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

Stephen East - Evercore ISI Kenneth Zener - KeyBanc Capital Markets Nishu Sood - Deutsche Bank Stephen Kim - Barclays Robert Wetenhall - RBC Capital Markets Michael Dahl - Credit Suisse Michael Rehaut - JPMorgan Susan Maklari - UBS Will Randow - Citigroup Jack Micenko - Susquehanna Financial Group Jade Rahmani - Keefe, Bruyette & Woods Buck Horne - Raymond James.

Good morning and welcome to the Second Quarter 2015 Earnings Conference Call of D.R. Horton America’s Builder, the largest builder in the United States. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder this conference is being recorded.

It’s now my pleasure to introduce your host, Jessica Hansen, Vice President of Investor Relations for D. R. Horton. Thank you Jessica, you may begin..

Thank you, Kevin. Good morning and welcome to our call to discuss our financial results for the second 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 in the next few days.

Also after the conclusion of our call we will again post supplementary historical data on the investor relations section of our website for your reference. The supplementary information includes historical data on gross margins, change in active selling community, product mix and our mortgage operation updated for this quarter’s results.

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. The spring selling season is in full swing at D.R. Horton.

During the second quarter housing market conditions were healthy and relatively stable with new home demand growing moderately across all our markets.

Our sales absorption improved significantly during this quarter as our homes sold increased by 30% from a year ago on a 4% increase in active selling communities, with double-digit percentage sales increases in all three of our brands. This reflects strong performance in our core D.R.

Horton communities and growth of our Emerald Homes and Express Homes brand, enabling us to expand our industry leading market share. Compared to the year ago quarter our number of homes sold doubled in our luxury Emerald communities and tripled in our entry level Express communities.

Our homes closed increased by 33% and we delivered another solid quarter of profitability with $230.1 million in pretax income on $2.4 billion of revenue. We had a great first half of 2015 and expect the second half to be even better, with a sales backlog of 12,177 homes at March 31, and a well-stocked supply of land, lots, and homes.

Our continued strategic focus is to leverage our operating platform to generate double-digit growth in both revenues and pretax profits on approving cash flows and increasing our returns.

Mike?.

Net income for the second quarter increased 13% to $147.9 million, or $0.40 per diluted share compared to $131 million or $0.38 per diluted share in the year ago quarter.

Our consolidated pretax income increased 14% to $230.1 million in the second quarter compared to $201.9 million in the year ago quarter and home building pretax income increased 9% to $208.6 million compared to $191.7 million in the prior year quarter.

Our second quarter home sales revenues increased 38% to $2.3 billion on 8,243 homes closed up from $1.7 billion on 6,194 homes closed in the year ago quarter. Our average closing price for the quarter was $281,300, up 4% compared to the prior year, primarily driven by 3% increase in our average home size.

Bill?.

The value of our net sales orders in the second quarter increased 33% from the year ago quarter to $3.2 billion and homes sold increased 30% to 11,135 homes on a 4% increase in active selling communities. Our average sales price on net sales orders in the second quarter increased 2% to $284,400.

Cancellation rate for the second quarter was 20% compared to 19% in the year ago quarter. The value of our backlog increased 27% from a year ago to $3.6 billion with an average sales price for homes of $293,500 and homes in backlog increased 21% to 12,177 homes.

Our backlog conversion rate for the second quarter was higher than our expectations at 89%. We expect our third quarter backlog conversion rate to be in the range of 78% to 80%, up from 76% for third quarter of last year.

Jessica?.

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

Emerald Homes our brand for higher end move up and luxury communities is now available in 41 markets across 16 states. Our Emerald product offering has been well received by home buyers and we plan to continue expanding our footprint of higher end communities across the country.

In the second quarter homes price greater than $500,000 accounted for 15% of our home sales revenue and 6% of our homes closed.

Our Express homes brands, which are targeted at the true entry level buyer, focused primarily on affordability, is now being offered in 44 markets and 13 states with the significant majority of our Express sales and closings to-date coming from Texas, the Carolinas and Florida.

Customer response to our affordable Express product offering has been very positive and we expect to have Express Homes communities open in a substantial majority of our markets by the end of this year. This quarter Express accounted for 18% of our homes sold, 13% of homes closed and 8% of home sales revenue.

The average closing price in an Express home in the second quarter was $179,000. 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.

Bill?.

Our gross profit margin on home sales revenue in the second quarter was 19.7%, down 10 basis points from the first quarter and in the middle of the expected range we shared on our last call.

The consistency in our gross margin in the first two quarters reflects the stability of most of our markets today and the normalization of housing market conditions we have seen over the past year, while the increases in our average sales price have moderated as we have increased our mix of entry level product, 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 shared the past several quarters.

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

For the upcoming third quarter we expect our home sales gross margin will be in the range of 19.5% to 20%, consistent with the first two quarters of the year.

Mike?.

Home building SG&A expense for the quarter was $242.4 million, compared to $187.9 million in the prior year quarter. As a percentage of home building revenues our SG&A improved 70 basis points to 10.4% compared to 11.1% in the prior year quarter as our significant revenue increase this quarter improved our SG&A leverage.

Based on our projected backlog conversion we expect our SG&A as a percentage of home building revenues in the third quarter to be in the range of 9.9% to 10.2% which would be a year-over-year improvement of 40 to 70 basis points. Our ongoing annual target for SG&A as a percentage of home building revenue is 10%. Jessica..

Financial services pretax income in the second quarter increased 111% to $21.5 million from $10.2 million in the year ago quarter. 89% of our mortgage company’s loan originations during the quarter related to homes closed by our homebuilding operation.

FHA and VA loans accounted for 45% 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 FICA score of 717 and an average loan to value ratio at 88%. David. .

At the end of March we had 21,300 homes in inventory, of which 1,700 were remodels, 10,200 were spec homes and 4,100 of the specs were completed. Our construction in progress and finished home inventory increased by $196 million during the quarter, due to our seasonal home construction activity for the spring selling season.

Our second quarter investment in lots, land and development totaled $507 million, of which $282 million was to replenish finished lots and land and $225 million was for land development. At March 31, 2015 our lot portfolio consisted of 122,000 owned lots with an additional 55,000 lots controlled through option contracts.

64,000 of our lots were finished, of which 33,000 are owned and 31,000 are options. Our 177,000 total loan lots owned and controlled provide us a strong competitive position in the current housing market with a sufficient lot supply that supports strong growth in sales and closings in the future periods.

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

We expect each community, regardless of brand to achieve this target by optimizing the balance between absorptions, margins and inventory levels, as our underwriting continues to support our ongoing goal continual improvement in the company’s home building pretax return on inventory.

Bill?.

During the second quarter we recorded $4.4 million in land options charges for write-offs of earnest money deposits and due diligence cost for projects that we do not intend to pursue. We also recorded $8.1 million of inventory impairment charges primarily related to an expected land sale in our Southeast region.

Our inactive land held for development of $271.3 million at the end of the quarter represents 12,900 lots, down 7% from December and down 41% 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 decline further this year.

We will also continue to evaluate our inactive land parcels for potential impairments which may result in additional impairment charges in future periods, but the timing and magnitude of these charges will fluctuate as they have in past.

Mike?.

At March 31st our homebuilding liquidity included $665.8 million of unrestricted homebuilding cash and $710 million of available capacity on our revolving credit facility. We had $175 million of cash borrowings and $90 million of letters of credit outstanding on the revolver.

Our gross homebuilding leverage ratio was 39.6% and our homebuilding leverage ratio net of cash was 34.7%. We repaid $158 million of senior notes at maturity in February and the balance of our public notes outstanding at March 31 was $3.3 billion, which includes $500 million of 4% senior notes we issued in February.

We had no debt maturities for the remainder of fiscal 2015 and as of today we have a total of $542.6 million of senior notes maturity in the next 12 months. At March 31, our shareholders equity balance was $5.4 billion and book value per share is $14.78, which is up 11% from a year ago.

For the fiscal year-to-date period our cash used in operating activities was $168.8 million, down from $265.8 million in the year ago period reflecting our efforts to improve our cash flow from operations.

Jessica?.

Looking forward, we would like to update our expectations for the full fiscal year, which are still relatively consistent from the beginning of the year. As we are well into the spring selling season and gaining better visibility we are tightening the ranges that we originally provided.

Our updated expectations continue to be based on the current relatively stable housing market conditions and we still expect to generate a similar level of profitability and operating margins as our original range.

In fiscal 2015 we expect to close between 35,500 and 37,500 homes and generate consolidated revenues of between $9.8 billion and $10.5 billion. We anticipate our home sales gross margins for the full fiscal year of 2015 will range from 19.5% to 20.5%, consistent with our margins during the first half of the year.

We estimate our homebuilding SG&A expense will range from 9.9% to 10.2% of homebuilding revenues for the full year. We expect our financial services operating margins to range from 30% to 33%, slightly higher than our original range.

And we continue to forecast our fiscal 2015 income tax rate to be between 35% and 36% and our diluted share count to be approximately 370 million shares. For the third fiscal quarter of 2015 we expect our number of homes closed to approximate the beginning backlog conversion rate in the range of 78% to 80%.

We anticipate our third quarter home sales gross margin will be in the range of 19.5% to 20% subject to potential fluctuations from product mix, warranty and interest cost and we expect our homebuilding SG&A in the third quarter to be in the range of 9.9% to 10.2% of homebuilding revenues.

David?.

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

We remain focused on growing both our revenue and pretax profits at a double digit pace, while improving cash flows and increasing our returns. We are well positioned 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 finish lot and land position and most importantly our tremendous operational team across the country. We’d like to thank all of our employees for their continued hard work and we look forward to working together to continue to grow and improve our operations. This concludes our prepared remarks.

We can now host questions. .

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. Our first question today is coming from Stephen East from Evercore ISI. Please proceed with your question. .

Thank you. Good morning guys.

Maybe I’ll start out with Express, David and you’re seeing some great growth there on it, are you -- a couple of different things there, are you seeing more competition yet come in to the market to serve this customer base? And then you all talked a little bit about your growth, maybe what we should expect in the timeline and what type of community openings et cetera and where do we sit with the gross margin with that versus the rest of the company?.

Well, Stephen at this point we’re not seeing a lot of competition. People try to come in and compete with us. We continue to open markets pretty much as fast as we can. So we are seeing good growth in that brand and expect it to continue. There seems to be a lot of talk about the lack of first time home buyer coming into the market.

That’s certainly not something we’re seeing, where we have been able to get product on the ground we have found buyers. So and from a margin perspective it’s running below the company average but it’s in line with our expectations and in some cases we were able to push margins up so….

Solid margins over there, but that solid margins and absorptions are very strong. So absorptions are probably bit higher than our original expectations. .

And that then drives the returns in line with our expectations. .

Okay, got you. .

We’re very happy with it. .

Okay what we’ve seen in the field has been amazing response to it. I guess you are, if we look at Texas more broadly and Houston specifically, I know your numbers were really good.

Can you give us a little bit of color though about what you’re seeing as the progression month by month and maybe what April looked like particularly in Houston as everybody is concerned about it?.

Yes, Stephen I have spent the last month and a half driving our Texas markets, including Houston with the Regional President reporting and his Divisional Presidents.

You would think the market would be slowing down but we are seeing consistent performance pretty much across the Board and our April sales are a continuation of what we saw in the first quarter. .

Stephen, our Houston sales were in line with the expectations for the quarter, our south central region was up 33% in sales and Houston was pretty much in line with the region. So still strong increases out of that market for us. .

I can tell you Steve we’re not seeing a slowdown in our projects. .

Okay, thanks a lot. I appreciate that. .

Thank you. Our next question today is coming from Ben Zener [ph] from KeyBanc Capital Markets. Please proceed with your question. .

Good morning, Ken Zener here. .

Good morning, Ken. .

Good morning Ken..

So no good, Steve goes unpunished here today. You talked about in line with orders, in line with expectations. From our analysis while obviously you’re up very strong year-over-year. If I look at pace it looks as though you’re doing normal seasonality sequentially.

Could you just comment on that and if that’s accurate?.

Yes, we would consider it to be in line with normal seasonality. Our sales were up I want to say, right around 50% sequentially.

And even when you take into account our change in active selling communities, as we've talked about for a little while, those increases have moderated and so our sales were up about 51% from December to March on about 2% increase in selling communities. So right inline with what we would expect for this time of the year. .

Yes so that’s kind of how our seasonality is consistent with what we see but clearly we took a step up in absorptions this year versus last year and that is continuing through the spring. .

Correct. And then Dave I guess what's interesting, our view or thesis [ph] is this is quantity not quality pointing to actually a lack of supply at the low end being the inhibitor for cyclical growth rather than demand, which would be more loan oriented. You seem to express that view relative to Express Homes.

Could you talk about why you think it’s supply not demand when so many people are focused on the tight loans as the issue. What are the differences between your Express buyer and your traditional Horton? Thank you. .

Technically the Express Buyers is buying their first home. 60% of our Express Buyers are first time home buyers. Or they are people that are very conservative and looking for a great buy. I'm not sure there is a lot of difference other than their income levels, between the people buying the Express Home and the people buying a D. R. Horton home. .

And just based on our experience thus far what we're seeing when we put the product out there at an affordable price for those entry levels buyers and the current mortgage environment, there is plenty of demand. We're not having any problem selling those houses.

So from that standpoint we -- our evidence would show that we think that any limitations for the entry level buyer is supply driven. The mortgage environment, someone has a decent credit score, decent credit history they can get a mortgage today. .

You do think housing demand is elastic relative to the home prices, what Express would tell you?.

Yeah, absolutely. It's a value driven market. And that's pretty much across the board. .

Thank you. .

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

Thanks. First question I wanted to ask was about pricing power. So you folks are very clear and appreciate the color you've described, normal demand trends and you've talked about the demand trends and you've talked about the spring selling season being normal, even toned down your gross margin expectations a little bit.

But on the other hand you've now had, I think three or four quarters in a row of nearly 30% order growth. Your absorptions this quarter, being up what 25% 26% year-over-year and you've actually taken up your volume expectations.

So how do I reconcile those two? I would think with those sort of volume increases you would be seeing greater pricing power but that's not -- doesn't seem to be what you're saying.

So how do I reconcile those two?.

So I can tell you, the way we're looking at it is a return based model. And if we can generate a 20% return at the division level, then it's going to drive significant improvement to our operations and overall returns as a company. So where we have the ability to maintain that absorption level and increase production we do.

And I can tell you we have seen a significant number of our projects where the margins have improved. .

We are seeing that that we're hitting the pace and our plan pace in the various communities that we get there and then we feel we have pricing that are coming back, incentives have not been increasing, incentives are essentially flat for about a year.

And so we're seeing as pace improves we get price, we will get some pricing power back we're seeing in communities. And we're very happy with getting the stability in our margins. .

The other thing Nishu keep in mind is our mix shift and so our average sales price have moderated in terms of increases, but that's with Express Homes now accounting for 18% of our sales this quarter and 13% at closing at an ASP of about $179,000.

So we are raising prices in many of our communities today but we do have that Express grow in mix that's offsetting our overall ASP that you are seeing. .

Got it. Thanks, that's very helpful. And then the second question, Easter came a couple of weeks earlier than it did last year. So I wanted to ask if there was any effect on demand, maybe it pushed some orders from March into April. So I guess, maybe if you could comment on March relative to April to just let know if there is any affect there..

I think both year -- Easter was in April both year, slightly earlier this year and we don’t see a big impact there, as David said earlier, April’s continued the same trend we saw through the March quarter..

Okay, thank you..

Thank you. Our next question today is coming from Stephen Kim from Barclays. Please proceed with your question..

Hello, guys.

Can you hear me?.

Yeah, sure. Good to see you, Stephen..

Are you there?.

Hello, Stephen..

Yeah, okay. Sorry about that, technical issues.

First question relates to Express and Emerald, you know you have kind of been at this now for about a year or more in the case of Emerald but I am curious about how your thoughts are evolving around the product design? And what -- how to refine the product offering in Express and Emerald? What are the advantage of course that you had been kind of early in launching this product.

I imagine when you first came out you had an expectation for what your customers would be looking for and I was wondering if you could share directionally what you have found, if you gone out there, have you found for example at Express people have been looking for not just the really small boxes but that also there is some willingness to maybe move up in terms of size.

And in the Emerald has there been any preference for maybe a little more design or dirt [ph] sales so that they can really kind of customize it more than you initially anticipated when you rolled that product out. .

Stephen, when we first launched Emerald we were launching a brand that was different than what the perception of D. R. Horton had been in the past and so we built really, really [indiscernible] ourselves.

And I think as we have met with these customers and kind of defined what they are looking for we are modifying that and we are ultimately it kind of comes back to the same thing that’s on the Express side.

People want a great value at a great location and so yes, we are really kind of simplifying what we are doing on Emerald side, focusing on location but delivering competitive house in that market. .

Within the Express product we have tried to be consistent with the product offering but we have been sensitive to the markets and where is demand for greater square footage we are certainly delivering that and adjusting the mix, community by community to meet what that buyer is looking for in that community.

It is not a one size fits all approach, it is not just the smallest house, as you said, it’s driven by a family need, of the bedroom count since we are -- footage that they need and with the Express efficiencies we gain, we can deliver that value and deliver that a square footage at the price they can get the mortgage for..

And would you launch Express or Emerald across all of our markets, I mean you are going to learn a lot and you are going to make modifications to improve returns through the process. We are looking at the market, we are identifying where we can get better and we are pushing to get better..

So if I could paraphrase what I think I heard you say, is it sounds like in Emerald there is maybe an emphasis to really, if anything do less customization and maybe a little bit more that would lead probably to a little more spec activity but more of a focus on value.

And in Express I hear that there is some elasticity upwards in terms of the size of the homes.

Did I just generally hear that right?.

It would be 100% correct..

Okay. My second question relates to conversation rate, backlog conversation rate. I think you gave guidance for conversation rate, you are just a little bit higher than where you were last year and that would represent a deceleration in turnover rate from what you did in the second quarter.

Generally speaking, we think of conversation rates or backlog turnover rates going up as you do more spec activity and what we are seeing here from the way we model your spec activity it’s continued to go up but yet you seem to be looking for a bit of moderation in your backlog turnover rate.

And so I was curious if you could talk a little bit about why that is, is there some exogenous factor that we are not thinking about here or you are just being conservative on your backlog turnover rate or if you can reconcile that for me, that will be great..

You know we did exceed our expectations in the second quarter higher than our range and a bit higher jump in the backlog conversation from Q1 to Q2 than we have seen in the past. What we are guiding to for Q3 in the range of 78% to 80% is conversion [ph] is higher than our conversion rate last year.

It is also in line with what we are seeing in our business and in our updated forecast, really from the community level up. So that’s really a large part of what drives our guidance on conversion rate is what our guys, what our operators are telling us they are going to do.

We have had great sales in Q1 and so our backlog is up significantly and certainly we will -- we are going to be focused on closing every home that we can, that’s ready to close and in whatever period it’s ready but today based on the plans that we have in our business, the visibility we have in our business it lines up with that high 70s to 80% conversion rate for Q3..

And Steve, if you look at the last five years we really had been a slight tick down from Q2 to Q3 in our backlog conversion rates. So what we are projecting is in line with our sequential changes over the last few years..

Yeah, got it on seasonality. Thank you very much guys I appreciate it and good luck..

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

Hey, good morning and nice quarter. Just one question for me, I just want to understand your comment, obviously you are getting tremendous demand with the entry level product and from a mix standpoint, I think that would drag down your ASP which continued to increase.

So I am just trying to understand from a modeling standpoint, whether it’s third quarter or fourth quarter, does ASP start to turn negative on a year-over-year basis, just because you are selling more of the Express Homes?.

Bob, we’ve, really from the start of the year we said we did expect our ASP growth to moderate to the low single digit range and that’s where it is today. There is a number of factors that offset and it’s a little difficult to say whether it will continue to be slightly up, flat, or slightly down.

I wouldn’t say we have an expectation, it could be down. Certainly as Express grows that does pull the ASP down. But we are seeing good sales in Horton, good sales in Emerald. We are seeing pricing power in a number of our communities as well. So that ASP is one of the most difficult things to predict, exactly where it’s going to be quarter-to-quarter.

So I think we would stay consistent with what we have said all along this year, expect it to continue to moderate and to the extent it’s up, it will be up in the low single digits..

Got it and the other question nobody has really touched on it, how to think about land spend and land acquisition in terms of the cycle and where you are at? Thanks very much..

I think so far this year we are about consistent in our land spending and largely looking at replacements of the lots that we have been delivering. We feel like we have got a very strong owned and controlled lot position over 170,000 lots available for us.

So I don’t see a huge growth in our land acquisition spending at the present time but we still do see opportunities in all of our markets and we will continue to invest..

I think the key for us right now is we don’t have to buy anything. We are in a very strong position, where we see A plus deals than we can -- we are moving on those with a lot of energy and a lot of aggression. .

Just to replenish our lot supply at the level of volume we are at today there is still going to be significant investment. It will be north of $2 billion, $2.0 billion to $2.3 billion somewhere in here in land spend for the year, consistent with last year..

Got it. Thanks very much. .

Thank you. The next question today is coming from Mike Dahl from Credit Suisse. Please proceed with your question..

Hi, thank you. My first question, I understand that there, on a total community basis the community count growth has been fairly modest.

But wondering just given the rollouts in Emerald and Express if you can breakdown, you said sales doubled in Emerald, sales tripled in Express, what was community count growth versus absorption in those two parts specifically?.

Mike, we haven’t actually disclosed our community count in total or by brand. But clearly we are growing our Express community count at a faster rate than the rest of the company.

In absolute terms the number of homes sold doubled -- or tripled and then on Emerald we are growing that still, we are growing it at a slightly slower rate than we are Express, but our absorptions improved dramatically in both of these brands in addition to having some community count growth as well. .

Got it and then this is my second question, if we think about Express and how is the product that we have seen in person, it seems like the strength in absorption is such that the backlog delivery times have stretched out, call it five, six months and so just wondering at what point do you think you have maxed out sales velocity in terms of absorption at Express, and so incrementally you’re likely to just see growth coming from the community rollout versus incremental gains and absorption at Express?.

It’s a project by project comment. I will tell you we have a lot of projects out there where we continue to expect absorption for community to increase. Some we have maxed out and then some are our bigger Express offerings. We are building everything we can build on it. So in those projects we’re taking margins up. .

My comment would be no different in a Horton community or an Emerald community, that’s the case community by community across our country all the time. .

Okay, thank you. .

That’s a very good problem. .

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

Thanks, good morning everyone. First question, I had was just wanted to circle back to the pricing trends during the quarter.

I think David in your initial comments you kind of just characterized the market overall as healthy and relatively stable demand, growing moderately and I think just you kind of highlighted as well that you are still raising prices in a bunch of communities, but overall how would you characterize the pricing environment? I mean what we’ve heard is kind of just kind of stable to maybe just slightly increasing and incentives by and large, incentives/discounts by and large stable.

I mean obviously market to market that varies but on a broad basis is that kind of what you’re seeing?.

That’s pretty much the market out there right now. It’s a great market for us because we’ve got the land, we’ve got the operating platform, we’ve got the people in place. So we’re not having to make any investments. We’re just riding the market.

It jumps up then labor becomes a bigger issue and some of the higher price land that have been bought by others becomes competitive and we like the way deals run, it’s a good market for us, or consistent, absorptions are consistent, margins are consistent, yes, just continuing to gain market share. .

Yes no, certainly and I guess just the second question here, I appreciate all the detailed guidance for the year and like you said kind of tightening the ranges here and there. One area of focus for many is the gross margins and that did come in a little bit, of course on the flip side you slightly raised the closings and revenue and lowered SG&A.

So don’t want to exclude that but people do focus on the gross margins, the slight lowering of the range or lowering the high end of the range, could you just elaborate on what was the driver there, is it mix, is it maybe costs coming in slightly higher, any color there would be helpful. .

Michael I think we’re seeing there we are six months into the year at this point. So we’ve been through a very good spring selling season. We posted two quarters of margin in the 19.7%, 19.8% range and looking forward we see continued stability around that level. So it’s not necessarily price pressure that’s come in to play.

I think we’re seeing that our pricing relative to our sales price, our cost increases relative to sales prices have moderated and we’re not losing ground there. We’re seeing some stability in our reported margins and probably in our go forward margin at this point.

So at this point half way through the year, at the turn we’re looking to kind of tighten that range down around what we posted. .

We’re very pleased with that, to find that stable level in our normal range and obviously we’ll work to improve it in here. .

And you alluded that mix change does have an impact on this, our Express margins which are making up a bigger percentage of our deliveries are at a slightly lower margin rates on average with their faster absorptions than the company average right now. .

Right, okay. No fair enough, appreciate it, thanks guys. .

Thank you. Our next question today is coming from Susan Maklari from UBS. Please proceed with your question. .

Good morning.

First in terms of the Express product, can you tell us a little bit about your ability or your confidence in realizing the efficiencies that you see in those sort of core three markets where you’re currently selling through, as you expand into the rest of your areas?.

The Express was designed to be a very efficient product to build, and as we build it more and more times we’re getting better and better at delivering it and that’s across all three of those markets. .

Okay, and then in terms of material pricing and any of labor constraint can you just sort of talk to that and if there’s anything we should be aware of there?.

Part of what I think it’s going to be one of the big constraints in this cycle is going to be labor. And we are focused on creating efficient plans that will allow us to build more houses with less labor and that’s been an ongoing effort now for really the last couple of years. .

Susan as Mike just alluded on one of the previous questions, we have seen our rate has increased and our cost come down a bit.

So our stick and brick cost per square foot this quarter was up about 4.5% on a year-over-year basis and that still wasn’t in line with our revenues but it’s a smaller increase than we’ve been seeing and headed in the right direction.

Sequentially we actually saw our stick and brick cost increase per square foot almost essentially in line with what our price per square foot did. So we’ve made a lot of progress on that front and we plan to continue to do so as we move throughout the year. .

Okay, great. That’s very helpful. Thank you. .

Thank you. Our next question today is coming from Will Randow from Citigroup. Please proceed with your question. .

Hi good morning and thank you for taking my question.

In terms of this cycle versus past cycles, how are you thinking about cash and cash returns or said it differently, given I would call that certainly a slowdown but from a land investment perspective you’re not buying at I recall the same year-on-year pace, you previously were, would it make sense to step up the dividend or think about some other capital returns to shareholders?.

First as we look at our land supply we did make a lot investments early in the cycle and so we built up our land supply to a very sufficient level to support really strong top line growth for a few years here. So we are working into that and so our requirements to increase our land supply really not there right now.

So the pace of spending has slowed but as we said earlier our pace will continue to be at a very strong pace in terms of reinvesting in the business. We’re constantly evaluating our opportunities to invest market by market. We’re focused on achieving a 20% ROI, so pretax income over average inventory on every project that we invest in.

It’s one of our key investment criteria and to the extent we were finding deals that can do that in markets that we feel confident in we’ll continue to invest strongly in our business. That being said, we do expect and one of our goals is to continue to improve our cash flow. We did see and are seeing improvement in our cash flows from operations.

We’ve improved year-to-date a 100 million or better in terms of cash use from operations this year versus last year and we believe we’ll see significant improvement by the end of the year on a year-over-year basis. So heading towards the breakeven and hopefully a positive cash flow position.

We’re focused right now on achieving that and when we achieve that certainly that opens up a lot of flexibility for us either to invest further in the business, to look at other opportunities to look at distributions to shareholders as well, all those things come into play when we get to a stronger cash flow position. .

Thanks for that and just a quick follow up on Texas. It seems like from our vantage point things slowed a little bit in January and February and then snapped back towards the end of March.

I guess from that perspective what activity have you seen and there’s a big differentiation point between your higher ASP homes and your lower ASP homes and thanks again. .

I don’t think we’ve seen anything in Texas outside of our expectations and pretty consistent performance across our price points. Our exposure in Texas is long and deep.

We’ve been here a long time, it’s home and our presence in the markets is very tailored to the individual markets and we’ve not seen anything outside in Texas that’s occurring outside of our expectations right now. We do watch it closely, but we are very happy with Texas’ performance. .

These are normal seasonal trends Will in January and February. So our sales cadence in Texas was increasing as we moved throughout January and February, which is what we would expect as we move into the early part of spring..

I have been in almost every project, every slide [ph] that we have in Texas over the last month and a half. And I can tell you there is no defining point about whether one of them is doing really well or not doing well. Across the board they are almost 100% on target and at the price point of the Express or the price point of Emerald.

Texas is a good market for us right now..

Thanks again. I appreciate the time..

Thank you. Our next question today is coming from Jack Micenko from SIG. Please proceed with your question..

Hi, good morning. Looking at the regional order trends, I mean we had East up 40, Southeast up mid-30s, Central up mid-30s and then Southwest was below that cluster.

Guessing that’s a community count growth driven issue, is that a strategic plan or do you think community count in the Southwest will grow, which should help the overall growth rates in coming quarters?.

You know that Southwest is one of our smaller regions, and it’s only made up of few markets, including Phoenix and you are right that our community count is impacting their sales rate and their community count was down this quarter and their absorptions were up.

But their absorptions were a little bit slower than the company average and at really no point is Phoenix continuing to be a little bit more of a challenging market for us than other parts of the country that are just growing faster..

Phoenix is a great city. Phoenix is going to be a great housing market again, it’s not there right now but we have big expectations for Phoenix down the road..

Okay, great and then you have grown Express from 13% to 18% of sales sequentially. You also talked about getting into more -- most markets I guess by the end of the year.

With your land pipeline in your sort of near-term how do we think about Express from a mix, I mean is it 20%, 25%, 30%, I mean how big of a component of the business does it become in the foreseeable future?.

Yes, we certainly would expect to get up into the high 20s, exactly where that lands for the long-term is hard to say, but it wouldn’t surprise us if it got to the high 20% to 30% in terms of units and that may translate to 20% of revenues, but really we are focused project by project, market by market, expanding where it makes sense and where locations are good and then we will see where it lands..

And we are laying out a plan and just kind of thinking about the business long-term we would expect at some point, Emerald to be about 20% of our revenue, Express to be about 20% of our revenue and the core Horton brand to be the balance of 60%..

Great, that’s helpful..

That’s good balance, gives us coverage in every market, that’s kind of the long-term plan..

Thank you..

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

Hi, thanks for taking the question.

Just quickly on the inventory impairment, can you provide any color on what drove that, and how that split between options walk away cost and anything one time or community specific?.

Jade, we had, I believe $8 million of impairments this quarter, that was primarily related to one community in South Florida that we have owned for a long time, that the opportunity came to sell it and we thought that was a better use of cash to be able to reinvest the cash with some current investment opportunities.

There were about $4 million of option write-offs and earnest money, due diligence cost that we rolled off during the quarter for projects we are not pursuing..

And Jade we have said consistently for a while that we are sort of working through actively on our former land held for development or moth balled communities and that’s a source of cash for us and we are trying to turn those inactive, unproductive assets into productive ones.

So most of the projects that we have pulled out of mothball we put into production, we are building houses on and we haven’t had any impairment charges but there are the occasional projects we have had and we might have a few more, that the best answer is to sell it and those have a higher risk or higher likelihood of having some impairment chargers but I would tell you in general our expectations for charges going forward are definitely lower and we expect fewer charges again going forward over the next year then we have seen over the past 12 months..

Great, thanks. And regarding the orders growth, I was wondering if you anticipate a moderation in the year-over-year pace of orders growth from the strong 30% level, just given last year’s strong comps in the second-half of the year..

Jade we have really just guided to what we expect to do this year in terms of closings. I don’t think we want to make any educated guesses on sales, but clearly we have to drive a good sales pace to hit the closings guidance that we went ahead and updated this quarter..

So high 20s to 30% is our guidance for year-over-year, and we have to sell at that pace to close at that pace..

Thank you very much..

Thank you. Our next question today is coming from Ryan Gilbert [ph] from Morgan Stanley. Please proceed with your question..

Hi, good morning..

Good morning..

Just a follow-up on the commentary on land spend, you guys said you are largely looking at every place of land, the land is being delivered, would this indicate a continue deceleration in year-over-year community count openings?.

Right now we expect it to remain relatively stable. Our expectations all year have been that we would continue to see relatively stable to slightly up low single-digit on community counts and I think that continues to be our expectation for the short to medium term, that’s something we are always evaluating as we are making our investment decisions..

Okay, great, thanks. And then just on the overall absorption level, absorptions have been increasing at a very rapid pace over the past three quarters.

Are you getting to a level, just companywide that you are more comfortable with or do you think there is still room to continue pushing absorption growth higher?.

I think we have some on communities that we talked about before we do have a limit that we probably hit, but there are certainly several communities we have, that we identified for increases in absorptions.

So we will continue to look to operate the company on a community by community basis at the right pace for that community to drive the expected returns..

As we look throughout company we always like plenty of opportunities to get better and plenty of opportunities to improve. So we will keep doing that..

Great, thanks..

Thank you. Our next question is coming from Buck Horne from Raymond James. Please proceed with your question..

Hey, thanks good morning. I appreciate the additional color you guys offered on the FHA and VA loan percentages at the mortgage spec.

I was curious though, could you may be provide any detail on how many of your mortgage closings are coming from 0% down financing including USDA and/or VA loans, any -- and in just a broader sense are you seeing a return to the drive to your qualified type mentality among buyers?.

What we have seen in terms of VA is pretty consistent. It ticked slightly down. So we will have this in our supplementary data on the investor part of our website after the call. But our VA percentage was 18% and we also saw a slight decrease in our USDA percentage from what we have been running down to 5%.

So those were the two products most likely and to have zeroed down in them I don’t have [indiscernible] are overall zero down.

In terms of driving the qualified we are going to a little further out in some cases for Express to hit that value proposition and people do still want to seem to do that but in terms of where our communities are located today compared to kind of back during the boom we are not nearly back out those areas again and there might some of the those areas we don’t ever go back to..

I appreciate that.

And my follow-up is just going back to the Texas discussion, obviously doesn’t look like you are seeing much sign of slow down at the entry level, in fact there is a lot of people still going -- migrating into those markets with your numbers but some competitors have noted maybe some softening at the higher price points, where you maybe a move up market or white color jobs that might be at risk in those markets.

Have you guys seen any signs of moderation in Houston or otherwise at some of the higher price points in those markets?.

We are in the higher price points, but we are in the higher price points really positioned over the last couple of years and there are locations that for us at least today we are not seeing any slowdown. Maybe it's there are areas where people were selling higher priced homes that are seeing a slowdown.

But our experience today is that the locations we have chosen and entered in last couple of years are still very high demand. When we launched the Emerald brand we focused on location. And that has been a prudent focus. .

All right. Thanks very much. .

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

Thank you, David. We appreciate everyone's time on the call today and look forward to speaking with you in July. I'd like to personally thank our people out there for the outstanding results of the last quarter and the way you are positioned for the quarter coming up. We appreciate it. Thank you. .

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