Good morning, and welcome to the D.R. Horton, America's Builder, the Largest Builder in the United States Third Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. An interactive question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Ms. Jessica Hansen, Vice President of Investor Relations for D.R. Horton. Thank you. You may begin.

Thank you, Donna, and good morning. Welcome to our call to discuss our results for the third 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 is no assurance that actual outcomes will not be materially different. All forward-looking statements are based upon information available to D.R. Horton on the date of this conference call, and D.R. Horton does not undertake any obligation to publicly update or revise any forward-looking statements. Additional information about issues that could lead to material changes in performance is contained in D.R. Horton's annual report on Form 10-K and our most recent quarterly report on Form 10-Q, both of which are filed with the Securities and Exchange Commission. This morning's earnings release can be found on our website at investor.drhorton.com, and we plan to file our 10-Q this week. After this call, we will post updated supplementary data to our Investor Relations site on the Presentations section under News & Events for your reference. The supplementary information includes data on our homebuilding return on inventory, home sales gross margin, 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 am pleased to be joined on this call by Mike Murray, our Executive Vice President and Chief Operating Officer; and Bill Wheat, our Executive Vice President and Chief Financial Officer. The D.R. Horton team is producing strong results in 2017. In the third quarter, our consolidated pre-tax income increased 17% to $444 million on $3.8 billion of revenue. Our pre-tax profit margin was 11.8%, and the value of our homes sold increased 13%. For the nine months ended June, our consolidated pre-tax income increased 21% to $1.1 billion on an 18% increase in revenue to $9.9 billion. Our pre-tax profit margin for the nine-month period improved 30 basis points to 11.2%. These results put us on strong – put us on track to deliver our guidance on all metrics for the full-year of 2017, and reflect the strength of our operational teams and diverse product offerings across our broad national footprint. Our continued strategic focus is to produce double-digit annual growth in both revenue and pre-tax profits, while generating annual positive operating cash flows, and increasing our returns. For the trailing 12 months, our homebuilding return on inventory was 16.3%, an improvement of 200 basis points from 14.3% a year ago. With 27,600 homes in inventory end of June and 252,000 lots owned and controlled, we are well-positioned for the fourth quarter and further growth in 2018. Mike?

Net income for the third quarter increased 16% to $289 million or $0.76 per diluted share, compared to $250 million or $0.66 per diluted share in the prior-year quarter. Our consolidated pre-tax income for the quarter increased 17% to $444 million versus $379 million a year ago. And homebuilding pre-tax income increased 19% to $415 million compared to $348 million. Our backlog conversion rate for the third quarter was 85%. As a result, our third quarter home sales revenues increased 17% to $3.7 billion on 12,497 homes closed, up from $3.1 billion on 10,739 homes closed in the prior year quarter. Our average closing price for the quarter was $293,100, up 1% compared to last year. This quarter, entry-level homes marketed under our Express Homes brand accounted for 33% of homes closed and 25% of home sales revenue. Our homes for higher-end, move-up and luxury buyers priced greater than $500,000 were 6% of homes closed, and 15% of home sales revenue. Our active adult Freedom Homes brand is now being offered in 15 markets across 12 states, and customer response to the affordable homes in communities offering a low maintenance lifestyle has been positive. Bill?

The value of our net sales orders in the third quarter increased 13% from the prior year quarter to $3.9 billion and homes sold increased 11% to 13,040 homes. Our average number of active selling communities increased 1% from the prior year quarter, and 2% sequentially, from our second quarter. Our average sales price on net sales orders in the third quarter was $296,900, and the 21% cancellation rate during the quarter was consistent with the prior year. The value of our backlog increased 6% from a year ago to $4.6 billion with an average sales price per home of $306,400. And homes in backlog increased 3% to 15,161 homes. Jessica?

Our gross profit margin on home sales revenue in the third quarter was 19.8% consistent with our expectations in the first half of the year. Our gross margin decreased 50 basis points compared to the prior year quarter due to higher litigation costs. 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 the relative impact of warranty, litigation and interest costs. Bill?

In the third quarter, homebuilding SG&A expense as a percentage of revenues improved 50 basis points from the prior year quarter to 8.4% due to better leverage of our fixed overhead costs from increased revenues. We remain focused on controlling our SG&A, while ensuring that our infrastructure adequately supports our growth. Jessica?

Financial services pre-tax income in the third quarter was $29.3 million, compared to $30.2 million in the prior year quarter. 95% of our mortgage company's loan originations during the quarter related to homes closed by our homebuilding operations. And our mortgage company handled the financing for 55% of D.R. Horton homebuyers. FHA and VA loans accounted for 48% of the mortgage company's volume. Borrowers originating loans with DHI Mortgage this quarter had an average FICO score of 719, and an average loan-to-value ratio of 89%. First time homebuyers represented 46% in the closings handled by our mortgage company, consistent with the prior year quarter. Mike?

We ended the third quarter with 27,600 homes in inventory, 12,800 of our total homes were unsold with 9,200 in various stages of construction and 3,600 completed. Compared to a year ago, we have 9% more homes in inventory, putting us in a strong position for the fourth quarter and into fiscal 2018. Our investment in lots, land and development during the third quarter totaled $1.1 billion, of which, $740 million was for finished lots and land, and $360 million was for land development. During the nine months ended June, we invested $2.8 billion in lots, land and development, compared to $2 billion in the same period of last year. Our underwriting criteria and operational expectations for new communities remain consistent at a minimum 20% annual pre-tax 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. David?

This quarter, we achieved our previously-stated goal of a 50% owned, 50% optioned land and lot pipeline. At June 30, our land and lot portfolio consisted of 252,000 lots, of which, 125,000 are owned and 127,000 are controlled through option contracts. 83,000 of our total lots are finished, of which 33,000 are owned and 50,000 are optioned. We have increased our optioned lot position 41% from a year ago, and we plan to continue expanding our relationship with land developers across our national footprint to further increase the option portion of our lands lots (09:31). Our 252,000 total lot portfolio is a strong competitive advantage in the current housing market, and sufficient lot supply to support our targeted growth. Mike?

On June 29th, we entered into a definitive merger agreement to acquire 75% of the currently outstanding shares of Forestar Group, a publicly-traded residential real estate development company for $17.75 per share in cash or approximately $560 million of total cash consideration. The strategic relationship between D.R. Horton and Forestar will significantly grow Forestar into a large national residential land development company, selling lots to D.R. Horton and other homebuilders. Forestar will remain a public company with access to the capital markets to support its future growth. The proposed merger accelerates our strategy of expanding D.R. Horton's relationships with land developers and ultimately increasing the option portion of our land and lot position to enhance operational efficiency and returns. As a reminder, there is a slide deck with additional details about the transaction available on the Investor Relations section of our website at investor.drhorton.com/for. We remain confident in the growth plan for Forestar as outlined in that presentation. Our interactions with the Forestar team have been very positive, and we are pleased with the progress we are making on the acquisition. The transaction is expected to close in our first fiscal quarter of 2018, subject to the approval of Forestar's shareholders and other customary closing conditions. We expect the preliminary S-4 to be filed by Forestar soon, and will have no other information to share until after the closing date. We are excited about the value that this relationship will create for both D.R. Horton and Forestar's shareholders. Bill?

At June 30th, our homebuilding liquidity included $461 million of unrestricted homebuilding cash and $900 million of available capacity on our revolving credit facility. Our homebuilding leverage ratio improved 520 basis points from a year ago to 24.8%. In May, we repaid $350 million of senior notes at their maturity, and the balance of our public notes outstanding at the end of the quarter was $2.4 billion. We have $400 million of senior note maturities in the next 12 months. During the quarter, we repurchased 1.85 million shares of our common stock for $60.6 million, which partially offset dilution from equity awards. At June 30th, our shareholders' equity was $7.4 billion and book value per share was $19.87, up 14% from a year ago. Subsequent to quarter end our board of directors increased our share repurchase authorization to $200 million effective through July 2018, replacing the prior authorization. Our balanced capital approach is centered on being flexible, opportunistic and disciplined. Our top cash flow priorities are to consolidate market share by investing in our homebuilding business and strategic acquisitions, payoff senior notes at maturity and return capital to our shareholders through dividends and share repurchases. Our balance sheet strength, liquidity, consistent earnings growth and cash flow generation are increasing our flexibility. And we plan to maintain our disciplined, opportunistic position to improve the long-term value of the company. Jessica?

Looking forward to the fourth quarter, we expect our homes closed to approximate a beginning backlog conversion rate in the range of 88% to 90%. This will result in homes closed for the full year of fiscal 2017 in the range of 45,800 to 46,200 homes, and consolidated revenues of $13.9 billion to $14.1 billion, both of which are above the high-end of our initial guidance range. We anticipate our home sales gross margin in the fourth quarter will be around 20%, and we expect our fourth quarter homebuilding SG&A to be in the range of 8.3% to 8.4% of homebuilding revenues. We estimate that our fourth quarter financial services operating margin will be in the range of 32% to 34%. We expect our tax rate in the fourth quarter to be approximately 35.2%, and our fourth quarter diluted share count to be around 380 million shares. We now expect our consolidated pre-tax operating margin for the full year of 2017 to be in the range of 11.3% to 11.5%, and we expect approximately $300 million of positive cash flow from operations for the year. Our expectations are based on today's market conditions. Our preliminary expectations for fiscal 2018 are for consolidated revenues to increase 10% to 15%, and to achieve a consolidated pre-tax margin of approximately 11.5% for the full year of fiscal year 2018. We also expect to generate positive cash flow from operations for a fourth consecutive year in a range of $300 million to $500 million. We anticipate our tax rate for fiscal 2018 will be approximately 35.5%, and that our diluted share count next year may increase up to 1%. Our preliminary guidance for fiscal 2018 is for our current operations and does not include any impact from Forestar. We do expect Forestar to be accretive, but not material to our earnings in fiscal year 2018, and we'll provide more information after we close on the transaction. David?

In closing, our third quarter and year-to-date growth in sales, closings and profits is a result of the strength of our people and operating platform. We are striving to be the leading builder in each of our markets and continue to expand our industry-leading market share. We have been the largest builder in the United States for 15 consecutive years. According to Builder magazine's recent Local Leader issue, in 2016, we were the number one builder in four of the top five U.S. housing markets, and we believe, we will be the number one in all five of those markets in 2017. Also, in 2016, we were a top five builder in 28 of the top 50 largest housing markets. We remain focused on growing both our revenue and pre-tax profits at a double-digit annual pace, while continuing to generate annual positive operating cash flows and improved returns. We're well-positioned to do so, with our solid balance sheet, broad geographic footprint, diversified product offering across our D.R. Horton, Emerald, Express and Freedom brands, attractive finished lot and land position, and most importantly, our outstanding team across the country. We thank the entire D.R. Horton team for their focus and hard work. We look forward to finishing this year strong and to continue growing and improving our operations together in 2018. This concludes our prepared remarks. We will now host questions.

Thank you. At this time, we will be conducting a question-and-answer session. Our first question is coming from Stephen East of Wells Fargo. Please proceed with your question.

Thank you, and good morning, guys. I'll start with the gross margin. Jessica, you mentioned that, third quarter you had 50 bps of legal, maybe, you could just give us an idea of what that is. But more importantly, fourth quarter around 20% implies, it may be down some. I guess, what are you all seeing as the drivers of that, when we're looking at price, cost. One of your competitors yesterday mentioned heightened incentives in a few markets, just maybe what's driving the thought process there of where you're going with your gross margin?

Sure. We'll have our detail on our gross margin, historically as we always do in our supplementary data, and what you'll see in that is in terms of the true just lot level prior to interest, property tax, warranty and lit, and those types of charges, our margin has been very, very steady. On a year-over-year basis, it was down about 20 basis points in that case, and that really is just driven by slightly higher land costs, which we have been talking about. So in terms of our stick and brick costs, our revenues have been covering that. They did on a year-over-year basis, and sequentially they were essentially on top of our cost increase. So we continue to see a very consistent gross margin, and then we did refer to the higher litigation costs, and that is – we've had that for a couple of quarters now, and that's why we continue to reiterate our 19% to 21% gross margin guide, as kind of our broader range outside of around 20%, because we do have some variability to some of those charges, and every once in a while it fluctuates a little bit.

Okay. Fair enough. Fair enough. And then, Bill you talked on the capital structure, your cash flow expected et cetera. Where do you all want to take your debt? I mean, at 20%, I think, most builders would love to be at that level already. So you're generating close to $0.5 billion next year even before Forestar, so what's the focus there on debt, and where do you want to take it?

We certainly like our position, we're in a flexible opportunistic position as we look at each year and look at our business plans, which we'll be spending a lot of time on that with our operators over the next couple of months, preparing, putting the kind of final touches on being prepared for fiscal 2018. We will look at where we feel like our cash flow will be, we'll look at our opportunities to invest. And then from there determine further actions with our cash, whether we take our debt down further or replace it, how much we do in terms of dividends and share repurchase, and then obviously further opportunities to invest in the business, including acquisitions...

Yeah.

...we do have the purchase price of Forestar, which we would expect to be paid in Q1 of fiscal 2018 of around $560 million, so certainly that's a use of cash that we'll be looking at closely. We don't have a target debt level, we like being flexible, we're certainly – if we feel like that's the best decision for utilizing our cash is to continue to reduce our debt, we certainly will.

Okay. Do you have a targeted land spend?

We're going to spend on land and development at a level, so that we maintain our lot portfolio at a similar level through the day, we do expect to continue to try to get more efficient with what we own, as we continue to grow our option position, but we would expect all things considered, if our revenues are expected to grow at 10% to 15%, we would expect our land spend to grow accordingly to just keep the lot pipeline sufficient for that growth.

Fair enough. All right, thank you.

Thank you. Our next is coming from Alan Ratner of Zelman & Associates. Please proceed with your question. Alan Ratner - Zelman & Associates: Hey, guys. Good morning. Nice quarter. Congrats on the consistent results here.

Thank you. Alan Ratner - Zelman & Associates: My first question is, kind of a follow-up on that last line, I was thinking on the land portfolio, so you guys had really nice pickup in your lot supply this quarter, both owned and optioned, and congrats on getting to the 50/50 target. I guess, just thinking about the owned piece, which is about 125,000 lots, I know, you're on current underwriting, the goal and the target is to effectively get your cash back within two years there. You're owning up 25% year-over-year on the lot count, up 12% on the owned piece. If we just assume, you turned through those owned lots in a two-year period; and I know that's somewhat oversimplified, because there's legacy lots in there, which might be sitting there for a while. But it would imply a pretty sharp acceleration in the volume, even probably above that 10% to 15% rate in order to get to that type of cash generation. So just curious kind of how you see the volume trending, I know you guided to 10% to 15%, but with the lot count up seemingly more than that, is there anything else we should be paying attention to?

I think, Alan, we have done a great job, our team has done a phenomenal job increasing the optioned lot position in line with the strategy we have. But we don't see an acceleration beyond the 10% to 15%, we're looking for next year. Even though, that lot supply is coming up, and we've got a two-year cash back return hurdle, we talked about; we look upon that as capital invested in land and lots, plus the margin we achieve on selling those homes goes back towards the capital reduction and how we reclaim that initial capital commitment. So projects, we're buying certainly have durations longer than two years. Alan Ratner - Zelman & Associates: Got it.

So it's not exactly going to see that kind of ramp in growth beyond our 10% to 15% expectation. Alan Ratner - Zelman & Associates: Okay. That's helpful.

We're investing to hit a 10% to 15% increase year-over-year-over-year. So it's – we have a plan, we're trying to be very discipline with that plan, maximizing returns as we continue to grow at this rate. Alan Ratner - Zelman & Associates: Got it. And that's a very helpful clarification. Thank you for that. Second question, just in terms of market conditions, today. If you go back a year ago, your fiscal fourth quarter, you did see a bit of a pullback in your order growth. And I remember you guys talking about just in the market back then, you saw some discounting from some of the calendar reporting companies that you guys were instead deciding to focus more on building up your inventory in anticipation of the spring, which obviously worked out very well. So just now that you're roughly a month or so into your fiscal fourth quarter here, do you see a similar dynamic playing out, where other builders might be trying to capture some year-end sales here, and it might impact your order results in the fourth quarter, or does it feel like the market is a little bit firmer from a pricing standpoint?

Right now, it feels pretty firm. We monitor week-to-week, we're hitting targets week-to-week. Feel very good about the fourth quarter, the way it's setting up right now. We don't control what other builders do. We're not going to force sales just to have one quarter look better than the market's going to give us. But again, we're managing this in long-term. We're very interested in how we're setting up for 2018 right now, but feel very good about fourth quarter, both sales and deliveries.

And the inventory position we have on the ground and coming out of the ground right now. Feeling good about getting set up for the first and second quarters of 2018. Alan Ratner - Zelman & Associates: Great. Thanks a lot, guys. Good luck.

Thanks, Alan.

Thank you.

Thanks.

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

Hey, good morning. Nice quarter.

Good morning.

Thank you.

Thank you, Bob.

Hey, just wanted to ask you, order growth was up 50% (25:17) in the Southwest. Deliveries are crushing in the Southwest to Southeast and the East. From your standpoint, is demand coming in ahead of your expectations? And where are you seeing the most demand? I mean, the pace is really torrid, it's higher than we were anticipating, how are you explaining it, and do you view this as sustainable?

Southwest, really has been driven by our Phoenix operation. I think, we've talked over the last couple of quarters, we've been repositioning at Phoenix, pushing down a price point, realigning management, that's paying off. They are taking market share at a torrid pace right now. And the reality is that, they're improving their margin as they're doing it, so we feel very, very good about the Southwest. As far as the East and Florida, that's really just getting flags online, market's very good, been very good. Florida market's very difficult to get flags up, and get lots in front of you, and our operators out there have done a great job positioning...

Got it.

...taking some of the pressure off, the market's been carrying for all these years, let's focus little more on margin there.

That's helpful. So this seems like you're seeing demand across the board plus great execution. Could you speak for a minute, what are you doing on the SG&A side? You obviously are executing well against your volume-driven operating strategy and getting great SG&A leverage. How much is left, is there room for improvement, is there anything you can do to lever your overheads to drive net margin performance? Great quarter and good luck.

Thank you, Bob.

Thanks, Bob. There's always a little more in SG&A, and really, our focus is just to continue to watch everything that we do. We certainly want to make sure we have an infrastructure to support growth, but just to watch everything that we spend, watch every ad that we make, every hire that we make to make sure that's absolutely needed. And then, if we're doing that, while we're growing the business at 10% to 15%, we would expect to continue to squeeze out a little bit more out of SG&A, whether that's 10 basis points or 30 basis points, it may fluctuate a bit, but we would expect to continue to push it down a little bit further as we go in 2018.

We ask our operators to get better every day, make it a little easier to build houses in the field and sell houses in the sales offices. And if we keep doing...

It's working?

We're going to keep getting better.

Sounds good guys, good luck.

Thank you.

Thank you. Our next question is coming from Carl Reichardt of BTIG. Please proceed with your question.

Thanks. Good morning, folks. I wanted to ask about, as you look out at your community mix on the next couple of years, as you're looking at land now. Are you looking at changing the mix, maybe moving away from Emerald, where it seems like we're seeing a bit of saturation in a few markets that move up price points and shifting more towards Express and Freedom? And you mentioned, I think that your – was it – over $500,000 through sales were 6%, I think in terms of delivery volume, but 15%. Is that Emerald plus stuff that's over $500,000? I'm just trying to get a sense of whether or not your mix over time is likely continue to shift towards those low-end price point?

We're going to shift our mix to where the market is, but we do want to maintain broad product offerings, regardless of cycle. It's just in terms of what percentage goes to what brand, it's going to vary depending on where we're at in the cycle, but we do plan to maintain an Emerald presence, and ultimately grow that business as well. And there'll be a time where the move-up buyer is back and very strong in that market, and we want to have that platform and that ability to deliver those higher end homes as well. The greater than $500,000 mark that we talk about, Carl, that is a mix. There is a lot of Emerald in that, but there is also some Horton products that falls into that price point as well. So in our supplementary data we give both a brand stratification and a price point stratification where you can see both of those mixes, and what that looks like for a trailing eight quarters.

Right. Of course. Thanks, Jess. And then, as a follow-up, can you talk a little bit about how the Freedom rollout looks as we look forward over the next couple of years or so? And I think, if I recall correctly, the ramp was, I think, a third of your markets. And I'm just kind of curious, maybe a little more detail on how that's been rolling out, how absorptions are tracking too? Thanks so much.

Bob, it's David. We're very excited and very happy with the Freedom rollout. Positioning that product, it takes a little bit longer than the typical Express or Horton project, because there are certain zoning requirements that make it a better deal that take a little longer. The rollout, I think, we're 15 markets. We're starting to see it impact to a minimal extent right now on our closings, but I think over the next couple of years, it's going to be a very significant part of what we do. I think we've been guiding to a third to a quarter of our markets that rolled out. But...

Yeah. We'll probably be closer to a quarter, just because it is a little bit slower as David mentioned versus a third we'd originally talked about. But we're very happy with our progress and expect that 15 markets to continue to grow as we move throughout 2018.

Probably start accelerating at some point because we do have a lot in pipeline that we're trying to get to market. Very excited though. It's going to be a – well, never mind, I'm not going to say the word.

Thanks, folks.

I almost gave you a Trumpism.

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

Hi, thanks. Good morning, everyone.

Good morning.

First question, just want to go back to the land and Forestar. And as said before, the increase in optioned lots has really been extremely impressive, essentially doubling it over the last six quarters or so. So the question is, as you look at Forestar now, over the next year or two. Clearly you haven't had an issue getting option lots on your own. The own portion is still up there; obviously getting a little under 50% was a great achievement as well. Going forward, do you anticipate that Forestar will be more – would you anticipate kind of essentially keeping your option lot supply on your own books going forward or would you say, effectively you're looking at all either owned and optioned kind of being funneled towards Forestar, and your overall lot position might stay at these levels, maybe even start to decline, and all incremental land deals, owned and optioned will be pushed towards Forestar?

Michael, this is Mike. We will continue to have direct relationships from D.R. Horton to our land development partners that we have across the country today and look to grow those relationships. In addition, we will continue to maintain a level of land purchasing at D.R. Horton and development. We see Forestar as being very helpful in us and not having to increase our development activities as we continue to grow the business. As we continue to see double-digit growth year-over-year, that calls for more and more lots to be needed by the builders to start houses on. We'd like to maintain our current development activities at a consistent level to where we are today, which is about half of our current level of development. But as we move forward and grow, grow more of our future home deliveries off of lots developed by others, whether they are third-party developers or whether they are projects that Forestar puts on the ground for the homebuilder. So we Forestar as an important part of land and lot strategy going forward, but it's another supplement to the relationships we've built with land developers across the country and we'll continue to invest in those relationships moving forward.

Okay. No, that's helpful, Mike. I guess, just secondly on the fiscal 2018 pre-tax margin guidance at 11.5%, that compares to fiscal 2017 of 11.3% to 11.5%, so it seems like, if I'm getting that right, and thinking about the components, you're more or less looking for a steady gross margin, and maybe flat to 20 bps of incremental leverage on the SG&A. So just wanted to know if I'm thinking about that right, and if that's the case, it appears that, relative to a few years ago, you're more or less approaching kind of like a steady-state margin, all else equal from a – let's say a pricing and cost inflation dynamic standpoint; really going forward, the bus is going to be more driven by top line, I mean, absolutely trying to get a little bit more on SG&A, but is that fair in terms of how to think about it?

Yeah, Mike. And in terms of the guidance to 11.5%, that is the right way to think about it. We continue to guide, and have seen very stable gross margins, and then continue to leverage SG&A a bit. And at this early day here in July, talking about the full fiscal year 2018, we do feel like we can squeeze out a little bit, so guiding to 11.5%, a slight improvement is where we feel comfortable today. As we get closer, and as we get into 2018, if we feel like we've got more opportunity, we will certainly adjust our guidance there as well. But within – certainly then, beyond the next quarter, and as we look to where we are as a business, we feel really good, and you're kind of in the middle of our normal operating margin range at about 20%, historically 19% to 21% is kind of in a range, and we've been at a very steady level, kind of in the middle of this range, really for the last couple of years. And we feel like that's still where the business is today, and then as we grow our volume, certainly the biggest driver of our earnings growth is going to come from our top line growth, growing at 10% to 15%. And to the extent that the market gives us a bit on the gross margin, we're certainly going to take it, and then we're certainly going to continue to try to drive a bit more operating margin from SG&A. But we're not projecting significant increases in operating margin, but certainly a continued consistent margin in order to improve it on the SG&A side.

Great. And then, quick clarification, the quarter markets for Freedom brands, that's expected to be by the end of this fiscal year, correct?

2017.

Sure.

Basically, towards the end of 2017.

Right. Great. Thank you.

Thank you. Our next question is coming from John Lovallo of Bank of America. Please proceed with your question.

Hey guys, thanks for getting me in here. The first question would be, I guess, how would you characterize kind of order growth throughout the quarter, and maybe more broadly, how would you characterize the overall demand environment? And some of your competitors have said that demand remains very strong and quite possibly is accelerating. Would you agree with that kind of characterization?

This time of year in the market, I don't know, the accelerating part. I will say, it's very consistent market. It's week-to-week, flag-to-flag, it's just kind of almost boring, it's so consistent. It's a great market for people that can operate efficiently and put good value in front of buyers, and we're seeing the benefit of that.

Okay. And then in terms of the 10% to 15% top line growth, what kind of community count growth are you kind of contemplating in that?

John, we did see for the first time this quarter, our community count tick up ever so slightly on a year-over-year basis, and I think, the second quarter in a row, it went up sequentially. So we've kind of hit that inflection point that we've been expecting to come, in the back half of the year. We wouldn't expect it to grow significantly in 2018, but I think, a low, probably no higher than mid-single-digit range, maybe by the time, we get to the end of 2018. So continued improvement and absorption, supplemented by a little bit of community count growth next year.

Great. Thanks, guys.

Thank you. Our next question is coming from Ken Zener of KeyBanc Capital Markets. Please proceed with your question.

Good morning, everybody.

Good morning.

Good morning.

I'm going to kind of try and go at your 10% to 15% growth target for next year. This year was very much comprised of pace, and the way we look at pace; sequentially, things have been pretty seasonal and pretty predictable. If that were the case again, it seems as though your approach on these communities and pace would lead to perhaps the same level of unit volumes that you've seen, orders going into closings. Is there something about your business that would – if demand were to pick up, and not be boring, could you or would you stop yourself from exceeding that 15% volumes? Is there something intuitively designed around your business that would stop you from getting that if the market wanted to go higher?

No, I don't think that's – certainly not or we're going to have not sell houses when people want to buy them, that's not going to be the case. I will say, if we have an opportunity to stay on pace and increase margin, we're going to do that. So if in fact, we do see some kind of acceleration, we will take a little margin and we will take a little bit more pace. The end goal for every flag is to maximize a return we make on that investment, and if that means tweak in margin, then we'll tweak margin; if that means tweak in pace, we'll tweak pace. It's good times for us.

So since it's so boring, and you guys went to the stable gross margin about two years ago, and it seems certainly guidance from other builders, there's been more than two now, have talked about kind of really sequential improvements looking into the back half of the year, which would be a change from the kind of compression trends that we had seen in recent years. And I ask David, because you said, if the market gives us gross margins, we'll take it, I'm sure, it's kind of tongue-in-cheek, but it does appear that other builders are finding stability that you're seeing?

Yeah. And that's not tongue-in-cheek, that is our operating platform and thought process. We set these communities to hit a certain absorption target, and we adjust margin to maximize the return at that target. And that's why we're so consistent on our deliveries. And first of all, we're able to build houses on a – without expanding our bill cycles. I mean, it does a lot of good things for us.

Would you say that you're more inclined to see gross margin expansion this year versus last year, kind of could you couch that considering we're seeing stability in others, and you were the first to see stability, so logically you might be...

Clearly depends on what the market does. Right now, very consistent margins, very consistent absorptions, we've got a good balance as we – the other builders that were seeing this acceleration are correct, and yeah, I would say, we're going to see some margin expansion. I'm just telling you, right now, what we're seeing is a very solid, very consistent high-demand, low-inventory market that feels like it's going to continue.

Ken, I do you think you hear other builders talk to seasonality in their gross margins as well, which I don't know, if that's playing into their commentary for the back-half of the year. But we don't have fixed costs in our gross margin. And so we don't experience that kind of seasonality in the back-half of the year.

Yeah, less the fixed costs then...

What is the commission percentage generally that goes into your gross margin and out of SG&A? Thank you.

It's around 2.7%, 2.8%, at times up to 3% in our margin.

Great.

Thank you. Our next question is coming from Stephen Kim of Evercore ISI. Please go ahead.

Hey, guys, it's Steve Kim. Apologies, if this question was asked. But curious about the gross margins for next year implied by the pre-tax GAAP number. We know that, that pre-tax GAAP number includes a lot of things in it, and one of the things you mentioned today, was that, you have this litigation expense that was going to run a little higher, and had been for a couple of quarters now. So I was curious as to what in the way of your outlook for next year, you're embedding in terms of the trajectory for, either warranty and litigation or anything else that might be a little sort of unusual, that typically gets backed out into 2018?

Yeah. Steve, we do see some more variability in items like warranty and litigation that we do in other components of our margin, but our guidance for next year is still kind of right down the middle of our historic range at around 20%, and there certainly could be some quarterly variability, as we've seen from time-to-time in those other areas, but we're not anticipating anything unusual, either positive or negative in terms of those other items. We do continue to see the benefit of a reduced debt with our interest charges and our margin continuing to be reduced, but at the same time, we do see cost pressures in the core business, especially on the lot side, right now, that we're absorbing a little bit as well. But again, we don't see significant volatility, and aren't embedding any significant volatility into our assumptions.

Got it.

And the expectations we're putting out there kind of reflect the increased lot costs that we've seen coming through in some of the closing, that's kind of an outcropping of our land and lot strategy is to try to buy more lots finished, see that come through and is helping us to drive our returns up, our homebuilding pre-tax return on inventory has improved 200 basis points over the past 12 months, and that's been very helpful for us.

Yeah, now I know, clearly. And then, with respect to Express specifically, I believe that, when you first launched that product line, your anticipation was that it was going to garner lower gross margins, but then as you actually got into it, do effective execution, you actually, I believe found that the margins there have been much more comparable to your company average, I was curious as to whether that's still the case today? And whether that's your expectation going forward?

Yes. Steve, you stated that dead-on, our Express gross margin has been better than we originally anticipated when we launched the brand in the spring of 2014, and it's right in line with our company average, and we really don't see anything today that would anticipate that changing as we move throughout fiscal 2018.

Excellent. Okay. Thanks very much, guys.

Thank you. Our next question is coming from Susan Maklari of Credit Suisse. Please proceed with your question. Susan Maklari - Credit Suisse Securities (USA) LLC: Thank you. Good morning.

Good morning.

Good morning. Susan Maklari - Credit Suisse Securities (USA) LLC: Can you talk a little bit to, perhaps what you're seeing in the Texas markets, it seems like you had some good results down there, can you just talk a little bit about what's actually going on, on the ground?

Texas is a very, very good market for us. We benefit from being incredibly well-positioned, I think, we're the top builder in every market in Texas. And just great execution combined with solid demand and tight, tight inventories. No, we love Texas. Susan Maklari - Credit Suisse Securities (USA) LLC: Okay. And then, I'm wondering if you could just dive in a little bit more into the raw material inflation that you're seeing, kind of what's been going on there, and how you're thinking about that as we move through the fourth quarter and then into 2018?

Sure, Sue. We haven't seen any significant moves in our raw material cost inputs, I know lumber's been the headline. Out there it really – it has been a lot of headline noise. We've seen a slight tick up in our lumber costs year-to-date, but nothing significant, and we clearly offset that in terms of our revenues offsetting our stick and brick costs. So we're really not seeing any noticeable changes in any of our raw material costs at this point. Susan Maklari - Credit Suisse Securities (USA) LLC: Okay. And so you expect that to stay relatively consistent then?

Yes. Susan Maklari - Credit Suisse Securities (USA) LLC: Okay. Perfect. Thank you.

Thank you. Our next question is coming from Jay McCanless of Wedbush Securities. Please go ahead.

Hi. Good morning, everyone.

Good morning.

Good morning.

A quick question on the Midwest segment and the order decline there. Can you talk about geographically what's going on and how you guys are addressing it?

The Midwest segment's a pretty small region for us, some of those markets, we have reworked a little bit of the management leadership in one of those markets, and we feel pretty good about where that team is going to be positioned in 2018 and 2019. So, I think we're going to see some improvements in those markets. They've been pretty consistent, they're just like a lot of other places, fairly supply constraint. Chicago market, still a little slow, seems to be little slow coming out compared to the balance of the country, but the other markets, I think we'll see some good things in 2018 and 2019.

And then, the other question I had, just to Express specifically, what type of pricing power are you seeing there, and I know some of your competitors have announced new brand names and new products to maybe target that brand name or to target Express, what are you guys seeing right now, and how's the pricing power for you guys on that Express brand?

Yeah, the key to the Express brand is affordability and making the – keeping that very broad customer segment where the most people can buy the most house. And so, the pricing power is probably higher or greater than where we have pushed pricing in Express because we are very sensitive to maintaining a very affordable product. Those buyers typically are not the most sophisticated, and you can make kind of a slow conveyor – presentation with them, but at the end of the day, we're selling houses to people that we want to sell the second, third and fourth house. We want it to be a great investment for them, and we want to give them a great house. So that's a long way of saying, yes, there's probably pricing power there. But as long as we can maintain the margins we're making and absorptions we're making, and retain a very affordable, very well built house, we lack that model. We lack what it's doing for our returns.

And Jay, you will see in our supplemental information that our average ASP on Express continues to tick up a little bit. That's more of a reflection of our geographic mix though, as we continue to roll Express out, and it continues to penetrate some of the higher-priced markets a little bit greater than it had been in prior quarters, but it's not – we obviously will move price somewhat, but we are continuing to stay very focused on affordability. And then, in terms of other builders in the entry level space, first time homebuyer space, certainly we're seeing other builders start to introduce new names, new brands, new communities out there, but as we've said for a long while, that market is pretty large, and there's a lot of demand from those entry level buyers today. So there's a lot of room for other participants to participate in that market, but we're still focused on penetrating that and gaining as much market share as we can there because we feel like there's still a lot of demand and very little supply to that entry level buyer.

Sounds great. Thanks for taking my questions.

Thank you. Our next question is coming from Jack Micenko of SIG. Please go ahead, sir.

Hi, good morning. I wanted to just clarify your tone on the share buybacks. I mean, your debt levels have come down further, generating cash, you bought back some stock this quarter, as you always do to offset the stock comp, but you upped the authorization. So is this more status quo – should we think of the buyback approach status quo, or is there an incremental focus on share repurchase here as you generate cash and get your debt levels lower because you did seem to call it out a bit more in the prepared comments as well. Just trying to gauge what the real message is?

Yeah. Thanks, Jack. We have had an authorization outstanding for quite some time on share repurchases. Actually – and we've talked about potentially starting to repurchase shares to offset dilution, actually this quarter was the first quarter in which we've actually repurchased any shares under that authorization. So, it was a step forward for us into an era of beginning to start to offset our dilution from our share creep. And we would expect to continue to at least partially offset that dilution, we – our board did increase our authorization to a $200 million level effective for the next year; that is an increase from the prior-year authorization of $100 million. So certainly as the business is growing, as our profits grow, as we continue to expect strong cash flow generation, we do expect to continue to be able to repurchase shares within that authorization going forward. So, yes, we are saying a little bit more about it because we've actually repurchased some shares this quarter.

Okay. And then, around your 2018 outlook, you talk about driving more of the top line through absorption, you're also going to grow, I think, Freedom's going to be somewhat of a driver of growth. How do we think about Freedom versus Express absorptions. Do they absorb about the same faster, slower and what's that mean to that expectation for further absorption improvement next year?

If we're – we will find out what happens as time goes on. I can tell you the way we are believing, it's going to take place right now is, the Freedom will come in at a little lower absorption than the Express program, but we think, we can get a little bit more margin there, so the returns are going to be equivalent to that push to 20% we're trying to get to, and it's – right now, we're seeing very, very strong demand. Part of it is, it's just nothing else – nothing else in the market like it. It's just been harder to roll it out than we really kind of thought it would, because of zoning requirements, and really city approvals and things. But we're very excited about it. I think, it's going to be great.

Okay. Thank you.

Thank you. Our next question is coming from Alex Barrón of Housing Research Center. Please go ahead. Alex Barrón - Housing Research Center LLC: Yeah, thanks. Congratulations on the results. I wanted to ask about the leverage; so you guys, I think, at this point have the lowest leverage of any builder. Curious if you guys, the thought process is to stay here or you're just being opportunistic about more – other opportunities? And my second question has to do with, heard some rumblings that some of these rental companies are thinking of developing entire communities for, I guess, single family communities for rents, and giving your platform of being very efficient to develop homes; wondering if that's something that you guys are potentially contemplating on doing, entering those types of deals?

I'll take the second question first, Alex. Thank you very much for your comments. We've heard some of the rumblings about that as well, probably just rumors or articles written here and there. We've not really explored the build out of a community for ourselves as a full rental community. We've had great demand selling houses, and generally, we prefer to sell them, and it's more capital-efficient for us, and that's the way it has historically worked for us. We'll see how they do with the full on rental communities – we do see it's something that can make good business sense for us to bring our building platform to bear, community development expertise to bear in developing a rental community, maybe that's something we will pursue. But at this point, we have no immediate plans to pursue that.

And then, Alex, in terms of the leverage, we do lock our flexible opportunistic position we're in today, as we look at opportunities to invest in the business; we just try to balance that with where we want to keep our liquidity. And to the extent that we have capital available to continue to reduce debt, we certainly will. But if we see enough opportunities to invest in the business that we need to replace the debt, and not reduce it further, then we'll do that as well. So we certainly like our position, willing to take the debt lower if need be and the cash flow is available, but certainly, it's got us in a really strong position to be able to really take advantage of opportunities as we see them in the marketplace. Alex Barrón - Housing Research Center LLC: Great. Thanks. Congrats again.

Thank you.

Thanks, Alex.

Thank you. We're showing time for one additional question today. Our last question will be coming from Mike Dahl of Barclays. Please go ahead.

Hi, thanks for fitting me in. Couple of quick ones. First, related to the guide and some of the comments around absorption and community count. Just hoping to get a little clarification on just how the 10% to 15% in dollar terms breaks out, because presumably mix is continuing to shift towards Freedom and Express, which while you've had some pricing power there is still mixing lower. So what's generally your expectation for how ASPs play out for next year when you kind of add that altogether?

So we don't give specific guidance on ASP or community count really. I mean, we end up talking about it, because obviously you guys want to hear about that. So we do talk about it directionally, but no specific guidance for a reason, because those are two of the hardest for us to predict. ASP being very much market-driven and coupled with a lot of mix impacts that we have had going on that you already referenced, Mike. So we continue to expect our ASP to be around flat. In reality, it continue to creep up at a low-single-digit percentage here for the last year or two. So we'll see as we move throughout 2018, but once again, not really expecting a whole lot of movement on the ASP front.

Okay. That's still helpful. And then, secondly, just if we think about some of the comments around your price, obviously there's kind of a push and pull. You've got some power in the market on the low-end, but you want to manage and make sure it's an affordable product in those segments. You mentioned that the cost side is fairly benign for you guys. So can you give us any level of quantification since overall margins are stable, you know what the underlying land costs are inflating at currently, and what the embedded expectation is for 2018?

Sure, we saw our lot cost at the beginning of the year, it'd be up a high-single-digit percentage. Now that we've moved into the back half of the year, that's moderated a bit, and this quarter on a year-over-year basis was up a mid-single-digit percentage. So we would expect in 2018 to continue to have an increase in our lot costs, but hopefully it maintains that mid-single-digit range that we're at today or you know trends down just ever so slightly to a low-single-digit.

Okay, great. Thanks and good luck into year-end.

Thank you.

Thanks, Mike.

Thank you. At this time, I'd like to turn the floor back over to management for any additional or closing comments.

Thank you, Donna. We appreciate everyone's time on the call today, and look forward to speaking with you again in November, to share what we think is going to be a great year-end. And to the Horton family, thank you for yet another strong quarter, and an outstanding execution in 2017 . It is an honor to be here, and I appreciate everything you did. Thank you.

Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may disconnect your lines at this time, and have a wonderful day.