basis on a per square foot for lot costs. And I think as we've said, we do expect that to remain pretty sticky at least on closings for the next year or so. And so it's probably best case mid single, but it could continue to be high single as well as it takes a little bit longer for that ultimately to flow through in our closings.

Trevor Allenson - (00:32:30)

Great. Thank you. Thank you. The next question will be from Trevor Allenson from Wolf Research. Trevor, your line is live. Hi, good morning. Thank you for taking my questions. First question is on demand in Texas. We've heard a couple of builders call out Texas being among the weaker markets here, but your South Central orders were up 11% year over year. So can you talk about what you're seeing? There is a strong order performance decision to lean more into volumes or you've got really strong community count growth. Did you see a lot of that come through in Texas? Just any commentary on what's driving the good order growth there relative to some weaker commentary from others. Trevor, I would describe Texas like a lot of markets and areas and geographies and that's choppy. You know, it's kind of market to market. You know, we did lean in as you saw in our margins. The incentives to drive the absorptions that we were looking for in the fourth quarter still have certainly bright spots throughout the state, but others that we still have an elevated inventory level that we in the industry need to work through in the coming months. Okay, thank you for that. And then second question, you've talked about getting your inventory lower in the quarter. You're also now talking though about increasing your start pace here. So perhaps that suggests that you feel good about where your inventory is at. What about for the industry more broadly relative to demand? Do you think that the reduced starts pace here recently has brought inventory more in alignment with current demand conditions? Or do you think, especially in some of these weaker markets, that there's still room for for inventory to move lower here late in 2025 and early in 2026? I do think the reduction in starts has helped to balance inventory market by market. Again, it is market by market. As you look at that across the board. Our slowdown in starts also gives us the opportunity to work on repricing some of our stick and brick cost. And the ability for us to sell houses and start houses and increase our start space is predicated upon the sales environment and the ability to reduce our vertical construction cost so that we can start houses. So I expect to see that the inventory balance helping support a backdrop of increasing starts into our December and March quarters. I think we've had a lot of chatter about builders just being more rational today. Right. And so we are seeing the industry, by and large, adjust their inventory overall so we don't end up in an oversupply situation in most of our markets.

Anthony Pettinari - Equity Analyst at Citi - (00:35:12)

Thank you for all the color and good luck moving forward. Thank you. The next question will be from Anthony Pettinari from Citi. Anthony, your line is live. Good morning. Your repurchase guide 2.5 billion, I think, is kind of significantly below what you'll probably end up doing in 25, despite cash generation could be somewhat similar year over year. Is that just caution early in the year or before the year starts? And then maybe more broadly, can you just talk about potential capital allocation priorities in 26 in terms of step up in land purchase, development or any other thoughts there? Yes, we repurchased $4.3 billion in fiscal 25. The guide of 2.5 is lower. It's all governed by our cash flow this year. We have said several times in fiscal 25 we had a unique situation coming into the year. We had a higher than normal level of liquidity coming into the year, so we felt like we had some cushion there to utilize it. And we took advantage of when our price was much lower to buy shares with that. We were also coming into fiscal 25 below our leverage target, so we had some room on our balance sheet and we did increase our leverage a bit and utilize that cash in our share repurchase as well. So we had some unique opportunities in fiscal 25 to lean in a bit, take advantage of the dislocation in our stock price. But going forward and over the long term, consistently our share repurchases and dividends will be governed by our level of cash flow. And right now, going into the year, every year has potential upside and downside relative to our business plan. But right now, our baseline is we expect to generate $3 billion of cash flow and essentially distribute it to our shareholders. $2.5 billion of share repurchase, $500 million of dividends. And so that's our baseline going into the year. And then we will adjust as necessary, depending on what the market shows us in the spring and ultimately what our cash flow generation is. Okay, that's very helpful. And then when I look at your net sales order growth year over year by region, it looks like you have relatively strong sales order growth, except in the Southeast. And I'm just wondering if you can give any kind of additional color on the Southeast, if there are MSAs that are stronger or weaker or particular inventory challenges or just any kind of color you can give on that region and kind of where you are in terms of visibility into inflection there generally within the southeast, Florida is a big component of the company and that's a huge component of the Southeast region. We report there are some markets within Florida that have struggled with some inventory balance issues. Notably Jacksonville and southwest Florida have had some excess inventory. And demand has been a while coming to absorb that. So that's kind of what you're seeing in the current quarter's results in the Southeast for us. Okay, that's helpful. I'll turn it over. Thank you.

Michael Reholt - Equity Analyst at J.P. Morgan - (00:38:27)

The next question will be from Michael Reholt from J.P. morgan. Michael, your line is live. Great. Thanks everyone. Appreciate taking my questions. First, I wanted to circle back to the gross margins for a moment, but look at it from a perspective of we've highlighted, discussed the outlook for continued land cost inflation and the hope that that could be offset by lower labor material costs. I'm trying to get a sense for theoretically, let's say if from here on in, so from the 20% to 25% gross margin expected in the first quarter, if land costs are going to be up, let's say mid to high single digits, what type of reduction would you need in construction costs to offset that? So that gross margins would be flattish without any help from better pricing? I think absent of any pricing or reduction in incentives or breaks on the cost of our builder forward and financing, I think you need to see that somewhere in the 3% to 5% range. And we'll see how that comes in over the year. But I've certainly seen our vendors interested in the starch pace increasing, as are we. I mean, that's good for the industry and they recognize that they've been at the table with us to help do what we can to replace the homes that we're selling today with a more affordable home. And that's really the ultimate goal is to, is to open up home ownership to more people. So, you know, we do see the opportunity to balance the reality of the increased lot costs that we, we see over the next 12 months. And I appreciate that. Paul, what were construction costs on a year over year basis? For the fourth quarter. We were down 1% year over year and flat sequentially. And for the full year we were down about a point and a half.

Ken Zenor - Equity Analyst at Seaport Research Partners - (00:40:48)

Okay, that's helpful. And then I guess secondly on some of the regional commentary, I guess we've heard that Texas remains kind of choppy, I believe you said, and Florida, some pain points. I guess I'm interested in if those are the two markets today that you consider, broadly speaking, the most challenged across your footprint, or how does California and Pacific Northwest fit in there? And then if you've seen any change for the better or for the worse, Marginally better, Marginally worse. Where you sit today versus three months ago, I think California has also been a bit of a struggle. I think we're seeing some strength, or at least stability, if you will, across the Midwest and into the mid Atlantic. I think, you know, gauging it today compared to three months ago, I would say similar, you know, and it truly is choppy. I mean, and there's a lot of headlines and noise and you know, we would have expect to see a little bigger bump out of the reduction in mortgage rates that we've seen. And we've seen them come down a little more here recently and hope that that turns into more people getting off the the fence and into the buy box. But we do see interest in our sales offices and we do see people out there looking for homeownership. Great, thank you. Thank you. The next question will be from Ken Zenor from Seaport Research Partners. Ken, your line is live. Good morning, everybody. I want to take a step back if we could, just because orders are up. It's a big deal, right? In a market that is challenging. But could we start. First question, 20% gross margin guidance. While it's down sequentially, it's actually kind of in the range. If you take the historical view of the industry, that's pretty normal. So do you think that in fact, this could be the more normalized rate given how much you've improved your asset efficiency in terms of upwards of two thirds of your loss being bought, finished. And also, can you talk to a lot of the home builders describe consumer confidence? The way I look at it, we describe it as, you know, job growth in Dallas is kind of half what it was historically. Phoenix has been kind of flat the last six months. Vegas has been a bit negative. And I'm asking this because aren't we actually kind of in a more environment where the consumer, while interest rates matter and affordability matters, there's just not a lot of job growth. So it's more of a traditional economic slowdown. I think that job growth certainly, I mean absolutely has an impact on, you know, new household formations and you know, consumer confidence and you know, where you see that flatness and in those markets that is going to have an impact on go forward demand. Do still feel very good about our positioning across our markets and at the affordable price points and the need for housing. But ultimately, yes, Ken, we need to see consistent sustainable job growth to drive growth in the housing market. And the 20% question, I think we. Feel pretty good where our margin profile is based on the disruptions we've seen in the housing market over the last year or two and we've adjusted accordingly. And the bottom line op margin we're seeing still producing generally better than what our old historical norm would have been. Not ready to call a bottom on anything right now, but we do feel good still over the long term about running on average sustainably higher pre tax profit margins.

Susan McLauri - (00:45:09)

Okay, and then I guess you said incentives went up 120bps. I know you guys haven't quantified it in the past. I think it would be good if you did. But you said high single digits in the past. Are we in at the 120bp increase now? Bring us into low double digits in terms of incentives. No, it was 110 basis point sequential increase and we're still a high single digit percentage overall.

Charles Perron - (00:45:36)

And no specificity, I take it, correct?

Mike Dahl - (00:45:41)

No, I mean we give you the gross margin detail that shows kind of our core lot level gross margin and then the things that also impact our gross margin below that that we've already talked to in terms of the outsized litigation costs. We also did in our supplemental presentation break out external broker commissions now. So you'll see of the 110/10 basis points was related to increased broker commissions, which is to be expected when we're, you know, trying to drive in criminal sales.

Jade Rahmani - Equity Analyst at KBW - (00:46:09)

Thank you very much. Thank you. The next question will be from Susan McLauri from Goldman Sachs. Susan, your line is live. Hi everyone, this is Charles Perron. And for Susan, thanks for taking my question. First, I would like to discuss the performance of operations in smaller markets where you have a large market share. You've been successful in those markets in the past few years. Can you talk about the opportunity you're seeding there relative to your larger markets and how this influences your ability to outperform the market next year? Yeah, I think we have seen, you know, when we just kind of look at the beginning expectation or budget for some of those divisions, a higher level of able to achieve their intended absorptions and, you know, when we're in a lower competitive environment and we can react to the market, whether that's up or down, and control some of those inventories a little better. We, we have seen pretty solid performance in some of those and feel good about our geographic footprint. We've expanded quite a bit into some of those secondary markets over the last couple years and happy to see our divisions and our teams maturing in those markets. Gotcha. And second, I want to drill down on the ASB a little bit. Considering the 3% growth in closings and flat revenue guide for next year, this suggests the potential for ASP pressure continuing into fiscal 26. I guess. First, is this a fair assumption? And more broadly, how do you expect the ASP to trend in 2026 should market conditions persist and how much of that would be driven by like, for like, pricing versus mixed relative impact? Yeah, I mean, we continue to try to focus on affordability. That's one of the constraints in the market today. And so our ASP has been trending down, caused both by mix in terms of smaller homes and the mix of homes that we're providing, as well as the incentive levels that we're providing. So our base assumption is that we will continue to see a net decline in ASP in fiscal 2026 for those same reasons. Thanks for your time. Thank you. The next question will be from Mike Dahl from orbc. Mike, your line is live. Great. Thanks for taking my questions. I had another follow up on the starts and inventory dynamic. You guys did a great job on really significantly reducing inventory in the quarter. Now, at the same time, you're acknowledging that you do have to ramp start space consistent with how you've guided for the year. So that still absent market improvement suggests that you are going to ramp specs back up, which I understand is normal. Seasonally, but I'm trying to get a better handle on what exactly we should be thinking about in terms of your comfort level on ramping specs. Specifically back up into 1Q. Given the current market dynamics, I would say our preferred path is to sell the homes earlier in the process and be building more backlog. We are going to need to see an increase in start whether those are four specs or sold homes. But we just, with the, with the speed at which we're building homes, the ability to deliver with predictability of delivery date and rate even on a new start, we just don't need to carry as many total specs and feel comfortable with spec count that we have. And you know, we'll be managing that to the market as a service sales come. Got it. Okay. And then as a follow up, you did just close on the acquisition of SK Builders in South Carolina. I was wondering if you could comment a little bit more on how much contribution you expect from that. And then taking a step back, you know, you've done a number of these kind of tuck ins to help bolster market share at a local level and kind of firm up the growth, maybe give us, give us a broader view on how you're seeing the kind of the M and A and Baltimore landscape for yourselves. I think the SK acquisition helps our positioning in the Greenville, South Carolina market quite a bit. We picked up about 150 houses in inventory, another 400 lots on the ground today. And then sales orders on those homes in construction, about 2/3 of them are sold, you know, and then we got control over 1300 lots and good communities throughout the Greenville market. That will help, you know, further leverage our operating platform in Greenville. And with what happened there, you know, we continue to look at those tuck in opportunities to accelerate the pace of delivery of homes into those markets across the country. We tend to operate their capital structure, cost structure, you know, at a higher pace than some of the smaller builders do with some of the limitations they have on capital and cost. So it's very accretive to our platform and we look to see people that are really good at the small local home building are also generally very good at the local entitlement and some development operations and kind of decoupling their operations from entitlement development from home building and splitting it between us and them works out really well for a long term win win for both the seller and the Dr. Horton.

Jay McCandless - Equity Analyst at Wedbush - (00:51:31)

And if anyone's not familiar, that was an October transaction that didn't happen during the quarter. So it was subsequent to the year end.

Alex Riegel - Equity Analyst at Texas Capital - (00:51:40)

Thank you. Thank you. The next question will be from Jade Rahmani from kbw. Jade, your line is live. Thank you very much. I wanted to ask you about your view on interest rates and if you think a step down in mortgage rate will translate into further mortgage buy downs. In other words, if you will pass on that improvement to buyers in the new home market to maintain relative standing with the existing market or if you think those lower rates will actually alleviate some of the incentive pressure. Jade, you know, we're still solving for a monthly payment across most of our communities. And so, you know, the ability to offer a lower rate than market and to solve for a monthly payment, that it allows people to move forward with the purchase is what we will continue to do. You know, in the current environment, the reduction in rates generally has meant a little lower cost for us. In the rates that we're offering. We're still largely, you know, at the low end, about 3.99 rate that we're offering. And you know, we'll just see as it comes. I think it's probably going to be a combination of both. In other words, if, if we need to step down some more to drive to the monthly payment to open up the absorptions that we're looking for at a community level to drive the returns that we want, then we'll continue to do that. And if rates drop down and we are allowed to reduce our incentive in terms of the cost of that bfc, we'll take advantage of some of that. So I'd expect it to be a balance as we look forward. And in terms of buyer preferences on the incentive package, have you seen any shift toward outright lower home base prices or savings in other areas over mortgage buydowns? I think for our buyer, again, it still comes back to the monthly payment. And the most attractive monthly payment we can put them in is with a lower rate. And I think it's, you know, it's a benefit to the homeowner over time in terms of they're paying down more of their principal. And I think just overall it's been a, but it's been a solid incentive and probably the most that people have taken and had interest in is still at the lower rate. Thank you. Thank you. The next question will be from Jay McCandless from Wedbush. Jay, your line is live. Hey, good morning everyone. So, just wanted to follow up on your comments. I think it was, Bill, you said that the exit rate on gross margins at the end of the quarter was lower than you guys expected. Was that more Incentives, higher lot costs. Maybe talk about that a little bit. And what have you seen so far in October, you know, on a like for like basis, we landed about 40 basis points below the low end of our guide for Q4. And really most of that we would, we would put at the feet of incentives what it took in order to get the sales for the closings that needed that we needed to generate the volume to generate our return for fiscal 25 ended up being a little bit more than what we anticipated as we went into the quarter. And so as we go into Q1, we'll be trying to strike the balance as best we can, but we are starting Q1 at a lower entry point than we did when we entered Q4. Got it. Okay. And then I can't remember who made the comment about this, but about lower rates seeming to drive some traffic, but maybe not conversions, I guess. What are y' all hearing from the field? Why aren't people willing to go ahead and pull the trigger? I mean, I know we've all talked about confidence ad nauseam at this point, but are there other things that you're hearing from the field that are keeping people from going ahead and stepping up and buying the home? In some cases they want to buy the home. It's qualification issue for what payment they can afford. So as Paul said, we're solving back for a payment and when we can align that payment that's attainable for them, they are compelled to do that and make that move. Other buyers with rates bouncing around being volatile, they're thinking maybe I should wait for them to drop. Maybe I should. I can't afford now because they're spiking up. I think we'll see rates, if rates drop, we'll see an increase in the transactions in the existing home side which helps relocate people and shuffle them around a little bit. And those folks then will be looking for different housing options other places. And we see a lot of people with house to sell contingencies that come in that want to buy a house but they can't get their house sold. Got it. Okay, thank you. Thank you. And the next question will be from Alex Riegel from Texas Capital. Alex, your line is live. Thank you. What percentage of your buyers are using adjustable rate mortgages and how has that changed over the last 12 months? Sure. It's come from essentially zero to mid to high single digit percentage on closings this most recent quarter. And we have introduced some new ARM products tethered to a rate buy down. I do think our base case would be that percentage continues to drift up, but it won't move sharp.

Paul Romanowski - President and CEO - (00:57:01)

And then secondly, as you reaccelerate starts, can you comment on the average square footage of the floor plans? Have you changed it much at all or do you expect sort of modestly smaller homes, kind of for the foreseeable future? I would say modestly smaller. You know, our square footage has continued to drift down slightly, but not a significant change over the last 12 months. I think where we are today and where we have starch coming, it'll be on the smaller end in the community. But we'll respond to the market as it comes. The good news about having the ability to sell early in the process is it opens up us to be more responsive to the market and not just responding with the inventory that we've already selected. Thank you very much. Thank you. This does conclude today's Q and A. I will now hand the call back to Paul Romanowski for closing remarks. Thank you, Paul. We appreciate everyone's time on the call today and look forward to speaking with you again to share our first quarter results on Tuesday, January 20th. Congratulations to the entire Dr. Horton family on a successful fiscal 2025. Due to your efforts, we just completed our 24th consecutive year as the largest builder in the United States. We are honored to represent you on this call and we look forward to everything we will accomplish together in fiscal 2026. Thank you. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your particip.