D.R. Horton Q2 2024 Earnings Call Transcript

AlphaStreet
Provided by AlphaStreet
April 18, 2024
Skip to Questions & Answers
Operator

Good morning and welcome to the Second Quarter 2024 Earnings Conference Call for DR 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] I will now turn the call over to Jessica Hansen, Senior Vice President of Communications for DR Horton.

Jessica Hansen
Vice President, Investor Relations at D.R. Horton

Thank you, Tom, and good morning. Welcome to our call to discuss our financial results for the second quarter of fiscal 2024. Before we get started, today's call includes forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Although DR Horton believes any such statements are based on reasonable assumptions, there is no assurance that actual outcomes will not be materially different. All forward-looking statements are based upon information available to DR Horton on the date of this conference call, and DR Horton 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 DR Horton's annual report on form 10-K and its most recent quarterly report on form 10-Q, both of which are filed with the Securities and Exchange Commission.

This morning's earnings release can be found on our website at investor.drhorton.com, and we plan to file our 10-Q early next week. After this call, we will post updated investor and supplementary data presentations to our Investor Relations site on the presentation section under News and Events for your reference.

Now, I will turn the call over to Paul Romanowski, our President and CEO.

Paul Romanowski
President and Chief Executive Officer at D.R. Horton

Thank you, Jessica, and good morning. I'm pleased to also be joined on this call by Mike Murray, our Executive Vice President and Chief Operating Officer and Bill Wheat, our Executive Vice President and Chief Financial Officer.

For the second quarter, the DR Horton team delivered solid results, highlighted by earnings of $3.52 per diluted share. Our consolidated pretax income increased 23% to $1.5 billion on a 14% increase in revenues to $9.1 billion, with a pretax profit margin of 16.8%. Our homebuilding return on inventory for the trailing 12 months ended March 31st was 29.9% and our return on equity for the same period was 22.2%.

Although inflation and mortgage interest rates remain elevated, our net sales orders increased 46% for the first quarter and 14% from the prior year quarter, as the supply of both new and existing homes at affordable price points is still limited, and the demographics supporting housing demand remained favorable. Homebuyer demand during the spring selling season thus far has been good despite continued affordability challenges. With 45,000 homes in inventory, we are well positioned to continue consolidating market share. Our average construction cycle times are back to normal and our housing inventory turns are improving.

We continue to focus on capital efficiency to produce consistent, strong homebuilding, operating cash flows and returns. Mike?

Mike Murray
Executive Vice President, Chief Operating Officer at D.R. Horton

Earnings for the second quarter of fiscal 2024 increased 29% to $3.52 per diluted share compared to $2.73 per share in the prior year quarter. Net income for the quarter was $1.2 billion on consolidated revenues of $9.1 billion.

Our second quarter home sales revenues increased 14% to $8.5 billion on 22,548 homes closed, compared to $7.4 billion on 19,664 homes closed in the prior year. Our average closing price for the quarter was $375,500, flat sequentially and down 1% from the prior year quarter. Bill?

Bill Wheat
Executive Vice President, Chief Financial Officer at D.R. Horton

Our net sales orders in the second quarter increased 14% to 26,456 homes, and order value increased 17% from the prior year to $10.1 billion. Our cancellation rate for the quarter was 15%, down from 19% sequentially and 18% in the prior year quarter. Our average number of active selling communities was up 4% sequentially and up 15% year over year.

The average price of net sales orders in the second quarter was $380,400, up 1% sequentially and up 2% from the prior year quarter. To address affordability for homebuyers, we are still using incentives such as mortgage rate buy downs, and we have reduced the prices and sizes of our homes where necessary. Based on current market conditions and mortgage rates, we expect our incentives to remain at these elevated levels in the near term.

Our sales continue to be primarily from homes under construction and completed homes, and we will continue to start homes and maintain sufficient inventory to meet sales demand and aggregate market share. Jessica?

Jessica Hansen
Vice President, Investor Relations at D.R. Horton

Our gross profit margin on home sales revenues in the second quarter was 23.2%, up 30 basis points sequentially from the December quarter. On a per square foot basis, home sales revenues and stick and brick costs were both essentially flat in the quarter, while lot costs increased 3%. Our home sales gross margin for the full year fiscal 2024 will be dependent on the strength of demand during the rest of the spring selling season, in addition to changes in mortgage interest rates and other market conditions. For the third quarter, we expect our home sales gross margin to be similar to or slightly better than the second quarter. Bill?

Bill Wheat
Executive Vice President, Chief Financial Officer at D.R. Horton

In the second quarter, our homebuilding SG&A expenses increased by 13% from last year and homebuilding SG&A expense as a percentage of revenues was 7.2%, down 10 basis points from the same quarter in the prior year. Fiscal year to date, homebuilding SG&A was 7.7% of revenues, up 20 basis points from the same period last year, due primarily to the expansion of our operations to support growth. We will continue to control our SG&A while ensuring that our platform adequately supports our business. Paul?

Paul Romanowski
President and Chief Executive Officer at D.R. Horton

We started 24,900 homes in the March quarter and ended the quarter with 45,000 homes in inventory, up 3% from a year ago and up 6% sequentially. 27,600 of our homes at March 31st were unsold. 7,300 of our total unsold homes were completed, of which 790 had been completed for greater than six months. For homes we closed in the second quarter, our construction cycle time improved slightly from the first quarter and we are back to our historical average of four months from start to complete. We will maintain a sufficient starts pace and homes and inventory to meet demand and continue consolidating market share. Mike?

Mike Murray
Executive Vice President, Chief Operating Officer at D.R. Horton

Our home building lot position at March 31st consisted of approximately 617,000 lots, of which 23% were owned and 77% were controlled through purchase contracts. We remain focused on our relationships with land developers across the country to maximize returns. These relationships allow us to build more homes on lots developed by others. Of the homes we closed this quarter, 62% were on a lot developed by Forestar or a third party. Our capital efficient and flexible lot portfolio is a key to our strong competitive position.

Our second quarter homebuilding investments in lots, land and development totaled $2.4 billion. Our investments this quarter consisted of $1.4 billion for finished lots, $760 million for land development and $230 million for land acquisition. Paul?

Paul Romanowski
President and Chief Executive Officer at D.R. Horton

In the second quarter, our rental operations generated $33 million of pretax income on $371 million of revenues from the sale of 1,109 single family rental homes and 424 multifamily rental units. Our rental property inventory at March 31st was $3.1 billion, which consisted of $1.3 billion of single-family rental properties and $1.8 billion of multifamily rental properties. We are not providing separate annual guidance for our rental segment due to the uncertainty regarding the timing of closings caused by interest rate volatility and capital market fluctuations. Based on our current pipeline of projects, we expect our rental revenues in the third quarter to be similar to the second quarter. Jessica?

Jessica Hansen
Vice President, Investor Relations at D.R. Horton

Forestar, our majority owned residential lot development company, reported revenues of $334 million for the second quarter on 3,289 lots sold with pretax income of $59 million. Forestar's owned and controlled lot position at March 31st was 96,100 lots. 60% of Forestar's owned lots are under contract with or subject to a right of first offer to DR Horton. $310 million of the finished lots we purchased in the second quarter were from Forestar.

Forestar had approximately $800 million of liquidity at quarter end, with a net debt to capital ratio of 16.4%. Forestar remains uniquely positioned to capitalize on the shortage of finished lots in the homebuilding industry, and to aggregate significant market share over the next few years with its strong balance sheet, lot supply and relationship with Dr Horton. Mike?

Mike Murray
Executive Vice President, Chief Operating Officer at D.R. Horton

Financial Services earned $78 million of pretax income in the second quarter, $226 million of revenues, resulting in a pretax profit margin of 34.6%. During the second quarter, essentially, all of our mortgage company's loan originations related to homes closed by our home building operations, and our mortgage company handled the financing for 80% of our buyers. FHA and VA loans accounted for 59% of the mortgage company's volume.

Borrowers originating loans with DHI Mortgage this quarter had an average FICO score of 725, and an average loan-to-value ratio of 89%. First time homebuyers represented 57% of the closings handled by a mortgage company this quarter. Bill?

Bill Wheat
Executive Vice President, Chief Financial Officer at D.R. Horton

Our balanced capital approach focuses on being disciplined, flexible and opportunistic to sustain an operating platform that produces consistent returns, growth and cash flow. We continue to maintain a strong balance sheet with low leverage and significant liquidity, which provides us with the ability to adjust to changing market conditions. During the first six months of the year, our consolidated cash used in operations was $470 million, and our homebuilding operations provided $408 million of cash. At March 31st, we had $5.7 billion of consolidated liquidity consisting of $3.1 billion of cash and $2.6 billion of available capacity on our credit facilities.

Debt at the end of the quarter totaled $5.9 billion with no senior note maturities in fiscal 2024. Our consolidated leverage at March 31st was 20%, and consolidated leverage net of cash was 10.8%. At March 31st, our stockholders equity was $23.8 billion, and book value per share was $72.13, up 19% from a year ago. For the trailing 12 months ended March 31, our return on equity was 22.2% and our consolidated return on assets was 15.1%.

During the quarter, we paid cash dividends of $0.30 per share totaling $99 million, and our board has declared a quarterly dividend at the same level to be paid in May. We repurchased 2.7 million shares of common stock for $402 million during the quarter, and our fiscal year to date stock repurchases were $801 million. Jessica?

Jessica Hansen
Vice President, Investor Relations at D.R. Horton

For the third quarter, we currently expect to generate consolidated revenues of $9.5 billion to $9.7 billion, and homes closed by our homebuilding operations to be in the range of 23,500 to 24,000 homes. We expect our home sales gross margin in the third quarter to be approximately 23% to 23.5%, and home building SG&A as a percentage of revenues to be approximately 7%. We anticipate a financial services pretax profit margin of around 30% to 35% in the third quarter, and we expect our quarterly income tax rate to be approximately 24%.

Our full year fiscal 2024 revenue, pricing and margins will be affected by market conditions and changes in mortgage rates, in addition to our efforts to meet demand by balancing sales, pace and price to maximize returns. For the full year of fiscal 2024, we now expect to generate consolidated revenues of approximately $36.7 billion to $37.7 billion and expect homes closed by our homebuilding operations to be in the range of 89,000 to 91,000 homes.

We continue to expect to generate approximately $3 billion of cash flow from our homebuilding operations. We now plan to purchase approximately $1.6 billion of our common stock for the full year in addition to our annual dividend payments of around $400 million.

Finally, we now expect an income tax rate for fiscal 2024 in the range of 23.5% to 24%. We are balancing our cash flow utilization priorities to grow our operations, pay an increased dividend and consistently repurchase shares while maintaining strong liquidity and conservative leverage. Paul?

Paul Romanowski
President and Chief Executive Officer at D.R. Horton

In closing, our results and position reflect our experienced teams, industry leading market share, broad geographic footprint and diverse product offerings. All of these are key components of our operating platform that sustain our ability to produce consistent returns, growth and cash flow while continuing to aggregate market share. We will maintain our disciplined approach to investing capital to enhance the long-term value of the company, which includes returning capital to our shareholders through both dividends and share repurchases on a consistent basis.

Thank you to the entire DR Horton family of employees, land developers, trade partners, vendors and real estate agents for your continued focus and hard work. This concludes our prepared remarks. We will now host questions.

Skip to Participants
Operator

Thank you. The floor is now open for questions. [Operator Instructions] And the first question this morning is coming from Carl Reichardt from BTIG. Carl, your line is live. Please go ahead.

Carl Reichardt
Analyst at BTIG Research

Thanks. Morning everybody. I wanted to talk about Florida. It's a pretty important market for you all, the long experience there. We've seen an increase in existing home inventory in some parts of that market, and we obviously know higher insurance costs are also coming to bear there. So, could you talk a little bit in some detail about your performance there? May be the various markets within Florida, and how it feels to you right now.

Paul Romanowski
President and Chief Executive Officer at D.R. Horton

You know, Carl, Florida still feels good to us. There certainly has been a lot of news tied to the rise in insurance rates, and for most of where we sell our homes are off the coast and building new construction allows for some stability in those insurance rates. So haven't seen as significant increase for the homes in the communities where we sell, as you may see reported along the coastal and high wind zones. Still seeing good in migration and good job growth throughout the Florida market. So, we feel pretty good about the Florida market and especially about our positioning at the more affordable price points across the Florida peninsula.

Carl Reichardt
Analyst at BTIG Research

Thanks. And then follow up multifamily and single family for sale, that portfolio business with some lumpiness there. I'm curious about the markets where you've got fairly good sized operations in multifamily and single family rental. One of the reasons for you entering and playing more significantly in that space, I think, is scale benefits for the overall homebuilding operation. So, if you think about the markets where you're big in those two businesses, are you seeing lower overall vertical costs for the home building operation too, or better margins and maybe sort of expand a little bit on that particular element of the business? Thanks.

Paul Romanowski
President and Chief Executive Officer at D.R. Horton

I think there's two big factors that drive into our push into the rental business. One is we're a better buyer of land, a better user of land, and that we're able to convert more of the land to its ultimate final use. So, we're a better counterparty to a lot of sellers as we can deal with the build for rent, the multifamily component, as well as the residential for sale. That gives us some economies in the purchase of the land and efficiencies in the entitlement process. Certainly, within the vertical cost structure, we've probably seen more ability to influence cost on the traditional multifamily side coming over from our home building operations, because we're much bigger buyers of parts and pieces that go into the structures than a traditional multifamily developer is.

Carl Reichardt
Analyst at BTIG Research

Okay, I appreciate it. Thanks all.

Operator

Thank you. Your next question is coming from John Lovallo from UBS. John, your line is live. Please go ahead.

John Lovallo
Analyst at UBS Group

Good morning, guys, and thank you for taking my questions. The first one, obviously there's a lot of concern in the market given the stickier than expected CPI. Although rates, the long-term mortgage rates only moved up by about 35 basis points since pre-CPI. I guess the question is, have you seen or would you expect to see any impacted demand or would there be any change in your incentive activity given this 35-basis point move in rates?

Paul Romanowski
President and Chief Executive Officer at D.R. Horton

We, you know, we expect to continue to meet the market and, you know, we continue to stay focused on incentives that drive that activity. And interest rate buy downs has been a portion of what we have done. We tend to move with the market. So, as you've seen that increase in market rates, we will move up the rate buydowns to be about 1 point to 1.5 points below market. But we do expect incentives to remain near their elevated levels today, especially with the rate instability and stickiness up in that 7% range today.

John Lovallo
Analyst at UBS Group

Understood. And maybe splitting hairs slightly here, but you guys beat deliveries versus your outlook in the quarter by about 2,300 units at the midpoint. Raise the outlook by about 1,500 units at the midpoint. Was there some pull forward in the second quarter or is there some conservatism in this outlook? Or maybe the expectation that delivery pace could moderate to some extent? I mean, how should we think about that?

Jessica Hansen
Vice President, Investor Relations at D.R. Horton

Yeah, great, great question, John. We did go into the quarter with a significant number of completed specs. So, we actually sold and closed intra quarter 54% of our houses. And so that is a very high percentage for us. A typical range would be about 35% to 40% of our homes would be sold and closed within the same quarter. So, we still have over 7,000 completed specs. So, I do think you'll see that intra-quarter activity stay higher than our historical norms. It may not be at the 54% we saw this quarter, but that did allow for probably a little bit of pull forward of demand, and it gave us the confidence to up the low end of our range by the full 2,000 units that we beat, and then the high end of our range by just 1,000. And we're now, you know, back to normal if not better than our historical inventory turns in terms of what we're guiding to at the high end, it'd be a roughly 2.2 times churn. So, feel very good about, about the ability to take that range up, but don't think there's necessarily an opportunity for the same scale of beat next quarter.

John Lovallo
Analyst at UBS Group

Yeah, makes a lot of sense. Thank you, guys.

Operator

Thank you. Your next question is coming from Stephen Kim from Evercore ISI. Stephen, your line is live. Please go ahead.

Stephen Kim
Analyst at Evercore ISI

Thanks very much, guys. Strong quarter. Appreciate all the guidance thus far. Was curious if you could shed a little bit more light regarding your cash flow guidance. You mentioned about $3 billion from homebuilding specifically, but you do have other segments. You have the rental segment and you have Forestar in particular. And I was curious as to what kind of an offset should we expect from rental or Forestar this year relative to that $3 billion from home building? And then specifically with rental, you have about $3.1 billion in inventory value right now. Where do you think that's going to go over the next, let's call it 12 months or so.

Bill Wheat
Executive Vice President, Chief Financial Officer at D.R. Horton

Sure, Steve. On our cash flow guide, we have been guiding to home building cash flow because that has been the primary [Technical Issues] of cash for us over the last couple of years. And we have invested portions of that into the rental operations as well, which feeds to the consolidated cash flow from ops. So, there is some offset versus the home building cash flow this year. We're guiding to around $3 billion of homebuilding cash flow. Would expect in the $800 million to $1 billion dollar range, probably as an offset to that for the full year, this year unconsolidated, but we do expect that gap to start narrowing in future years as the growth ramp of our rental platform starts to moderate. And so, we would expect, going forward, our consolidated cash flow and our home loading cash flow to be much nearer to the same number beyond fiscal '24.

So, with the rental platform, you know, asset growth moderating, we're at 3.1 today. We do still expect to see that grow a bit further this year, and will grow slightly next year, primarily from the multifamily platform. Our multifamily platform continues to grow, and we're building out a more elevated level of starts over the last couple of years, but that will, probably late '25 start to moderate as well. And so, we do see prospects for the cash flow on a consolidated basis to be increasing consistently from here into '24 and into '25.

Stephen Kim
Analyst at Evercore ISI

Okay, that's helpful. Appreciate that. And then with respect to uses of cash, I think, as always, you talk about the opportunity for growth and your market share across the country still leaves some room there. And so, I wanted to ask about your community count. You were up 4% month-to-month, up 15% year-over-year. That's an area where a lot of other builders have struggled. And I'm curious if you can provide a little bit of granularity into how much you expect there's further opportunity for growth this year in your community count, and what you generally target for the next year or two in terms of community count growth?

Jessica Hansen
Vice President, Investor Relations at D.R. Horton

Sure, Steve. We've been up at double-digit percentage on a year-over-year basis for community count now for several quarters. So, we've probably got at least another quarter or so until we've cycled and anniversary that, and would expect the growth to moderate a bit. But as look at our overall lot position and our positioning for the future to continue to drive growth, we have shifted to a lot of that coming from community count rather than just continuing to have to drive more absorption out of each and every community. So, I do think you'll continue to see our community count grow. It just probably won't continue to be at the double-digit percentage year-over-year increase here in a quarter or two.

Stephen Kim
Analyst at Evercore ISI

Okay, gotcha. So like, more like, kind of like a high single digit kind of rate is what you're talking about, right?

Jessica Hansen
Vice President, Investor Relations at D.R. Horton

Yeah, mid to high.

Stephen Kim
Analyst at Evercore ISI

Okay, gotcha. Appreciate it. Thanks very much, guys.

Operator

Thank you. Your next question is coming from Matthew Bouley from Barclays. Matthew, your line is live. Please go ahead.

Matthew Bouley
Analyst at Barclays

Good morning, everyone. Thank you for taking the questions. I wanted to ask around start pace going forward, perhaps assuming we live in this kind of mid to high sevens mortgage rate environment, is there a scenario where you would dial back production at all to the extent it supports price or margin or maybe said another way, is there a mortgage rate at which you would consider pulling back a little bit on starts? Thank you.

Mike Murray
Executive Vice President, Chief Operating Officer at D.R. Horton

I think we're going to manage the start space at a community-by-community level based upon what we're seeing with buyers in the market and how they're responding to the current interest rate environment and mix of incentives that we're offering. You know, traditionally, we've had a limiter for the past several periods on lot supply in terms of what we could actually start. So, as we're seeing our lots get developed and get brought online, we're able to bring good production starts into the market. I think we started just under 25,000 homes in the quarter. And, you know, we probably expect that to continue into the June quarter. You know, as if we see continued absorptions and sales.

Jessica Hansen
Vice President, Investor Relations at D.R. Horton

And so, with our gross margin currently over 23% and very solid, it would take a pretty big disruption in the market for you to see us have a broad based across the board pull back and starts. As Mike alluded to, it's going to be just driven on a community-by-community basis like it always is, based on our finished lot position, and what makes the most sense to maximize returns at that individual community level.

So, as we see right now, you know, without another big shock or any sort of big shock to the system or a more significant move in rate, I think we would expect our starts to be pretty consistent through the remainder of the year.

Matthew Bouley
Analyst at Barclays

Got it. Very helpful. Secondly, I wanted to ask around credit and DTI metrics, particularly for your first-time buyers. Are you seeing any sort of incremental signs of stress in your mortgage applications just given this affordability backdrop? Thank you.

Paul Romanowski
President and Chief Executive Officer at D.R. Horton

No, we've seen a pretty, pretty solid level of qualified buyer. Our average FICO store this last quarter was still at 725. And with the low level of inventory and available homes to purchase out there, we still see a strong buyer demographic and demand, and we've remained pretty consistent. We have seen fluctuation in rates, but they've really not been significant enough to have any meaningful impact on our backlog and people's ability to qualify.

Matthew Bouley
Analyst at Barclays

Great. Thanks everyone.

Operator

Thank you. Your next question is coming from Michael Rehaut from J.P. Morgan. Michael, your line is live. Please go ahead.

Mike Rehaut
Analyst at J.P. Morgan Chase and Company

Thanks. Good morning, everyone. Just wanted to drill down, if possible, a little bit on, you know, the demand trends over the last couple of months. And I know you don't typically go too far down the rabbit hole in terms of month to month, but obviously with the change in rates, with some of the concerns in the market, any kind of January, February, March, April type of progression. We've heard that, for example, March, I'm sorry, March and April maybe are a little bit more moderate than what we saw in February. I'd love your take on just, you know, how the demand trends, how the sales pace has come in through the door, you know, maybe versus your expectations and, you know, if incentives in the marketplace have changed it all around that.

Bill Wheat
Executive Vice President, Chief Financial Officer at D.R. Horton

Sure, Mike. You know, we did see the end of our first fiscal quarter in December. We saw, you know, I'd say better than normal seasonality in terms of sales demand. And that continued on into January. When we had our call in January, we were still seeing, I'd say probably a little bit better than a normal seasonality into January. And then, as we've talked many times, anytime you see a lot of volatility in rates, there's always an adjustment period for buyers. And so, we saw more volatility in rates in February and March. And so, we saw some intermittent periods where buyers were having to adjust, which does affect, you know, weekly sales pace. But then, you know, as we look up, like over the last six weeks or so, we've seen that stabilize and, and are seeing a very good sales pace in line with our overall plans, and very pleased that that's positioned us to increase our guide for the year.

Going forward, as Jessica has said a couple of times already, going forward, it's going to be subject to the rate, what happens in the market with rates. And we're in the last week, we've seen another period of volatility. So, I think we'll continue to see the market adjust and will adjust to it as the rate environment changes.

Mike Rehaut
Analyst at J.P. Morgan Chase and Company

Great. Thanks, Bill. Appreciate that. And I guess just maybe along those lines in terms of the impact of higher rates at points, it seems like if you go back to your guidance last quarter, there was a little bit of surprise that maybe the out quarter for gross margins was a little less than people were looking for. And it kind of went back to the higher level of rates and incentives seen in three -- in the calendar third quarter. Wondering, obviously, you haven't given guidance for the fourth quarter, but all else equal, if perhaps you're having some of the delayed impact of perhaps higher incentives, perhaps more costly incentives, and I know there's some warehouse buying and delaying of an impact on the incentive front from the mortgage rate buydowns. If we were to stay at these levels, just from the standpoint basically, of the buydowns being maybe a little more expensive, all else equal, would that impact be more on your fiscal fourth quarter than your third quarter?

Jessica Hansen
Vice President, Investor Relations at D.R. Horton

I think right now, Mike, you know, with the number of homes that we're selling and closing intra quarter, you're seeing a pretty good real time average gross margin. And so, unlike a lot of other builders, I think you'll see more real time market conditions show up in our results faster. Hard to say, you know, split in hairs between Q3 and Q4, but we were really pleased with where our gross margin came in this quarter, and we actually did see an increase in the number of buyers sequentially that we're able to utilize a mortgage rate buydown. And in spite of that, we had, you know, a slight tick up in our gross margin. So, without giving specific guidance for the remainder of the year because it is going to be dependent on the interest rate environment, you know, it feels pretty good to us right now. Our costs outside of incentives have generally flattened out on the stick and brick side. You know, we're still having some categories go up where we have pressure, but we've had some success getting categories to go down. We obviously do still have some lot cost inflation we would expect to continue to need to be able to offset. So, when we think about really predominantly the next two quarters, it is going to be incentives as the wildcard, and it's going to be dependent solely on market conditions.

Mike Rehaut
Analyst at J.P. Morgan Chase and Company

Just to make sure we understand then, to the extent that rates have given-- rates have risen and the cost of those mortgage rate buydowns become more expensive, you feel like a lot of that is already reflected in 2Q and 3Q?

Paul Romanowski
President and Chief Executive Officer at D.R. Horton

I think again, based on the fact that we are selling more than 50% of our homes inter-quarter, we'll see how that plays out as we look at the next -- in the third quarter and the fourth. But we move our rates along with the market, and so really it becomes a question of absorption and pace. We're going to continue to manage pace and margin to the returns that we want, and if we need to press a little more on the incentives to keep that pace consistent, we'll do so. But we move our rates along with the market, so it doesn't necessarily mean we're seeing significant cost in the level of those buydowns. It really just starts to stress the buyer when they climb up into the 7%, and if they go to the 8% range, then we'll see a little more challenge in getting buyers qualified. And if it goes that high, I would expect to see our incentives increase to keep our pace.

Mike Rehaut
Analyst at J.P. Morgan Chase and Company

Great. Thanks so much. Appreciate it.

Operator

Thank you. Your next question is coming from Eric Bosshard from CRC. Eric, your line is live. Please go ahead.

Eric Bosshard
Analyst at Cleveland Research

Good morning. Two things if I could. First of all, the gross margin in the quarter was a little bit better. What was different that created that?

Jessica Hansen
Vice President, Investor Relations at D.R. Horton

I'm assuming you're talking on a sequential basis.

Eric Bosshard
Analyst at Cleveland Research

Correct.

Jessica Hansen
Vice President, Investor Relations at D.R. Horton

Yes. So, a little bit was just core inclusive of just a very modest pickup on the incentive front in terms of the forward commitments and the interest rate buy down, because you'll see when we put out our supplemental guidance that kind of core margins up about 20 basis points, and then we also had a little bit less of an impact on warranty and litigation this quarter. Those are the two kinds of biggest pieces of why there was a sequential increase.

Eric Bosshard
Analyst at Cleveland Research

Okay. And then secondly, you talked about it a little bit, but I'm just curious the effectiveness of the incentives as you've moved through the quarter, and in the march and April, I suppose, but just trying to figure out that effectiveness and the last comment that was made of, as rates move higher, what do you have to do different with buy downs? I'm just curious how you're seeing conversion or closing customers behave relative to incentives, relative to buydowns, and if you indeed are having to do anything different.

Mike Murray
Executive Vice President, Chief Operating Officer at D.R. Horton

Currently, we're not doing anything significantly different. We're responding to the rates and the customers that are in front of us at the time, and they are reacting very positively to the incentive offerings that our teams have crafted for the various neighborhoods we have out there. So, no, we're not seeing anything with the current range, range of rates we've been dealing with right now. We feel it's sort of, I want to say business as usual in this crazy, volatile world we're in. But right now, we feel pretty steady, pretty good about where things are.

Operator

Thank you. Your next question is coming from Sam Reid from Wells Fargo. Sam, your line is live. Please go ahead.

Sam Reid
Analyst at Wells Fargo & Company

Awesome. Thanks so much, guys, for taking my question. You made a lot of progress here in getting back to your historic levels on cycle times. That said, one thing that I'm thinking here is you're also building a more value engineered house today than perhaps what might have been the case pre-pandemic. So, the question really, is there an opportunity to bring cycle times lower versus that historical trend, or do you really think kind of four months is the steady state we should be thinking about longer term?

Paul Romanowski
President and Chief Executive Officer at D.R. Horton

Yeah, Sam, we're pleased to be back at what we deem our historical norm. And you bring up a good point. We are building a more efficient house, and it's been an extreme focus of us to try and pull labor and man hours out of the home to reach affordable and maintain affordability. We're always going to believe there's upside for improvement in our business, and so we continue to stay focused on our inventory turns and the opportunity to reduce cycle times, and be more efficient in the construction process where we can. We're going to continue to strive for that. We're not counting on significant reductions from here. We got back, you know, to this place, and we'll continue to focus on doing everything we can to drive it down further.

Sam Reid
Analyst at Wells Fargo & Company

Got you. And then maybe to touch on order ASP a little bit. Looks like there was a little bit of a sequential lift between Q1 and Q2. I just would like to hear maybe a bit more context on that number. Was there a function of perhaps a little bit of a dial back in incentives in early spring, or were there any kind of geographic or other mixed dynamics that might have also driven that sequential improvement? Thanks.

Jessica Hansen
Vice President, Investor Relations at D.R. Horton

Yeah, it continues to be primarily geographic when you look at our price points, the south, central and the southeast, which is two of our lower price point markets in terms of average sales price, has been a slightly lower percentage of our mix for a couple of quarters now, and that continued this quarter.

Sam Reid
Analyst at Wells Fargo & Company

Awesome. Thanks so much. I'll pass it on.

Operator

Thank you. Your next question is coming from Alan Ratner from Zelman and Associates. Alan, your line is live. Please go ahead.

Alan Ratner
Analyst at Zelman and Associates

Hey, guys, good morning. Nice quarter, and thanks for taking my questions. First, on the resale market, I'm curious some of your thoughts there. We're starting to see inventories ticking up a little bit and in some of your markets more meaningfully than others. And when I think about the spec entry level model, I think you guys have really benefited from the tight resale market over the last few years. I'm just curious, are there any markets now where you're starting to see increased competition from resale, you know, maybe more contingent buyers on your move up product, and just more broadly how you're viewing kind of the uptick in resell inventory right now?

Paul Romanowski
President and Chief Executive Officer at D.R. Horton

I still think it's a very limited amount of inventory that's available in the marketplace, especially at our price point, an affordable price point. That, coupled with some of the interest rate incentives that we're able to offer, that for the most part existing home offerings don't provide, we're able to solve the affordability problem a little better than some of the existing home sales would be able to do. But we haven't seen a significant impact on our sales pace to date.

Alan Ratner
Analyst at Zelman and Associates

Great. Appreciate that. And then second, on the NAR settlement with brokers, I know it's still very early, but you guys have been one of the heavier users that were friends to the brokerage community, if you will, over the years. I think you view them as an important tool to bring buyers to your communities. And I'm just curious if you've given any thought to how this settlement might change the economics there, the relationships you have with brokers, and any commentary you can give would be helpful.

Paul Romanowski
President and Chief Executive Officer at D.R. Horton

Yeah, I mean, we think this is going to take some time to play out. You know, we work very closely with the brokerage community, and we'll continue to do so regardless of what direction this takes. You know, I think you are going to see some restructuring, certainly in terms of commissions, and it will have some impact, I believe, on the number of realtors that stay active through the market. But, you know, we are going to continue to stay close to the realtor community, communicate with them. This is still an emotional buy for people. And we're also going to stay focused on our digital presence and ability to make sure that we are ahead of the curve in terms of reaching customers through whatever form it takes over the next couple of years.

Alan Ratner
Analyst at Zelman and Associates

Appreciate the thoughts. Thank you.

Operator

Thank you. Your next question is coming from Collin Verron from Jefferies. Colin, your line is live. Please go ahead.

Collin Verron
Analyst at Jefferies Financial Group

Good morning. Thank you for taking my questions. I guess I just want to start on the lot in full cost inflation you're seeing. Any thoughts on the magnitude of that through the remainder of the year? I think you said it was tracking the low single digits in the most recent quarter.

Bill Wheat
Executive Vice President, Chief Financial Officer at D.R. Horton

Yeah. I think our expectations will continue to see moderate increases. I think that low single digit percentage continuing is in our current -- what we can see in our current pipeline.

Collin Verron
Analyst at Jefferies Financial Group

That's helpful. And then just on the lots controlled, it's moved up again as you concentrate on that land-light model, I guess, how much more runway do you think that there is and any update on the timeline of getting there, and just thoughts on the right number of the years of land or lots owned?

Bill Wheat
Executive Vice President, Chief Financial Officer at D.R. Horton

So, I think we continue to look for ways to be more efficient and more capital efficient in our lot portfolio. 77% is a great controlled number position right now, and we're looking at 62% of our deliveries were on lots that were actually developed by third parties or Forestar. So, we're continuing to expand those relationships and seek opportunities to buy more lots from third parties. I'm not going to put a ceiling onto how far we can take that, but we've made a lot of progress. And when you've had a lot of success, incremental success takes a lot more work. That's what we do every day.

Collin Verron
Analyst at Jefferies Financial Group

Great. Thank you for taking my questions.

Operator

Thank you. Your next question is coming from Jade Rahmani from KBW. Jade, your line is live. Please go ahead.

Jade Rahmani
Analyst at KBW

Thank you. Are you seeing any changes in terms of investor appetite for single family rentals and multifamily? Leaving aside the issue of interest rates, we've seen Blackstone, for example, make a couple of quite large acquisitions. Wondering what the tone is from the investors you sell to.

Paul Romanowski
President and Chief Executive Officer at D.R. Horton

Yeah, I would say we've seen a little bit of a tick up in terms of interest and the number of investors out there in the market, they're still being cautious, and rates are where they are and cap rates acting in kind. But I would say that just across the board, we've seen a bit of a tick up and have more interested parties in those assets that we have out for sale today.

Jade Rahmani
Analyst at KBW

And a follow up would be, a lot of these investors are looking for scale in their capital deployment. You've already done, you know, some large deals. Are you seeing on average the size of deals you're looking at increase?

Paul Romanowski
President and Chief Executive Officer at D.R. Horton

Size per community, not necessarily, but there are large appetites to place dollars at scale into this space. [Speech Overlap] there are multiple conditions.

Operator

Thank you. Your next question is coming from Mike Dahl from RBC Capital Markets. Mike, your line is live. Please go ahead.

Mike Dahl
Analyst at RBC Capital Markets

Morning. Thanks for taking my questions. Just to follow up on Jade's question on the rental side, you know, revenue is flat sequentially expected in 3Q. You do have more units completed on, I think, both single family and multifamily. Is that a function of, you have to characterize why it's not better, is it more the investor hesitancy at this point, or is it the conversations you're having around price don't meet your objectives for margin and return on those projects?

Paul Romanowski
President and Chief Executive Officer at D.R. Horton

You know, it's really a matter of communities, community size and timing of those closings. You know, we're going to be selective through the process, but we have projects that are done and we're going to go ahead and monetize those and put them into the market. You know, not seeing the margins where we would like to see them. But that's relative, that's just tied to cap rates and interest rates. But, you know, no real significant shift that we're going to see in terms of up or down, and it's going to be a little lumpy as we look through the quarters because we're selling whole communities at a time. It's not one at a time.

Mike Dahl
Analyst at RBC Capital Markets

Got it. Okay. And then shifting gears back to the home building margins, last fall when there was a period of significant rate volatility and ultimately rates came down, you had a negative mark to market. Jessica, I think you mentioned that lower forward contracts played a role or lowered cost or mark to market there played a role in sequential gross margin improvement in fiscal quarter. Can you be more specific around what impact or quantification your forward hedges are having on both the 2Q gross margin? And is that actually a continued sequential benefit in your 3Q guide?

Jessica Hansen
Vice President, Investor Relations at D.R. Horton

No, I mean, we really think about it, Mike, as last quarter was somewhat of an anomaly. We're not going to say one time and it could happen again, but it was highly unusual in terms of the rate move going up and down so quickly and the timing in which that happened and then, you know, a move close to quarter end. So, this quarter, when we say minimal impact, I mean, we've talked about outside of Q1, it's been no more than a plus or minus 10 basis point move from a gross margin perspective. And so, you know, hopefully that'll be the case going forward as well, and you won't see a repeat of what happened in Q1.

Mike Dahl
Analyst at RBC Capital Markets

Okay, great. Thanks.

Operator

Thank you. Your next question is coming from Susan Maklari from Goldman Sachs. Susan, your line is live. Please go ahead.

Susan Maklari
Analyst at The Goldman Sachs Group

Thank you. Good morning, everyone. My first question is on the material cost. I think, Jessica, you'd mentioned that you're seeing some success on seeing some of those move lower. Can you give more detail on what is coming down and how you're thinking about that relative to some of the other areas where there may be some inflation that's coming through, and any thoughts on lumber as well within that?

Jessica Hansen
Vice President, Investor Relations at D.R. Horton

I'll start with lumber, and then I'll leave that up and down on other categories to fall in to Mike, they're probably better versed than I am. Lumber is still less than half what it was at its peak back in March of '22, but it has started to increase since December, which would be kind of a typical seasonal trend. So, hopefully we're not going to be talking about lumber in terms of big swings in our closings. Most of our year-over-year stick and brick decline is still from lumber, but in terms of sequential moves going forward, we expect it to be relatively modest.

Mike Murray
Executive Vice President, Chief Operating Officer at D.R. Horton

Very fair. And I think in terms of the other categories, it's a market by market, category by category. I don't want to say struggle or battle, but it's an ongoing effort to be as efficient as we can be with that. And, you know, we make some progress on some categories, and then we might have to give back some on others. So, it's a constant battle, Susan. And, you know, we've seen right now, I think, some moderation in seeing increases, which has been very helpful in margin right now.

Susan Maklari
Analyst at The Goldman Sachs Group

Okay. All right. That's helpful. And then you guided your SG&A to be about 7% for the third quarter, which is, you know, still really low in there even as you're making those investments. Can you just talk about the puts and takes into the SG&A as we think about not just the third quarter, but even looking out. Any thoughts there?

Mike Murray
Executive Vice President, Chief Operating Officer at D.R. Horton

Yes, sure. So, we're continually trying to position ourselves to across our footprint to be in position to grow. And as we've gotten larger and have more scale in individual markets, that has involved, you know, realigning certain divisions, breaking up certain markets into multiple divisions to put ourselves in position to more deeply penetrate, you know, market share in those markets, and the same has applied across our infrastructure, you know, across the country as well. And so, we're making some of those investments right now, and we do see pretty quick payback on that. And so that's why our SG&A percentage has remained as low as it has. But we are making those investments that sometimes do have to come a little bit ahead of the growth, but it's primarily in -- its primarily in people and making sure we've got the depth on our teams, and we've got the land personnel in various markets in order to be able to tie up the land positions and develop those relationships with third party developers and trades to continue to position our platform to support growth.

Susan Maklari
Analyst at The Goldman Sachs Group

Okay, that's great. Thank you. Good luck.

Operator

Thank you. Your next question is coming from Kenneth Zener from Seaport Research Partners. Kenneth, your line is live. Please go ahead.

Kenneth Zener
Analyst at Seaport Research Partners

Morning, everybody.

Mike Murray
Executive Vice President, Chief Operating Officer at D.R. Horton

Morning, Ken.

Kenneth Zener
Analyst at Seaport Research Partners

All right, margin stability its up 52% of closings intra-quarter orders. Why was it higher specifically? It looks, to begin, I could make my own narrative, but I want to hear it specifically. And then what was the margin spread between those 52% in 2Q versus the ones that were naturally coming out of backlog?

Jessica Hansen
Vice President, Investor Relations at D.R. Horton

I frankly don't think any of us looked at that before the call, but we can take a look and get back to you. It was 54% versus the 52%, just to clarify. And the driver on that was just a function of we went into the quarter with over 9,000 completed specs and our cycle times are back to normal.

Kenneth Zener
Analyst at Seaport Research Partners

Okay, so you're getting -- we'll follow up on the margin backlog versus intra-Q, is that correct?

Jessica Hansen
Vice President, Investor Relations at D.R. Horton

Yes.

Kenneth Zener
Analyst at Seaport Research Partners

Okay. And then, Paul, I think you kind of talked about your markets in Florida not being affected by the rise in inventory. We're seeing coastal markets and/or, you know, higher cost of ownership related to insurance. Could we maybe isolate that comment to a place like Central Texas? Think Austin, I know you're building in Buda, not, you know, Austin per se, but we are seeing inventory go up in Central Texas. You don't have, right, the coastal issues. Is it still that you have homes that are affordable and in demand? So, you're seeing the same dynamics you talked about there where we're kind of excluding coastal conditions. Thank you.

Paul Romanowski
President and Chief Executive Officer at D.R. Horton

Well, the question and the comment back on Florida was mostly as it relates to insurance and increased costs around that inventories. We have certainly seen more inventory in the market today on the resale side than we have in the past. Months of supply has crept up slowly across most of our markets, but majority of what we see coming to the market is still maybe either overpriced or has significant need and work and very minimal in the affordable price points where we tend to compete. So, we expect it's going to take significantly more homes to come on before we see to be a lot of impact on our ability to sell. But, you know, we've competed in that market forever. You know, we have been a spec builder. We do that to compete, you know, in the new home market as much as we do against the resale market. Feel very good about our product and positioning against the homes that come to market as resale available when they do. And we think we have a great package of incentives, warranty and closing cost basis to compete against that inventory when it does come on. And it will at some point in the future.

Kenneth Zener
Analyst at Seaport Research Partners

Right. Appreciate it. And I guess, Jessica, you said 3% on land. Could you split that between land you developed and land you're buying finished?

Jessica Hansen
Vice President, Investor Relations at D.R. Horton

I don't think we quantified that, and I definitely don't have that in front of me.

Kenneth Zener
Analyst at Seaport Research Partners

Talk to you guys later. Thank you.

Operator

Thank you. Your next question is coming from Rafe Jadrosich from Bank of America. Rafe, your line is live. Please go ahead.

Rafe Jadrosich
Analyst at Bank of America Merrill Lynch

Hi. Good morning. Thanks for taking my questions. Just first, on the fiscal third quarter, gross margin outlook was flat to slightly up. How do we think about the assumptions for the stick and brick per square foot, net pricing and land inflation that's baked into that guidance? And then specifically on land inflation, just the lot cost is flat quarter over quarter. What are you seeing in terms of land inflation for land that's contracted today?

Bill Wheat
Executive Vice President, Chief Financial Officer at D.R. Horton

Yeah, Rafe, in our forward guide, we've got relative stability right now in materials and labor. So, we are still seeing some components that go up slightly. So, I think a very low single digit percentage increases is generally the expectation there. And our lot costs a little bit higher than that. Still low single digits, but probably more in that 3% to 4% range.

And in terms of just new land, that's, that's deal by deal specific, market by market specific. I think in general, we've seen, you know, land prices kind of settle out here over the last little while. Not as much inflation, but, but the long-term trend is still up over time. This industry still has a shortage of lot availability. And so, I think that's going to continue to be a constrained situation. And so, in that situation, we would not expect to see land prices come down.

Rafe Jadrosich
Analyst at Bank of America Merrill Lynch

Thank you. That's very helpful. And then for the rate buy downs, the forward commitments that you all have, how long do those go out? Are those months or those weeks? So, the recent move in rates, it hasn't impacted the rates that you are offering yet. When will that start to be kind of offered to the home buyer? How long of forward commitment do you have?

Bill Wheat
Executive Vice President, Chief Financial Officer at D.R. Horton

We generally don't go out too terribly far in terms of the volume of forward commitments that we go with. We have various levels based upon anticipated demand of how much we'll buy for a given expiration date, which can vary from 60 days to 90 days out. But we're not going to look to fulfill all of our existing sales expectations with any one given hedge or any one given builder forward. And we'll continually sort of reprice to market so that we're offering incentives that are within, as Paul said before, I think 1 point to 1.5 points of market, when that is the incentive that we feel is the most effective at driving appropriate pace and margin for the returns at a given community.

Rafe Jadrosich
Analyst at Bank of America Merrill Lynch

Thank you. That's helpful.

Operator

Thank you. Your next question is coming from Alex Barron from Housing Research Center. Alex, your line is live. Please go ahead.

Alex Barron
Analyst at Housing Research Center

Yeah, thanks, guys. And great job on the quarter. Yeah, I was just curious around land development costs. I mean, you guys are developing, I mean, using a lot more land options and stuff, but are land development costs expected to, you know, impact margin for you guys in the near term, or do you feel that's going to be more absorbed by whoever's developing the land for you?

Paul Romanowski
President and Chief Executive Officer at D.R. Horton

Hey, Alex, we haven't seen much reduction in land development costs, either from materials or labor. You know, we still have significant demand out there for the labor, and those that are putting lots in the ground, not just in what we're doing and other builders are doing, but you have infrastructure improvements throughout the country that are keeping demand up for materials and labor. So, that's kind of baked into what we look at in terms of our increase in lot price over time. So, we'd love to see some reduction, but we don't expect to see it in the near term.

Alex Barron
Analyst at Housing Research Center

Got it. And I guess you already touched a bit on the rental business, but I was just curious if the margins we saw this quarter do you expect that's going to be sort of more what they're going to look like in the future or not necessarily.

Mike Murray
Executive Vice President, Chief Operating Officer at D.R. Horton

It's going to be largely rate dependent in the capital markets as to the execution on those. You know, I think at this point our expectation is that it's going to be somewhat consistent with where we are today, but there's opportunity for some volatility around that too, especially within quarters, you know, within one quarter to the next, because these are some chunky transactions. There are large, individual transactions, and our multifamily platform is not yet to the scale where they're producing a significant number of multifamily communities delivering every quarter to the marketplace. So, there's a relatively small number. They can be chunky and there's an opportunity for volatility, but our expectation is, you know, somewhere in the range we're in today.

Alex Barron
Analyst at Housing Research Center

Got it. Okay. Well, good luck. Thanks.

Operator

Thank you. The final question this morning is coming from Jay McCanless from Wedbush. Jay, your line is live. Please go ahead.

Jay McCanless
Analyst at Wedbush

Thanks. Good morning, everyone. So, on that rental guidance you talked about for 3Q, is that guidance based on projects that already have financing in place, or is that just the schedule of what you think might close during the quarter?

Bill Wheat
Executive Vice President, Chief Financial Officer at D.R. Horton

It's a mix of both.

Jay McCanless
Analyst at Wedbush

Okay. And then the other question I had is, I don't want to make too much of this if it's not a big deal, but it does seem like you're going from maybe an aggressive selling pace during the COVID years now to trying to gain market share leadership through more communities. I guess, how far along do you think you are in that transition? And I think kind of Sue's question also, what is that ultimately going to mean for SG&A going forward if you are starting to staff up and bring more people on to support a larger organization?

Jessica Hansen
Vice President, Investor Relations at D.R. Horton

Yeah, I wouldn't say, Jay, that it has anything to do with us trying to push more pace during COVID, it's all tied to our lot position. And so, we've been building our lot position up, but not all of those lots were ready to go, and so we knew the communities were coming. And, you know, obviously the market was extremely hot for a period of time, so we were able to drive additional absorption where we had the lots available. We don't have that same kind of strong demand, you know, less affordability challenged environment today. And at the same time, our lots are getting finished, and the communities are ready to go, so we're bringing them online, and it happens to be good timing that we have the communities ready to go when we're not able to drive incremental absorption, you know, further in our existing communities.

Jay McCanless
Analyst at Wedbush

Okay. And I guess, how far along do you think you are? Maybe in the process of trying to get bigger from a community count standpoint?

Jessica Hansen
Vice President, Investor Relations at D.R. Horton

That's going to be an ongoing plan and goal and positioning, and I'd say just watch our lot position and ultimately the communities are going to come online over time now from year to year. What exactly is that community count growth going to look like? It's impossible for us to predict.

Jay McCanless
Analyst at Wedbush

Okay, great. Thanks for fitting me in.

Operator

Thank you. I would now like to turn the floor back to Paul Romanowski for closing remarks.

Paul Romanowski
President and Chief Executive Officer at D.R. Horton

Thank you, Tom. We appreciate everyone's time on the call today, and look forward to speaking with you again to share our third quarter results in July. Congratulations to the entire DR Horton family on producing a solid second quarter. We are proud to represent you on this call, and appreciate all that you do.

Operator

Thank you. [Operator Closing Remarks]

Corporate Executives
  • Jessica Hansen
    Vice President, Investor Relations
  • Paul Romanowski
    President and Chief Executive Officer
  • Mike Murray
    Executive Vice President, Chief Operating Officer
  • Bill Wheat
    Executive Vice President, Chief Financial Officer
Analysts

Alpha Street Logo

Powered by Quartr

Transcript Sections

Why I'm telling friends to avoid gold stocks (Ad)

Back in November, gold made a tiny move of 1.6%. But according to my backtesting by using a special type of gold trade, I would have seen a 141% gain in just a week. It happened again in March. Gold nudged up 1.2%. This time? A 104% overnight gain. And in June? A 1% gold move turned into a 74% gain in two weeks. Granted, there would have been smaller wins and those that did not work out, but you see, there's a reason I'm telling all my friends to hold off from buying gold or regular gold stocks right now. There's a more lucrative way to play the gold market as we enter a new breakout period. It's all about catching what I call "Acceleration Cycles."

And if you’d like to get your hands on this, here you go, the complete breakdown.