D.R. Horton Inc (DHI) — Q3 2015 Earnings Call Transcript

Thank you, Kevin. Good morning and welcome to our call to discuss our financial results for the third quarter of fiscal 2015. Before we get started, today’s call may include comments that constitute forward-looking statements, as defined by the Private Securities Litigation Reform Act of 1995. Although D.R. Horton believes any such statements are based on reasonable assumptions, there is no assurance that actual outcomes will not be materially different. All forward-looking statements are based upon information available to D.R. Horton on the date of this conference call, and D.R. Horton does not undertake any obligation to publicly update or revise any forward-looking statements. Additional information about issues that could lead to material changes in performance is contained in D.R. Horton’s annual report on Form 10-K and our most recent quarterly report on Form 10-Q, both of which are filed with the Securities and Exchange Commission. For your convenience, this morning’s earnings release can be found on our website at investor.drhorton.com, and we plan to file our 10-Q later today. After the conclusion of the call, we will post updated supplementary historical data on the presentation section of our investor relations site for your reference. The supplementary information, which we encourage you to review, includes historical data on gross margins, changes in active selling community, product mix, and our mortgage operation. Now I will turn the call over to David Auld, our President and CEO.

Thank you, Jessica, and good morning. In addition to Jessica, I am pleased to be joined on this call by Mike Murray, our Executive Vice President and Chief Operating Officer; and Bill Wheat, our Executive Vice President and Chief Financial Officer. Our D.R. Horton team delivered an outstanding third quarter. Our pre-tax income increased to $334 million on $3 billion of revenues, and our pre-tax margin improved 330 basis points to 11.3%. Our sales absorptions continued to improve during the quarter, as our homes sold increased by 22% from a year-ago on only a slight increase in active selling communities. This reflects strong performance in our core D.R. Horton communities and growth of our Emerald Homes and Express Homes brands, which enable us to expand our product offerings and our industry-leading market share. Our continued strategic focus is to leverage our operating platform to produce double-digit growth in both revenue and pretax profits while generating positive cash flows and increasing our returns. During the third quarter, we generated $357 million in positive cash flow from operations. With a sales backlog of 12,761 homes at the end of June, solid sales trends in July, and a well-stocked supply of land, plots, and homes, we are well positioned to finish our year strong and have an even stronger 2016.

Net income for the third quarter increased 96% to $221 million or $0.60 per diluted share, compared to $113 million or $0.32 per diluted share in the year-ago quarter. Our consolidated pre-tax income increased 94% to $334 million in the third quarter, compared to $172 million in the year-ago quarter. And home building pre-tax income increased 90% to $302 million compared to $159 million in the prior year quarter. Our third quarter home sales revenues increased 37% to $2.9 billion on 9,856 homes closed, up from $2.1 billion on 7,676 homes closed in the year-ago quarter. Our average closing price for the quarter was $290,000, up 7% compared to the prior year, driven primarily by an increase in our average sales price per square foot and, to a lesser extent, a larger average home size.

The value of our net sales orders in the third quarter increased 25% from the year-ago quarter to $3 billion. Homes sold increased 22% to 10,398 homes on a 1% increase in active selling communities. Our average sales price on net sales orders in the third quarter increased 3% to $289,400. The calculation rate for the third quarter was 22% compared to 24% in the year-ago quarter. The value of our backlog increased 15% from a year-ago to $3.7 billion, with an average sales price per home of $293,400 and homes in backlog increased 12% to 12,761 homes. Our backlog conversion rate for the third quarter was 81%. We expect our fourth quarter backlog conversion rate to be in the range of 81% to 84%, up from 76% in the fourth quarter of last year.

We are experiencing strong growth in revenues and profitability in our D.R. Horton branded communities, which accounted for the substantial majority of our sales and closings this quarter. We also continued to be pleased with the progress and performance of our Emerald Homes and Express Homes brands. Emerald Homes, our brand for higher-end move-up and luxury communities, is now available in 46 markets across 18 states. In the third quarter, homes priced greater than $500,000 accounted for 16% of our home sales revenue and 7% of our homes closed. Our Express Homes brand, which is targeted at the true entry-level buyer and focused primarily on affordability, is currently being offered in 44 markets and 14 states with the significant majority of our Express sales and closings to date coming from Texas, Florida, and the Carolinas. This quarter Express accounted for 19% of our homes sold, 16% of homes closed, and 10% of home sales revenue. The average closing price for an Express Home in the third quarter was $188,000. We are striving to be the leading builder in each of our operating markets with all three of our brands, and we plan to maintain consistent broad diversity in our product offerings over the long term.

Our gross profit margin on home sales revenue in the third quarter was 19.9%, up 20 basis points from the second quarter. The consistency in our gross margin in the first three quarters of the year reflects the stability of most of our markets today and the normalization of housing market conditions we have seen over the last year. We are raising price or reducing incentives when possible in communities where we are achieving our target absorptions, and we are working to control cost increases. These factors have enabled our gross margins to stabilize within our normal historical range. Our general gross margin expectations remain unchanged from what we have shared the past several quarters. In the current housing environment, we continue to expect our average home sales gross margin to generally be around 20%, with quarterly fluctuations that may range from 19% to 21% due to product and geographic mix and the relative impact of warranty and interest costs. As a reminder, our reported gross margins include all of our interest costs. For the upcoming fourth quarter, we expect our home sales gross margin will be consistent with our margins for the first three quarters of the year in the high 19s to 20%.

Homebuilding SG&A expense for the quarter was $258 million, compared to $222 million in the prior year quarter. As a percentage of home building revenues, our SG&A improved 160 basis points to 9% compared to 10.6% in the prior year quarter as our significant revenue increase this quarter improved our leverage of fixed overhead costs. Based on our projected backlog conversion, we expect our SG&A as a percentage of homebuilding revenues in the fourth quarter to be in the range of 8.7% to 8.9%, which would be a year-over-year improvement of 100 to 120 basis points. We are very pleased that our homebuilding SG&A in fiscal 2015 will be below our longstanding targeted 10%, and we believe we will further improve our SG&A leverage in fiscal 2016.

Financial services pre-tax income in the third quarter increased 140% to $31.7 million, from $13.2 million in the year-ago quarter. 88% of our mortgage company’s loan originations during the quarter related to homes closed by our homebuilding operation. FHA and VA loans accounted for 49% of the mortgage company's volume compared to 43% in the year-ago quarter. Borrowers originating loans with our mortgage company in this quarter had an average FICO score of 716 and an average loan-to-value ratio of 89%.

At the end of June, we had 21,200 homes in inventory, of which 1,600 were models, 9,400 were spec homes in all stages of construction, and 3,600 of these specs were completed. Our construction in progress and finished homes inventory decreased by $100 million during the quarter, while our number of homes in inventory remains relatively stable. Our completed specs declined by 12% during the quarter. Our third quarter investments in lots, land, and development totaled $575 million, of which $311 million was to replenish finished lots and land while $264 million was for land development. Our residential land and lot inventory increased by $82.5 million during the quarter.

At June 30, 2015, our lot portfolio consisted of 120,000 owned lots with an additional 54,000 lots controlled through option contracts. 65,000 of our lots were finished, of which 32,000 are owned and 33,000 are options. Our 174,000 total lots owned and controlled provide us a strong competitive advantage in the current housing market, with a sufficient lot supply to support strong growth in sales and closings in future periods. Although our housing inventories will fluctuate if we manage each of our communities to optimize returns, we expect our land and lot inventories to remain relatively stable during the remainder of 2015 and in 2016, which will allow continued positive cash flow from operations. In the third quarter, we generated $357 million of positive cash flow. For the nine-month period ended June, we generated $189 million, an improvement of $762 million from the same period in the prior year.

During the third quarter, we recorded $3.7 million in land options charges for write-offs of earnest money deposits and due diligence costs for projects that we do not intend to pursue. We also recorded $11.7 million of inventory impairment charges, of which $7.4 million were in our West region, primarily related to long-held inactive land parcels that we intend to sell to improve our returns by redeploying the capital into more productive assets. Our inactive land held for development of $235 million at the end of the quarter represents 12,800 lots, down 25% from a year-ago. We continue to formulate our operating plans to work through each of our remaining inactive land parcels to improve cash flows and returns, and we expect that our land held for development will continue to decline. We also will continue to evaluate our inactive land parcels for potential impairment, which may result in additional impairment charges in future periods, but the timing and magnitude of these charges will fluctuate as they have in the past.

During the quarter, we acquired the homebuilding operations at Pacific Ridge Homes for $70.9 million in cash, of which $2 million was paid subsequent to the quarter end. Pacific Ridge operates in Seattle, Washington. We acquired approximately 90 homes in inventory, 350 lots, as well as control of approximately 400 additional lots through option contracts. We also acquired a sales order backlog of 42 homes valued at $18.7 million.

At June 30, our homebuilding liquidity included $767 million of unrestricted homebuilding cash and $881 million available capacity on our revolving credit facility. We had no cash borrowings and $94.3 million of letters of credit outstanding on the revolver. Our gross homebuilding leverage ratio was 37.5%, and our homebuilding leverage ratio net of cash was 31.6%. The balance of our public notes outstanding at June 30 was $3.3 billion. We have no debt maturities for the remainder of fiscal 2015 and we have a total of $543 million of senior note maturities in the next 12 months. At June 30, our shareholders' equity balance was $5.6 billion, and book value per share was $15.35, up 13% from a year-ago.

Looking forward to the fourth quarter, we expect our number of homes closed to approximate the beginning backlog conversion rate in the range of 81% to 84% and an average sales price in the range of $285,000 to $290,000. We anticipate our home sales gross margin in the fourth quarter will be consistent with the first three quarters of the year in the high 19s to 20%, subject to potential fluctuations from product mix, warranty, and interest costs. We expect our fourth quarter homebuilding SG&A to be in the range of 8.7% to 8.9% of homebuilding revenues. We estimate that our fourth quarter financial services operating margins will be in the range of 35% to 40%. We expect our tax rate in the fourth quarter to be between 35% and 36%, and our fourth quarter diluted share count to be approximately 371 million shares. Our projected revenues and profitability for the full year of fiscal 2015 are in line with the expectations we’ve been communicating since the beginning of our fiscal year. Our expectations are based on today’s housing market conditions. Our current preliminary expectations for fiscal 2016 also include our consolidated revenues to grow by approximately 10% to 15% and for our consolidated pre-tax margin to be in the range of 10.5% to 11%. We also expect to generate positive cash flow from operations of approximately $300 million to $500 million for the full fiscal year, which we expect to be primarily towards debt maturity. We anticipate our tax rate for fiscal 2016 will be between 35% and 36%, and our diluted share count next year will increase by approximately 1%.

In closing, our third quarter growth in sales, closings, and profits is a result of the strength of our operating platform, and we are excited about the opportunities ahead. With the expectations Jessica shared for the fourth quarter, we believe our closings for the full year of 2015 will increase by approximately 27%, representing an increase of 8,000 homes and land right in the middle of the range outlined at the start of the year of around 36,500 homes. We remain focused on growing both our revenue and pre-tax profits at a double-digit pace, generating positive cash flow, and increasing our returns. We are well positioned to do so with our solid balance sheet, industry-leading market share, broad geographic footprint, diversified product offerings across our D.R. Horton, Emerald, and Express brands, attractive finished lot and land positions, and most importantly, our tremendous team across the country. We made considerable progress this year toward our goal of producing sustainable positive cash flow from operations. While still growing the business, we generated $189 million of cash in the first nine months of the year, an improvement of $762 million from the same period of 2014. We expect continued positive cash flow in 2016. We’d like to thank all of our employees for their continued hard work. In my opinion, the best in the industry. Now go forth and finish the year strong. This concludes our prepared remarks. We will host any questions.

Good morning, everybody.

Good morning.

Good morning, Ken.

Good morning, Ken.

David, you talked about FY16. You didn't have to go there, no one even asked you. Can you walk us through the process of why you wanted to do that now? Your revenue top line of 10% to 15%, what type of community count does that involve or absorption or just talk about how you kind of get there and the confidence around your EBIT given a very strong fourth quarter SG&A guidance? Kind of a broad question, but take what you want.

Well, right, Ken. No, I guess I’m excited because I think we just delivered a great quarter. But I think the positioning we did or have done over the last 12, 18 months has set us up for a good run. And we just see general solid markets across the country; nothing is exploding, but everything seems to be getting a little better on a month-to-month, quarter-to-quarter basis. Our position and what we’re focused on right now and what we’ve accomplished leveraging the SG&A and just controlling costs, I think it sets us up to continue what we’ve been doing.

On the community count front, Ken, the 10% to 15% consolidated revenue growth that’s really mainly driven by volume, coupled with a little bit of price, and in terms of community count we would expect to be low, maybe top out mid-single digit growth. So the majority of that revenue growth is coming from further improvement in our absorptions. And we’re not guiding to the 20% to 30% of next year like we did this year, so we don’t have to expand our absorptions quite as dramatically as we did in fiscal 2015, but still very confident that we can drive further absorption improvement as we move throughout 2016.

Very helpful. Now, because you had such strong pricing momentum year-over-year, you have been right about six. It sounds like you do not expect your successful mix shift towards Express to result in price degradation, realizing there are different mix, pricing mix there, between your different products. You said positive price, correct?

I think it's kind of flat to moderate price improvement, yes, and that’s what we’ve seen thus far. We came into the year expecting relatively flat pricing due, in part, to the expectations of mix shift to Express, and while Express has certainly grown shortly as a percentage of our business, that impact has been offset by price appreciation, and to the extent we continue to see current market conditions as we move into 2016, hopefully that will continue.

Thank you very much.

Yes, thanks very much, guys. Very encouraging to see your land spend being very disciplined. It is something that I certainly applaud what you are doing there and I think it is going to be very interesting. So I guess my first question would be, with respect to, if you can continue to generate this kind of cash, you have already said this year you're looking to do, applying it to the paydown, what should we expect going forward in 2016? I know that in the past there has been some talk about your wanting to run at a much lower level of leverage than you have in the past but I also know there's been a little bit of conversation about that, shall we say, at the corporate office. So I was wondering where your thoughts are right now in terms of where that is going to be in 2016?

We’re going to be very opportunistic. Excuse me. We’re going to spend $2 billion plus just replacing what we deliver as we consistently generate and prove at a sustainable level. It’s going to give us a lot of opportunity, I guess we’ll sure that when we get there.

And just to clarify, Stephen, the comments towards debt reduction were specific to fiscal 2016. We have $543 million in maturities in the next 12 months. So that would be what we expect in fiscal 2016 and then when we’re looking further out we’ll have more commentary to share later. But as David said, opportunistic.

Got it, okay, that’s helpful. That will continue to watch that. My next question I guess relates to Express. You know obviously, good success over there. We have observed that your average price within Express has been rising pretty meaningfully I think it was up 19% this quarter and it’s been kind of accelerating there. I was curious if you get sort of share little bit about what is going on there. I imagine some of that may just be geographic mix shift, but perhaps or something additional going on there where you – in terms of the kind of buyer that you are seeing come out for your product – just if could share some thoughts there?

Steve, this is Mike. Most of what we’re seeing with the Express price changes is mix shift as we’ve introduced it to more markets that have the higher bar for the industry-level buyer. We’re seeing the result of those come through in the closing.

Okay.

Pretty much the same thing.

Level of buyer, buying the Express product.

Got it. And in terms of where the markets are that you’re going to, what should we be thinking about that?

Most of it – where you’re seeing the impact in this quarter’s ASP has been closing from the state of Florida. Great success in Florida introducing Express over the past year and we’re starting to see a greater proportion of the Express closings coming from Florida with the higher sales prices.

We’re still about 80% of what we’re doing in Express is Texas, Florida, and the Carolinas, and the sizes in that order for those states in terms of percentage contribution. And we’re opening that in a lot of other places, but the vast majority of Express sales and closing to-date are in those three states.

All right, thanks very much guys.

Thank you, Steve.

Thank you. Good morning, guys. When you in your prepared remarks, I think everybody believes your volume growth is coming from Express myself included, but it sounded like more of this was coming from your core Horton brand. Is that a fair representation of what's going on and could you talk about maybe the trends within the three products and where the gross margins breakout in the three products?

Yes, Steve, this is Bill. We’re seeing growth really across all of our brands, solid growth, solid demand across all of our brands and actually with the rollout of Express being introduced into more and more markets. It is growing as a percentage of our overall business, as we introduced the product in more markets, but just when we look at all three brands, we’re seeing solid, solid growth across all three. In terms of relative gross margins, as we’ve kind of said all along, our expectations and what we’ve seen is that Express comes in a little bit below our average margin for the company, but we’ve been encouraged by the margins that we’ve been able to generate in Express, and then our expectations for our Emerald, our higher-end product is that it will generate a bit higher gross margin than the average, but our return expectations are the same across all brands.

Okay. And then geographically you talk some about Florida in the rollout, is that what really drove that market that was the Express rollout, and could you talk some about Texas, what you are seeing any impact with energy in Houston that type of thing?

The Florida market in general is just getting better really across all three brands. The rollout which impacted for pricing mix on this Express was – initially launched, we launched in Central Florida, much more price competitive then we’re introducing the product later which is kind of Southeast, Southwest. So you are just seeing a lift from those two various which I think is part of the overall increase in pricing in Express. But now, the state of Florida we feel very good about that.

And then you mentioned Texas, we are seeing solid demand across Texas, Texas is extremely strong for us and we saw, essentially our South Central region is largely Texas, and so we are very pleased with the performance across the state of Texas. Okay, North Houston dynamics going on right now with oil.

Certainly we continue to watch Houston on a year-over-year basis. Houston sales were basically flat, saw higher average prices this year than last year in Houston, but clearly the Dallas market continues to be extremely strong, San Antonio seems to be picking up for us a bit, and Houston continues to be solid for us as well.

All right.

We definitely watching Houston, but we’re just still be at the level it is, it’s still encouraging.

Okay, thanks.

We grew very fast in Houston for about three or four years, so kind of a flat year-over-year this year, it is actually?

It takes the replenishing community count in that market, is that a problem, with land pricing moving up?

We were very well positioned in Houston in 2012, 2013, and the community counts in Houston are again very well positioned.

We are still opening communities, we’ve been preparing to open for the last year, year and a half.

Okay.

The prices mixed actions and so.

Thanks, first question I wanted to ask, you mentioned solid sales trends continuing into July, there has been some concern obviously with rates rising whether some threats to consumer confidence, so I was wondering if you could just take down into that a little bit, and you know how things look from the end of the Spring selling season into the Summer and just your thoughts if any of those specific concerns if you have any perspective on whether or not that – those have affected your trends or not?

Well, if we get up every day thinking about sales, so yes, if we’re up 30% we’re concerned, we are not up 50, we’re up 20, we are concerned, we are not up 30. That’s just the nature of our journey. But we travel in the markets down, moving this right now driving sales divisions. And the general feel across pretty much every market is it’s a little better today than it was last year. And there is a confidence in our operators, there is a confidence in our sales, in our model homes, traffic is steady. So it’s been a slow recovery, but consistent and it just seems to be continuing, so we feel good about that.

Got it. So would be fair to say then it sounds like the momentum that we’ve seen so far this year has persisted into the summer.

Correct.

Got it, great. Okay. And I wanted to also ask about the cash flow, very impressive cash flow performance this quarter. I think you guided to $300 million to $500 million if I got the number correctly for next year and your next quarter is typically a pretty big cash flow quarter as well. Your guidance implied that share count will rise, so no share buybacks in your debt paydown. My question was with cash flow so strong, with your net debt to cap fairly low against the kind of typical to start building norm of 40% to 45%. Have you given any thought to allocating some to share purchases because we’re based on what you’re implying you can have strong book value growth, you get a paydown quite a bit of debt? I mean you are going to continue to delever and you are going to be pretty far below that historic norm. So what your thoughts on share buyback saying a little more balanced about reallocating that cash.

Yes, Nishu. We’re pleased to be in a positive cash flow position. We’ve been focused on achieving this. And we feel like we’re in a position now to continue to generate sustainable positive cash flow. And we’re going to take a balanced approach to it. We will always look first to our business to invest in the business and be opportunistic there to the extent that we can generate returns there, and that will include acquisitions as we continue to steadily be in that market. With over $500 million of debt maturities coming in next year, that is a higher priority for us in fiscal 2016. But then certainly as we get into 2016 and we look beyond that, other opportunities will be out there and available for us. Certainly, we’ve continued to be a consistent dividend payer, there is potential with that good increase as our earnings and cash flow continue. And then share repurchases would be one of those items that we would look at in balance as we are opportunistic, and if we see that as a good return and that’s an appropriate use for our cash, it will certainly be considered alongside the other things.

Got it. So the 1% increase in share count that you are talking about, that’s a general range, but there could be some flexibility around that.

I think there’s always been flexibility. As we stand right now, with no express intent of repurchasing shares in 2016, we would expect our share count to rise by about 1%.

Hey, good morning and a nice job on the quarter. Just wanted to ask on your preliminary 2016 guidance, you are coming in higher than we thought and higher than your pre-tax income margin for 2015. So I’m just trying to understand is the way we should think about the 10.5% to 11% range you gave derived from better gross margin performance or is that a SG&A leverage?

Rob, what we’re seeing—we showed in the third quarter—it’s an improved SG&A leverage. Margins were essentially flat throughout this year, firmed up nice and stable, and we’re seeing some improvement with our absorptions driving up in our communities. We’re seeing improvements in our SG&A leverage falling right to the operating margin improvements we’re seeing. And we fully expect to continue that in the fiscal 2016.

Bob, it is David. I continue the general consensus is flat, as we hit these absorption targets and as the market stays steady. I do think there may be a little upside in margin, but we’re going to guide to flat and attempt to do what we say we’re going to do.

Okay, cool. Those are ambitious targets I hope you get there. I wanted to ask about your average order price is up almost 3% this quarter. Just taking through, you know you have easy comp in the fourth quarter, but can you talk about just how you are thinking about the trajectory of pricing given mix? There is some commentary about bigger floor plans being a positive to more sales as the entry-level product. I just kind of want to get a hand to one how you think this evolves into 2016. Thanks very much and good luck.

So Bob, in terms of further price appreciation we’ll see ASPs—one of the hardest things for us to determine—we don’t necessarily look at Q4 as an easy comp though we had a very, very strong up last Q4, I think in the high 30s is in reserves. And so to us, that’s not an easy comp. But we’re going to continue going out and every day hitting our targets on a community-by-community basis and continue to drive sales improvement and it’s the markets there we’ll get the price. But the markets really going to determine that and from where we sit today with the impact of mix from Express, we would continue to expect our ASP to be flat to slightly up in fiscal 2016 versus fiscal 2015. 290,000 ASP on deliveries and just shy of that on sales is pretty much in all-time record for us. And with the continued mix impact from Express, I don’t think we expect to necessarily move that needle a whole lot further.

It makes a lot of sense. Good luck, thanks very much.

Thanks. Two questions, in regards to I guess leverage within the business that community count plan and leveraging SG&A. Just interested if strategically you’re thinking differently or having a different level of success in both of these areas that is one of the factors that’s helping your profitability improve?

I think we’ve always stressed leverage on the SG&A line and getting as much as we can out of our fixed overhead, and so what we’re seeing now is low to single-digit growth in our community counts driving greater absorptions from those communities. Generally, we’re probably replacing communities that are closing out with slightly larger communities they’re opening up, allowing us greater opportunities for increased absorptions and better leverage at the community level. For us, this business all happens at the community level. The pace we drive at a given community helps drive improvements in margin efficiencies in the construction processes, as well as better leverage of the overhead associated with that community.

And when we look at SG&A leverage to the extent that we drive a good part of our volume growth from increased absorptions in existing communities that drives even more SG&A leverage than driving growth from community count increases. So our focus there on improving absorptions is definitely a big driver for our SG&A leverage, and as we look at it—going forward we believe we have more opportunities to improve it.

And if I could one follow-up on gross margin after a couple of years of progress kind of step down it sounds like stable to slightly favorable maybe gross margin outlook. Just talk a little bit about the moving pieces you’re seeing within gross margin now and as we project forward over the next 12 or 18 months?

On a year-over-year basis, Eric, we continue to face headwinds, particularly on laboring materials and to a lesser extent lands, but sequentially those trends have been getting better. Which is what you’ve seen in the stability in our gross margin and sequentially as we’ve moved throughout this year. So our gap is between our revenue increased per square foot and our cost increased per square foot this quarter. With the best we’ve seen in quite some time, our revenues per square foot were up 4.1% year-over-year, while our stick and brick cost we’re still slightly higher than that, but at 5.3%. So that 120 bps different is one of the narrower we had over the last year, year and a half. And to a lesser extent—as expected we’re starting to see on a year-over-year basis slightly higher land cost on a per square footage basis as well. But I think we feel really good about—moving into 2016, especially with the trends we’ve seen sequentially. And hopefully we can see it benefit next year. You know, it’s only July, so we’re not going to go out on a whole lot of wins yet, as far as gross margin is concerned in 2016, but we feel very good about remaining stable and if we can move it up or we’re going to move it up.

Great, thank you.

Hi, thank you. A couple of follow-up questions. First on the discussion around Houston, I wanted to ask if you could give a little more of a breakdown on what you are seeing across price points. Obviously some other builders have talked about some weakness at the higher end or mid-to-high end. And so what are you seeing across the different brands? Is this really still just being driven by Express, and then also if the overall orders are flat, what is the community count like in Houston year-over-year?

Our community count is roughly similar to what it would have been a year ago. Yes, I think in general we’ve heard commentary from other builders as well. We don’t have a huge presence at the high end. We have a few communities at the higher end in Houston. And so I’m not sure where a good proxy necessarily is. But we have clearly continued to see very strong reception at the entry level and first-time move-up level, so in our Express and Horton brands, and that’s really where the core of our business is in Houston.

And along that…

We are hopeful to get relatively well.

We’re very happy with Houston.

Okay. So on a—I guess, on a positive note then it’s a pretty strong trends in the Southwest. And then so wondering how much that’s being driven by Phoenix or Vegas and what's the absorption trends in those markets specifically?

I hope we’re seeing out there a pretty much Arizona Phoenix is picking up a little bit, seeing some good sales trend there, but coming up a pretty small base. So it shows us a large percentage, but the prior year numbers were fairly small. Las Vegas is actually in our West region, so it’s not impacting our Southwest numbers at all.

Got it, okay, thanks.

We just like Phoenix for us has been a very good market in the past on a leading in the company. And I have every belief that it will be again. We’re seeing life in Phoenix and glad to see it.

Okay, thanks.

Hi, thanks. Good morning, everyone and nice quarter. First question, I had was just going back to the SG&A for a moment. Obviously, great improvement there, and better than expected. It looks like the full year will be around 9.6 instead of 9.9 to 10.2 your previous guidance. Just tying to get a sense of perhaps what are the drivers of that leverage or was there any type of cost take outs that you are able to exact as you kind of moved into the back half of the year? And again, just confirming in terms of 2016, the pre-tax margin improvement will effectively at this point be expected to be driven by SG&A as well?

SG&A will definitely be a big part of the driver of the improvement in our operating margin next year, probably the primary driver, at least as we sit here today in July. SG&A, there are a lot of factors that go in there, and there is a lot of focus that we spend in the company on it. We talk a little bit earlier with our improved absorptions in our existing communities that's clearly a driver of SG&A leverage as we're not having to add the incremental cost with additional community counts. But also I would attribute to some of our focus on being more efficient with our inventory investments in our housing investments trying to improve our turns there. That clearly drives more SG&A leverage. You will see our specs counts are a little bit lower than where they have been here recently and that cuts out some SG&A cost as well. I would say there is just a general focus in the company that as we grow while we continue to have to continue to add overhead to support that growth in our expected growth. There is a discipline that I think is in place across the organization to make sure that we keep our overhead in line with where our business is and that we don’t get ahead of ourselves there. I just—there is probably a bit of caution with adding additional overhead that I think we are seeing some very good leverage from as we grow.

I mean just looking a little bit past next year, when you think about you are at 9.6 this year, if most of the improvement is going to be driven by SG&A next year. Because I believe correct me if I’m wrong, but David I think you pointed to an outlook or expectation for gross margins to be flattish, that would put you at a SG&A closer to 9% and that’s essentially the best type of level you did. In company history hit it low 9s in 2004 and 2005. So as you think around that 9% mark, is that something that you can actually improve from? And what I’m really getting at here is – is there structural difference in how you’re running the business that can allow for SG&A to get into the 8s as you progress into mid-cycle or just any thoughts around that?

Mike, at this point, in July, we are not going to guide to a 9% SG&A in fiscal 2016 as of yet, but clearly if we expect to improve from where we are this year. We would expect to get below 9.5 and into the low 9s next year, and we have achieved 9.0 before in the past. So it’s not all the realm of possibility. We are focused on just continuing to incrementally improve, incrementally leverage it. And we do believe that if we are able to continue to drive growth for multiple years beyond 2016 that we can continue to drive incremental SG&A leverage beyond that and could that result in us getting below 9 at some point in the future beyond 2016 that’s certainly possible. But I think that is a little bit of a longer potential.

Our 10.5% to 11% that we guided to for 2016 was a consolidated margin. So we could potentially have some upside on our financial services business as well as we see as we move throughout the year and we’ll have more color to share.

Okay. So just lastly then if I’m understanding it right, a little bit of the improvement you’re expecting from gross margin expansion, or is it going to be closer to more stable-ish?

We’ve operated this year in the high 19s, 19.7 and 19.9 in the first three quarters. We consistently say we expect our margin to be around 20. So if we come in around 20 that next year, that would be a slight improvement in our gross margin from this year.

Good morning.

Good morning, Susan.

Good morning.

In terms of your specs, you noted that they were down about 12% during this quarter. Can you talk a little bit about how you’re thinking about that even it’s such a big part of your strategy and if there is any change there that we should be aware of?

We saw our completed specs go down by 12% during the quarter, which is a pretty seasonal movement for us through the spring selling season, as we’re selling those homes that we build and had available for our customers. But specs as you said are always have been a big part of our business. We’re very comfortable building speculative homes and we think it opens up a new buyer to us that we wouldn’t have before just building homes for the customers.

No real change in our strategy there. We’re trying to operate as efficiently as we can and so our spec percentage is a little lower than perhaps you’ve seen in the times in the past, but really there is no change in strategy at all.

Okay, perfect. And then can you just give us an update on what you’re seeing in terms of the mortgage market? It sounds like things are kind of continuing to maybe incrementally improve there, but what do you think?

Probably exactly what you just said, Sue. To us, the mortgage environment is okay. Assuming a buyer has decent credit and has a little bit of money to put down which isn’t unreasonable for somebody buying a house, buyers can get credit today. So we’re seeing plenty of traffic come in and that can qualify. Our cancellation rate has settled out into the low 20s and that still the main reason people do cancel. They can’t qualify for the mortgage. But that low 20s rate is not unusually high or something we’re uncomfortable with. And we haven’t seen much in the way of change, but I do think you continue to just see very gradual incremental loosening. That probably at least all signs point right now that will continue. I don’t think we expect any broad movements in the market to really open the flood gates again, but just continued improvement in components then more buyers coming out and feeling better about their ability to qualify. And whether the standards have actually changed or not, I think we would point to as more of a positive over the past year.

Hi, good morning. Your FHA, VA mix picked up pretty significantly year-to-year, is that price cut driven or is that more some of the expansion you are seeing on the VA side, just curious what's driving that.

Yes, Jack. It’s not a pickup on the VA side or VA was pretty much flat. So I think what you are seeing is an impact from the pricing getting more favorable on FHA coupled with a higher share of express. And coming through our closings which is a higher FHA percentage than our reporting in Emerald buyers.

Okay. And then just looking back I guess the last couple of months, has the 97 GSE return had any impact on demand any of you.

No.

Okay, great. Thank you.

Thanks for taking my question. I wanted to first, if you could provide a comment on the land market where you are seeing overall and where there is still good opportunities to invest.

I would say yes, we’re still seeing good opportunities overall. I mean even replacing—we’ve just replacing what we use—we’re going to spend $2 billion plus this year. We’re disciplined, we’re basically underwriting it to two-year cash back program generating a certain level return 20 % and if we can get it in that box, it’s buy for us. I can tell you we’re seeing deals we’re getting it done.

No shortage of deals out there available.

Okay. And then just regarding the SG&A outlook in terms of employee retention and yes, sustaining the growth rate in topline, what do you see as the risk of having to sort of re-accelerate the amount of dollars being spent in SG&A?

The SG&A savings are being driven by revenue increases and efficiencies gained in the operation. This is not a cut employee program. In fact, some of our highest paid people are in some of our lowest SG&A divisions. And it’s because of the revenue-driven and the efficiencies they operate with. So it really comes down to driving sales per flag per month. If you look at our 8,000 additional closings this year on a relatively flat community count that $290,000 per ASP, per average sales price, and that’s driving a tremendous amount of revenue out of the same store sales. So this is not a—this model is protecting employees, not putting them in risk.

Thanks. I appreciate the color.

Hey, good morning and thanks for taking my question.

Thank you.

Hey, Bill.

I’m just kind of thinking about in the past you’ve talked about return on inventory on your land supply is down, I’ll call it close to – a little under four-year supply. Looking forward to the fourth quarter and looks like inventory growth is slowing down especially with land held for development coming off the balance sheet. Where are the opportunities to improve – I guess, returns on asset as well as how do you think about leverage in that context for ROE?

Yes, Will. This is Bill. Yes, return just clearly the focus on our end our strategy, it’s balancing our inventory investments and trying to get the right balance of volume and absorptions compared to pricing and margins profitability to drive the best return in each one of our inventory investments and we’ve been saying for a while. We feel like our land supply was that a sufficient level or our owned land supply was sufficient. And so we’re maintaining that at around the same level. We own about 120,000 lots today. And we’ve been essentially in the range of 120 to 125 or so for two years. That’s still a sufficient level for our current volume and we expected that it will support continued strong double-digit growth for the remainder of 2015 and in 2016. And with our growth and improvement in profitability, with a more stable land supply, that’s improving our returns, and we expect to continue to drive some more from that.

If you look at our homebuilding ROI on a trailing 12 months, it’s actually up 100 basis points as compared to fiscal 2014 and we would expect to continue to make further progress on that in Q4 in fiscal 2016.

And I guess as a follow-up is a land bank in market there it’s used to run 50/50 in order to improve ROI? And also on the leverage front, do you think about you should be running closer to group medium leverage to hit kind of the group or total of the better ROE?

With regard to your first question on the optioning of land and lots, we are working continually to increase our controlled lot position and trying to get back more to the 50/50 balance. That is exactly where we have been in the past and that's where we’re striving to get to today. That helps us greatly with the return on our invested inventory. With regard to the ROE, as Bill mentioned before our initial use of the cash that we’re looking for in 2016 are handling the $540 million of debt maturities that we have next year. As well as continual opportunistic investments in the business, whether that’s land and lots deal by deal or whether that’s continued acquisitions as we look to consolidate mortgage and open up the new products and new customers to us. With that great opportunities – in front of us with the cash flow and we’re always monitoring – the leverage ratio and looking at what we feel is appropriate for where we are in the given cycle and the opportunity that are there.

Thanks guys and congrats on the quarter.

Thank you.

Welcome.

Thank you. A bit of a bigger picture question I guess. And that’s – we’ve seen multifamily as a bigger percentage of total start for a while now. I’m curious whether you see that as secular or cyclical. How has that all might be impacting you in some of your markets, even if – indirectly presumably. And whether in forms that all in any of your medium to longer-term decision making?

You know on multifamily something that we look where the demand is in each market, and we build some multifamily and it’s not a big percentage of our business at all and so we really look at that market by market, I don’t see that being a major driver of our business going forward. But in certain markets, it’s only a bigger percentage of business.

And I guess that when you think about growth for the single-family business. Are you of the view that we’re going to catch back up to prior compositions multifamily and single-family, which would presumably you have an extra engine of growth from that change in mix or do you view we’re probably going to stay at these higher levels of multifamily for a while, at a national level recognizing that you have your own individual markets, obviously have a single-family?

Mark, I’m sure we really have a view. I mean our focus is primarily on single-family and we’re not too worried about where that split is going to fall out going forward. Our goal every day is to go out and increase our market share in each of the markets we currently operate in. And so we’re going to gain as much of the single-family market as we can.