Good morning, and welcome to the Second Quarter 2025 Earnings Conference Call for D.R. Horton, Americas Builder. [Operator Instructions] Please note, this conference is being recorded. I will now turn the call over to Jessica Hansen, Senior Vice President of Communications for D.R. Horton.

Thank you, Paul, and good morning. Welcome to our call to discuss our financial results for the second quarter of fiscal 2025. Before we get started, today's call includes forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Although D.R. Horton believes any such statements are based on reasonable assumptions, there is no assurance that actual outcomes will not be materially different. All forward-looking statements are based upon information available to D.R. Horton on the date of this conference call and D.R. Horton does not undertake any obligation to publicly update or revise any forward-looking statements. Additional information about factors that could lead to material changes in performance is contained in D.R. Horton's Annual Report on Form 10-K and its most recent Quarterly Report on Form 10-Q, both of which are 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 this call, we will post updated investor and supplementary data presentations to our Investor Relations site on the Presentations section under News and Events for your reference. Now, I will turn the call over to Paul Romanowski, our President and CEO.

Thank you, Jessica, and good morning. I am pleased to also 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. For the second quarter, the D.R. Horton team delivered solid results, highlighted by earnings of $2.58 per diluted share. Our consolidated pre-tax income was $1.1 billion, on $7.7 billion of revenues with a pre-tax profit margin of 13.8%. We remain focused on improving capital efficiency to generate substantial operating cash flow and deliver compelling returns to our shareholders. Our homebuilding pre-tax return on inventory for the 12 months ended March 31 was 24.3%. Return on equity was 17.4% and return on assets was 12.2%. Although, homebuilders are generally thought of as being capital-intensive businesses, our return on assets ranks in the top 15% of all S&P 500 companies for the past three, five and 10-year periods, demonstrating that our disciplined returns focused operating model produces sustainable results. Over the past 12 months, we have returned all of the cash we generated to shareholders through repurchases and dividends. This year's spring selling season started slower than expected, as potential home buyers have been more cautious due to continued affordability constraints and declining consumer confidence. In the second quarter, our net sales orders and homebuilding revenues decreased 15%. Our tenured operators are responding appropriately to market conditions by carefully balancing pace versus price to maximize returns, resulting in a home sales gross margin of 21.8%. Where necessary, we have increased sales incentives to drive traffic and incremental sales. Our weekly sales in March and to-date in April have outpaced our February rate. Additionally, our cancellation rate remains at the low end of our historical range, indicating that buyers in today's market are able to qualify financially and are committed to their home purchase despite the volatility and elevated uncertainty of the current economic environment. We expect our incentive levels to remain elevated and increase further the extent to which will depend on market conditions and changes in mortgage interest rates. With 58% of our second quarter closings also sold in the same quarter, our sales incentive levels, and gross margin are generally representative of current market conditions. We will continue to adjust our product offerings, sales incentives, and number of homes in inventory based on the level of demand for new homes in each of our local markets. We are well-positioned, offering our customers an attractive value proposition with quality homes at affordable price points. Mike?

Earnings for the second quarter of fiscal 2025, were $2.58 per diluted share compared to $3.52 per share in the prior year quarter. Net income for the quarter was $810 million on consolidated revenues of $7.7 billion. Our second quarter home sales revenues were $7.2 billion on 19,276 homes closed compared to $8.5 billion on 22,548 homes closed in the prior year quarter. Our average closing price for the quarter was $372,500, down 1%, both sequentially and year-over-year. Bill?

Our net sales orders for the second quarter decreased 15% from the prior year to 22,437 homes and order value decreased 17% to $8.4 billion. Our cancellation rate for the quarter was 16%, down from 18% sequentially and up from 15% in the prior year quarter. Our average number of active selling communities was up 5% sequentially and up 10% year-over-year. The average price of net sales orders in the second quarter was $372,500, which was essentially flat sequentially and down 2% from the prior year quarter. Jessica?

Our gross profit margin on home sales revenue in the second quarter was 21.8%, down 90 basis points sequentially from the December quarter due to higher incentive costs and in line with our expectations. On a per square foot basis, home sales revenues and stick and brick costs were both relatively flat sequentially, while lot costs increased approximately 3%. We expect our incentive costs to increase further over the next few months, so our home sales gross margin will likely be lower in the third quarter compared to the second quarter. Our actual incentive level in home sales gross margin for the second half of the fiscal year will be dependent on the strength of demand during the remainder of the spring and summer in addition to changes in mortgage interest rates and other market conditions. Bill?

In the second quarter, our homebuilding SG&A expenses increased by 4% from last year and homebuilding SG&A expense as a percentage of revenues was 8.9%, up 170 basis points from the same quarter in the prior year. Our increased SG&A costs are primarily due to the expansion of our operating platform. Our employee count is up 5% from a year ago, our community count is up 10%, and our market count has increased 6% to 126 markets in 36 states. The investments we have made in our team and platform position us to continue producing strong returns, cash flow, and market share gains. Paul?

We started 20,000 homes in the March quarter and ended the quarter with 36,900 homes in inventory. 23,500 of our homes in March 31 were unsold. 8,400 of our unsold homes at quarter end were completed, down 2,000 homes from December. 1,200 of our unsold homes have been completed for greater than six months. For homes we closed in the second quarter, our construction cycle times improved a few days from the first quarter and approximately three weeks from a year ago. Our improved cycle times position us to turn our housing inventory faster, and we will continue to manage our homes and inventory and starch pace based on market conditions. Mike?

Our homebuilding lot position at March 31 consisted of approximately 613,000 lots, of which 25% were owned and 75% were controlled through purchase contracts. We remain focused on our relationships with land developers across the country to allow us to build more homes on lots developed by others which enhances our capital efficiency, returns and operational flexibility. Of the homes we closed this quarter, 64% weren't a lot developed by either Forestar or a third party, up from 62% in the prior year quarter. Our second quarter homebuilding investments in lots, land and development totaled $2 billion, of which $1.2 billion was for finished lots, $700 million was for land development and $100 million was for land acquisition. Paul?

In the second quarter, our rental operations generated $23 million of pre-tax income on $237 million of revenues from the sale of 519 single-family rental homes and 300 multi-family rental units. We continue to operate a merchant-build model in which we construct and sell purpose-built rental communities. Our rental operations provide synergies to our homebuilding operations by enhancing our purchasing scale and providing opportunities for more efficient utilization of trade labor and absorption of our land and lot pipeline. During the last several quarters, we have been successful monetizing some of our single-family rental communities prior to leasing stabilization, resulting in higher returns on these sales. We remain focused on improving the capital efficiency and returns of our rental operations. Our rental property inventory at March 31 was $3.1 billion, which consisted of $813 million of single-family rental properties and $2.3 billion of multi-family rental properties. Jessica?

Forestar, our majority-owned residential lot development company reported revenues of $351 million for the second quarter on 3,411 lots sold with pre-tax income of $41 million. Forestar's owned and controlled lot position at March 31 was 105,900 lots. 64% of Forestar's owned lots are under contract with are subject to a right of first offer to D.R. Horton. $270 million of our finished lots purchased in the second quarter were from Forestar. Forestar had approximately $790 million of liquidity at quarter end with a net debt-to-capital ratio of 29.8%. Our strategic relationship with Forestar is a vital component of our returns-focused business model. Forestar's strong separately capitalized balance sheet, substantial operating platform, and lot supply position them well to consistently provide essential finished lots to the homebuilding industry and aggregate significant market share. Mike?

Financial Services earned $73 million of pre-tax income in the second quarter on $213 million of revenues, resulting in a pre-tax profit margin of 34.3%. During the second quarter, our mortgage company handled the financing for 81% of our homebuyers. Borrowers originating loans with DHI Mortgage this quarter had an average FICO score of 723 and an average loan-to-value ratio of 89%. First-time homebuyers represented 63% of the closings handled by our mortgage company this quarter. Bill?

Our capital allocation strategy is disciplined and balanced to support an operating platform that produces compelling returns and substantial operating cash flows. We have a strong balance sheet with low leverage and healthy liquidity, which provides us with significant financial flexibility to adapt to changing market conditions and opportunities. During the quarter, Moody's upgraded our credit rating to A3 and we now have an A rating from two of the three credit rating agencies. During the first six months of the year, homebuilding cash provided by operations was $876 million and consolidated cash provided by operations was $211 million. At March 31, we had $5.8 billion of consolidated liquidity, consisting of $2.5 billion of cash and $3.3 billion available capacity on our credit facilities. In February, we issued $700 million of homebuilding senior notes due in 2035. Debt at the end of the quarter totaled $6.5 billion, with $500 million of homebuilding senior notes maturing in the next 12 months. Our consolidated leverage at March 31 was 21.1%, and we plan to maintain our leverage around 20% over the long--term. At March 31, our stockholders' equity was $24.3 billion, and book value per share was $78.82, up 9% from a year ago. For the trailing 12 months ended March 31, our return on equity was 17.4% and our consolidated return on assets was 12.2%. During the quarter, we paid cash dividends of $0.40 per share, totaling $126 million, and our Board has declared a quarterly dividend at the same level to be paid in May. We repurchased 9.7 million shares of common stock during the quarter for $1.3 billion. And our fiscal year-to-date stock repurchases were $2.4 billion, which reduced our outstanding share count by 7% from the prior year. We have increased our near-term capital allocation for share repurchases, and our Board recently approved a new share repurchase authorization totaling $5 billion. Jessica?

Looking forward to the third quarter, we currently expect to generate consolidated revenues in the range of $8.4 billion to $8.9 billion, and homes closed by our homebuilding operations to be in the range of 22,000 to 22,500 homes. We expect our home sales gross margin for the third quarter to be in the range of 21% to 21.5% and our consolidated pre-tax profit margin to be in the range of 13.3% to 13.8%. Our results for the second half of fiscal 2025 will be largely dependent on the strength of our sales during the remainder of the spring and into the summer. For the full year, we now expect to generate consolidated revenues of approximately $33.3 billion to $34.8 billion and homes closed by our homebuilding operations to be in the range of 85,000 to 87,000 homes. We still forecast an income tax rate for fiscal 2025 of approximately 24%. Based on our fiscal year-to-date share repurchase activity, strong financial position and expected operating cash flows of greater than $3 billion, we now plan to repurchase approximately $4 billion of our common stock in fiscal 2025, which is more than double the amount we purchased in fiscal 2024. We also continue to expect annual dividend payments of around $500 million. Paul?

In closing, our results and position reflect our experienced teams, industry-leading market share, broad geographic footprint and focus on delivering quality homes at affordable price points. All of these are key components of our operating platform that support our ability to generate substantial operating cash flows and return capital to shareholders while continuing to aggregate market share. We acknowledge the significant current volatility and uncertainty in the economy, and we'll continue to adjust to market conditions in a disciplined manner in our operations and capital allocation to enhance the long-term value of our company by providing compelling returns to our shareholders. Thank you to the entire D.R. Horton family of employees, land developers, trade partners, vendors and real estate agents for your continued efforts and hardwork. This concludes our prepared remarks. We will now host questions.

[Operator Instructions] And first question today is coming from Stephen Kim from Evercore ISI. Stephen, your line is live.

Thanks very much, guys. And yes, congratulations, tough market, you guys are really executing well, I wanted to ask a bigger picture question to start. In the past, being number one in terms of units sold was pretty central to the company's identity. But based on the guidance you and others have provided, it's pretty clear that sheer size isn't the primary metric that the company prioritizes anymore. And this also combined with your significant share repurchases, it seems to crystallize some important changes in the company's management approach over the, call it, last 5 to 10 years. I'm wondering if you'd care to articulate what's behind these changes at the company, particularly with respect to volume, and if there's one metric that investors should focus on for Horton going forward, what would that be?

Yes, Stephen. We have certainly seen a market that was below our expectations and have responded accordingly, balancing pace and price across all of our communities throughout our footprint and, remaining focused on providing significant operating cash flows. And then as we have with share repurchases, providing returns to our shareholders through share repurchase and increased dividends. You're going to maintain a focus on a return-based business and continue to balance based on that market. We have certainly reached a significant scale, and it continues to be challenging to put new communities in front of us, and we're going to balance our pace and price to drive returns and consistent operating cash flows.

So would you say that maybe consistent operating cash flow is the primary metric that we should be focused on?

A combination of returns and consistent cash flows. We believe those two are hand-in-hand.

Got you.

And so we believe we are well positioned over the long term to continue to sustain our position as the largest builder in the United States and aggregate significant market share. In short-term periods, we're going to do what we need to do to maximize returns, and that could differ, but we do believe we're positioned over the long term to remain largest builder.

Got you. Okay. And then I'm going to turn my attention to SG&A. Another notable difference from the past is your SG&A rate, which historically, that was a real point of pride for the company. I recall when I first visited the company, I think folks told me that DR wanted them to use paperclips instead of staples because you couldn't reuse staples. Your SG&A is still low, but it's up a lot over the last couple of years and in 2Q specifically. So, I'm wondering you think maybe some staplers have found their way into the company.

I would appreciate your question, Steve.

Obviously, keeping a low-cost operating model, it's still very important. It's still a very important part of our culture. And we're still very focused on being very efficient throughout issues, including in our SG&A. We have made investments over the last two to three years, which have expanded our footprint, our market count has increased significantly, just 6% in the last year on what was already the largest footprint in the industry. Our community count is up 10%. We felt like those investments were important to position ourselves to continue to aggregate share over the longer period of time. Obviously, for this year, those were in place with an expectation for a bit higher growth rate than the market is giving us right now. But we still feel like those are investments. It's not a change in our focus or a change in our importance and efficiency of SG&A. But at this point in time with where volumes are and we're balancing pace and price that we're not getting the same leverage on SG&A today. But we would expect, over time, we would. And over time, we would expect our SG&A to be lower than it is today.

Great. Appreciate that. Thanks guys.

Thank you.

Thank you. The next question will be from John Lovallo from UBS. John, your line is live.

Good morning guys. Thanks for taking my questions. The first one is the third quarter gross margin of 21% to 21.5% is definitely better than the expectations that we had heard in the market and I think that, that's encouraging. If we think about the walk sequentially, it sounds like stick and brick costs could be fairly flat. Land, maybe low single-digits and the big sort of delta or unknown being the incentives. I mean is that the right way to think about it? And if incentives were actually flat sequentially, would that hit the higher end of the target?

I think you're thinking about it exactly right, John. And certainly, if incentives were flat, we could do towards the higher end of that range. It's just hard to know, a little bit of rate volatility last week, just create some challenges for prediction.

Yes. Understood. And then if we think about sort of the playbook for tariffs, I mean, obviously, there's a lot of noise and uncertainty here. Curious what you're hearing from your suppliers in terms of potential incremental price increases? And maybe more importantly, how you guys feel that you stack up in these negotiations and your ability to sort of push back some of that pressure throughout the value chain?

John, there's so much noise around tariffs today and is changing day-to-day, sometimes our hour-to-hour, hard to figure out exactly where that lands. But over the last several years, our suppliers have done good job of having to respond to supply chain challenges and feel like we're in a position to do that. Our suppliers are in a good position to do that. We do feel that our strength and size and scale across our markets will put us in a good position to hold those costs and see the lower end of any impact from tariffs wherever they land. But feel very good about our supply chain today and about our labor force today, and we'll just take whatever comes out of the tariffs as it comes at us once it settles down.

Yes, makes a lot of sense. Appreciate it.

The next question will be from Alan Ratner from Zelman & Associates. Alan, your line is live.

Hi guys, good morning. Thanks for all the details so far. A question just about the start pace, your spec count, your spec count, if I'm looking at this correctly, is at the lowest levels we've seen in about almost four years. And your starts are down about 15% year-over-year. So I know a lot of people have been concerned about rising spec counts across the industry. You're clearly moving in the opposite direction, which I'm sure is supporting the gross margin. I guess my question is, as you start to think about 2026, and I know it's early for that, but presumably growth is still in the company’s target or you'd like to grow assuming the market gives you a favorable backdrop. So should we expect starts to ramp here over the next quarter or two to position important for growth in 2026? Or should we think about any potential changes to the sales strategy? I know you've talked about potentially getting back into BTO at some point. Just kind of curious to think about how low that spec count can go while still positioning your company for growth next year?

Yes, Alan, our starts are certainly lower than they have been, but our cycle times are also at their historical efficiency. And so we don't have to carry as many homes in inventory to be able to respond to demand in the market. As it flexes up or down, we can respond in kind with our starts space. So this is what we've done. We are in position and would expect that our starts will accelerate into the third quarter. And based on the remainder of the spring and summer selling season, that continue into the fourth. And we feel good about our position with our existing spec inventory. We watch very closely our completed spec inventory. We've reduced that by 2,000 units just in the last quarter, and that allows us to turn our inventory more efficiently, which ties into, again, maintaining strong operating cash flow. We feel good about our ability to start homes and respond to the market and put us in a position, which we have an always continue to stay focused on growth. And we feel like we're in a good position to achieve our current guide and the market will tell us how to respond from there.

Great. I appreciate the detail there. Second, just in terms of as we think about the tariff environment, and I know you mentioned kind of wait and see, but I'm just curious within the gross margin guide. We've started to see some price increase announcements coming from suppliers, whether there's any contemplation of -- because increases there because you mentioned your stickier costs have been pretty flat quarter-over-quarter.

Yes. I don't think we're going to see any impact of that come through until we get 2026 closings based upon anything we've seen -- we haven't seen anything substantially coming across in the way of price increases today. Again, it's early days on understanding where things will fall out with the impact of the tariffs. But from what we've seen in the conversations we've had with our suppliers, we're not expecting material changes at this point.

Great. Okay. Thanks a lot.

The next question will be from Carl Reichardt from BTIG. Carl, your line is live.

Thanks. Good morning everybody. I wanted to ask about -- sorry if we slice and dice the orders this particular quarter. Are you seeing a better performance from a, markets that you've gone into more recently where you might have fewer public peers; and b, while you're perceived to be all entry-level builder, we know you've got a number of communities that are sort of more first move-up or even higher end than that or differentiated. Can you talk about difference in performance among the more entry-level communities versus others, let's say.

So I think we've seen with 63% of our buyers this quarter at the mortgage company being first-time homebuyers, we're still seeing strong demand for the first-time homebuyer. The affordability is a pressure point for that buyer. There's no doubt about it. And we are seeing, frankly, pretty good demand or you did through the quarter of that move up higher or second move up. And we're not heavily positioned for that in particular buyer type, but we do have a fair number of flats just in absolute terms that have done very well. And then in terms of markets that are performing well, it's those markets that you can see that are more supply constrained, both from new and existing homes where there have been more significant restrictions on development of new communities. Those markets are much more rationed or allocated to the supply that comes into the market and demand is still very strong in those markets.

All right. Thanks. And we've talked about changes in price and balancing pace price with incentives. And maybe it's two sides of the same coin, but are your operators starting to focus a little bit more on effectively price cuts as opposed to incentives related to interest rates. Are you starting to see a move in that direction? And if so, are you seeing some traction with that? Thanks.

Not really in any significant manner. The focus still has been on rates and rate buydowns and keeping consistency of that. And if we see a little weakness in the market or by community, we may adjust further down, but still more advantageous to the buyer and the cost is less to increase the rate buydown then to cut the price. Our prices held relatively stable. Certainly, we have communities if we aren't hitting with the incentives we have in place and we need to cut the price to drive activity and increase traffic and sales, we'll do that. But that's a community by community position and our operators are doing a great job in the field of managing inside of their own submarkets and across their division platforms to drive what they need to at a community level.

To Paul's point, from a year ago, our number of buyers utilizing a rate buydown on a percentage basis is up, and so when we talk about higher incentive costs, it is just more buyers taking advantage of that rate buydown.

Which is reflected in our financials as a reduction in the sales price.

Yes. Okay, great. Thanks a lot. Appreciate it guys.

Thank you. The next question will be from Sam Reid from Wells Fargo. Sam, your line is live.

Awesome. Thanks so much. I'm going to touch on 2026 again here. And, obviously, I understand you're not providing guidance. But at what point in the current year, would you start to assess your community count for the following year? I guess just, kind of, saying it differently, if demand were to remain soft in Q3 and Q4, would you be biased towards holding community count flat in 2026? Or is there is there a scenario where you potentially shrink community count. And then how much flex is there in your operating plans to make downward adjustments if necessary?

Yes. So Sam, that's like everything we talk about community by community. And so it's going to be dependent on sales paces in local markets, and where we're closing out of communities and it makes sense to open the next market. Those plans are happening out in terms of our lot position. You've heard us talk a lot about how it's not getting any easier to put finished lots on the ground. So to accelerate community starts is much harder than to slow them down. So in terms of what we actually ultimately grow or not grow community count-wise in fiscal 2026. It will be a function of local market conditions and the sales pace that we're seeing in each of our markets.

That's helpful, Jessica. And then I wanted to touch on the geographic composition potentially of where you're taking delivery expectations and starts lower, are you making sharper cuts to areas like Florida and Texas, just known pressure points? Or would you characterize some of your reduction in delivery guide to perhaps more broad-based cuts? Just would love some additional context there.

I think you look at our concentration in Texas and through Florida. And certainly, when those markets are a little softer, it's going to cause us to have fewer starts in those markets in response to market conditions. As Bill had mentioned earlier, we have expanded our geographic footprint and have some newer markets that are seeing good, stable activity without much supply, and we're expecting some of those markets to grow potentially beyond our expectations. So it really is a balance, but it is market to market and community to community across our platform.

Thanks. I'll pass it on.

Thank you. The next question will be from Michael Rehaut from JPMorgan. Michael, your line is live.

Great. Thanks. Good morning, everyone. Thanks for taking my question. I wanted to start off just trying to understand the balance. And obviously, as you say it's community by community, but trying to understand where you are from an incentive standpoint versus the rest of the market. It looks like your gross margins are holding up relatively well. And I was curious, when you think about incentives as a percent of sales, where you are today versus three months ago and maybe even versus a year ago? And more specifically, over the last few months, how would you say your incentives are holding relative to the rest of the market? Because it would appear maybe on a first glance that perhaps you're holding price a little bit more and allowing volumes to slide. So I'd love to hear your thoughts around those -- around that metric and again, kind of comparing the incentives for yourself as well as the market.

We compete every day in each of our markets and watch closely what's going on across all of our competitors. And when you get down to a market and submarket level, we have different competitors in each of those. And so that's why we rely heavily on our local operators to measure their market, respond and react on a daily basis to drive the returns that we're looking for in each of our communities. So I think we compete favorably, and we respond in kind to what we're seeing. And although we've seen our sales revenue number per unit remain relatively flat, our size of home has reduced. And so that changes the inputs. And I think that's some of where you've seen some of the strength in our margin is a response to the market with a house that meets the buyer with what they can afford on a monthly basis.

So just trying to parse that out a little bit and I appreciate the response. I know it's obviously hard to do market by market. But would you say overall, your incentive levels are holding relative to the market or maybe holding up a little stronger. In other words, holding price a little bit more than the average competitor?

Hard to say. It's a daily and weekly price market value discovery process that our teams are going through. Again, community by community. I know you got to be tired of saying that, but that's really what they do. And we kind of encourage and guide them to recognize the fact that in a given submarket where you may have a very deep lot position that's easily replaceable, then probably more volume makes sense there. And where you have one where the lots are scarce or harder to get on the ground, it's going to be more of a price thing, and that's going to maximize the overall returns produced in the portfolio. And it's every day we are out there seeking to be competitive in the marketplace and be sure we're getting attention from the buying community on the value we're providing and then have the ability once we get somebody in the community to sit down and discover what they need in their housing that housing options and meet that need with the payment they can afford. And so whether that's a combination of various closing cost incentives or rate buydowns. It's working with that individual buyer to understand what it takes to get them to commit to the transaction.

And Mike, it's also hard for us to say because builders don't all disclose every metric the same way from an incentive perspective. But I do think we feel like we have a very strong competitive advantage with a very strong financial services partner and a high capture rate that works very closely with our builder to make sure we're managing our incentives as tightly as we can and capture as much buyer traffic out there as possible.

I appreciate that. And thanks for the additional color. I guess second question more, just a quick one on lumber. With all the tariff noise and concerns with different types of tariffs that would hit Canada. I was wondering if you could kind of just review your exposure to Canadian softwood lumber. Number one, what percent of your homes are built with that? And number two, historically, if you have seen movements in price on Canadian lumber, does that typically flow through to price changes more broadly across the U.S. or in certain regions? And what would that look like?

Yes, Michael, overall, we've seen lumber holding pretty steady and about 20% of the lumber that we use in our homes is through Canada. Should we see tariffs accelerate or hold up at a higher level, we'll look to adjust that. But again, I think with where we are today, you won't see those lumber prices come through really towards the end of this fiscal year and into 2026.

Great. Thanks so much.

Thank you. The next question is coming from Eric Bosshard from Cleveland Research. Eric, your line is live.

Thanks. Two things, if I could. First of all, on tariffs, in the event that tariffs do manifest themselves in inflation, how do you manage that? I know it sounds like that's not an issue in 2025, it might be in 2026. In the event that the supply chain can't manage that on their own and they have to raise price, how do you manage that or adjust for that or digest that?

I think that's a combination of things, right? The input of the items that will be covered by a tariff are only part of our cost input. We have labor. We have our vendor partners and labor partners that look at their level of profit. And I think we're all going to have to come to the table and adjust to deliver a house that the market finds compelling and can afford. And I know that's not a direct answer, but I don't think there is one other than we're just going to have to see how this plays out and work with our supply partners and vendors to figure it out together.

I guess there's -- you can raise price, you could take gross margin or you can build a lower cost house to offset it. Is there an initial mindset of this is the path to choose in this market?

I think it's all of the above at a community level that we'll have to make those decisions.

And tariffs are not, we do expect to be able to continue to leverage our relationships and our scale to navigate the cost environment better than smaller builders.

Okay, fair point. And then secondly, you certainly have a great partner with Forestar. I'm curious for Forestar and relationships you have like that, when you end up when you end up starting 20% less homes taking less land, does this create an opportunity for you to get concessions from them or price support from them. At the same time, does this also create strain on those players who bought land expecting to deliver and when the timing changes, does that have a meaningful impact on those businesses?

We've communicated pretty early on with our development partner about what we're seeing in the marketplace, and they're very aware of what's happening in their communities as well. And we're continually looking at adjusting phase sizing, lot delivery timeframes, and getting to meet the market on a just-in-time basis. I mean, it's never a perfect thing, but you're seeking it. And -- but there are times when we work with them to restructure the takedowns of a given community to potentially slow lot takes and work through maybe going a little faster and one deal that's running faster and going a little slower than another deal that we're working with them on. It's a lot of puts and takes in the context of a long-term relationship that folks who work with are very seasoned. They're not new to this business, and they understand business goes up and down and they're prepared for those days like we are, part of our vetting process and our developers.

Fair enough. Thank you.

Thank you. The next question will be from Matthew Bouley from Barclays. Matthew, your line is live.

Good morning everyone. Thank you for taking the questions. So just, I guess, addressing the elephant in the room around overall policy uncertainty and consumer confidence. I guess, what are you seeing from homebuyers from a traffic perspective over these past few weeks? And maybe even into April as we got that tariff news, anything changing around conversions of that traffic or what you need to do to incentivize conversions? Thank you.

We've still seen pretty good traffic. We've had to incent a little more to get them off the fence and into contract and working towards their homeownership and hence, the guide on our margins. But we have seen March and into April, sales pace better than we saw in February, and traffic is still pretty good, but there is certainly uncertainty and people watch that. I think when you look at our buyer makeup with 63% of those that took the mortgage or a mortgage company being first-time own buyers, maybe a little less impacted when -- with the markets because they just don't have the portfolio to worry about, they're more focused on getting into their first home. And it ties really to their comfort and their job and their income on a go-forward basis than it does the market for that buyer demographic.

Got it. Okay, that's helpful. And then maybe zooming into the delivery outlook for the second half. I think you're implying something like 48,000 homes over the entire second half. I think you've got about 37,000 homes in inventory right now. So, that ratio is maybe a little bit higher than what we've historically seen with D.R. Horton. So, I think you made a comment earlier, correct me if I'm wrong, about starts accelerating going forward. So, just wanted to kind of double click on that and get a sense on what you're assuming around the ability to kind of hit that new delivery guide. Thank you.

Great. It's two things. It's a more recent up-tick we've seen in the sales space has given us more confidence for starts -- and so we'll be increasing our start pace over the March quarter, combined with the fact that we've gotten a much better control of our construction build times. And so we've been able to compress the time frame between start and a home ready for delivery to a customer, which allows us to be more nimble in responding to demand in a given community. And so that's giving us the confidence to run with a lower level of spec inventory of home inventory than we historically had and still be able to deliver numbers in a subsequent quarter.

All right. Thanks, guys. Good luck.

Thank you.

Thank you. The next question will be from Rafe Jadrosich from Bank of America. Rafe, your line is live.

Hi. Good morning. Thanks for taking my question. Just on the land cost, I think you said, it was up 3% quarter-over-quarter. Can you just talk about what the year-over-year was? And then you've pulled back on starts here and the market is a little bit softer. Have you seen any relief there on land that that is being contracted today? And when would potentially if so, like when would that flow through? Your cost of goods.

So land and lot costs, they were up 3% sequentially, 10% year-over-year. And as we look forward, we don't expect land costs to pull back. We do expect further inflation there. We have not seen any significant change in land cost or land prices. So we've said many times, it's still very difficult to bring communities online. It's still not an excess number of finished lots in the market. So we have not seen a big adjustment there. But to the extent, as far as timing from the time we buy a lot, typically, we're going to see that rolling through our cost of goods in the next two to three quarters with our construction cycle times and our inventory turns.

Okay. That's helpful. And then on the SG&A, you made a comment to an earlier question that you'd expect it lower as a percent of sales longer term. Is that just an improvement on delivery growth that will get you leverage? Or is that like if the market flow remains soft, you would reduce spending? And if it is about like reducing spending, like when would you start to make that adjustment?

Well, we're focused primarily on delivering on the guidance we're providing here in terms of volume. And typically, in our Q3 and Q4, you see better leverage on our SG&A when we close more homes. So in the near-term, that's certainly what's in our plans. And then at a market level, just like everything else we do, we manage our business at a market level, each market depending on where their volume is. They're managing their overhead. They're managing their land supply. They and their homes and inventory accordingly. So if there's a pullback in volume in a market that we don't feel like is going to correct itself in the near-term, then they make adjustments on all of those factors in their business.

That's helpful. Thank you.

Thank you. The next question will be from Trevor Allinson from Wolfe Research. Trevor your line is live.

Hi. Good morning. Thank you for taking my questions. First, I want to follow-up on the pace versus price topic. And I appreciate these decisions are being made at the community level, but it appears you guys are being more balanced than what many were expecting. There's clearly a lot of uncertainty right now more so than there was just a few weeks ago. So if demand were slow even more going forward than one you currently expect? Should we expect that those impacts to be primarily reflected in fewer closings and orders right now than you currently expect? Or would that be more so reflected in gross margin?

Yes, Trevor, we certainly have been watching the market closely. And our second quarter, the March quarter is the early part of the spring selling season. And we've watched that pace week-to-week and have pulled back a little bit on our absorption expectations and our starts expectations. And we'll see what the spring and into the summer brings to us. We are anticipating we're going to continue to see consistent sales activity, and that's what we have put forth in our guide. We'll respond to that as it comes. We do have volume numbers that we like to hold on to, and we'll adjust accordingly based on what the market tells us.

Okay. I appreciate that color. And then second, just on land and development spend, again, given all the uncertainty, you closing expectations down some here, share repo expectations have gone up. Perhaps could imply that maybe you're pulling it back a little bit on land and development spend than you were previously anticipating. I guess first, is that the correct interpretation? And then if that is, could you provide some color on perhaps what you're expecting in terms of land and development spend now versus what you had previously? Thanks.

Our total land and development spend in Q2, the quarter we just reported was lower than it has been over the last year to year and a half. And so we are constantly adjusting in each of our markets based on where our sales pace is and what our lot needs are. And so as Mike said earlier, we work with developers who are delivering us lots and to the extent that we can extend timing on the next phase of development and extend then our lot takedown schedules. We're doing that. And so yes, as we deal with lower volumes than we expected going into the year, land spend will adjust accordingly. We still love our lot position. We love our overall flexibility that we have in it, and we need all of those lots. We may just not need some of them quite as quickly as we had originally planned.

Very helpful. Thanks for all the color and good luck moving forward.

Thank you. The next question will be from Anthony Pettinari from Citi. Anthony, your line is live.

Good morning. If I look at your closings year-to-date, the total homes closed in the north and the east are actually up year-over-year. And understanding that's not the biggest part of the company. I'm just -- is that increase in closing is just a function of lack of inventory in the market or is anything from a comp perspective or maybe entering new markets that we should be thinking about when we think about that year-over-year growth?

I don't think there's been a few new markets entered in those regions, but it's been -- those are areas that have seen probably more supply constrained historically. And so the demand has just not been satisfied. And so as we're able to bring neighborhoods to market and get houses started there, there's very strong demand from the local population for the housing.

The North has been running a higher increase in community count as well. So they're just continuing to drive additional absorption out of those new communities.

Got it. And then looking at the cost environment, I was wondering kind of what level of labor inflation might be baked into your outlook? And then have you seen anything from a labor cost or labor availability perspective, talking with your contractors or subcontractors that is kind of different than what you might have expected at the beginning of the year?

I think when you -- we look at labor, we're assuming that, that remains relatively flat. We have good labor base across pretty much all of our markets, and that's been a big part of the reduction in our construction cycle times. So our vendors and labor partners out there are already willing and able, if we need to move up the start base on which we will be this quarter to satisfy that pace, and we feel really good about our position with the labor today.

Okay. That's helpful. I'll turn it over.

The next question will be from Ken Zener from Seaport Research Partners. Ken, your line is live.

Thank you. Good morning all. Thinking about your gross margin, which if you could just comment, I think it includes about 3% outside commission, just I'm interested in how that's trending, but most importantly, I'm trying to understand conceptually how you think about the floor and pace that you're willing to cut take price to drive sales. As we see another large builder leverage, it's improving with turns and falling land intensity. And I'm asking specifically within the context that your order pace, which was about 4.7 in 2024, looks to be sub-4 perhaps this year, but it was 3.7 in 2018, 2019 and 2.6, that's pace in 2015, 2016. So how do you given that kind of structural lift, where do you think that plays into your focus on returns and cash flow? That's obviously the base side versus the margin. Thank you.

Okay. I'll start with commissions and then I'll see which one of the guys who wants to answer the latter part of your question. You're right, roughly 300 basis points. On total closings, we're probably looking at closer to about 270 basis points in our gross margin. But we have seen a slight decline in the number of closings that have a realtor associated with them. That was about 83% of the homes we closed this quarter at an average commission of about 3.3%, which is down slightly from a year ago. It was flat sequentially. But on overall closing is about 270 basis points of impact.

And in terms of the pace or a floor in pace and Ken, I know we say this a lot, but it truly is in each community. We have a business plan when we open a community around what we expect to do in terms of pace, price margin. And then depending on how things go when we open the community, then we adjust from there. But we are focused on hitting our pace in each community. You threw out some of the starts from the pre-COVID period and then -- and in more recent years, we did see accelerated absorptions during the COVID years from 2020 to 2022 as we started to see those absorptions start reverting back to more normal levels. While we have focused on the last couple of years increasing our community count. So we could still keep the scale of our operations, continue aggregating market share through community count increases with an anticipation that absorptions per community, the pace community per community would probably revert back to more normal levels. And so I think our general expectation, high level, is that those absorptions are and getting close back to more normal levels. But ultimately, the real answer is community by community. And each community is going to try to balance the pace that they're driving at to maximize returns. And so there is a floor. There is always floor. There is no return without pace, but there's also a balance. There's not return without margin either. So you're going to -- each community, you're going to strike a balance between pace and margin.

Good. And I guess the biggest question I get with investors is putting aside stock volatilities, are the companies is the industry different? So if your EBIT had kind of a 10% pre-COVID rate or a bit lower in 2015, 2016 versus right before pre-COVID. If you turn that 2 times a year, is that still the basic floor on returns that you think is acceptable? And then do you guys expect inventory units to be down year-over-year in 4Q? Thank you.

I think our inventory units, we expect to be about flat from year-over-year at the end of the fiscal. That will depend a bit on market and whether it's a little above or a little below, but it's going to be somewhere in that ballpark. And we're continually looking to increase our turns. Historically, they have been running two. We had a few years we did better than two on the units, and we expect we're going to do better than two this year on units and into next year on units as well, just taking advantage of our compressed construction times and focus on that part of our operation.

Thank you.

Thank you. The next question will be from Jay McCanless from Wedbush Securities. Jay, your line is live. Jay McCanless your line is live. Please go ahead.

Sorry. Thanks. So looking at finished specs, it looks like you guys had 8,400 this year versus roughly 7,300 last year. I guess maybe could you square up that increase in inventory with what I think, Bill, you said you guys are going to start to increase starts this quarter?

Yes. The 8,400 is up versus last year. However, it's down 2,000 versus the December quarter. So we were at 10,400 in December. So down 2,000. We expect that to continue to decline. It goes back to Paul's discussion earlier around our improved cycle times. So our construction cycle times are shorter. We're very focused on turning our housing inventory more quickly because the construction times allow it. And so we are expecting to operate with fewer overall homes in inventory, but we're going to turn them faster. And so in order to be at the volume levels that we would expect to be at, that does start to require us to increase our starts, but I think you will see our turns continue to improve from where they are right now.

And we saw our aged completed specs decline slightly as well, which is really our biggest focus. In today's environment, having completed specs continues to be an advantage. Buyers want that certainty of rate and ability to take advantage of the rate lock.

Thanks. And then the second question I had, congrats on keeping the cancellation rate, I think, fairly low relative to historical numbers. I guess, has there been communication from corporate out to the division presidents to keep the can rate low? And then also, we've seen some commentary in the market about rising insurance -- property insurance rates. And just wondering what type of impact you guys think that rising insurance could have on can rates and what you're hearing from the field right now about maybe can rates in April?

I think what we're seeing reflected in the low can rates is that we have buyers that when they're writing a sales contract, are very committed to that house process. There's a lot of headlines out there about people and consumer sentiment saying it's not a great time to buy a house. And so the people that are out buying homes today, and we're seeing a pickup in spring traffic are committed to the process. And so when they get on paper and they get to write a contract, they've done their homework, they've likely prequalified with the mortgage company, and they're following through on that process. So there's -- we actually would always encourage our division presidents, if you think you have a contract that's not going to make a customer is not going to get there with the contract, it's better to know that sooner rather than later, take the cancellation early so you can sell that house and not have a hidden spec in your inventory. So I think from the cancellation, I think to me, that's a little bit of a sign of the strength of the underlying buyers and the commitment they have to the process right now.

Okay. That’s great. Thanks for taking the questions.

Thank you. And the next question will be from Susan Maklari from Goldman Sachs. Susan, your line is live.

Thank you. Good morning, everyone. My first question is on the rental segment of the business, changing topics a bit. It was nice to see that the margin actually came up a bit year-over-year even though you're still seeing some pressure there. Can you just talk generally about how the change in the macro has perhaps impacted that business, and any thoughts on the outlook there?

Yes. So, we're still dealing with a lot of the markets where we've seen the much written and talked about buildup in inventory. So we have still seen pretty good rent pace. We've had to add a little more concessions in the process depending again similar to our full sale market, the competitive environment, market by market. But we still feel pretty good about that business. I would say that the macro environment hasn't done a lot to change either the pace or the concessions as much it's been the availability of inventory in the market. We are moving through that inventory in a lot of the markets and the starch space has been down on apartments quite a bit. So we feel good about the position and the communities that we have under development today. And I think on the single-family for rent side, we've been successful in transitioning several of those to more of a forward sale. In other words, selling those priorities to lease stabilization and in doing so, that's created higher returns for the sales.

Okay. That's good to hear. And then it's nice to see you increasing the buyback for this year even with all the pressures that you're obviously operating under. Can you just talk about how you're thinking about the potential for any further upside to that as things perhaps change out there? And then also other uses of cash, maybe perhaps M&A opportunities or anything else that you're seeing?

Sure, Sue. Yes, we have taken advantage of the flexibility that we have in our balance sheet and our liquidity to increase our near-term allocation for share repurchase and so $1.3 billion this quarter, $2.4 billion year-to-date. We've increased our guide to $4 billion for the year, which would be more than double than we did a year ago. So we do see that as a compelling opportunity, utilization of our cash in the near-term. However, we're still approaching it in a disciplined manner. We are going to balance our utilization to keep our liquidity at a healthy level where it has been and keep our consolidated leverage around 20%. So that's the constraint is ultimately the cash flow that we generate in the business, and then where our balance sheet and liquidity levels are. There's, obviously, further flexibility depending on where the business is and what we see in terms of our need for capital in the business. There could be further flexibility beyond the current guide, but that will be dependent on what we see in the business, what we've seen in our cash flow and then what we see in the stock over the next couple of quarters. You mentioned beyond share repurchase, I mean, we do constantly see and have conversations with potential builders who are looking to sell assets, but we haven't had nothing to close this quarter and would expect anything that we do to continue to be small private operations.

Yes. Okay. Thank you for all the color. Good luck.

Thank you. And that does conclude today's Q&A session. I will now hand the call back to Paul Romanowski for closing remarks.

Thank you, Paul. We appreciate everyone's time on the call today and look forward to speaking with you again to share our third-quarter results on Tuesday, July 22. Congratulations to the entire D.R. Horton family on producing a solid second quarter. We are honored to represent you on this call and greatly appreciate all that you do.

This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.