D.R. Horton Inc (DHI) — Q1 2017 Earnings Call Transcript

Thank you, Kevin, and good morning. Welcome to our call to discuss our results for the first quarter of fiscal 2017. 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's 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, which is 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 in the next few days. After the conclusion of the call, we will post updated supplementary data to our Investor Relations site on the Presentations section under News and Events for your reference. The supplementary information includes current and historical supporting data on our homebuilding return on inventory, gross margins, changes in active selling communities, product mix and our mortgage operations. 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'm 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. The D.R. Horton team produced strong results in our first quarter. Our consolidated pre-tax income increased 32% to $318 million on a revenue increase of 20% to $2.9 billion. Our pre-tax profit margin improved 100 basis points to 11%. We experienced a 20% improvement in our absorption per community as home sales increased 15% compared to last year. These results reflect the strength of our operational teams and diverse product offering across our broad national footprint, as well as solid market conditions. Our continued strategic focus is to produce double-digit annual growth in both revenue and pre-tax profits, while generating annual positive cash flows and increases in returns. For the trailing 12 months, our homebuilding return on inventory improved to 15.9%, up 290 basis points from 30% a year ago. And we expect to generate $300 million to $500 million of positive cash flows from operations for the year. With 24,500 homes in inventory at the end of December and an ample supply of land and lots, we are well positioned for the upcoming spring selling season and the remainder of 2017.

Net income for the first quarter increased 31% to $207 million or $0.55 per diluted share compared to $158 million or $0.42 per diluted share in the prior year quarter. Our consolidated pre-tax income increased 32% to $318 million in the first quarter versus $241 million a year-ago quarter. And homebuilding pre-tax income increased 28% to $294 million compared to $229 million. Our backlog conversion rate for the first quarter was 82%, above the high-end of the range we guided to on our fourth quarter call. As a result, our first quarter home sales revenues increased 20% to $2.8 billion on 9,404 homes closed, up from $2.3 billion on 8,061 homes closed in the prior year quarter. Our average closing price for the quarter was $297,000, up 2% compared to last year. This quarter, entry-level homes marketed under our Express Homes brand accounted for 28% of homes closed and 20% of home sales revenue. Our homes for higher-end move up and luxury buyers priced greater than $500,000 accounted for 7% of homes closed and 17% of home sale revenue. Our active adult Freedom Homes brand is still in the early stages of rollout, and customer response in the eight markets we are open has been positive. We still expect to have Freedom communities open in a third of our same-day operating markets by the end of the year.

The value of our net sales orders in the first quarter increased 17% from the prior year quarter to $2.8 billion. And homes sold increased 15% to 9,241 homes on a 5% decline in our average active selling community. Our average sales price on net sales orders in the first quarter was $299,100. And the cancellation rate for the first quarter was 22%, consistent with the prior year quarter. The value of our backlog increased 7% from a year ago to $3.4 billion with an average sales price per home of $300,900. And homes in backlog increased 6% to 11,312 homes.

Our gross profit margin on home sales revenue in the first quarter was 19.8% compared to 19.9% in the prior year quarter and 20.5% in the fourth quarter. 60 of the 70 basis points sequential change in gross profit margin was due to higher warranty and litigation costs this quarter. In the current housing market, we expect our average home sales gross margin to be around 20% with quarterly fluctuations that may range from 19% to 21% due to product and geographic mix, as well as the relative impact of warranty, litigation and interest costs.

In the first quarter, homebuilding SG&A expense, as a percentage of revenue, improved 70 basis points to 9.5% compared to 10.2% in the prior year quarter. We remain focused on controlling our SG&A while ensuring that our infrastructure adequately supports current and future growth. We expect our SG&A, as a percentage of homebuilding revenues, to be lower in 2017 than in 2016. However, we expect the improvement for the full year to be less than the 70 basis points improvement we achieved this quarter.

Financial services pre-tax income in the first quarter increased to $24.2 million from $12.4 million in the prior year quarter, driven by growth in revenue and an improved operating margin. 93% of our mortgage company's loan originations during the quarter related to homes closed by our homebuilding operation. Our mortgage company handled the financing for 57% of our home buyers, up from 51% in the same quarter last year. FHA and VA loans accounted for 48% of the mortgage company's volume compared to 50% in the prior year quarter. Borrowers originating loans with our mortgage company this quarter had an average FICO score of 719 and an average loan to value ratio of 88%. First-time home buyers represented 45% of the closings handled by our mortgage company compared to 43% in the first quarter last year.

During the quarter, our total number of homes in inventory increased by 6%, a normal seasonal trend as we approach the spring selling season. We ended the first quarter with 24,500 homes in inventory, of which 1,600 were models, 13,400 of our total homes were spec homes with 9,700 in various stages of construction and 3,700 completed. Compared to a year ago, we have 14% more homes in inventory, putting us in a strong position for the spring selling season and to achieve double-digit growth in revenues in 2017. Our first-quarter investments in lots, land and developer totaled $847 million, of which $552 million was for finished lots and land and $295 million was for land development. We plan to increase our investment in our land and lot supply this year at a rate to support our expected growth in revenues.

At December 31, 2016, our land and lot portfolio consisted of 213,000 lots, of which 119,000 or 56% are owned and 94,000 or 44% are controlled through option contracts. 77,000 of our total lots are finished, of which 32,000 are owned and 45,000 are option. Our option lot position increased 54% from a year ago, while our overall lot position increased 20%. Our 213,000 lot portfolio is a strong competitive advantage in the current housing market and a sufficient lot supply to support our future growth.

At December 31st, our homebuilding liquidity included $1.1 billion of unrestricted homebuilding cash and $888 million of available capacity on our revolving credit facility. Our homebuilding leverage ratio improved 690 basis points from a year ago to 28.6%. The balance of our public notes outstanding at December 31st was $2.8 billion, and we have a total of $350 million of senior notes that will mature this year in May. Subsequent to quarter end, Moody’s upgraded our corporate credit ratings to BAA3, and we now have investment-grade ratings from all three rating agencies. At December 31st, our shareholders' equity was $7 billion and book value per share was $18.70, up 14% from a year ago. Our priorities for cash flow utilization are centered around being opportunistic while remaining disciplined. Our top priorities for fiscal 2017 include continuing to consolidate market share by both investing in our homebuilding business and through strategic acquisitions; paying off $350 million of our senior notes on maturity in May; and providing consistent dividends to our shareholders.

Looking forward, our expectations for 2017 are consistent with what we shared on our November call, and are based on current market conditions. We still expect to generate a consolidated pre-tax margin of 11.2% to 11.5%. We also expect consolidated revenues of between $13.4 billion and $13.8 billion, and to close between 43,500 and 45,500 homes. We anticipate our home sales gross margin for fiscal 2017 will be around 20% with potential quarterly fluctuations that may range from 19% to 21%. We estimate our annual homebuilding SG&A expense will be approximately 9.0% with the second quarter of the year higher than 9% and the third and fourth quarters lower than 9%. We expect our annual financial services operating margin to be around 30%. We are forecasting a fiscal 2017 income tax rate of approximately 35% and an annual average diluted share count of approximately 380 million shares. We also expect to generate positive cash flow from operations for the third consecutive year in a range of approximately $300 million to $500 million. Our fiscal 2017 results will be significantly impacted by the strengths of the spring selling season, and we will update our expectations as necessary each quarter as visibility to the spring and the full year becomes clear. For the second quarter of 2017, we expect our number of homes closed will approximate the beginning backlog conversion rate in a range of 88% to 92%. We anticipate our second quarter home sales gross margin will be around 20%, and we expect our homebuilding SG&A in the second quarter to be in the range of 9.3% to 9.5% of homebuilding revenues.

In closing, our first quarter growth in sales, closings, and profits, and the improvement in our pre-tax profit margin are the result of the strength of our people and operating platform. We are striving to be the leading builder in each of our markets and to continue to expand our industry-leading market share. We remain focused on growing both revenues and pre-tax profits at a double-digit annual pace, while continuing to generate annual positive operating cash flows and improved returns. We are well positioned to do so with our solid balance sheet, industry-leading market share, broad geographic footprint, diversified product offering across our D.R. Horton, Emerald, Express and Freedom brands, attractive finished lot and land positions, and most importantly, our tremendous team across the country. We'd like to thank the entire D.R. Horton team for their continued focus and hard work, and we look forward to continuing to grow and improve our operations in 2017. This concludes the prepared remarks. We will now host questions.

Thank you, congratulations guys. I'm sure you're going to hear it several times today, but great quarter. Maybe we'll just start with the orders because you're going to probably get that question 100 times also. But can you talk a little bit about the trends that you saw through the quarter? Did you see any impact from the rates, from the election, product type disparity, what was going on? And then, whatever type of commentary you want to give post-quarter on what we've seen in January so far.

We were very pleased with the quarter. And we saw very strong improvement in our absorptions, community-by-community. Throughout the quarter, we continued to see a good response to our positioning. We were much better positioned coming into this first quarter this year than we had been, and we were able to execute against that. Therefore, the market is very solid. I wouldn't say we saw significant deviations within the quarter month-to-month. It was a pretty consistent result for us. In January, the Cowboy lost. So, in this part of the world, the selling season is kind of starting now. So, we're excited about the silver lining on that cloud for us. But we continue to see good sales trends in January, very early into spring. And we'll certainly keep you updated as things progress, and we get back with you in April on that one.

And follow up the absorption one, can you sustain it? And then with the rate move that you've seen so far, I assume that you're seeing very few that are not qualifying. Are you starting to see any trade-down in product? And at what rate, do you think you would start to see maybe some of those Express buyers have to drop out of the market?

Stephen, it's always good to be, in my mind anyway, the price leader in a rising interest rate environment, because you can’t afford $300. And if you've got a product to $250, you can still support this. So, we like our positioning. As far as absorption for our community, at some point, no, you're not going to be able to sustain and continue. But our focus has been driving to 20% ROI. And so we're going to drive absorption levels and improve ROI. And at some point, we're going to max out. The return we can make out of lag, and at that point, we will add flags.

And for fiscal '17, we feel very comfortable that we can continue to drive further improvement in our absorption to offset any community count decline to generate an 8% to 13% increase in closings that we’ve guided to for the year. So, clearly, we’re off to a strong start. And we can have some variability from quarter-to-quarter in how we get there for the year. As you saw, our sales were outside of that 8% to 13% range. We could have a quarter where our sales are under that 8% to 13% range, but we feel very comfortable that for the full year, our closings will be up at least 8% to 13%.

Stephen, we wouldn’t guide up double digits if we weren’t confident that we could drive that level of absorption.

Well, I am going to just add my congrats as well, because it's clearly, while your orders were very strong and you also executed very well below the top line also, so congratulations on a good execution this quarter. My first question actually revolves around cost control. I mean, I know that you are always focused on leveraging your scale with your vendors. But I think that recently you’ve conducted a pretty significant rebidding process with some of your suppliers. And I was wondering if you would be willing to share what you think the overall savings opportunity might be from those conversations?

Stephen, we’re constantly rebidding our suppliers and our vendors across the board. We’ve had several pushes over the last several years really in which we pushed hard on rebidding. And so, yes, that’s a continual effort for us, and we’re continually working to mitigate certainly any cost increases and improve our cost wherever we can. On a year-over-year basis, our costs, our stick and brick cost which we put up, were up only 2%, which is certainly more moderate than we saw a couple of years ago. And so, we’ve been able to keep our revenue growth per square foot exceeding our cost per square foot on the stick and brick basis, which is certainly helping us going forward. We’re seeing lot costs start to increase, lot costs were up 9% on a per-square-foot basis this quarter. So we’re seeing very good results from our efforts to control our stick and brick, which is helping to keep our margins stable.

And Stephen, we’ve been focusing a long time on driving a higher level of absorption on the community basis. And that allows us to control labor, and it makes the entire process of building houses more efficient. And I think we’re reaping some of the benefits of that.

Well, that’s really encouraging. My next question relates to deleveraging in the fate of very strong demand. I mean, we’ve seen your net debt to cap already now well below what I would consider historical norms, and it seems to be on track to trend lower this year, giving a strong cash flow. I was wondering if you could talk to us about how you think about what the right level and what trajectory is appropriate for your leverage at this time, as we’re seeing some recent demand indicators inflecting upwards?

Stephen, we assess our balance sheet, capital structure, and our annual guidance, considering where we aim for the Company to be. As long as we can sustain solid growth at a consistent double-digit rate over the year and invest adequately to support that growth in 2017 and beyond while maintaining a healthy land pipeline, we believe we can support that growth and still produce positive cash flow. We don't have a specific target for leverage, but we intend to use cash flow in a way that serves the best interests of our Company and shareholders in the long term. This year, we have prioritized reducing our leverage. We anticipate generating between $300 million and $500 million in cash flow while still supporting our growth. We plan to allocate $350 million of that to pay down debt while continuing to reinvest in the business and maintain strong dividends for our shareholders, which we've increased and expect to be around $150 million this year. Our focus isn't on a specific ideal leverage level; rather, it's about balancing that with the growth we expect to achieve.

We're trying to create as much flexibility into the future as we possibly can. And so like Bill said, we don’t have a target on debt. But right now, we're generating enough cash to buy the land and lots that we need to support double-digit growth. And speculating beyond that is just not in our nature to do.

I wanted to ask about, first the backlog conversion ratio. Very, very strong conversion ratio, I think, the strongest in five years, just wanted to dig into that a little bit. You mentioned you're obviously driving absorptions in communities. That may have played a part of that. But on the other hand, there's still, I think, pretty widespread concerns about labor. And so, how should we think about that? Are we getting back to normal in terms of just the ability to deliver homes? And so what's helping you overcome the labor concerns out there?

Nishu, we feel we were coming in the first quarter much better positioned. I mentioned before, on our homes and inventory, and where we are right now at December 31st with 24,500 homes in inventory. That is a great indicator of future closings because we're getting the houses we want out of the ground, we're getting them where we want, and working them through to completion and then we're closing them. That's for us a much better predictor of closings volume in a given quarter perhaps than backlog conversion is. In terms of back to normal, I don't know whatever is normal in this business, it seems like the conditions are always changing a bit year-to-year. And we're building a platform that allows us to respond to those market conditions, and look to position our communities in front of the market with the trades we need to build the houses when we want to get built.

And another number, very-very strong, I think it’s a record for your first quarter SG&A. I think it might be your first single-digit number you've ever reported, very strong performance. You mentioned that look, hey, don’t expect the same level of improvement on the subsequent quarter, just wanted to dig into that a little bit. What drove the strong performance that might reverse in the subsequent quarters? Obviously, you've got the corporate relocation coming up that might be a factor. But why would it reverse after such a strong performance in the first quarter?

Nishu, our costs in the first quarter were consistent with expectations, with nothing unusual impacting them. The strong performance was primarily due to higher revenue, which exceeded our guidance for backlog conversion in the first quarter. This led to significant leverage on our SG&A costs during that period. Looking ahead, we maintain our annual revenue guidance in the range of 10% to 14%, with unit expectations between $10 to $14. While we anticipate continued leverage on our SG&A expenses, we do not expect to see an improvement of 70 basis points moving forward. We are pleased with our year's start, our positioning, inventory, SG&A expenses, and infrastructure, and we aim to leverage this as we progress through the year.

Nishu, thank you for noticing that. That is something we worked very hard at.

David, maybe this question is for you or anybody can chime in. But I think everybody is trying to read the tea leaves on what impact, if any, higher rates might have on demand. And I think you certainly have a very balanced outlook there, and it seems like there was no impact this quarter. I was curious if you were to go back in time in prior periods where we’ve seen similar rate moves in 2013 to the most recent instance. But certainly, there have been others. And if I look at your '13 results, you and everybody else, pretty big deceleration in orders in that period and we generally have seen that in prior periods as well. So, it might be too early to figure out what exactly is going to happen this go-around. But I was curious back then when you were out there in the field visiting your communities. What type of signs do you see that might have foretold that slowdown, and compare and contrast that maybe to what you’re hearing from your people in the field today with that move we’ve seen over the last eight weeks or so? Thank you.

Well, 2013, I don’t know that it was necessarily the rate increase as the rapidity of the rate increase that kind of shocked the market. And you saw, I would say, a deceleration in traffic and less consumer confidence from our sales agents. We fought through it. I think we ended with a pretty good 2013. But it did have a significant impact. Right now, the over-optimism that seems to be out there in the market, just traveled through Florida, and I’ll tell you, Florida feels like it is going to market as I’ve seen in a long time. Our sales agents were very excited. And we have inventory that right now we’re in the best competitive position we’ve ever been. As far as you great competition, price point competition model against model; it is as low as I have seen it for us. We’re very bullish today on positioning inventory in front of what we think is going to be a pretty strong sales season.

Alan, I think we’re seeing interest rates trend up gradually over time today, in connection with job growth, income growth and overall consumer confidence. I think those are very positives because we’ll see good household formations, we’ll see good confidence by the consumer, and able to adjust to a gradual rate rise that seems to be telegraphed. I think in '13 what was different is that rates spiked up very quickly for no reason, that was really tied to what people felt on the ground at the time. It happened in a vacuum and it had a very negative impact. Today, I don’t think those things are happening in a vacuum. I think there's, as David mentioned, there's confidence, there's good traffic in the sales offices, there’s very good confidence levels across our platform of 1,600 model homes. Our sales agents feel very good about the traffic they're seeing, and they feel really good about the indicators they're getting. Our inventory positioning is strong going into the spring. So we're very encouraged.

And as David already mentioned earlier in the call.

It's Ivy, I was just going to ask you guys, sorry Alan for jumping in. One of the questions we get a lot from our clients, especially because of your strength in leadership and entry level, and recognizing that you were ahead of the curve and certainly pioneers in many markets that others are following suit. That the entry-level customer is likely to be the most impacted on a rising rates. And frankly what we've heard is that it might even be more per se to the buyer who's stretching to maybe get to a move up. And so maybe sensitivity within the portfolio. Maybe you could talk about the experience. So they just buy a little less house, a little less option. If in fact, you do see, if rate continues to rise and you do, and the future see some impact. Can you give us some of your perspective around the price sensitivity within the portfolio of different price points that might be helpful?

What we are seeing is increasing demand. And I think, like Mike said, as long as the jobs are there and nominal increases over a period of time, people are going to adjust them. The position we're in is that we have a pretty broad product line in the Express and entry-level Horton that we can flex down in price to meet lower demand price, a lower price.

And as David mentioned earlier in the call, Ivy, that is why we believe our results are what they are, and we've been focused on offering an affordable product. And we're going to continue to do so, specifically with our Express homes and our new Freedom homes brands for the active adult. And we believe right now that's why we haven't seen any impact from the rate rise is that we are positioned where we want to be, and we'll continue to adjust as necessary to continue to offer an affordable product, regardless of the rate environment we're in.

The progress on absorptions, obviously impressive. I'm curious as you think about the growth path forward, the plans in terms of community count growth, the success you're having. Does it encourage you to be more aggressive in opening new communities over the next 12 months? Just curious if your thinking on that has evolved?

Sure, Eric. Really, our outlook on community count is the same as it was last quarter. We expect community count from where we are today to still remain relatively flat over the next few quarters. At some point, we would expect it to increase. But right now, our community opening schedule would indicate that it’s going to stay relatively flat. So sequentially, relatively flat, which would still indicate the year-over-year decrease. So, in this quarter, community count was down 5%, but with the 20% absorption improvement, our sales are up 15%. So, in the short to medium term, still relatively flat.

That's exactly right. Eric, I think also what we're seeing is the impact of some of the communities we’re opening now are frankly more productive communities than some that are closing off. We've been focusing on a return-based model for the past several years, and the fruit of that's coming through. We're seeing our return on homebuilding inventory jump up almost 300 basis points on a trailing 12-month basis over where it was a year ago. And our discipline around living within our means inventory-wise and being very focused on the balance sheet has encouraged our field teams to be very selective in the communities they are bringing in line and whether deploying their capital as to whether it gets the most turn out of that capital. So, that's what we’re seeing, I think, some good pickup in our absorption on a flag-by-flag basis.

The second question is in terms of the runway with Express, both from a competitive standpoint and a cost standpoint, and customer standpoint. Wondering how you view that? And if you view that any different if the runway and the opportunity is even greater than you had thought. Just wonder where we are in this cycle of the sustained success or even accelerating the success with what you've done with Express?

I can say that the demand for the product and the returns it generates have been surprisingly strong. The market demand has been much deeper and higher than I anticipated when we launched it. In terms of sustainability, I believe that’s the largest segment where most buyers are. We are well positioned in that area and feel confident that we can compete effectively, sustain our position, and grow. We are just starting our rollout in the west and have begun in Phoenix, with early stages in Denver, and we believe there is significant potential for growth. We are also very excited about Freedom, our edge-targeted and edge-designed product, which we think will complement Express and provide something that is currently not available in the market.

So, I'm trying to understand, given the orders and your units under construction converging, why you’re thinking with that broad range. Because your closing as a percent of units under construction in 1Q was kind of normal, so it didn’t seem like that constrained. Orders have been following the seasonality over the last few years. Your under construction is up 14%. So how does that translate to 10% unit delivery for the midpoint for the year? I mean, what are we kind of missing there? Or is it just a natural conservatism on your part?

Well, Ken, our guidance is not 10% on units; it’s 8% to 13%. So there is a range there, so we could certainly be 10%, and still be in our guidance range. And as you well know, the entire year is driven really largely by the spring selling season. And so on the front edge of that and we certainly feel optimistic about it and we're positive about it. And we really feel like our positioning is very strong for that, but it hasn’t happened. So, we will evaluate the spring as we get into it. We will certainly evaluate our guidance, and we’ll update that as we think we need to once we have the visibility into the spring, and it's still too early to do that at this point.

Understood. But we've had normal seasonal trends, so you don’t need anything stellar to actually hit the high end of your unit, is my, I guess, statement.

Sure, Ken. I'll talk about it very generally. And I am happy to follow up on the specifics that we’ve given on most of our calls over the last couple of years. In fiscal '15 is really where we started to see the sharpest increase in both, really primarily labor and to some extent materials. Therefore, a couple of quarters, we did experience a high single-digit percentage increase in our stick and brick cost per square foot, which was outpacing our revenues at that point in time. As we moved through the end of '15 and into '16, we were able to get that closer to call it a mid single-digit percentage. And our revenue started catching up with that stick and brick costs, which is where you saw our gross margin really start to stabilize and become very consistent for the last, call it, six to eight quarters now. And as we’ve kicked off '17 and really the end of '16, we’re in a low single-digit cost inflation environment. This is all stick and brick that I’ve been talking about. In terms of lot costs, lot costs, if you go back to '15 and '16, pretty much needed increases really into the back half of '16, which was when we started seeing, call it a mid to high single-digit increase in lot costs. And this quarter is one of the higher in terms of we were up 9%, as Bill mentioned earlier, for a lot cost increase on a per-square-foot basis. But we’ve been able to offset the majority of that with price and kept that gross margin very, very consistent, at least from a lot level gross margin perspective.

You guys, you’re having a fantastic start to the year, congratulations. I wanted to ask you, how much of your outperformance and the strength in orders do you attribute to, you guys taking share relative to the broader market? Are you guys doing something on the ground so you’re picking up share?

That’s always our goal. As we compete in every community and we continue to have affordable product out there, that’s always our goal. If you look, really, when you look at share you have to look over a longer trend. And we certainly over the longer term have been pretty consistently gaining share, and that's certainly our goal going forward; market by market, community by community, and then rolling up to the overall company to continue to gain share in the marketplace. It looks like we’re in really good position to do that. We’re looking to position our communities, our homes, to be the best choice for every customer in every market that we’re serving. So to the extent that helps us gain share, that’s great to the extent it just helps us grow with the market, we’re going to do that as well.

And clearly, our product offering at the Express entry-level affordable price point has driven an outsized increase in those efforts over the last couple of years.

Every one of our operators wants to be number one in their market. Whether they’re closing 100 houses in a 7,000 permit market or 500 houses in a 600 permit market, they want to win. We instill that ambition and promote it, and our expectation is that they will succeed. With that said, we will gain market share.

Well, it sounds like your execution is great. And my just follow-up question. You reiterated free cash flow guidance, M&A is the core strategy, you guys have a great track record of that. What's the pipeline like? And do you think it's a public or private type of M&A situation? Is there anything out there size wise that would be a game-changer that would be a good fit for the platform right now? Or do you think it's just going to be kind of selective sharp-shooter M&A? Great job, and thanks and good luck.

Thanks, Bob. We continue to look at a lot of opportunities, and we evaluate them all against the track record we have. And so we have a very high bar for what makes sense for us to bring on board. But we continue to look at every opportunity that's presented to us, give us a very serious look and try to learn and understand how it could be a good fit for the company. And we will continue to do so. And it's been a very active time over the past few years, and I expect it will continue to be so. Well, over the last couple of years, we've generated a lot of cash and we’ve consistently still found some acquisitions to allocate capital to work. So right now with the pipeline that we see, our expectation is that we will still find some acquisitions that fit. So right now, we'll certainly think about if we don't find some acquisitions that fit.

There’s a great big old vault underneath the new Horton building. And Don wants to be able to spit it out down there and play in.

Thanks, good morning everyone, and also obviously nice results on the orders, nice to see the rebound from the prior quarter. First question, I was hoping to dig into the Freedom homes rollout a little bit. You're still on track, it appears, and expecting to be in a third of your markets by fiscal '17 end. I was wondering if you could give us a sense of, and maybe remind us if we talked about this last quarter. But how does that Freedom brands product defer from your corporate average in terms of ASPs and sales pace? And given that it would appear that this is a market share gain opportunity. If this is something that is just getting revved up in this current year, is this something that you can, further perhaps take share in your given markets over the next two or three years?

Sure Mike. We definitely agree with the latter part of your statement, in terms of this helping us to continue to capture additional share, as David mentioned earlier on the call. This is a product that we don't think really is out there today in terms of a lower price affordable active adults community, smaller community size, limited amenities, but good locations, kind of a lock and leave approach. So gated where we can and some pools and small club houses in markets like Florida. In terms of a price point, very early stages, so we’ll adjust as we continue to roll it out. But we would currently anticipate it to run about 10% to 15% higher than a like Express product. And we do have plans, as you mentioned in the beginning, to be in at least a third of our markets by the end of 2017. So not a huge driver of our 2017 results, probably more of a driver in 2018, but definitely something that's going to help us continue to consolidate share and rounds out our product offering for the one place we weren't really playing before.

Super large demographics favor that brand, and as interest rates pick up, these buyers are less mortgage sensitive. So it's kind of a hit against a little higher rate as well.

And part of my mind just to make sure I also get as part of that first question, the sales pace so that compares to the rest of the group. And then my second question is on SG&A, obviously continues to be a hallmark of the company. It was interesting I was looking back at the past cycle. And in 2004, when you did a similar amount of homes close that you’re guiding for this year, you actually also had an SG&A of about 9.1, it looks like in that year. And what struck me was is that there are many builders today talking about maybe having a lower cost structure this cycle versus last, either through digital marketing, which is something that you guys talked about as well. But I was wondering if there is some pluses and minuses to your business model, from a cost standpoint, certainly what comes to mind is your three or four brands today, which might require a little bit more SG&A relative to your singular approach last cycle. But I was curious about some of the pluses and minuses on the SG&A front, because on a top-down level, looks like the same cost structure.

Mike, I think Bill will touch on the SG&A question, in terms of going back to your follow-ups freedom and absorption. Once again, very-very early stages for that brand, but we would likely anticipate it being faster than a typical Horton community, but probably not quite as fast as an Express community.

And then, Mike, compared to the historical, we've looked at those historical comparisons as well. And you’re right, as far as where we were on SG&A as a percentage for the entire year in all four to similar closings was at 9.1, is a difference between then and now, as we were seeing significant price depreciation in our homes. In 2004, the data that I'm looking at was a high single-digit ASP increase then, which obviously creates a lot of SG&A leverage. And so today, we're achieving this with a much more modest ASP appreciation. And we're not really quite up to our peak volume yet, and with some lower on track for right now. And our expectations were we’re guiding the 9%, we certainly feel very confident that we can hit the 9%. But if we continue to see the improvements and efficiencies in our business, we expect to push beyond that before we get fully to peak volumes again. You asked about costs and where there might be some changes. So, certainly in terms of efficiencies from technology, and you mentioned the marketing, certainly efficiencies there. Those are things that have been positives over this life cycle over the last decade that are certainly helping to contribute. On the cost side, frankly, the cost of regulations and running our business throughout our business in all respects are significantly higher today at the local level and really all the way up through our business, which is something that we've had to absorb as well as everyone else in the industry, and well publicized. So I would say that's probably one of the more significant offsets to the other efficiencies we’re seeing.

The other big difference, Mike, between ‘04, ’05, and ’06 and our business model today is we have extremely aggressive growth targets in place that we were actually adding headcount and building infrastructure out for. Today, we are growing. We have a stated target of double-digit revenue growth, and we're making sure we’re incurring and adding SG&A to be able to handle that. But we don’t have to add at the same rate today as we would have had to back then to go after that.

First question is, the orders in the west region seemed a little bit lighter than we expected, and time to perform some of the other regions. Was this community count driven, or maybe with the rollout of Express in California. What were the factors there?

John, in the west, as we’ve talked about, we have not been investing as heavily in the west. We’ve been maintaining our position. And it's been relative to our other regions we’ve been making larger investments in other regions. So I think it’s a reflection of just a little bit lower growth expectation there in our west region, which does reflect itself in community counts.

And we did get, because we don’t have the number of communities there that we had in some of these other regions. The delays in getting a couple of significant communities online can impact quarter-over-quarter numbers.

We are in the very early stages of the Express rollout there. Therefore, the west is not experiencing the same level of improvement in absorption and efficiencies as we have observed in other parts of the country.

We are getting those communities open, and there is certainly a market after.

The pickup in absorption pace, I think, was one of the biggest things out of the quarter. I am wondering if you could give us, or if you have, the absorption pace improvement year-over-year for each of the brands, so Express, Horton and Emerald, just kind of get a sense of the relative mix? And do you have that number?

No, we don’t buy brand. We’ve got it here by region, but we don’t have it here by brand in front of us, that’s something we could look at and follow up with later on. But that’s not something we have right here in front of us.

And then your capture at mortgage had a nice improvement year-over-year. What was driving that?

I think a lot of it was driving the capture rate improvement has been refocused by the mortgage company on improving their utilization that’s shown up in a lot of their operating metrics, their operating margins improving as they’re getting better overhead leverage as our volumes increase. And we’re serving more of the Express home buyers, the first-time home buyers. It's very helpful to our homebuilding operating divisions to have that customer managed at the mortgage qualification process into the backlogs, so that when a home is ready, they are ready with the mortgage to close, and the service levels provided by our mortgage company to the home builder are very high in that regard. I mean, we're still out there. The mortgage company is competing for the business, customer by customer in a very competitive mortgage market. But they're able to deliver a higher service level to that customer, because of the integration we have with the builder in a lot of cases.

And Jack, to go back to your question, we were able to get our hands on the change in absorption by brand. And really, it was consistently strong across all three brands, a strong double-digit increase in absorption.

Thanks for taking my questions and all the color so far, voice is a bit raspy. Wanted to ask about your owned option mix and you've been one of the few builders that's successfully pushed pretty meaningfully back towards option. And this quarter seems to stabilize a bit; recognize that it's not going to be so linear. But over time, can you continue to mix that higher? Curious to hear if there's anything reasonably you can speak to in terms of either incremental successes or challenges that you found in striking your option deals?

Mike, we're still not at our goal of a 50-50 balance in our total portfolio of option and controls. We're very happy with the relationships we've been able to expand upon with developers across the country. Key trade partners for us, frankly, in supplying the first raw material input to our business is land or lots. And we're very pleased with the increase of finished lots we've been able to tie up and partner with others to develop for us. That's probably driving a bit of our lot costs increase, as a percentage of revenue, or per square foot that we're seeing in our current deliveries. It’s a reflection of our strategy to try to have more lots provided for the Company finished, rather than us self-developing as much. And we’re seeing a big benefit of that in our focus on our improved returns, and we're seeing that return come up as a result of that. So there is no magic bullet to that. It’s building relationships, partnering with the right people, market-by-market, having the experience with them, and the confidence to get projects on the ground and work through them together.

And as part of the lower investment in the west, a function of just really still being more of a cash market and given your focus on shifting towards this balance, it's kind of an intentional mix away from the west?

We are not reducing our investment in the west. We appreciate the west and have made significant profits there. However, we will be disciplined and adhere to our underwriting guidelines for all our investments, whether in Texas or California. These guidelines serve as a limit on our capital. We are actually performing very well in the west and are pleased with our results and the returns we are generating.

And just continuing to work just like everywhere else to improve our returns on the west, there's more capital-intensive areas. It's still an area we want to improve our returns in.

This is actually Ryan on for Jade. Thanks for taking my question. It seems that other real estate sectors are going through a period of price discovery as markets digest the economic outlook, but just after your rates. So can you say if you’ve seen any adjustments in pricing, or bid-ask spreads or demand in the land markets that you are currently purchasing in?

We haven't observed any changes in land pricing at this time. From what we hear, there may be another opportunity for a project that was previously purchased. Some projects might be falling through, but that's just based on anecdotal evidence; it's difficult to establish a trend or see anything else occurring on a larger quantitative level globally for us.

Ryan, we closed some deals in our first quarter that were as good as any lot buy we made in the last four or five years. So, there are opportunities out there, and you've just got to be out there looking for them.

And then my second question is a bit more nuanced. Have you seen any changes in the levels of completion in any of your markets from either single family rentals or multifamily apartments?

We haven't observed any significant changes in our markets regarding housing choices for customers. Generally, these sources of housing are beneficial for our business, especially as people notice shifts in rental prices and the chance to own property, which allows them to stabilize their housing costs. This creates an appealing option for many. Additionally, we assist numerous individuals in transitioning from rental situations, whether from single-family homes or traditional multi-family properties, to owning their first home.

Thank you, Kevin. We appreciate everyone's time on the call today, and look forward to speaking with you again in April, as we share our second quarter results. To the entire D.R. Horton team, an outstanding first quarter. You are truly the best of the best and still fair enough of 2017.