Good morning. And welcome to the Second Quarter 2017 Earnings Conference Call of D.R. Horton America's Builder and the largest builder in the United States. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Jessica Hansen, Vice President of Investor Relations. Thank you Ms. Hansen you may begin.

Thank you, Doug, and good morning. Welcome to our call to discuss our results for the second quarter of fiscal 2017. Before we get started, today's call may include comments that constitute forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Although, D.R. Horton believes any such statements are based on reasonable assumptions, there's no assurance that actual outcomes will not be materially different. All forward-looking statements are based upon information available to D.R. Horton on the date of this conference call, and D.R. Horton does not undertake any obligation to publicly update or revise any forward-looking statements. Additional information about issues that could lead to material changes in performance is contained in D.R. Horton's annual report on Form 10-K, which is filed with the Securities and Exchange Commission. This morning's earnings release can be found on our website at investor.drhorton.com, and we plan to file our 10-Q next week. After the conclusion of the call, we will post updated supplementary data to our Investor Relations site on the Presentations section under News and Events for your reference. The supplementary information includes current and historical supporting data on our homebuilding return on inventory, home sales gross margins, changes in active selling communities, product mix and our mortgage operations. Now, I will turn the call over to David Auld, our President and CEO.

Thank you, Jessica, and good morning. In addition to Jessica, I'm pleased to be joined on this call by Mike Murray, our Executive Vice President and Chief Operating Officer and Bill Wheat, our Executive Vice President and Chief Financial Officer. The D.R. Horton team produced solid second quarter results. Our consolidated pre-tax income increased 18% to $354 million on a 17% revenue increase to $3.3 billion. Our pre-tax profit margin was stable at 10.9%. We experienced a 16% improvement in our absorption per community as home sales increased 14% compared to last year. These results reflect strength of our operational teams and diverse product offering across our broad national footprints, as well as a strong spring selling season. Our continued strategic focus is to produce double-digit annual growth in both revenues and pre-tax profits, while generating annual positive operating cash flows and increasing returns. For the trailing 12 months, our homebuilding return on inventory improved to 16%, up 220 basis points from 13.8% a year ago. We still expect to generate $300 million to $500 million of positive cash flows from operations in 2017. With 27,100 homes in inventory end of March and 227,000 lots owned and controlled, we are well positioned for the remainder of 2017 and for future growth. Mike?

Net income for the second quarter increased 17% to $229 million or $0.60 per diluted share compared to $195 million or $0.52 per diluted share in the prior year quarter. Our consolidated pre-tax income increased 18% to $354 million in the second quarter versus $301 million a year ago and homebuilding pre-tax income increased 14% to $322 million compared to $282 million. Our backlog conversion rate for the second quarter was 94% above the high end of the range, we guided to on our first quarter call. As a result, our second quarter home sales revenues increased 18% to $3.2 billion on 10,685 homes closed up from $2.7 billion on 9,262 homes closed in the prior year quarter. Our average closing price for the quarter was $295,600 up 2% compared to last year. This quarter entry level homes marketed under our Express Homes brand accounted for 29% of homes closed and 22% of home sales revenue. Our homes for higher end move up and luxury buyers priced greater than $500,000 was 7% of homes closed and 17% of home sales revenue. Our active adult Freedom Homes brand is currently being offered in 10 markets across eight states. Customer response to affordable homes and communities offering a low maintenance lifestyle has been positive. Bill?

The value of our net sales orders in the second quarter increased 17% from the prior year quarter to $4.2 billion. And homes sold increased 14% to 13,991 homes. Our average number of active selling communities was 2% lower than the prior year quarter but increased 2% sequentially from our first quarter. Our average sales price on net sales orders in the second quarter was $299,400. And the cancellation rate for the second quarter was 20%, consistent with the prior year quarter. The value of our backlog increased 9% from a year ago to $4.4 billion with an average sales price per home of $303,400. And homes in backlog increased 7% to 14,618 homes. Mike?

Our gross profit margin on home sales revenue in the second quarter was 19.8% consistent with our expectation in the first quarter. In the current housing market, we continue to expect our average home sales gross margin to be around 20% with quarterly fluctuations that may range from 19% to 21% due to product and geographic mix as well as a relative impact of warranty, litigation and interest cost. Bill?

In the second quarter, homebuilding SG&A expense as a percentage of revenues improved 20 basis points from the prior year quarter to 9.3% at the low end of our guidance range. For the six months ended March 31 homebuilding SG&A was 9.4%, an improvement of 50 basis points compared to the same period last year. We remain focused on controlling our SG&A, while ensuring that our infrastructure adequately supports current and future growth. Jessica?

Financial services pre-tax income in the second quarter increased to $31.5 million from $18.6 million in the prior year quarter, driven by growth in revenue and an improved operating margin. 96% of our mortgage companies loan originations during the quarter related to homes closed by our homebuilding operation. Our mortgage company handled the financing for 57% of our home buyers, up from 53% in the same quarter last year. FHA and DA loans accounted for 47% of the mortgage company's volume. Borrowers originating loans with our mortgage company this quarter had an average FICO score of 720 and an average loan to value ratio of 89%. First time home buyers represented 46% of the closings handled by our mortgage company consistent with the prior year quarter. David?

During the quarter, our total number of homes in inventory increased by 11%, as we prepared for higher closing volumes in the third and fourth quarters. We ended the second quarter with 27,100 homes in inventory, 13,200 of our total homes were unsold and 9,700 in various stages of construction and 3,500 completed. Compared to a year ago, we have 10% more homes in inventory, putting us in a strong position for the remainder of the year. Our second quarter investments in lot, land and development totaled $814 million, of which $512 million were for finished lots and land and $302 million was for land development. During the first half of 2017 we invested $1.7 billion in lots, land and development compared to $1.1 billion in the first half of last year. Our underwriting criteria and operational expectations for each new community remained consistent at a minimum 20% annual net return on inventory and a return of our initial cash investment within 24 months. We plan to continue to invest in land and lots at a rate to support our expected growth in revenues. Mike?

At March 31, our land and lot portfolio consisted of 227,000 lots, of which, 118,000 or 52% are owned and 109,000 or 48% are controlled through option contracts. 77,000 of our total lots are finished, of which, 30,000 are owned and 47,000 are option. Our option lot position increased 42% from a year ago, in line with our focus on developing strong relationships with land developers across our national footprint. Our 227,000 total lot portfolio is a strong competitive advantage in the current housing market, and a sufficient lot supply to support future growth. Bill?

At March 31st, our homebuilding liquidity included $948 million of unrestricted homebuilding cash and $900 million of available capacity on our revolving credit facility. Our homebuilding leverage ratio improved 560 basis points from a year ago to 28%. The balance of our public notes outstanding at the end of the quarter was $2.8 billion. At March 31st, our shareholder's equity was $7.2 billion and book value per share was $19.23, up 14% from a year ago. Our balanced capital approach is centered on being flexible, opportunistic and disciplined. Our top cash flow priorities for fiscal 2017; include, continuing to consolidate market share by both investing in our homebuilding business and through strategic acquisitions; paying off $350 million of our senior notes of maturity in May; and providing consistent dividends which are expected to total $150 million this year. Our balance sheet strength, liquidity and continued earnings in cash flow generation are increasing our flexibility and we plan to maintain our disciplined, opportunistic position to improve the long-term value of our company. Jessica?

We are updating our expectations for fiscal 2017 based on current housing market conditions and our financial performance to-date this year. As we noted in our press release this morning, we are updating our annual guidance as follows; we are increasing the range of our consolidated revenues to between $13.6 billion and $14 billion and are increasing the range of homes closed to 44,500 and 46,000 homes. We now expect homebuilding SG&A for the full year in a range of 8.8% to 9.1% of homebuilding revenues and are increasing our guidance for our financial services pre-tax operating margin to approximately 35%. We currently forecast an income tax rate of 35.5%. Also is outlined in our press release this morning, we are reaffirming our previously issued guidance for fiscal 2017 including a consolidated pre-tax profit margin of 11.2% to 11.5%. Our home sales gross margin for the full year of 2017 around 20% and annual diluted share count of approximately 380 million shares and $300 million to $500 million of positive cash flow from operations for fiscal 2017. Specifically for the third quarter of fiscal 2017, we expect our numbers of homes closed will approximate beginning backlog conversion rate in the range of 81% to 84%. We anticipate our third quarter home sales gross margin will be around 20% and we expect our homebuilding SG&A in the third quarter to be in the range of 8.6%, 8.8% of homebuilding revenues. David?

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

[Operator Instructions] our first question comes from the line of Alan Ratner from Zelman & Associates. Please proceed with your question.

My first question, if I could just thinking about the pricing environment and costs. You raised the revenue guidance, held the gross margin guidance and we've heard from some other builders lately that pricing power seems to be re-emerging especially at the entry level, but at the same time there is obviously some uncertainty on the cost side, lumbers probably the biggest unknown just given the potential tariffs coming down the pike here. So I'm curious as you look at the full year gross margin and I guess just a little bit longer term, how you're thinking about those two offsetting factors and I guess just as a company as a whole, if you could just give a little bit of insight into how you purchase lumber and if you're doing anything differently to potentially since rising costs. Thank you.

Good morning, Alan. This is Mike. Thank you for the question. We're seeing some pricing power in the communities where we have achieved the absorption pace, where going to rode [ph] these communities too and so that's been very helpful in maintaining our gross margin. At the same time, with our cost structure going forward we're seeing an efficient building process yield in savings in our vertical construction cost and so we've been able to offset some of the lot cost increases we've been seeing some through to protect the margins. Looking forward with regard to our cost structure, our guys are working very hard every day, we're working very hard with our national supplier partners to protect that cost structure. I can't say we're doing anything radically different on buying lumber it's something we look at market-by-market looking at the commodity market and trying to lock-in pricing when we feel it's a good time again market-by-market in lumber.

And I'll just add that the supply-demand equation is, I think allowing us also lookouts we've seen that vary commodity-by-commodity. Land goes up price of house goes up, it ultimately comes down to positioning and efficiency and we get up every day working on those two things.

We do feel very confident about forward margin guidance and it still remained consistent as it has for the past few years.

Got it. I appreciate that and on the cost side, I might have missed it. But do you have, however you look at it price per square foot, what your material and labor costs are on a year-over-year and just curious within the lumber component specifically, have you already seen that inflation hit your P&L or what the price increases is that going to be more on a go forward basis.

So Alan, this is Jessica. Year-over-year we saw revenue per square foot up 3% and our stick and brick costs were only were up 1%, what was offsetting that we do continue to see slightly higher land prices falling through our P&L on a per square foot basis and sequentially our revenues per square foot in our stick and brick was really right in line, they were both just very low single-digit percentage. In terms of lumber specifically we haven't seen any noticeable impact from lumber. Generally, when I talk to our purchasing teams, they say whatever that market price is doing or generally taking some lesser price increase when we're out there locking in our prices for our backlog and our homes under construction.

Very helpful, thanks again. Good luck.

Our next question comes from the line of Carl Reichardt from BTIG. Please proceed with your question.

I wanted to ask about community count. I know we've talked about it being flat to little bit down for the balance of the year, when do you guys think that's likely to inflect and begin to track up as you look forward.

Carl, this is Bill again. We've talked about it, we have visibility to exactly where the community count is pretty good for our quarter too but beyond that it gets a little murky just given the timing of when communities roll off. So as we look the next couple of quarters, we continue to believe we're going to stay relatively stable plus or minus flat within couple of percentage points. But we do believe that over the long-term as we get into '18 and beyond as we continue to expect to grow at a 10% to 15% pace on the top line that will require some community count growth and so as we make those investments to prepare for that growth, we would expect, so we get into '18 for our community counts to start to rise at a modest pace. We still expect to continue to improve our absorptions and are very focused community-by-community on executing as well as we can to continue to drive some of our growth through absorption improvement as well.

Okay, thanks Bill. And then, if I can ask about Freedom and the roll out. When we had gone and looked at the product I'm curious about whether or not you're concerned about cannibalization of the Express product. We talked about Express one of the reasons it's been successful is because you saw a larger percentage of customers in that product who were effectively move down buyers and so, I think the thinking is, well if you're opening Freedom near Express you may see some level of cannibalizations, so how do you think about and balance that and has there been any impact to Express absorptions because of nearby Freedom product?

Carl, this is David. We haven't seen any negative impact to Express. The concept of Freedom is to capture an expand the offering to include the people that just don't want to live next door to a two-storey with bunch of kids and those buyers are out there. We're trying to set these communities up as kind of lock and leave opportunity something that they don't have to be there every day to maintain and that was a buyer segment that to be honest with you, we were not actively pursuing at the level, we are now but we think it's a huge opportunity for the company and little more difficult to roll out in Express because it a specific type of community that we're launching Freedom, you can't just go build it on a lot. From my perception and what I'm hearing from our people Freedom is not going to cannibalized it's going to augment and I think support Express.

Thanks so much guys. I'm sorry, go ahead.

Just as we look it's very early when we look at average price points on Freedom versus Express today, they're running about 10% to 15% higher, so there is a little bit of extra cost for those home buyers, so they're still affordable but certainly a step above Express and there is an element of HO8B to cover the maintenance and those [indiscernible] for the community that are not in Express as well, so little bit of differentiation from an economic standpoint.

Okay, thanks guys.

Our next question comes from the line of Stephen East with Wells Fargo. Please proceed with your question.

Your guidance for revenue for the full year suggest you're slowing down in the second half and your backlog today, your growth in your backlog today is whole lot different than your growth in the fourth quarter of last year, so I'm trying to understand is it just conservatism or you're all seeing something out there that will take longer to deliver on the homes, what's driving that reduced growth rate in the second half?

Well Stephen, you know got off to a really good start, to start of the year and the spring helps drive where we're going to be for the end of the year, we're raising our guidance for the year to a higher annual growth rate and as we get a little bit closer, if we see that we need to raise a bit more, we certainly will do that, but I wouldn't try to imply necessarily anything as far as a moderating growth rate at all, we're right in line, right in the range of what we've been investing for and planning for the year.

Okay, all right appreciate that. And then, you talked about your capital allocation which I appreciate, you talked about M&A sort of couple part question here. One you talked about M&A, there are a lot of non-traditional buyers out there right now and I'm wondering, is it disrupting the market. You don't have the strategic buyers we're not seeing be that active and just wondering why the strategic buyers aren't as active or the non-traditional guys pushing pricing too far etc. and just how you all are thinking about it and then, no conversation of share repurchase in your capital allocation and while I'm not a huge repo guy. When I look at the impact, it can have on your returns, your ROEs that can make a big difference, so just your thoughts there.

Stephen this is Mike on the M&A question, we're continuing to be very active and looking at a lot of opportunities and the most important things for us are finding a good homebuilder, a good operation that fits with us culturally and lot-wise and equally is important is a reasonable seller and reasonable seller expectations and there has been a little bit of dislocation in that, but I would say that seems to have died down a bit and we might see the bit outspread and there little bit coming, going forward.

Stephen, this is [technical difficulty]. I'll tag onto to the rest of the question and in terms of our overall allocations acquisitions are part of that, but we're going to remain disciplined and so we're going to, we certainly have the room to make large investment there, if we find the right deal that fits out return strategy. In terms of share repurchase, we have an outstanding authorization from our board of $100 million which we have not used as of yet and when we talk about our top priorities our most significant priorities for this year, we'd laid those out but that is something and we've talked about this previously that as we look further and as we generate cash flow for our third consecutive year over the longer term, we would expect there to be some level of share repurchase in our overall allocation, but as of yet we have not purchased any shares back.

All right, fair enough. Thanks a lot guys.

Our next question comes from the line of Nishu Sood from Deutsche Bank. Please proceed with your question.

So this focus on absorption growth versus raw community count growth obviously been, you've been successful with that, this trend I guess dates back probably about two years or so. Current pace puts you at about 46,000, 47,000 orders for fiscal 2017. How much upside is there as you think about getting all over communities to their optimal absorption rate? I mean does that take us to 55,000, 60,000 on the current footprint and I understand you mentioned community counts might begin to rise again in 2018, just trying to think about how much upside there is left on this absorption push?

Nishu, we're just focused every day, every community getting incrementally little bit better. If you'd asked us three years ago if we'd be exactly where we're today I'm not sure what our answer would have because we're just trying to get better every day and what I'd tell you is that, our operators through the field and our division Presidents who are out there working hard every day, they're finding ways to get better every day and so we do believe there is continued upside, there is continued opportunities to continue to get better, we got certain markets, that so they can significantly better. We've got others that maybe getting closer to that potential, we're going to keep trying to work to improve it and we do believe that, in this year and into next year we will continue to find ways to improve our absorptions. Exactly what that full potential is, what the feeling is, I'm not sure there is ever a feeling. We're just going keep working to get better.

Nishu, it's never going to be good enough with our Chair, [ph] an active shareholder we have here, so we're just going to keep rolling.

Got it. Okay, so sounds like still some runway left there. The southwest division had some pretty good looking metrics this quarter in terms of the orders and the pricing etc. Can you dig down into that obviously the closings were up nicely as well? Can you just dig down into that and walk us through the drivers of that please?

Go ahead, Mike.

Thank you for noticing. The southwest market is, had been a little bit of smaller area for us and we have been repositioning that group and making some investments in opportunities in Phoenix primarily and that team has done a great job of taking advantage of those opportunities in a market that's kind of been rebounding, bit. So very happy with the positioning that our team is done and their execution against that position and so that's really simply is what it is right there.

Nishu, we spend a lot of time talking about people, people. We've got an operational focus and a leader in that division today that we can support with capital and she's doing a tremendous job of turning that into growth and profitability, so kudos for her.

Great, thank you.

Our next question comes from the line of Ken Zener from KeyBanc. Please proceed with your question.

I'm thinking Toy Story, infinity and beyond for your order pay.

Absolutely, Ken.

Yes, so looking at from operational metrics your orders were basically seasonal in 2Q that's quarter-over-quarter pace. You guys did very well in 1Q, so it's good you maintained that. But when I think about your guidance which is related to closing, I think about comms [ph] that are totally about which includes all your specs, so you used under construction. Your guidance went from I think 8% to 13%, it's like 10% to 14% for year-over-year now and little bit. But your units under construction was 14% growth in 1Q, now we're down to 10%. Can you talk about the decisions that are being made to have that lower growth, was it warmer weather that it enabled you to put more units in the ground and you're really targeting 10% because the delta shows that you're decelerating your units under construction, which obviously build up in the year closing. So can you kind of talk about that actual capital allocation if we use units under construction, year-over-year as the indicator for your forward, best speedometer.

Sure, Ken. We've talked quite a bit about the fact that we were starting this year much stronger in position back on October 1 and then January 1 with our units under construction to prepare ourselves for the spring and so we had a stronger a year-over-year comparison in those first couple of quarters, I wouldn't say that we're decelerating at all and order versus our expectations there, we just simply got an earlier start and so now we're into a good mode of just replacing homes and maintaining on that level, that we believe will support the growth that we're expecting and position to start to position ourselves then for next year as well, so wouldn't read too much into just this quarter and positioning on a year-over-year, we're in a good position with our homes under construction.

Go ahead, David.

We are focused on a community-by-community process and market shifts and starts and plans, targeted closings. We're trying to disciplined, we're trying to be smart and we're trying to maximize every flags, so again we set annual targets, we operate quarter-to-quarter and we adjust, but don't read anything negative into that number.

As you look at, as our community counts do start to get back to close to flat year-over-year and then rising into 17, obviously there is some homes that go along with those flags as well, that I would expect to be coming into the picture as well.

I wasn't set up as a derogatory comment, it's just that I think people misunderstand that number or don't apply it enough. As you start moving into right from 2Q, to 3Q, to 4Q. 4Q is actually just multiply it every times two and it's usually your forward volumes. So I'm just trying to think about not only the execution that you're doing this year but how you're setting up conceptually 18 right from your capital allocation, as we think about that and it seems as though. Labor is not an issue here, closing is a percent of units under construction is exactly what it was last year, you obviously labor is not an issue for you so, just determining how many units you are going to have in for spec so.

We're very focused on maintaining and I think, to be honest with you.

Thank you.

Our next question comes from the line of Bob Wetenhall from RBC Capital Markets. Please proceed with your question.

A surprise, another great quarter to report just wanted to understand your gross margin target a little bit better. It looks like you're increasing your financial services operating margin by a pretty healthy amount. But at the same time, you're reiterating your full year gross margin guidance. And I just want to understand kind of what the offset was. It sounds like cost pressures are actually rather benign, can you help us think through that a little bit?

Sure, Bob. This is Mike. What we have is financial services are not a component of our gross margin, that's down in our other area, operating margin. It's part of operating margin overall, but we're seeing gross margin to be consistent with where it's been. Financial services is improving a bit and will probably get some more SG&A leverage in the second half of the year.

Right. So with that - so sorry, I misspoke, I meant to say you reiterated your full year operating margin for the company of 11.2 to 11.5. There seems like you got a very positive trend there on the financial services side with the consistent gross margin. So you're also getting the SG&A leverage so I'm just trying to understand, at some point does operating margin inflect higher just because of what's going on?

It will depend on what happens with gross margin in the back half of the year, but if you look at it at the first six months of the year, we're only running 19.8% so our margin is a little loose [technical difficulty] 20%, [technical difficulty] talk a lot about 19% to 21% as the broader range, so as if, we move into Q3 and Q4 and we do see that margin pick up over 20% that could allow us to have some upside or at least hit the high end of our operating margin guidance, but because we're only running 19.8% for the first six months of the year, we don't feel like it makes sense to move that operating margin range up from where it is today.

That makes perfect sense. Thank you. And that's very helpful. And also too, just a follow-up question if I may. What should we expect about the conversion rate going forward, the backlog? Do you think it will just be consistent with last year or do you expect any change to the pace?

We're focused on improving that on a year-over-year, so we're projecting a lower conversion rate sequentially but that's typical seasonality for us, but in terms of year-over-year we would hope to see some improvement although, let's see, yes we guided to 81% to 84% and that compares to last year's third quarter conversion rate of 78%.

Very impressive.

Just trying to get better every day, Bob.

Sounds good, good progress. Congrats on a great quarter.

Our next question comes from the line of Stephen Kim from Evercore ISI. Please proceed with your question.

I wanted to ask a question, if I could about the difference in the way you approach implementing price increases in communities which are perhaps lower price point, maybe more volume oriented versus more of your semi-customer or move up product. In general, we're hearing that there is strength across the board but probably more concentrated at the lower end, lower price points and I was curious if you could give us a sense for, if your strategy or the pace of implementation of price increases varies or is different when the strength you see is more in those lower price communities.

Stephen, we try to be consistent in our operation and absorption in these communities. So based upon the season and timing within the year, but the best practice we found is small, incremental based on number of units that are being sold, so if it's a 300-lot community and we want to sell 10 a month, then we would have a nominal increase every 10 houses, so if there is a consistency to the pricing, there is a set urgency to get people off fence, and they buy now or they pay little more next month. So and that's proven to be very effective, it's not only creates urgency but it improves margin.

Got it, that's helpful. Thanks for that. And then the second question I had to relates to kind of more general question, I think one of the things that we're seeing that's really fascinating about the industry and the stocks right now is, this sort of blend between things that are early cycle and later cycle, the valuations that we're seeing in the group, level of margins, the labor constraints you're running into and first rate of land spend as a percentage of revenue those are all things to more characteristic of later cycle and yet, we - I should say the not the multiple the evaluations are actually more early cycle. But we're also seeing that growing share at the entry level and the overall level at housings are to very cycles. So you have some aspects to the market that are kind of early cyclish [ph] and then you have some aspects it seems like they're more later cyclish [ph]. And I'm curious as to, as you look it where we are right now and you try to assess your strategy over the course of the next few years let's say, where do you think we are in the housing cycle and which of these various metrics or things to look at, do you think are the best gage for determining where we are and what the right approach for your company should be from a cyclical perspective.

We operate sub-division-by-sub-division and drive growth within submarkets and I can tell you we have submarkets are very early cycle and then we have others where they feel more mature. It doesn't get a sense that it's an actuary or something like there will be some disruptions and things may change. But right now in the markets that are producing at the top for us, there is more demand and less options or inventory out there than any forward that I have been in this business, so and I think you get too focused, I think sometimes we can get too focused on trying to judge a cycle and miss tremendous opportunity. So we're adjusting quarter-to-quarter and supporting the divisions that are improving returns. Mike?

Stephen, I think you touched on it not just geography as David mentioned and individual submarkets, but within markets different customer segments have been coming into the housing equation at different times. I think coming out of the last downturn we saw more of the move up buyers pent up demand being satisfied in that rush and now I think we're seeing more the entry level first-time buyers coming into the marketplace now that there is some supply out there, that is attainable for those folks. So we're - as David said community-by-community being responsive of what we see in the market in front of us and rather than looking at broad trends, we're focusing at a very micro level with our capital.

So we made a decision to push into the entry level opportunities that we see out in California and I can tell you that's certainly isn't late cycle because those opportunities haven't existed for the buyers out there and Don Horton traveled the west region over the last 30 days and you know, he's not an exuberant type guy, but he came back feeling better about what he saw in the west and specifically the opportunities in California and I have seen him in a long, long time. And I traveled Texas, Louisiana and Arizona in the last couple of months and I can tell you, I think I said two or three years ago Dallas was the best housing market I've ever seen, still an incredibly strong market, but [indiscernible] strengthened Houston an opportunity and Houston that compressed oil industry, kind of put on hold. Austin is red hot. Phoenix is - we're opening a price point Phoenix didn't exist. So to say that, Phoenix is that some point in the cycle I tell you from affordable housing standpoint it is at the very front end of the cycle. So it's just market-by-market and where people want to live and where there is no houses, we found the ability to sell houses.

Well for a company that doesn't focus on the cycle, you guys are certainly been doing a lot of things that looked pretty present [ph] from a cyclical perspective I have to say over the last several years. Just to put a fine point or to make sure I understood what you said, you don't manage to a cycle per se, but you don't mean to suggest that when we go into the next down cycle or downturn in the economy that you think that the markets across the country will some markets will be completely immune to that, do you - the market is going to [indiscernible]. Right?

No, I was around in '08, '09, '10 we're not in [indiscernible] market.

Not at all, but the only way to respond you can't respond at a global level effectively, you still have to respond on the ground in a sub-division what's the right decision, day-to-day and operating that community and what's going on around it and that's the way our operations set up, as to what our all of our operations field are focused on every single day.

And over the backdrop for the past several years, the balance sheet strength we have garnered that's going to give us regular flexibility through wherever the next cycle holds for the next stages of the cycle to make those best decisions, community-by-community.

Our next question comes from the line of John Lovallo from Bank of America. Please proceed with your question.

The first question here is and I don't want to be the dead horse, but I just want to be clear because I do believe this is why the stock is under pressure today. If we look at the first half revenue growth, year-over-year it's about 18.8%. If we take the high end of your total revenue range of $14 billion that's going to imply 15% growth for the full year at 13.6%, it's about 12% growth. So it does appeal like there is a deceleration and the market is looking for any reason to say that growth is slowing. So what are you guys seeing, is this is really kind of just that you got up to a stronger start, you see any indications that demand is slackening, it orders trail off through the quarter or are things looking a lot better than market is actually giving you credit for today.

Well John, I think one element here is, if we're looking at simply year-over-year trend one part of that component is the prior year numbers. We had a slow start last year honestly and we've talked about that, we were trying to play catch up all year long with our homes and inventory and getting communities open and we got lot of our growth last year in achieving our 10% to 15% of the growth in the second half of the year, we worked really hard to position ourselves to start this year a better position and so when we performed in Q1 and Q2 versus a slower Q1 and Q2 last year, we've seen a higher annual growth rate. The year is still right in line with what we've expected, it's not a deceleration of growth. It's really more of function of the comparison to the prior year on a quarter-to-quarter basis. We invest in this business on multi-year cycles, we plan our years out and we try to put ourselves and each of our communities in the best position possible to execute as well and give ourselves an opportunity to do better and we believe we were in good position this year to do it, we're feeling really good about the rest of the year, we're feeling really good of our ability to position ourselves to grow double-digit again in fiscal '18 and we certainly don't feel like we're decelerating here. It feels like we're in position to do exactly what we were planning to do.

Okay and that's really helpful and then if we think about just kind of traffic that's been coming through your communities, interest rates have bounced around a bit, I know last quarter you mentioned that you didn't see any real notable impact, but how is traffic, how are folks feeling in general, is there any continued chatter about interest rates that you guys are hearing?

Not a lot of chatter about interest rates, I can tell you the sales people in our company today feel as good about the market as they have ever. Traffic numbers are up. We're selling houses, we're well positioned against competition, where we have competition and it's just a good time to be in the business.

Okay, that's it. It's really helpful guys. Thank you.

Our next question comes from the line of Jack Micenko from SIG. please proceed with your question.

Wanted to talk a bit more about Freedom, I know in the past you've talked about it being a growth opportunity next year, I think you said 10 markets in eight states today, is it possible for you size what that looks like a year from now four, five quarters from now and if it is growing and the community count numbers are still flattish, what do Freedom communities displace or will that be the growth in community count.

This is David, I think Freedom will be growth within our community count. We're certainly not looking to displace any of our other brands, it is kind of unique product and offering, it's not going rollout at the same speed that Express did. So but yes I think in '18, '19 it will be a big part of the growth story.

Okay, great and then. On the financial service margin, what is driving it higher, is that just more volume or are you doing more FH VA[ph] that's driving the gain on sale profitability higher? What's behind the changing guidance on the financial service side?

We're seeing better land sale executions, so we're seeing higher gains on sale. We're also continuing to see a higher average loan amount particularly in this quarter. So that coupled with just this doesn't affect the operating margin but the revenue growth that we saw and our increase capture rate again, our financial services operations has done a great job of that capturing more of our home buyers or D.R Horton home buyers and that all helps us play out to drive better efficiencies, better G&A leverage to drive that higher operating margin.

Okay, thank you.

Our next question comes from the line of Mike Dahl from Barclays. Please proceed with your question.

David, wanted to follow-up on comment you made about California and D.R's tours a couple of questions ago and just to ask specifically, is the enthusiasm coming from the Express rollout or is it kind of across your brands and then specific to the rollout of Express, can you give us a little more color on how that's going and whether or not there is been any impact from things like the rains that you've seen in parts of California.

I would say the enthusiasm was the alignment of our people out there, with the opportunities in the market because he was not only in California looking at the Express program. While at, he was also along the coast looking at our infill operations and up in Seattle and Portland. So I mean it's just strong markets with aligned teams executing very well and what was California Express question? I'm sorry.

Just if you could give us any update on how that rollout's going and whether or not it's been any impact from the rain?

Have not seen a big impact on the rain because it's everything in California it takes a lot longer, we have a significant number of projects identified and or controlled and we're launching like the impact that we're going to see probably going to be in the 2018, but just the opportunity and the positioning that we've been able to accomplish pretty exciting for us.

Got it.

Have not seen lot of impact on the rains.

Thanks. My second question is going back to actually I think the first question around lumber and I appreciate that you guys have the purchasing power to negotiate much better deals than some other across the industry, but just want to make sure we understand just mechanically the right way to think about it between how you contract out on lumber and then the cost allocation process that takes place as you incur potentially higher cost and then obviously your build cycle. So could you extend this most recent leg higher in lumber sticks, is that something that will impact the P&L in the second half or is it more likely to be something where you'd have it impacting fiscal '18.

Mike, so we would allocate the cost to the individual houses that we're buying the lumber for and we're looking out lumber pricing, it varies on the lot 30, 60, 90 days and some adjustments so that, so the buying, protecting our backlog and our plan spec starts in the near term. So as any lumber cost may come through in our purchasing production they would show up in a house closing four to six months after that lumber was dropped on the lot, or two to six months after that lumber was dropped on the lot and so you would see that particular cost line potentially having some pressure, but I would tell you that we would expect to see some of those things offset by other decreases and other material costs that we're seeing as well as continued greater labor efficiencies that we're getting with our production processes in our neighbourhoods, more with the Express and some of that Express concepts going into our other product lines.

Got it and are there any things that you can point out specifically as far as the areas where you're seeing the decreases for the actual sticks and bricks cost?

Nothing point out specifically, it's just that we've been working really hard with lot of our national trade partners to focus on our purchasing power and some of the mutual benefits we can both have in expanding their market share in a given market.

Our next question comes from the line of Michael Rehaut from JP Morgan. Please proceed with your question.

First question, just wanted to circle back to community count and it looks like actually it was a couple questions earlier about, maybe community count flat to slightly down and you kind of I think earlier Bill talked about community count being stable for the year, but it seems like community count was actually up sequentially 3% during the quarter and you also have, I think as you've alluded to earlier, you have a continued growth now in lock count for a few quarters up solid double digits and excuse me that I didn't, I forgot the type in the total number for this quarter, but believe you're still at a healthy double-digit pace now for a few quarters. So why wanted lock count maybe continue to drift up sequentially for the rest of year, similar to the second quarter rate.

Are you asking, if our lock counts is going to continue to drift up?

No, I'm sorry the community count, excuse me.

Sequentially our community count on average was up 2%, so it was the first time we've seen a slight tick up in that community count and we do have the lot for that to happen but as Bill mentioned earlier the timing of when communities roll off and when new ones roll on, it's pretty flexible and it's highly dependent on the sales absorptions we're seeing in our currently open communities and then also just our ability to bring new communities online because there is a lot of moving part. So we could see that continue to go up, but we don't expect it to go drastically up, any changes in our community count both sequentially and year-over-year we would expect to be in the low single-digit range.

Okay, fair enough. Also on the gross margin front, obviously still well within your guidance range, but essentially what you've had now couple of quarters a touch below 20%, that was proceeded by the back half to '16 a little bit above 20%, so just curious if there is anything mixed driven so far in the first half of this year that you know resulted in it being a little touch below, it seems like your cost inflation is still very reasonable and not too much of a driver, if I'm interpreting those numbers correctly. So just curiously, if it was little bit more mix driven or you know obviously the warranties sometimes play a role.

Mike, this is Bill. We really think, incredible stability actually in our gross margin for quite some time now, at a core level it's been very tight within 20, 30 basis points from quarter-to-quarter-to-quarter and that's why we guide around 20 and we can see some quarterly volatility due to some of those other factors that you mentioned, in general our interest costs have been ticking slightly lower as a percentage of our cost and so that's been a slight help to our margin over the last eight quarters or so. We see more volatility in terms of our warranty line there and in recent quarters we've seen a little bit more of a negative impact from that, not too significant but a little bit more of a negative impact there in the last couple of quarters, which is one factor why we've been slightly below 20%, but overall we would characterize our margins as very stable, we're seeing actually less volatility from all of those factors than we've seen over the longer term history in our company and as long we're continuing to guide to around 20%, but you'll see some movement either above 20% and or below 20% from quarter-to-quarter.

And Mike, we'll post after the call, our supplementary data that has home sales growth margin slide in it that shows the specific basis point impacts either up and down to what we kind of call our core growth margin, some of those items that Bill and you've already touched on, you can see the specifics after the call. Our next question comes from the line of Will Randall with Citigroup. Please proceed with your question.

On Express and Freedom, the two things we noticed touring those brands in our recent field trip is your covering cost out of those homes, You're not using troughs [ph] for example and that Freedom buyers specifically buying to live near their adult children in for example in Express community. So can you discuss how much cost your carved out of Express and Freedom relative to your pure set on a dollar or a percentage base and secondly, what quantifiable benefits are you seeing from active adults buyers buying Freedom homes and communities near their children, who possibly bought a Horton home?

Well your question on the costs, was that related to troughs [ph], we didn't quite hear you there.

Sorry, so yes. So you've carved out cost on troughs [ph] and another places been a home, so that was my first one, can you quantify the benefits and second, what first derivate benefits are you seeing from active adults by near their children and co-located communities because we heard a few of your sales people say that on your recent tour.

That's part of our overall analysis of Freedom, is that we're giving adult children and the parents an opportunity and an affordable opportunity to live near their children and grandchildren. I mean we just feel like that's a major factor and people relocating and I've lived in Florida for 25 years, saw it every day where somebody was moving down. A job had brought the family the children and grandchildren down and then the parents were coming on trying to find something to buy, where they would have the home close to their grandchildren. Just think that's a big driver in the market and as far as the overall cost and the design and what I mean that's a market-to-market determination. What we try to do with the Freedom product is drive as much as efficiency and labor savings as we possibly could. And so everything we're doing today is to drive better value to the customer and try to take labor out of houses where we can because that's going to be, that has been and continuously the constraint on a market right now. There is not a builder out there that could sell more houses, if they couldn't build.

And I guess as a follow-up realizing your exposure to California smaller than those to your public peers, there have been concerns regarding the ever senseless State of California mandating what type of labor be choose via AB199 and in number of markets which can add thousands of dollars of cost to house and also a mandate to reduce emissions by 20% in 2017, which can add another $5,000 to $10,000 per house. We've heard AB199 as a move point but the emission cost is real, can you comment on both the AB199, you may have as well as the emissions productions, cost for you.

Well, we compete market-by-market and we're going to be competitive in every market we're in as David said looking to provide the value on the ground, that we're and it's great thing about the country, we have different parts and act different roles that meet with their population wants to see happen, so we have an exposure to California, maybe it is a little smaller percentage wise than some other of our peers, but we do like our positions in California and the way we're positioned to take advantage of some affordable value plays we have there.

We have time for one last person in queue. Our last person is Buck Horne with Raymond James. Please proceed with your question.

Just wondering if you could just maybe offer a little bit of color on the month-to-month trends in order growth activity, just how that progressed January through March and any comments you might be able to offer on how April is feeling right now?

Buck through the spring, we really seem to have solid good consistent demand out there, really good supply-demand dynamics, very little supply and so a really just a good solid, stable, consistent spring and really thus far in April we're seeing the same kind of conditions, pretty healthy good strong market out there.

Sounds good and on the just looking at your option lot position, since that's been growing so rapidly and I know that's a determined strategy, so what opportunities are still out there to keep growing the number of lots you're controlling through option, how do you see that longer term mix of owned versus option land going and does that impact your margins at longer terms.

Historically we like 50-50 balance as far as the [indiscernible] option lot contract is typically they extend over a period of time and your margin is on the front end of the community, maybe a little less but if pricing power continues within the market depending on times and the cycle, you can actually end up on the back half of those deals except market price lots and very strong margin.

About one more comment I'd make on the, that lot positioning and impact on margins, we're really focused on in underwriting our communities is our return that we get community-by-community and optional lot positions can provide a very efficient, very high returning community to move forward, with that. So it's not just the margin that's one component of the returns that we're looking at it a community, in our underwritings but returns are much more important to us today and generating cash flow.

Sounds good, thanks. Good quarter guys.

That is all the time we have for questions. I'd like to hand the call back to over to management for closing comments.

Thank you, Doug and we appreciate everyone's time on the call today and look forward to speaking with you again in July. Again a special thanks to the D.R. Horton team. Outstanding quarter, you continue quarter after quarter to outperform the industry and we certainly appreciate it. Thank you.

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