Brent Anderson - VP & IR Steve Hilton - Chairman & CEO Phillippe Lord - EVP & COO Hilla Sferruzza - SVP & CFO.

Michael Rehaut - JPMorgan Alan Ratner - Zelman & Associates Nishu Sood - Deutsche Bank Stephen East - Wells Fargo Securities, LLC Mike Dahl - Credit Suisse John Lovallo - Bank of America Merrill Lynch Will Randow - Citigroup Ryan Thomas - KBW.

Welcome to the Meritage Homes Second Quarter 2016 Analyst Call. [Operator Instructions]. I would now like to turn the conference over to Brent Anderson, Vice President of Investor Relations. Please go ahead, sir..

Thank you, Chad. Good morning, everyone and welcome to our analyst call to discuss our second quarter and year-to-date results which we issued in the press release before the market opened today.

If you need a copy of the release or the slides that will accompany this webcast you can find them on our website at investors.meritagehomes.com or by selecting the Investor Relations link at the bottom of our homepage. Referring to Slide 2 of the presentation for the customary cautionary language.

Our statements during this call and the accompanying materials contain projections and forward-looking statements which are the current opinions of management and subject to change. We undertake no obligation to update these projections or opinions.

Our actual results may also be materially different than our expectations due to various risk factor which are listed and explained in our press release and our most recent filings with the Securities and Exchange Commission, specifically our 2015 Annual Report on Form 10-K and subsequent 10-Qs.

Today's presentation also includes certain GAAP financial measures, as defined by the SEC. We've provided a reconciliation of these non-GAAP measures to the closest GAAP figures within our earnings press release.

Referring to Slide 3, with me today to discuss our results are Steve Hilton, Chairman and CEO; Hilla Sferruzza, Executive Vice President and CFO; and Phillippe Lord, Executive Vice President and Chief Operating Officer of Meritage Homes.

We expect the call to run about an hour and a replay will be available on our website approximately an hour after we conclude the call. It will remain active for 30 days. I will now turn it over to Mr. Hilton to review our second quarter results.

Steve?.

Thank you, Brent and welcome to everyone who's participating on our call today. We're pleased with our performance for both the second quarter and the first-half of 2016.

We have produced strong top and bottom line growth in each of the first two quarters this year which demonstrates the benefits of our strategic acquisitions and market expansion in recent years. Meritage now operates in 16 of the top 20 markets for home building activity.

They provide us the dual benefit of significant growth potential and better geographic diversifications. We have also improved our operating efficiencies and are building the platforms to sustain those efficiencies for operating leverage as we grow. Turning to Slide 4.

We generated a 37% increase in net income and a 36% growth in our diluted earnings per share over the second quarter of 2015. The earnings growth was primarily the result of strong home closing volume and revenue, combined with improved overhead leverage which was partially offset by a lower home closing gross margin.

Closing volume was greater than expected due to a 61% backlog conversion rate, up from 56% last year which reflected increased closings for spec inventory as well as operating efficiencies. Turning to Slide 5.

We closed 1,950 homes during the quarter, 25% more than we did a year ago and generate almost $796 million of home closing revenue, a 35% increase over last year's second quarter. Our average sales price of approximately 408,000 on homes closed was 7% higher for the second quarter of 2015.

Gross profit on home closings increased 21% over 2015 despite a 200 basis point contraction in home closing gross margin compared to last year. The increased home closing revenue allowed us to better leverage our selling, general and administrative expenses which were down 150 basis points on a combined basis compared to the second quarter of 2015.

We believe those efficiencies are sustainable, as we continue to grow revenue. The 150 basis points reduction in SG&A, coupled with a 60 basis point reduction in interest expense for the quarter more than offset the decline in home closing gross margin for the quarter.

Interest expense was lower, as we capitalized more interest to an increasing amount of land and homes under development. As a result, our pre-tax earnings increased 43% year over year in the second quarter which was fourth most profitable quarter since 2006 on a pre-tax basis.

Our tax rate was 32% and we expect and believe this is sustainable for the remainder of 2016. Turning to Slide 6. The key drivers for housing growth have remained positive this year and reflected in our orders for the quarter.

We contracted for 2,073 homes in the quarter which was 4% more than last year, with slight increases in both average community count and average orders per community, compared to the second quarter of 2015. That is the highest quarterly order volume we produced in nearly 10 years.

We ended the quarter with 4% more orders in backlog, 8% greater in total value, with a benefit of a 4% increase in ASPs, compared to the second quarter of 2015. I will now turn it over to Phillippe to expand on our order trends in greater detail.

Phillippe?.

Thanks Steve. I'll provide some operational highlights across our markets, beginning with the West region on Slide 7. Our closings were up 41% in units and 51% in total dollar value over 2015, reflecting a strong order growth in our West region last year.

We produced a 7% increase in orders of backlog was down 6% due to the higher conversion rate of beginning backlog. We had a 7% increase in order ASP, yielding a 15% increase in total order value. Absorption for community were 8% higher for in region, with increases in all three states compared to last year's second quarter.

Demand remains strongest in California and Colorado which has the highest absorption pace across the entire country at 11.8 and 13 homes per community on average, respectively, compared to our Company average of 8.6.

Our orders were lower in the second quarter of 2015 in Colorado, due to 19% fewer communities open this year than last year, as we sold out of several communities before we could replace them due to delays in development.

However, our sales pace improved 15% which partially offset the lower number of communities open and we're refilling our land pipeline quickly in Colorado.

Moving to Texas, we have rebuilt our community counts over the last year and ended the quarter with 13% more communities than a year ago, though our absorption pace was 23% lower this year, resulting in second quarter orders being down 13%.

ASPs increased 5% on our orders in Texas year over year, so total order value was less impacted, down 9% from the prior year. The year-over-year sales decline was most pronounced in Houston, although it continued to perform above our expectations with a smaller decline in Dallas due to transitioning between communities.

We had a significant increase in traffic as we opened new communities there and sales have picked up again in July. In our East region, we had mostly positive comparisons to last year second quarter and are pleased with the progress we're making there.

The broad average orders per community up to be more in line with the Company's average which has been a major focus on completing our most recent acquisition.

This is particularly true for Georgia, where we increased our sales pace by 7% to 8% on top of a 21% increase in average community count, resulting in 117% increase in orders and 130% increase in order values.

We also had significant increases in South Carolina and Florida orders which increased 19% and 22%, respectively, over last year's second quarter.

We grew community count in Tennessee by three new locations and while our sales pace there was not as strong as it was last year, it was still above our Company average and we increased both orders and order values by 21%, with a 35% increase in backlog.

As I explained last quarter, we introduced new product in Tennessee that is designed to have higher margins, during which time we basically shut down production while we revisit contracts and new plans so we're still in the process of ramping back up there.

Orlando demand has recently softened at the higher price point where we were earning outside margins and we have adjusted and adjusting prices to find the sweet spot with several of our higher-end communities there. Some of the softness in demand is due to fewer Brazilian buyers that we -- than what we saw there last year.

In summary, we're pleased with our operations overall, so we're experiencing more variability in demand, price sensitivity and a limited ability to control cost in different geographies. Those challenges have led us to be more innovative and efficient in everything we do on the construction side.

I will now turn it over to Hilla for some additional details on our financials..

Thank you Phillippe. Turning to Slide 10, Steve already hit the highlights of the income statement, so I'll review a few additional details on our land and balance sheet metrics.

Our home closing gross margin was 17.3% or 17.6%, excluding $2 million of impairment in the second quarter of 2016 which compares to 19.6%, excluding impairment for the same quarter last year.

Progress towards our goal and increasing our margin has been slower, as we have had limited pricing power beyond our ability to offset the increases to land, labor and material costs in most of our markets. On a regional level, Texas produced the highest margins again, though they have turned to more normal margins over the last several quarters.

Despite a healthy market overall, we have had minimal ability to raise prices in Houston and we closed out of several high-volume communities in Dallas that were producing outside the margins. Our margins in the West region were in line with last year and up slightly from the first quarter of 2016.

We have been able to increase prices to offset climbing construction costs and mitigate the impact of several underperforming communities in Arizona and Southern California which we discussed on our earnings call last quarter.

Gross margin in our East region continued to be choppy, as we're in different stages in our new product rollout in community positioning within each market. The region was also impacted to a lesser degree by some of this softening in Orlando's luxury market that Phillippe mentioned earlier. Slide 11.

Our ending cash position decreased approximately $134 million during the first six months of 2016 to $128 million at June 30 which was mainly used to fund construction of our backlog of homes under construction.

We invested approximately $254 million in land and development during the second quarter of 2016 compared to approximately $159 million in the second quarter of 2015. Almost three quarters of the amount in 2016 was for new land purchases.

As a result of these investments, our total real estate inventory increased by approximately $203 million year to date to end the quarter at $2.3 billion. We ended the second quarter of 2016 with 1,270 specs compared to about 1,136 specs a year ago at an average of about five specs per community in both periods.

Of those, approximately 21% were completed at the end of the second quarter of 2016, compared to 35% at the end of the second quarter of 2015, reflecting the fact that we sold and closed a larger number of specs during the second quarter this year.

Our net debt-to-capital ratio was 42.6% at June 30, 2016, compared to 40.4% at the end of 2015 due to the use of our cash during 2016 to replenish and grow our land supply and inventory of homes under construction.

During the quarter, we also extended the maturity of our credit facility to 2020 and at quarter end, we did not have any draws in the facility. Slide 12. Our total supply increased marginally during the quarter, ending in approximately 28,900 lots at June 30 or about a four-year lot supply based on trailing 12-month closings.

That's within our target range for land under control. With that, I'll turn it back over to Steve..

Turning to Slide 13. In summary, we were pleased with our operating results for the second quarter in the first half of 2016. We generated strong earnings expansion from topline growth and overhead leverage despite the headwinds we're facing that have slowed our progress towards increasing our gross margins.

Our orders closed in the backlog increased year over year in units, ASPS and total dollar values. We made improvements in various performance metrics in our newer markets, as a result of changes we implemented last year and we expect further improvements.

Demand remains steady and we believe that we're positioned in some of the best home buying markets in the country to take advantage of growth opportunities. I appreciate all of our employees' efforts and commend them on a job well done. Turning to Slide 14.

The key drivers for the housing market remain positive, namely job growth, low interest rates and a low supply of homes available for sale.

With more millennial buyers entering the market in growing numbers, we're working to position Meritage to increased demand from those buyers with our entry-level plus product offerings which we believe offer growth potential at lower price points than our typical move-up homes.

Based on our outlook and the results for the first half of 2016, we're reiterating our projections for full-year orders, closings revenue and diluted earnings per share while adjusting our expectations for gross margins. Consistent with our new guidance policy, we will also provide third quarter projections.

We project approximately 1,600 to 1,800 orders for the quarter, maintaining our projection of 7,350 to 7,550 for the full year. We expect to close 1,750 to 1,850 homes in the third quarter and maintain our estimate of 7,300 to 7,600 closings for the year.

We expect to generate home closing revenue between $740 million and $760 million for the third quarter and $2.9 to $3.1 billion for the full year. We're adjusting our expectations for the timing of gross margin improvements due to limited pricing power to offset rising costs.

We're projecting home closing gross margins of approximately 17.5% to 18%, excluding impairments for both the third and the full-year of 2016.

We're expecting to offset most of the impact of lower gross margins, with sustained operating leverage and are maintaining our projection for diluted EPS of $3.55 to $3.85 for the full-year which includes an estimate of $0.80 to $0.85 for the third quarter. We thank you for your interest in Meritage Homes and for supporting our growth and success.

We will now open it up for questions and the operator will remind you of the instructions.

Operator?.

[Operator Instructions]. The first question comes today from Michael Rehaut with JPMorgan. Please go ahead..

First question I had was on the gross margins and appreciate all the detail there, of course, as always.

When you think about the 200 bip year-over-year decline, I was hoping to get your sense of how much of that was driven by the higher costs versus the negative mix of fewer closings in higher-margin communities? And particularly, as you look at the East, given a lot of the improvements that you've already made there, how should we think about that margin over the next 12 months as we think about 2017?.

Well, as we've said earlier, almost all of our margin is driven by cost not just the cost of construction but also the cost of land. It's much higher this year than it was in years past. We've burned through a lot of the land that we bought at the bottom of the market after the downturn. We're using up much more retail priced land today.

I'd also say that the margin difference between specs and dirt sales has declined and the gap is lower. Part of our strong backlog conversion this last quarter was we sold more specs. But to your point regarding the South. The South continues to improve.

We're continuing to feather in and sell as many of those communities in the West that were affected by the reduction of the FHA limit, where our pricing was just a little high. We need to burn through that inventory. That is certainly mitigating some of that gains we're making in the South.

But certainly over time, as we go into next year, we're hoping for some improvement in our margins. But it's really hard for me to give you a precise schedule on that..

I appreciate that. I guess, Steve, what I was hoping for was, like in 2013 and 2014, you did a 22%, 21% margin and obviously I understand that there are several companies that have had some margin contraction off of those much higher returns and largely due to more recently purchased land.

At the same time at this level, 17% to 18%, I presume not all of that is just higher-priced land and I think in your comments, you were talking about labor inflation, maybe some raw material inflation as well. But not all of this is just a shift in land because I presume that you're not underwriting at a 17% gross margin typically.

So I was just trying to get a sense again on a year-over-year basis,, so far first half of 2016 versus first half 2015, you have been pointing to higher costs, either labor raw materials against which you had limited pricing power.

Just trying to get to how much that was the driver versus, again, you specifically cited some high-margin close-out communities as the other big driver..

Michael, I could tell you right out of the chute, there's nobody more keenly aware of the margin issue than I am. Okay? I have operated for 30 years at subsequently higher margins than we're achieving today. And I wake up every single morning thinking about how can I get those margins up because I absolutely understand it's a big issue.

It's a cost issue; it's a land issue. It's some underperforming communities issue due to the FHA issue that I outlined before in the West and we're working as hard as we can to fix it as fast as we can to get our margins back up to where they need to be. But I can't give you any more color than that.

I mean, at some point, we'll get them back up in line with some of our competitors. But I can't tell you what quarter that's going to be..

Okay. I appreciate that and certainly, I wasn't trying to imply otherwise. That is not my priority..

I know you weren't, but we don't take it lightly. We're very serious about trying to get that number higher -- this is not the new norm..

One last question and I'll get back in queue.

One thing that's also come out a little bit I think in the last year or so is that -- and maybe I'm a little off on this so tell me if you think so, but it feels like some of the larger cap builders, some of the largest builders in the space perhaps have had a little easier time, maybe a little more purchasing leverage or size in their markets, been able to combat some of the cost inflation pressures over the last year.

Do you feel that, that's a fair statement and if so, over the next year or two, what would you think in terms of M&A as we've seen already once in the last couple of years to get a bit bigger and increase some of your purchasing power, so to speak?.

I don't believe there's appreciable difference in cost between large builders and medium-sized builders and other public builders. I don't think that's what it is. I think it has a lot to do with their land strategy, land that they have been -- that have -- it's been impaired, that they brought out from the downturn.

New land they bought at lower prices. I think it has a lot to do with the product which segment of the market they are playing in. Certainly those that have gotten down to the entry-level space earlier have done better. There's a variety of factors but I believe strongly that construction costs are relatively consistent between big builders.

So and regarding M&A, our eyes are always open. We get packages on builders that are for sale all the time. We have conversations with people to see what opportunities are out there, but I can't tell you there's going to be more substantive M&A in the next year or two or not. We'll just have to wait and see..

The next question comes from Alan Ratner with Zelman & Associates. Please go ahead..

Steve, I have a question on the gross margin as well, but less focused on the year-over-year trend and more just curious, if we compare the guidance now versus a couple of months ago and the reduction there.

Last quarter, when you highlighted your optimism for improvement in margin in the back half of the year, I don't think it's -- was really dependent on pricing power. You mentioned a number of factors. The FHA impact to communities in California closing out which has been a headwind.

That should subside as well as the improvements you're making in the East region.

So I'm curious, now that you're mentioning, really, a lack of pricing power or I guess the -- less pricing power relative to what you might have thought, is the bigger driver of the gross margin reduction, higher incentives that you had to offer in the quarter? Or is it those other factors just being slower to materialize then maybe you previously thought?.

I think it's the other factors being slower to materialize. I mean, we do have pricing power in certain markets. Northern California, Inland Southern California, Colorado, some in Texas and other markets. But markets like Phoenix, there's not a lot of pricing power, we have a lot of communities here. I just think it's going to take more time..

Alan, just to jump in. When we're giving you guys our projections, we're not assuming that there's pricing power or assuming neutrality. We're assuming we will be able to maintain any increases in labor and material cost with corresponding increases in ASP to keep margins flat. So I think it's a combination of everything.

That's the cost maybe outpace our expectations a bit and the pricing power, while able to maintain and maybe absorb a little bit more of that cost since our margins did increase quarter over quarter, maybe it wasn't as strong as we had anticipated and so we're taking a pretty cautious approach for the back half of the year.

We're not really expecting the market to give us anything beyond what we're seeing right now. There are certainly opportunity but for right now, we're modeling the back half of the year so it's like what we're currently experiencing..

And then just secondly on that, I guess when you look at your Texas markets which is a big chunk of your business still. When we had some wet weather there, obviously Houston got hit the hardest, but I think some other markets might have as well.

So are you seeing any strain on the labor side in terms of getting those homes built and then maybe factoring in some higher cost as a result of that? Is that playing into the guidance reduction as well?.

I would say we don't have the production issues that we had last year, certainly, even though we had some weather issues this year. We're getting homes but we do have cost issues. And that's factoring into the margins. For example, masons -- the labor to lay bricks which almost every home in Texas has masonry. It's up over 50% in the last couple years.

It's pretty substantive. So we're doing our best to manage those and -- but we're pretty pleased with what's going on in Texas..

This is Phillippe. As it relates to the weather impact for this year ; it's been pretty nonexistent, quite honestly, on our production. We've had a few communities where it impacted the development and we had to reschedule those.

They're not going to open up quite on time as we expected before but from a production standpoint, we were actually able to get ahead of that and we haven't seen much of an impact to our business..

That's good to hear, Phillippe. And just on that note on the community count, my last question here. Your community count was roughly flat quarter over quarter. If we look at the upcoming quarters, if you hold at this 240 level you're going to be down roughly 5% year over year.

So do you expect that community count number to ramp higher in the next few quarters or have those delays maybe pushed some of those openings out to 2017 and you might be down for the next couple of quarters. Thanks..

We've had some delays, of course, that we didn't necessarily forecast into our guidance from previous quarters. But I would say the community count should rise over the next couple of quarters. And get us back to more of a flattish number for the full year. So yes, community count will pick up over the next couple of quarters..

The next question comes from Nishu Sood with Deutsche Bank. Please go ahead..

I also wanted to ask on the margin side, another of the drags on margins has been the uncapitalized or excess interest. Judging from your debt to camp, it's well within the normal range in the low 40s compared to some of the other builders that have excess uncapitalized interest so much higher debt to cap ratios.

Just obviously, the quick glance at the inventory balance being well -- I'm sorry the debt balance being well before the inventory balance.

So what's driving that still and what's it going to take to get that to go down to zero again?.

The interest expense to go down to zero again?.

Yes, the excess -- the uncapitalized portion..

So basically, the way that it works is that the higher our inventory balance is up under production, the more we can capitalize to access inventory. So I think you guys have seen a natural progression over the last two or three years, as our interest expense has continued to decline as we're able to capitalize more and more of it into inventory.

Our projections are sometime within the next couple of quarters. If it's 2, 3 or 4, I'm not really sure based on active inventory under production but with our expected growth rate and additional inventory under control, we should be able to see that interest expense eventually get fully capitalized..

Okay, in past quarters, as you've brought out the entry-level plus you have talked about some flattening out of ASPs but still very good momentum in the second quarter.

How is that shaping up and what should we expect as we head into 2017 on that front?.

We will have more entry-level-plus communities next year than we had this year and we will have more the year after. Our goal is to shift our mix to 35% to 40% of our total sales to be in the entry-level plus segment. It's going to take a few years to get there. But that's the direction we're heading..

The next question comes from Stephen East with Wells Fargo. Please go ahead..

Steve, help me out a little bit. The backlog conversion was really strong. You said you had a lot of specs. Your guidance is to not have specs coming through as many specs having a lower backlog.

Am I hearing that right?.

We didn't have a lot of specs. We had the same amount of specs that we had last year. We just were able to sell more of those specs that were near finished and get them closed in the same quarter. Remember, I read in my -- in the script somewhere that we had last year that 35% of our specs were finished. This year, only 21% of our specs are finished.

We're just get -- we're turning those specs better and we're not taking the -- any additional hit to our margin on those. And that's what's helped our conversion rate in this quarter..

And the backlog we brought in from last year..

And just to clarify, as we shift to more entry-level-plus, you should anticipate that the spec common point to continue to trend slightly upward due to the nature of that product and to cease point if we're not seeing margin compression between spec and dirt filled, that's a positive for us to be able to convert those into closings in the same cycle..

Yes. All right. It sounds like then you may have some upside on your closing guidance if all that plays out then. Okay. And then Steve, if you look at land and labor.

Can you quantify year over year, how much each one of those is up that's flowing through the income statement? Just as you all look at what you are doing either to combat the labor costs, value engineer or whatever the case may be, what do you think your outlook is for those two items moving forward?.

Land and labor.

So don't we have an average land price?.

Are you looking -- yes. I mean, land probably crept up maybe 200, 300, 400 basis points over the last several quarters, as we're shifting out of older land acquisitions to newer land acquisitions. But as far as the breakout between labor and material, I think that's probably too granular.

We're modeling the ability to maintain price increases to cover those and so far, we've been successful. We're not modeling any incremental pricing power above that to grow margins significantly at this point. But that's certainly something we're working on.

It's difficult for us to give you an exact percentage, as we're constantly value engineering our product to try to get those costs to come back in line with our expectations..

I'll try to have it for you on the next call so what our land lot is as a percentage of sales price this year versus last year. -- Couple of points higher..

And then Steve, could you just talk a little bit -- more detail of where you are on legendary and Philips and the turnaround. You talked about in prior quarters how far below the Company average, the gross margins were, et cetera.

You did talk something about it earlier but I'm interested in, just where do you get those two units because they are growth areas? When do you get those [indiscernible]?.

Every quarter, we're seeing improvements from those markets and those divisions. And we've got our people invoiced there. We've got strong teams and we're very, very bullish about the future of those businesses and I think about a year from now, we're going to be pretty close to normal. And we're going to make progress every quarter.

We've been at this now for three or four quarters and it's hard because you've got to change the product. First, you've got to change the people, then you've got to change the product and you've got to buy new land at the same time. We're doing all of that. And I am exceptionally pleased with the progress..

The next question comes from Mike Dahl with Credit Suisse. Please go ahead..

Steve, I was hoping to talk about SG&A and some of the operating leverage and I think specifically, as it relates to the guidance. You guys have obviously provided a good amount of detail on orders, closings, revenues, gross margins, tax rate.

I think it would be helpful if you could provide a little color around what type of SG&A leverage you are assuming for the full-year within the guide? And then also maybe some of the other line items, financial services, other income..

Our G&A, in terms of dollars, has only gradually increased at a much slower rate than our topline for the first couple of quarters. We expect that to continue. We expect to continue to get SG&A leverage.

Hilla, do you have any more granular information on that?.

Yes, so I think we've talked a little bit in the past about some initiatives that we have in place. We've right aligned our internal commissions policy. We have some tightening of controls here at corporate and throughout the divisions in G&A. We expect to be able to sustain that. There is a fairly high portion of G&A that's fixed.

Next quarter, where our projections are slightly lower you're going to see maybe a slight blip up and then in Q4, where our revenue increases, you'll see the percentage come back down. But the newer lower level that we're experiencing right now, as compared to the high 12%s and 13%s of 2015, we're expecting to maintain our current pace.

I think we were at 10.7% this quarter. It should hover somewhere around that couple bips higher or lower but that's the expectation for our new target..

And I guess just a follow up and this is my second question but, so yes. See the G&A leverage and certainly some good control there. On -- but on that commissions and sales cost side, it's -- it did improve this quarter.

But I think it's been some time since it's been sub-7%, at least on a full-year basis, but that seems to be the number that you have to get to, to reach some of these targets.

So is there -- is that realistic as far as -- or I guess not realistic but what specifically are you doing to drive that and then beyond this year, how low can that go? And how much of it is internal versus something like lowering like the co-broker participation?.

No, we're not going to be lowering the co-broke, but as Hilla mentioned, we have done some significant work on our internal commissions structure which should help that 7% number get down. We're doing some other things with sales G&A, with our models and our sales offices and around our marketing.

So we have a lot of things going on to help manage that number down. Are we're going to get below 7%? Probably not likely, but I think we can get a lot tighter to it. And then the rest of the G&A, construction G&A is certainly is another number as we move more into entry level, we can leverage that.

We can build more houses per field operator and that number will come down as well..

The next question comes from John Lovallo with Bank of America Merrill Lynch. Please go ahead..

First question is on, generally, we think of deliveries and revenue ramping throughout the year. The 3Q outlook appears to imply a sequential decline.

Is it fair to assume that there may have been a little bit of pull forward into the second quarter? How should we think about that?.

Maybe a little bit, coupled with some conservatism. Making sure we put a number out there that we feel comfortable we can hit. And then our sales for the first -- for the last quarter were not as robust as we would like. I think that's factored in as well. So I think it's a combination of that and other things..

Okay. And for the second question, the 3Q order estimate that you guys have out there seems to imply 2% growth to 15% growth on the high end. So it's a pretty wide range.

Can you just help us dimension the upper and lower ends of that range?.

Well, it's going to depend on when we get certain communities online in the quarter. They come online at the end of the quarter. We're not going to get as much out of them. If we can get them open earlier, we can open them clean. We can get more sales from them. That will give us at the higher-end.

And then sales is probably the hardest number to actually project because weather can influence that. What's happening in the news can influence that. Shootings and Brexits and all those kinds of things we experienced last quarter having an impact on consumer confidence. You can lose a weekend or two with just some bad stuff on TV.

Try to give ourselves a little cushion with a little bit of wider range on the sales guidance..

The next question comes from Will Randow with Citi. Please go ahead..

I guess, focusing on the move-up product. Your inventory turns are roughly about 1 turn or so. Historically, been closer to 2 and you have had outsized ROE relative to the peer set.

As you shift towards the move-up and hopefully, more option lots, how quickly do you think you can improve inventory turns and can you quantify that at all?.

I think over the next couple of years, as we do more entry-level product, it's going to help the inventory turns. Unfortunately, land banking is not as prevalent in this cycle as it was in the last cycle. So I don't see us ever getting back to those turns that we had before.

Just because we're not going to be able to do as much land banking and the cost of land banking is just too high. So we're just going to get back to that by being more efficient, by having communities that absorb higher in both the entry-level and in the move-up space. Certainly, we need more strong performers in our core move-up business.

I hope over the next couple of years, we're going to be able to get those -- the ROA, ROE up..

One other final point when looking at our turns a couple years back, don't forget there were a lot of finished lots available, that we were able to start developing into product right away. Now, almost everything that we purchase requires a couple years of hold while we do land development. So that's slowing down the turns a bit as well..

So I guess the best way to characterize it is you have wait for land banking to come back?.

I wouldn't say that because -- I mean, it's not to say we're not going to get back to those numbers that we had before. It's not going to come back. We're never going to have 90% lots on auction. I just don't think that's coming back.

So -- but can we do better? Can we get -- can we have a higher turn than we have today? Absolutely, as our product evolves into more entry-level..

And then just a follow up. You mentioned pressure in areas as a side note in masons in Texas, for example.

Can you point to any states or submarkets where you're seeing the most margin pressure there because of the labor, lot or other inflation?.

This is Phillippe. I don't think this is news to anybody but where the trade capacity is being most impact that is in Dallas and Denver. So, Phoenix, to some degree, a lesser degree but is most acute in those two markets. Those markets are really hot.

And there's a lot of strain on the trade-based, specifically, in those two areas where we're seeing the most pressure on labor costs..

Next question will come from Jade Rahmani with KBW. Please go ahead..

This is actually Ryan Thomas on for Jade. Thanks for taking the questions. I know you touched on it earlier regarding community count but just was hoping to get a bit more color on growth for the balance of the year, specifically, in what regions that growth might be coming from? And then looking beyond 2016, what your current expectations are..

I'll give you community count guidance for 2017 next quarter. I'll have a better handle on what we expect we'll do for the full-year next year. But as I said earlier, we expect to get back up to that 250 to 253 communities over the next two quarters.

And I think the 10 or so communities that we need to open to get to that number are pretty spread out amongst all of our regions. I wouldn't say there's any one particular region that most of those new communities are going to be in.

I will say the one comment that we mentioned earlier, we had gapping in a couple of locations in Colorado, in particular and some in Texas. So when you look at where our community count declined, you can expect that those were just pipeline delays and those are coming online before the end of the year..

And then my second question is regarding the appetite for land, specifically, what markets you're seeing the most competition for land and what markets are most attractive.

And perhaps what you're expecting for land spend for the balance of the year?.

Well, certainly Dallas and Denver, as Phillippe mentioned, are pretty hot. It's pretty tough to get land in those markets that pencils. But we're still buying land in those markets. But -- probably I think the South is where our biggest appetite is. We're very aggressive about finding the land in all the markets that were in the South.

We certainly want to grow our business in Tampa. Down in Florida, we have a small operation in South Florida. We're going to be opening two communities there later this year and we're hoping to add a few more to that. And then the West, probably California, is where we're going to put most of our West region capital. We're pretty big in Phoenix already.

We're buying some lots in Phoenix but at a much slower pace.

Are we giving any projections on land spend for the year or where we're in that?.

I think that the figures that we gave previously still stand. So I think we had $250 million about of land and development spend for the current quarter. I think something within that range for the next two quarters is realistic..

We have no further questions in the queue at the moment.

We don't? Okay. Well, thank you very much for your participation and attention for our call this quarter and we look forward to talking to you again next quarter. Have a great day..

Thank you, Mr. Hilton. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect. Take care..