Good morning and welcome to the Meritage Homes Second Quarter 2017 Analyst Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Brent Anderson, VP, Investor Relations. Please go ahead, sir.

Thank you, Chad. Good morning. Welcome to our analyst call to discuss our second quarter and year-to-date 2017 results. We issued a press release before the market opened today, and you can find it along with the slides that we'll refer to during our call on our website at investors.meritagehomes.com or by selecting the Investor Relations link at the bottom of our home page. I'll refer you to slide 2 and remind you that our statements during this call as well as the press release and slides contain forward-looking statements, including our projections for 2017 operating metrics such as community count, order trends, closings, revenue, margins, and earnings. Those and any other projections represent the current opinions of management which are subject to change at any time and we assume no obligation to update them. Any forward looking statements are inherently uncertain, and actual results may be materially different than our expectations. We have identified risk factors that may influence our actual results and listed them on the slide as well as in our press release and most recent filings with the Securities and Exchange Commission, specifically our 2016 Annual Report on Form 10-K and subsequent 10-Q for the first quarter of 2017 which contain a much more detailed discussion of those risks. We've also provided reconciliation of certain non-GAAP financial measures referred to in our press release or presentation as compared to their closest related GAAP measures. On slide 3, with me today to discuss our results are Steve Hilton, Chairman and CEO of Meritage Homes; Hilla Sferruzza, Executive Vice President and CFO; and Phillippe Lord, Executive Vice President and Chief Operating Officer of Meritage Homes. We expect to conclude the call within about an hour, and a replay will be available on our website approximately one hour afterwards and remain active for approximately two weeks. I'll now turn it over to Mr. Hilton to review our second quarter results. Steve?

Good morning. Thank you, Brent, and welcome to everyone participating in our call today. I'll begin on slide 4. We had another solid quarter with strong order growth in Texas and Arizona, good earnings growth, and further progress on our strategic initiatives. After years of constrained housing starts due to labor shortages, a lack of inventory, and rising home prices, demand for new homes continues to be strong. More entry-level buyers are in the market and we anticipate plenty of opportunities for further growth as we expand our offerings for this segment across many of the best markets in the U.S. for employment growth and homebuilding. While we were facing a difficult comparison to last year's second quarter, considering that we generated 37% net earnings growth and a 25% increase in home closing with second quarter of 2016 over 2015, we still improved our pre-tax earnings by 7% year-over-year in the second quarter of 2017. We delivered slightly higher revenue on fewer home closings during the second quarter this year than we did last year due to an increase in our average home closing prices. Although our closings were 2% lower than last year's second quarter, we were able to overcome cycle time expansion from tight labor supply by selling and closing more spec homes during the quarter. And in a rising cost environment, we price our homes appropriately to more than cover the cost increases, and improved our home closing gross margin. Turning to slide 5. Our performance during the second quarter reflects further progress on our strategic initiatives, building on what we accomplished in the first quarter. We are focusing on three primary metrics for earnings expansion. Community count growth, gross margin improvement, and overhead leverage. Turning to slide 6. After expanding our community count in the first…

Thank you, Steve. Generally speaking, we have enjoyed solid demand so far this year. We produced 4% order growth for the second quarter of 2017 over the second quarter of 2016 primarily due to strong demand in Texas and Arizona with moderate growth also in Florida. I'll direct you to slide 9. Orders increased 2% in the West on a 4% increase in absorptions that was mostly offset by a 3% decline in average community count. I'll hit some of the highlights for you to provide some color on the reported statistics by state. Almost all the growth in the West was in Arizona, particularly in Phoenix which continues to be very strong. We are benefiting from our aggressive pivot into the more entry-level product which is driving significant growth. We are well-positioned here with many communities priced under the FHA loan limits. And there are more in the pipeline and we have a long supply of lots to meet demand for the current pace we're selling. After a strong first quarter, orders were down from 2016 in California, where demand was particularly strong last year, and we're down to a few lots in a number of communities in Northern California. We've reloaded our lot supply and made some good acquisitions there in the second quarter, but some community openings were delayed due to heavy spring rains. We have a similar situation in Colorado, where demand is strong and we're closing out many communities earlier than projected, but are in the process of reloading our pipeline. We have a solid pipeline of new communities that we're planning to open over the next several quarters. Slide 10. Texas, which makes up our Central region, continue to experience solid to strong demand across all of our markets there. Orders increased 30% over…

Thank you, Phillippe. I'll review some additional details from our income statement, key land and balance sheet metrics, and our third quarter and full year outlook, starting on slide 12 with our year-to-date results. We generated $65 million in net earnings for the first half of 2017, a 7% increase over the first half of 2016. Our performance was primarily driven by a 5% increase in home closing revenue and a 50 bps improvement in overhead leverage, though partially offset by lower gross margins and a higher effective tax rate of 35% compared to 31% in the first half of 2016. On a pre-tax basis, our earnings were up 14% year-over-year. Our average closing price was $418,000 in the first half of 2017, continuing its upward path of the last several years, though ASP growth is moderating in our backlog. While we're successfully signing more entry-level homes, the majority of our business is still move-up and prices in general have continued to rise. Our first half home closing gross margin in 2017 was 30 bps lower than the first half of 2016, due entirely to the first quarter since the second quarter gross margin was 40 bps higher than 2016. We expect home closing gross margins to be higher in the second half of 2017 than they were in the first half, anticipating increased closing revenue which will drive improvements in construction overhead leverage and higher margin from price increases we've taken over the last couple of quarters. We brought our SG&A expenses down to 11.1% of home closing revenue in the first half of 2017 from 11.6% in the first half of 2016. We expect to reduce our SG&A percentage further in the back half of the year, though we may see a slight uptick in the third quarter…

Thanks, Hilla. In summary, we were pleased with our results for the second quarter of 2017 and the progress we've made on our strategic initiatives which are designed to deliver long-term growth and shareholder value. Housing market conditions remain healthy in general, and Meritage is well-positioned in many of the best markets for homebuilding in the country. We believe this strong growth will continue and we're prepared to take advantage of it. We've developed new products that we can deliver at lower price points to meet the growing demand from first-time buyers, and we're successfully executing our strategy to increase the number of communities for that growing segment to 35% to 40% of our total communities by the end of next year. We're dedicated to our brand promise of delivering a LIFE. BUILT. BETTER. for all of our customers which we demonstrated by rolling out our M.Connected Home Automation Suite recently. We continue to innovate and focus on customer satisfaction which we expect to drive additional growth and shareholder value. Thank you for your interest in Meritage Homes and for supporting our growth and success. We'll now open it up for questions, and the operator will remind you of the instructions. Operator?

Thank you. We will now begin the question-and-answer session. The first question today will come from Michael Rehaut with JPMorgan. Please go ahead.

Thanks. Good morning, everyone, and nice results. The first question I had was on the land investment and some of the progress that you're making additionally in the East region and all the talk around focus on entry-level and the transition – in particular, you're focusing on the East – as well as continued executing like Texas where you're focusing more and more on the entry-level. So my question is just around how, perhaps, to start to think about 2018. Obviously, guidance is tough enough when you typically introduce it later this year. But if there's any kind of thoughts around, directionally, at least community count growth and with the impact that more and more entry-level might have on sales pace, average sales pace relative to where you are today, as well as ASPs that'll be very helpful.

Well we're not really prepared yet to give guidance for 2018, Mike. But I can tell you that our ASPs are going to flatten, and I expect next year they will slightly decline. I don't think they're going to decline dramatically but I think they are going to decline. 70% of the lots that we bought in this last quarter were for entry-level. But on the same token, we did buy some communities in California that I believe are kind of shovel-ready, that will impact our 2018 results. I would say almost everything that we bought in this last quarter will produce sales in 2018. Also some of that will be late in 2018, but we tried to stay away from anything that's really long-term. I mean, we did buy a couple of larger positions but they're going to be opening sooner than later. I'll let Phillippe make some comments about the South region and what we're expecting there and how we think about that going into 2018.

Thanks, Steve. So we have 90 active communities open in the South region at the end of June. 60 are outside of Florida which is performing well relative to the others. 12 of those 60 were open in the first six months this year, and 30 more are scheduled to open over the next six quarters, replacing many of our existing...

38 more.

38 more are scheduled to open over the next six quarters, replacing many of our existing communities that have older, slowly moving, and less popular homes. The new community that we are opening in the East are in A locations. They will have our new product and we believe they will produce significantly better margin and absorptions based on our new experience with that product. So we think the East is going to get a lot better as we roll these out and we open up these new communities in the East region which makes up the South region.

And then Mike, just one quick follow-up. You had a question about general absorption trends for entry-level. They're running at about 1.5 to up to 2 times the absorptions pace of the traditional move-up product that we have. So as Steve mentioned, the ASP is going to decline some, but the quicker absorptions pace and increased closing will more than offset the decline.

Okay. Thanks, Mike. I'm sorry, go ahead.

No, just thank you for that. I just wanted to extrapolate from that. And when you talk about the improved sales pace there for – if you could just remind us, on average, kind of what your mix of the new entry-level product will be in 2018 versus 2017?

Well we're targeting 35% to 40% of our communities to be entry-level-facing. I expect that we'll have more than that, of actual entry-level buyers, because some entry-level buyers are still buying the move-up communities due to low interest rates. But that's what we're looking at going forward.

And currently we're in the mid to high-20s, so there'll be some incremental growth between the 17 and 18 percentage of entry-level.

Okay. Thank you.

Thank you.

The next question will be from Alan Ratner with Zelman & Associates. Please go ahead. Alan Ratner - Zelman & Associates: Hey, guys. Good morning. Nice job on the margin improvement. Really good to see. My question is if I look at the guidance for the back half of the year on gross margin, you obviously hit your target probably a quarter or two earlier than maybe you signal last quarter. The guidance kind of implies that it's going to flatline a little bit from here, maybe tick a little a bit higher but not improve materially. And I know, Hilla, you mentioned there might be some conservatism factored into that that guidance. But I'm just curious as you talk about price increases and the idea that pricing power is outpacing the cost inflation you're seeing, are you seeing any resistance at all especially in some of these newer entry-level communities where affordability of course is more of a concern there? Do you feel like the market still has a lot of runway to go in terms of potential price increases if the cost environment remains inflationary like it is today or are you starting to bump-up against a little bit of resistance there?

I think it's a market-by-market situation. Certainly, there are some markets like Northern California and Dallas where there is some headwinds on the higher-priced homes. There's resistance from buyers. But on the other side of that, the entry-level homes are selling really, really well and there's opportunity to get some pricing power on that. But for the first-time home buyer, they're a lot more price-sensitive so we'll probably be more focused on driving volume for the entry-level once we achieve our underwritten margin or better and try to get more margin back on the move-up homes where we can get it. But again, it's different in every city and every sub-market within the city, so it's hard for us to give you a general answer to that. Alan Ratner - Zelman & Associates: Okay. And that's helpful. I appreciate that, Steve. Hilla, just a clarification. You mentioned higher interest expense a few times in the back half of the year from the debt deal. Is that flung through your gross margin line in terms of capitalized interest or do you expect the actual direct interest piece to move higher? And if you could parse that out for us that'd be helpful because just trying to figure out based on your 3Q guidance, it does look like you might see some deleveraging on the margin side with revenue growing more than your pre-tax income. So I'm just trying to figure out what the drivers of that are.

Sure. Very, very minimally is the interest expense that's going to be capitalized going to be affected by the new debt. Since we already are breaking (27:49) on the interest expense, any incremental interest will flow through to the P&L if you can kind of back into it knowing that we're taking out the converts and putting in this debt in place, what the incremental break (28:00) will be, and most of that is going to flow through to the P&L as an expense. Alan Ratner - Zelman & Associates: So in terms of thinking about the pre-tax profit guidance of, I guess, down 2% to up 7%, so it sounds like EBIT margin you still expect to see some positive year-over-year comp but the interest expense is going to drag that lower?

That's fair. Alan Ratner - Zelman & Associates: Okay. Great. Thanks, guys. Good luck.

Thanks.

The next question is from Stephen East of Wells Fargo. Please go ahead.

Thank you and good morning. Nice quarter, and I agree with Alan on the gross margin there. Steve, you talked about specs and ramping-up the specs. I guess with entry-level, what percentage of specs are you targeting for your quarterly closings and what type of gross margin delta do you see in your specs versus your build to order on that? And I was a little surprised that your finished specs where as high as they were. Is that the type of level you want to run with with entry-level? Or just maybe some thoughts around that.

Well we had 51% of our closings for the quarter were specs. I think that's probably the highest it's ever been for us, at least in this cycle. Maybe in the last cycle, it was higher, but at least the highest I could remember. I think that's a good thing and I'd like to see it potentially even a bit higher than that because I think for the entry-level market and for the first-time move-up, that's what those buyers want. Our competition, without naming any names, who's doing well, is doing that, and they're having a lot of success with it, so I'm not afraid to build more specs. We got to be careful about it and do it in the right places at the right times. We're going into the slower time of the year right now, so we're going to manage those more carefully. I'd also say, without being too specific, that the margin delta on specs versus new builds has narrowed quite a bit, and it's as tight as I can remember. So we're not really giving up much for selling a spec versus a new build. And some of our entry-level LiVE.NOW. communities, we don't have a lot of them yet, but those that we have we don't even offer new builds; we don't offer build jobs. It's like all we have is specs because we want to really reduce the cycle time and we want to increase the backlog conversion and we want to get people in a home quicker. So that's all part of our strategy.

All right, fair enough. That helps me. And then as you're making this big pivot toward entry-level, in the past, you've talked about what you thought was a normalized gross margin for your business. Does that normalized target come down any with the entry-level pivot or is it a similar margin profile as the rest of your business?

No, it's a similar margin profile. And we're still targeting 19% to 20% gross margin and we expect still to get back there over time, even with more specs and with entry-level. So that doesn't change.

All right. Thanks a lot.

Thank you.

Our next question is from Nishu Sood with Deutsche Bank. Please go ahead.

Thanks. I wanted to follow-up on the questions about the entry-level. The way you described it in your press release, and I think in your comments as well, obviously, you're seeing strong demand there. And you mentioned, particularly in markets where you've expanded your entry-level efforts significantly, and obviously you're going to keep doing that. I wanted to ask are you trying to point out the broader market conditions or are you trying to point out the success of your particular efforts? Anyhow, obviously, I know those two will partially go hand-in-hand. Just trying to understand particularly what you were trying to get across there.

Well, it's both. Phoenix, you look at Phoenix as a market, I think it's broadly improved at both the entry-level, the move-up, and even arguably at the luxury price points. But you could say the entry-level is certainly leading the market substantively better than the rest of the segments. I'd say often a little bit different, if you look at that market, it's very much entry-level-driven and not very much move-up-driven; it's actually a little softer on the move-up side. So for us, since we've pivoted really hard and off into more entry-level, it's really paying big dividends for us. Other markets, we haven't been able to move as quickly into the entry-level niche so we're not really prepared to brag about them per se. But some of those results will come later, like in Denver, we have several entry-level communities coming. We have some duplex communities that are more infill coming, that are more positioned to the entry-level buyer, but we haven't got them open yet. And same story for Dallas; we're going to be building a lot more bungalows which will appeal to more entry-level buyers, but we don't have those communities open yet to the degree that we want. So I think it's a combination that many of the markets we're in are doing well and they're getting stronger at the entry-level price point, and our strategy of building more entry-level homes is working as well. Big challenge for us is we got to get the South online. South is not performing up to our expectations. We got to fix that. We're keenly aware of it. We're focused on it. As our new product rolls out there, we think that'll have a big impact on our results, along with other tweaks and changes that we're making at our operations in those markets.

Nishu, just one follow-up on the entry-level. While it's certainly a strong segment for all the builders, we feel like our strategic process to roll out entry-level with the spec levels, with the elimination of the design studio, with the simplification of the process, maybe gives us an edge over some folks that haven't made the full pivot to building entry-level. They're just building homes at a lower price point.

Got it. All that's very helpful. So clearly the increase in your investment into the entry-level speaks to a broadening of entry-level demand. Earlier in the recovery, it seemed to be concentrated in a few markets, mainly in Texas. Let me ask the question this way. Are there any of your markets, and obviously recognizing that you have a pretty attractive smile (35:32) market footprint, are there any markets where you have not seen that broadening of the entry-level demand, market demand? Again, I'm distinguishing between your products and the market level demand. Any markets where you have not seen that of the ones you operate in?

I would say no, but I would say I qualify that, that we haven't been able to penetrate entry-level positions in all of our markets. So we haven't put a lot of entry-level communities on the ground in California for example so I can't really speak to that. But I could see from amenable evidence from some of our competitors, they're doing really well and they own an empire who've bought more entry-level communities, or in Sacramento or further inland in California. So but a lot of our entry-level positions that we've purchased are not open yet.

Got it.

Affordability is a challenge in a lot of markets. Home prices continue to go up which naturally creates the case for a stronger entry-level segment. Both people who are getting priced out of the market and then there is just more entry-level buyers in all of these markets, they become more active and engaged in buying houses. So there's a lot of themes that are driving the strength and the broad recovery of the entry-level price segments and product segments.

Got it.

And that's why we think this cycle is probably a little different. We kind of think the cycle is a little different than previous cycles because as I think you've written about this and the others, the entry-level recovery has been kind of late. We're seven, eight years into this recovery and it's just really started in the last year or so. So we think that gives the cycle a lot more legs.

Right. And a quick clarification as well. The press release has revenue guidance up, I think, $3.2 million to $3.4 million. The slides still say $3.1 million to $3.3 million. I'm assuming the press release is what we should be looking at?

Are you talking about revenue dollars or units?

Dollars.

Dollars.

Dollars. For the full year, it's $3.15 million to $3.35 million. We just rounded it to 1, like, decimal point

Got it. Got it. Okay. Great. Thank you.

The next question will be from Stephen Kim with Evercore ISI. Please go ahead.

Yeah. Thanks very much, guys. Good results. I wanted to start off with a question about land spend and cash flow. Your land spend increased about 35% of revs. If we use this rate going forward, assuming about $1.2 billion or something like that in land spend next year, I'm looking in my model it's you probably aren't going generate positive cash flow next year. And so I'm just wondering when you think you might be able to generate positive cash flow? If you have a target for that? And if you think that's even a worthwhile metric to focus on at this point in the cycle or not?

It's not a metric that I'm very interested in right now. We're still in growth mode, so we're putting money back in the business. We still have many markets where we think we can get market share gains, particularly in some of our smaller markets in the South where we want to do a better job leveraging our overhead. So I'm not in a mode yet of harvesting cash.

Yeah. That's totally fair.

Yeah. One point of clarification. We're definitely not. We don't run the metrics exactly the same way as the analysts look at them as to how the cash flow is working. But 2016 and 2017 were years where we were trying to catch up from underpurchasing lots, so there was maybe a disproportionately high dollar amount as a percentage of...

2015 and 2016.

2015 – no, in 2015 we slowed down. 2016 and 2017, we were catching up. So while we're still going to acquire lots for growth, we don't have to refill a depleted pipeline; we just need to fund the incremental growth. So the percentages might be a little bit different than how you're modeling.

Perfect. Okay. That's helpful. And then regarding gross margins, I know that there's been a lot of talk about this already, and you've been very helpful with your comments. I believe you mentioned that the back half margin profile could or rather the back half margins could come in maybe a little better than what you're modeling, but you make allowances for lumber in light of the British Colombia fires and what not and tight labor supply continuing to be headwinds. You didn't mention the West Coast, but I was just curious whether or not the West region – you had talked about a pause in community count. I'm wondering whether or not that has a gross margin impact or is it a temporary nature that could also be somewhat of an offset temporarily in the back half, if that sort of factors into your thinking as well or not?

No.

No. I wouldn't say it's anything to do with any geography.

Right. We've been focused so much on the second quarter with a very, very significant growth over last year at 17.7%, but because of the first quarter performance our blend for the year is only 17%. So to reach our guidance, we would still need to expect – we expect to see noticeable improvements in the back half of the year to bring the full year average to where we were in 2016. So we're absolutely modeling improvements in the back half of the year to bring the total back up to that mid-2017 range.

Got it.

Yeah. I mean, so we had big community kind of growth in the first quarter, flattish in the second quarter. The third quarter is going to be flattish to maybe down a little bit communities, and then bouncing back up in the fourth quarter. But it's still going to finish the year right around where we are right now give or take a couple of few communities in its direction.

Okay. All right. That's very helpful. Thanks very much, guys.

Thank you.

Thank you.

Next is John Lovallo with Bank of America. Please go ahead.

Hey, guys. Good afternoon and thanks for taking my questions. The first question, Steve, you made an interesting comment about how the re-emergence of the entry-level buyer could give this cycle more legs, and I would certainly agree with that. But would say, I mean, can we actually see the rate of industry growth accelerate given the size of this millennial cohort and kind of the first-time buyer cohort in general?

I think we could. I mean, I'm not the person to ask about that kind of question, but I think the entry-level segment is still at a much lower percentage of the total housing starts than what you'd see in a normal market. So if we could just get back to a little bit more normal, in 2004, 2005, and 2006 we had 40%-plus entry-level communities and our absorptions were over 4 a month on average; today, they're around less than 3. So I am optimistic that this millennial demand is sustainable and it's going to drive a better housing market.

Okay. That's helpful. And then I guess my second question would be Houston. If you could just remind us of your exposure there. And did you see volatility in the quarter given kind of the pullback in oil prices or do you think that market is kind of getting used to some volatility there in oil?

No, I think the market in Houston is stabilized to starting to begin to improve a little bit. We're really comfortable with the Houston market now, albeit we're really focusing on more entry-level communities more on the south side of the town which is more petrochemical-driven, health industry-driven. The port down in Houston is experiencing some phenomenal growth, and all of our communities that are within a reasonable commute to the port are doing extremely well. The north side is certainly softer, so we're being careful up north. But the Houston market is definitely stabilized to beginning to the start to do better.

Okay. Thank you.

Thanks.

The next question will come from Mike Dahl of Barclays. Please go ahead.

Hi. Thanks for taking my questions. Steve, I wanted to follow-up on some of the comments around absorption, and specifically relating to some of your product types. And I think at the Investor Day you laid out you're targeting 3 a month or so for a traditional move-up, 4-plus for entry-level plus – greater than 5 for ELP. And just since you're still running a little below 3 a month, could you give us an update on where you stand on those major product segments, how you're absorbing today and what the plan is to, I guess, migrate those north?

So for this last quarter, I'll give you some stats by segment. Our entry-level communities generate 3.9 sales per month. Our first move-up were 2.8. Our second move-up were 2.2. Active adult was 2.2 and semi-custom luxury was 1.1, so for a total 2.8. So that's right in line with what we were kind of expect. What we're targeting is 4 months or better for entry-level and 3 a month for move-up. We got some little work to do to get a little bit better than that but that's what we're shooting for. And I think as we get more entry-level communities open that number will only get better, and also as we get the South region to where we want it to go is going to help those numbers also.

Okay, that's helpful. And then actually just dovetailing on that, on the South region. I noticed that you had a change in the South Carolina division, and I know obviously this is kind of a turnaround that's been in progress for a while now. It sounded like you were encouraged about some of the new product launches and/or the conversion of old product to newer product that's coming up over the next handful of quarters. So just curious, just in light of some of the optimism around getting that back on track, could you comment around the change in management there?

We had a management change in Greenville. I'll let Phillippe talk about it. And maybe you want to give some more color on the South, Phillippe?

Yeah, absolutely. We did have a management change in Greenville, an internal promotion that we're excited about. Really came from Meritage and we think he's going to drive some great improvements there. As it relates to the product, we're getting a lot of good reads from the market on the new product where we have rolled it out. It's going a little slower than we'd like as the new management get their arms around all these new communities and we try to get them open on time and clean. But the new product has been well-received and we think it's going to absolutely improve our results out of the South along with the new management that we have in place. So we're excited about the future there. These markets are incredibly strong and it's all about our execution, and that's what we're focused on right now, is getting the South to operate to the same level our other regions are.

And if I could sneak a quick follow-up to that. Just as you think about land investments since it seems like they're still being a little less directed towards that region, are we at a point where we're likely to see increased investment in some of those markets?

We've actually bought quite a bit of land in the South which is why all of those new communities that we discussed earlier are going to be opening here over the next few quarters. So we feel pretty good about our land investment. It's about getting those communities open with our new product, and we continue to invest in those markets because they're very strong. Charlotte and Atlanta are markets that we're still focused on growing, but we have a pretty good land book in the South and we've made a pretty big investment, and it's all about getting it opened and performing.

All right. Thanks for the color.

Thanks.

Our next question is from Michael Rehaut with JPMorgan. Please go ahead.

Great. Thanks for taking my follow-up. Just wanted to, again, just maybe get a little more granular, fine-tune in the back half to make sure I'm understanding the guidance correctly. In terms of gross margins and SG&A, Hilla, to hit the 17.6% from last year on the gross margins, it would point to second half gross margins around 18%, maybe a touch above 18%. I just want to make sure I have that right. And also, if you were mentioning SG&A maybe being a little bit above last year's level, and then maybe I'd expect a little bit of leverage in the fourth quarter, it would push that SG&A ratio to right around the high end of the guidance range. Just want to make sure I'm doing the math right on both of those accounts.

Mike, we can definitely if you want to walk through all the numbers, we can do so offline, but I don't think the math is working right. The SG&A leverage is not going up in the back half of the year, so maybe it's the interest component that's causing a little bit of an issue in the math. And we're certainly expecting the back half of the year to be stronger on the gross margin side, but also don't forget it's disproportionately weighted in volume. So you don't need it to be – it's not 17% in the first half; 18% in the second half, blending to 17.5%. You can have it kind of range around in there because the volume is greater. It's going to disproportionately impact the full year numbers, but we can definitely review it in more detail, if you'd like, offline.

Yeah. That'd be great. I thought you had said SG&A would be up year-over-year. Maybe you were talking dollars instead of ratio, I don't know, for the third quarter, but, yeah, we can follow-up offline.

Yeah. The third quarter ticks up a little bit every year based on the timing of certain expenses, so there's just a slight uptick, just like there was last year's third quarter, not necessarily higher than last year, just the way that our curve works on the SG&A with slight uptick in Q3 and then a significant reduction in Q4.

Okay. So it's kind of more sequential. Great. No, perhaps we could just follow-up offline. Thank you.

Sure.

Sure.

Our next question is from Susan Maklari with Credit Suisse. Please go ahead. Susan Maklari - Credit Suisse Securities (USA) LLC: Good morning. On the SG&A front, can you talk a little bit about your ability to kind of control those costs and where you think that can get to over time, especially as maybe you do focus on more growth within that entry-level/first-time kind of buyer segments?

Well, a lot of those costs are somewhat fixed. A lot of them are related to models, carrying models, decorating models, marketing costs. We have a new website we've invested quite a bit of money on. It's going to be coming out in the next week or so, corporate overhead. But I'd say as we move into entry-level, we'll probably have less models. We'll spend much less money on merchandising. Our commission structure (53:04) will be streamlined. And so you get a lot of leverage of the SG&A in the entry-level that you don't get as much in the move-up space. So I think as we get more entry-level communities open, it will be easier for us to control our SG&A. You want to add to that, Hilla?

Sure. So I think we've said it but maybe I'll clarify, even though our ASP will decrease, it will be more than offset by the faster pace from entry-level as we make a stronger shift into the entry-level being a larger portion of our total closing. So we will see an increase in revenue, even though the ASP will decrease due to higher volume of closing. So we will be able to leverage it on simpler operations in ELP, but also just on flat dollars, those fixed costs will just go further. Susan Maklari - Credit Suisse Securities (USA) LLC: Okay. That's very helpful. Thanks. And then just thinking about demand really broadly, as we sort of see affordability in the entry-level or the younger buyer sort of become more squeezed, whether from rising home prices, affordability, those kinds of things, are you seeing an increased interest or willingness, rather, among the buyer to sort of move further out, maybe more driving to qualify? Are you getting any sense that that's coming together at all?

Yeah. I mean, certainly there's a preference among the millennials to live closer in. But when they start to think about having a family and schools and backyard and larger house, they have more propensity to move into the suburbs and they're willing to go farther out. So there's a lot more activity on the periphery today than there certainly was a few years ago. Susan Maklari - Credit Suisse Securities (USA) LLC: Okay. Thank you.

Thanks.

The next question will be from Jade Rahmani of KBW. Please go ahead. Ryan Tomasello - Keefe, Bruyette & Woods, Inc.: Good morning. This is Ryan Tomasello on for Jade. Regarding the land market, what are return targets and have those changed at all, and what are the typical durations of the projects that you've been investing in, and are you seeing potentially more option deals available?

We haven't seen more option deals, although we'll be sending out a press release on a large deal that we just closed yesterday in Florida that was on a land bank option. But the deals really haven't changed from our historical land buying habits, generally, communities that we can absorb in three to four years. They generally have one to two years to get them on the ground and opened up, and then a sell-out period of two to three years.

If you look at our years supply of lots, we kind of always ping back and forth between four and five years; that's a comfortable place for us. As Steve mentioned, a year to two of development and three-ish years to close out the community; that's our comfortable place. And we're not speculative trying to time the market up or down; that's kind of where we stay so that hasn't changed. Ryan Tomasello - Keefe, Bruyette & Woods, Inc.: Thanks. And is there any interest in doing deals with any of the single family or rental companies that are either at the front or back end of any of your communities? We've heard some of your peers talking about seeing incremental opportunity in that space.

We've talked to some of them about different opportunities in communities, but haven't been able to make any really work for them and for us. Ryan Tomasello - Keefe, Bruyette & Woods, Inc.: Great. Thanks for taking my questions.

Okay.

The next question will be from Ryan Gilbert with BTIG.

Hi. Thanks, guys. I was wondering if you could quantify or at least kind of rank order on how much your gross margin benefit this quarter from pricing power versus operating leverage or the improvement in spec margins?

Certainly, we have the detail – parsed out to that level of detail, although we do say that throughout the year it's not necessarily just Q1 through Q2 but Q1 through Q4 there's about 100 bps that we pick up in leverage. So not all of that was in Q1 to Q2, but a portion of that.

Okay. Great. And I guess a follow-up to that. Is there any segment of your cost to sales where you're seeing particular moderation, so either in land, labor or materials?

Where we're seeing moderation? I mean, I think prices are outpacing cost increases. And I think that, generally across the board, cost increases, although they're still subs and they're less than they were a year ago.

Okay. Great. Thanks.

The next question will be from Alex Barrón of Housing Research Center. Please go ahead. Alex Barrón - Housing Research Center LLC: Hey, guys. Great job on the quarter. I wanted to ask if there's going to be any impact on the share count from the convert going forward and how much that would be. And then my second question was on the entry-level. Are you guys doing entry-level that's primarily specs, kind of like some of the other entry-level competitors, or is there still some element of build to order in your operation there?

Alex, I'll take the share count question. So we've already purchased $52 million back the converts, but it happened in the last couple of days of the quarter. So you'll see that impact about 500,000 shares for all of Q3. Q3 we're going to go ahead and call the note, the remaining note which is about another 1.7-ish million shares, but that's happening September 20. So there's not really going to be an impact in Q3 since the way that the math works it's in a relative shares' days (59:40), but you will see the full impact of that in Q4.

So on the spec question, within entry-level segment we definitely have more specs per community and we encourage our buyers to buy specs versus build jobs. But also within the entry-level segment, we have a segment within the segment called LiVE.NOW. which is our spec-only strategy, no design center program where it's all spec-driven. And that is we have a handful of communities around the country that are definitely LiVE.NOW that are in that situation. Alex Barrón - Housing Research Center LLC: Okay. And so, Hilla, the full impact will be what? How many shares?

The full impact in Q4 is I think I believe 2.1 million or 2.2 million shares in total. That will be out fully in Q4 and obviously going into 2018. Alex Barrón - Housing Research Center LLC: Got it. And, Steve, if I could ask again on the entry-level communities. As far as the land for entry-level, are you guys still finding finished lot opportunities out there that were left from the downturn or are you guys having to develop your own land?

Almost all of that we have developed, there's not much finished lot opportunities left. Alex Barrón - Housing Research Center LLC: Okay, great. Best of luck.

Thank you.

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Steve Hilton for any closing remarks.

Thank you very much for your attention and participating in our second quarter conference call. And we look forward to talking to you again next quarter. Have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.