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DR Horton (NYSE:DHI)

Q2 2011 Earnings Call

April 29, 2011 10:00 am ET

Executives

Mike Murray - VP and Controller

Bill Wheat - Chief Financial Officer, Principal Accounting Officer, Executive Vice President, Director and Member of Executive Committee

Stacey Dwyer - Executive Vice President, Treasurer and In Charge of Investor Relations

Donald Tomnitz - Vice Chairman, Chief Executive Officer, President and Member of Executive Committee

Analysts

Daniel Oppenheim - Crédit Suisse AG

Stephen East - Ticonderoga Securities LLC

Nishu Sood - Deutsche Bank AG

David Goldberg - UBS Investment Bank

Kenneth Zener - KeyBanc Capital Markets Inc.

Josh Levin - Citigroup Inc

Michael Rehaut - JP Morgan Chase & Co

Joel Locker - FBN Securities, Inc.

Alex Barron - Agency Trading Group

Robert Wetenhall - RBC Capital Markets, LLC

Adam Rudiger - Wells Fargo Securities, LLC

Michael Widner - Stifel, Nicolaus & Co., Inc.

Michael Smith - Oppenheimer

James McCanless - Guggenheim Securities, LLC

Jade Rahmani - Keefe, Bruyette, & Woods, Inc.

Joshua Pollard - Goldman Sachs Group Inc.

Jonathan Ellis - BofA Merrill Lynch

Operator

Good morning, and welcome to the D.R. Horton America’s Builder, The Largest Builder in the United States, Second Quarter 2011 Earnings Release Conference Call. [Operator Instructions] It is now my pleasure to introduce your host, Don Tomnitz, CEO and President of D.R. Horton. Thank you. Mr. Tomnitz, you may now begin.

Donald Tomnitz

Thank you, and good morning. Joining me this morning are Bill Wheat, Executive Vice President and CFO; Stacey Dwyer, Executive Vice President and Treasurer; and Mike Murray, Vice President and Controller. Before we get started, Stacey?

Stacey Dwyer

Some comments made on this call may constitute forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Although D.R. Horton believes any such statements are based on reasonable assumptions, there's no assurance that actual outcomes will not be materially different. All forward-looking statements are based upon information available to D.R. Horton on the date of this conference call, and D.R. Horton does not undertake any obligation to publicly update or revise any forward-looking statement. 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. Don?

Donald Tomnitz

The fundamental drivers of demand for the homebuilding industry, the overall economy, job growth and consumer confidence are still weak. National new home sales have remained at a low level subsequent to the expiration of the tax credit in April 2010. However, our net sales orders this quarter reflected traditional seasonality increasing 47% sequentially from the December to the March quarter. Our backlog of 5,281 homes at March 31, 2011, is higher than our backlog at the beginning of the fiscal year. And as a result, we expect our closings and pretax profitability to be higher in the second half of fiscal 2011 than in the first half. Given the weak macroeconomic conditions, higher levels of existing homes for sale and tight mortgage availability, we still remain cautious and realistic in our expectations and we will adjust our business to compete in the current market conditions. We plan to continue to aggressively open new communities and adjust our price points and product offerings to the demand we see in each of our individual markets. Mike?

Mike Murray

Our Homebuilding pretax loss was $32.4 million, which included $14.3 million of inventory impairment and lot-option charges. Financial Services pretax income was $1.6 million, which included $2.5 million of recourse expense. Our net income for the quarter was $27.8 million or $0.09 per diluted share, compared to $11.4 million or $0.04 per diluted share in the prior-year quarter. Net income for the quarter included a $59.2 million noncash tax benefit from a reduction in our unrecognized tax benefit reserve. During the quarter, we received a favorable result from the IRS on a ruling request concerning the capitalization of inventory cost. This ruling request and related potential tax benefit have been disclosed in prior quarterly SEC filings. Bill?

Bill Wheat

Our second quarter home sales revenues decreased 18% to $733 million on 3,516 homes closed from $894.8 million on 4,260 homes closed in the year ago quarter. Our average closing price for the quarter was down 1% compared to the prior year and essentially flat sequentially at $208,500. Homes closed in the March quarter represented 91% of the beginning backlog compared to 88% in the December quarter. We expect that our backlog conversion rate going forward will remain around or below 90% as we return to more normal conversion rates this year. Don?

Donald Tomnitz

Net sales numbers for the second quarter increased 47% sequentially to 4,943 homes, reflecting a seasonal increase from the spring selling season. However, sales orders were down 23% from the same period last year when we saw a 55% year-over-year increase as buyers were signing contracts to meet the April 30 sales deadline on the federal homebuyer tax credit.

In the March quarter, our average sales price on net sales orders was up 1.5% year-over-year to $207,700. Our cancellation rate was 25% and our active selling communities increased 4% sequentially. Our sales backlog decreased 16% from the prior year but increased 37% sequentially to 5,281 homes or $1.1 billion. We expect another difficult year-over-year net sales order comparison next quarter since our third quarter fiscal 2010 sales of 4,921 homes included extremely strong demand in the April period from the tax credit. A positive comparison would require that we sell approximately the same number of homes or greater in the June quarter than we sold in the March quarter. Stacey?

Stacey Dwyer

Our gross profit margin on home sales revenue in the quarter was 16.2%, down 180 basis points from the year ago period, reflecting the weaker housing market we continue to experience since the expiration of the federal homebuyer tax credit. However, our margin increased 60 basis points sequentially, primarily due to improvement in our core margin. Mike?

Mike Murray

In our second quarter impairment analysis, we reviewed all projects in the company and determined that projects with a pre-impairment carrying value of $59.4 million were impaired, which resulted in $13 million of impairment charges, the majority of which were in Hawaii, Florida and California. We refer to our projects which have indicators of potential impairment, but were not impaired, as our watch list, which represents those projects deemed to be at the highest risk for future impairments. After this quarter's impairments, our watch list now totals $432 million, up from $408 million at December, with the largest concentrations in California, Illinois and Florida. Our inventory impairment process in future quarters will incorporate any changes in market conditions and any adjustments we make in our business. Bill?

Bill Wheat

In the second quarter, we reduced our homebuilding SG&A expense, which includes all corporate overhead to $123.2 million from $129 million in the year-ago quarter. However, with the decrease in homes closed, SG&A expense increased to 16.8% of Homebuilding revenues compared to 14.4% in the year-ago quarter. Sequentially, our Homebuilding SG&A expense increased $4.3 million, primarily due to increased advertising costs for the spring selling season and higher payroll taxes. We continue to actively manage our SG&A levels relative to our expected number of homes closed, and we have begun implementing additional cost reductions throughout the company. Stacey?

Stacey Dwyer

Homebuilding interest expense was $14.7 million for the quarter, which represented 43% of our homebuilding interest incurred. We directly expense a portion of our interest incurred when our Homebuilding debt level exceeds our active inventory. Our second quarter Homebuilding interest incurred of $33.8 million decreased 26% compared to the prior year, primarily due to the $1 billion of debt reduction that we achieved in fiscal 2010. We expect our interest incurred to be reduced even further in the third quarter to approximately $32 million. Mike?

Mike Murray

Financial Services pretax income for the quarter was $1.6 million compared to $1 million in the year ago quarter. 87% of our mortgage company's business was captive during the quarter. Our company-wide capture rate was 61%, our average FICO score was 702 and our average combined loan-to-value was 92%. Our product mix in the quarter was essentially 100% agency eligible with government loans accounting for 61% of our volume. Don?

Donald Tomnitz

Our total inventory increased by $74.3 million, excluding noncash items since December 31. We increased our homes in inventory by $115.2 million for the spring selling season and decreased our investment in residential land and lots by $40.9 million. Our homes in inventory at the end of March totaled 10,500 homes, up 1,400 homes from December, but down 3,400 homes from a year ago. As of March 31, 1,200 of our homes were models, 5,500 were speculative homes and 2,400 of the specs were completed. We reduced our completed specs by 20% during the quarter, which we're extremely proud of. We continue to manage our total homes in inventory relative to our expectations of sales demand and we offer spec homes primarily to accommodate our first-time and relocation buyers. Bill?

Bill Wheat

In our second fiscal quarter, our total land, lot and development investments were $184 million, primarily in finished lots. Our spending on finished lots will remain largely dependent on our sales base, while our spending on land and development costs will continue to be at relatively low levels. At March 31, 2011, we owned approximately 89,000 lots, of which 23,000 are finished. We controlled an additional 27,000 lots through option contracts with a net earnest money deposit balance for these lots of $13.6 million. We are focused on managing our supply of owned, finished lots in line with our sales demand in a low-risk capital efficient manner. Mike?

Mike Murray

We ended the quarter with $1.4 billion of homebuilding cash and marketable securities. Cash used in operations for the March quarter totaled $70.6 million, primarily due to increased homes in inventory in response to seasonal demand. During the quarter, we repurchased $64.7 million of various issues of our notes for $67.2 million plus accrued interest and the balance of our public notes outstanding at March 31 was $1.9 billion. Stacey?

Stacey Dwyer

Subsequent to quarter end, we repaid at maturity the remaining $70.1 million of our 6% note. Also, as previously announced, we redeemed the remaining $112.3 million of our 5 3/8% notes due 2012, which will result in a loss on early debt retirement of $6.3 million next quarter. The amount remaining on our debt repurchase authorization after these transactions is $241.7 million. Our note maturities for the rest of fiscal 2011 are only $106 million with no further maturities until May of 2013. At March 31, our homebuilding leverage ratio, net of cash and marketable securities, improved 350 basis points from a year ago to 18.7%. Gross homebuilding leverage at March 31 improved 670 basis points from a year ago to 42.9%. These leverage improvements are due primarily to our lower debt balance. Don?

Donald Tomnitz

We continue to focus on the fundamentals of our business, bringing homes to the market at the right price points, controlling finished lots, closely monitoring our home and spec inventory in relation to our sales, further reducing our SG&A costs, maintaining our strong balance sheet and cash balances. Although our 47% sequential increase in sales reflected traditional seasonal demand, for us to see significant sales growth, we need to see sustained improvements in the overall economy, the jobs landscape and consumer confidence.

As we mentioned earlier, we are excited by the prospect of our closings and pretax profitability being higher in the second half of fiscal 2011 than on the first half. Thank you to all of our D.R. Horton employees for continuing to work hard and navigate through a difficult homebuilding environment. We appreciate all of you. This concludes our prepared remarks. We'll host any questions you now have.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from the line of Mr. Nishu Sood with Deutsche Bank.

Nishu Sood - Deutsche Bank AG

So first question I wanted to ask was about the end-market segments. The theme last year, the consensus theme among investors and the builder community was that the first-time buyer was where you wanted to be, and you folks obviously did a terrific job of harvesting demand from the homebuyer tax credit. This year, the theme seems to have shifted and now it seems to be more about the move-up buyer. And you did mention in your commentary that you're trying to make more move-up product available. So I wanted to just get your thoughts on that because you folks have traditionally been a first-time buyer-oriented builder, so what's the right strategy for D.R. Horton going forward?

Donald Tomnitz

I think clearly we adjust as the market adjusts. Before the downturn, we clearly were selling a bigger percentage of second-time homes as well as first-time homes. But my percentage changes. Last quarter 55% of our homes that we closed were first-time homes, and we've made a conscious effort in a number of our markets to move up into the move-up buyer market simply because we see more demand in that market. And we see a lot of fragmented builders in that market, primarily small, medium-sized builders across the country, some public, some private. But we see a great opportunity in that move up segment at this point in time so we're beginning to expand that portion of our business.

Nishu Sood - Deutsche Bank AG

Got it. Great. And second question I wanted to ask was related to your balance sheet and your community counts. If I look back to a couple years ago, the kind of the peak of your size of your balance sheet, your balance sheet is about 60% smaller now and it includes a lot more cash. So if you factor that in, it probably has shrunk even a little bit more. And yet your community count over that same period is almost level. So if I'm looking from that outside, maybe you're obviously less involved in land development, less involved in larger communities. I just wanted to get your thoughts on what's driven that bigger trend. You've become a lot more capital efficient over the past few years, so why is that and what can we expect going forward?

Donald Tomnitz

Clearly, what I've said before on previous conference calls is we plan on being a land-light company moving forward. We've rewritten our underwriting guidelines. Currently, we're looking for a return of our capital that we invest in land and lots of somewhere between 12 to 18 months. We're certainly not interested in 5-year projects any longer in this company. And we continue to work with sellers, developers as well as banks in terms of working on option deals. So one of our goals has been, and we've executed very well on this, and our goal going forward will continue to be to aggressively increase our flag counts as we look at various parts of the country. And the way that we've continued to focus on doing that is do option contracts with sellers.

Operator

Our next question is from the line of Michael Rehaut with JPMorgan.

Michael Rehaut - JP Morgan Chase & Co

First question on kind of pricing and incentive levels and how you're seeing that flow through to gross margins. You had a little bit of an improvement sequentially from first quarter on the gross margin side. And I wanted to know, I guess the backdrop in terms of pricing and incentive levels as you've seen it in the spring so far, has it been stable? And do you see perhaps some further improvement in the back half either driven off of greater leverage from higher volumes or perhaps a continued, more stable pricing/incentives environment?

Donald Tomnitz

Frankly, we are proud of the fact that our incentives remained low this time and if you look at our 60 basis point increase in gross margin, 50 basis points of that was from the fact that our incentives stayed flat.

Bill Wheat

Yes. Relative to our costs, so our core margins were 50 basis points of that.

Donald Tomnitz

On a go-forward basis though, I believe that as we move into the third and fourth quarters, obviously, we're very competitive out there and we have a game plan to sell and close x number of units. We're hopeful that our gross margins will remain solid as we move into the third and fourth quarter, but we don't know. It's to be determined. And it's really going to be based upon what our competition does out there. One of the things that adversely affects our gross margins today is just the competitors around us from time to time dropping their prices significantly and us having to adjust our prices. We've been consistently trying to hold our gross margins where they are, and I think we've done a very good job of it. The one very important fact that we were talking about before the conference call that everybody needs to know about is that we closed a larger percent of completed homes this quarter than we have in the past 3 or 4 quarters and our gross margins held very well. So we're extremely proud of that, and it's freshened up our inventory.

Operator

Our next question is from the line of Jonathan Ellis of Bank of America-Merrill Lynch.

Jonathan Ellis - BofA Merrill Lynch

First question was just on gross margins. You talked a little bit as you said about pursuing opportunities in the move-up market. Can you help us to understand whether there's any gross margin difference you see right now between the move-up product and the entry-level product?

Donald Tomnitz

The question was gross margins on the move-up and the entry-level product?

Jonathan Ellis - BofA Merrill Lynch

Correct.

Bill Wheat

Our underwriting guidelines are the same regardless of the product, so we don't necessarily expect to have a difference in our margins versus move-up versus first-time. But to the extent that in the move-up market a buyer may select more options that provides some additional opportunity for margins versus perhaps the same level on a first-time home. But in general we would expect similar margins.

Jonathan Ellis - BofA Merrill Lynch

Okay, great. And then my second question is just on land generally. I think last quarter you talked about gross margins on land purchase in 2009 having about 100-basis-point differential with margins on land purchased in '10, any update on that? And then secondly, the watch list and the increase this quarter, was any of that related to land that has been purchased since 2009?

Bill Wheat

In terms of the margin differential between land in '09 and '10, we're seeing a similar trend to what we saw a quarter ago. I wouldn't characterize the increase in the watch list of about $30 million as being heavily driven by the '09 land purchases. It would be just across the portfolio of our inventory. From a year ago, the watch list is actually down about $100 million, about $90 million. So I wouldn't say it's driven off of the increase most recent quarter off of '09 purchases, no.

Operator

Our next question is from the line of Michael Rehaut with JPMorgan.

Michael Rehaut - JP Morgan Chase & Co

The second question was just on community count. You mentioned I believe it was up 4% sequentially.

Donald Tomnitz

Correct, yes.

Michael Rehaut - JP Morgan Chase & Co

But you continue to aggressively open up new communities, so I was wondering if you could kind of give us first off, in the quarter itself what it was on a year-over-year basis, as well as on a year-over-year basis what you're at this point expecting year end to be.

Bill Wheat

On a year-over-year basis, our communities are up 20% versus last year. Going forward in the forward quarters, while we continue to plan to aggressively open new communities on a gross basis, what's more difficult to predict is the pace of which older communities will roll off. The demand environment basically sets that. So we would expect and hope to be able to at least hold our community count at current levels. Hopefully continue to increase them incrementally but in terms of holding or giving exact projections on forward community counts, we're not really at a point to be able to do that very well.

Donald Tomnitz

Part of that has to do with how tough we're negotiating out there also because obviously, we're looking for a good return on our underwriting criteria. So as a result, sometimes we think we're going to make a deal and we don't make a deal. So it just all depends.

Stacey Dwyer

The year-over-year percentage increase is probably going to trend down a little bit, Michael. Because we had a pretty good jump from our March quarter to our June quarter in terms of active selling communities last year.

Operator

Our next question is from the line of Dan Oppenheim with Crédit Suisse.

Daniel Oppenheim - Crédit Suisse AG

Historically, you guys have always focused on affordability, and I think you noted that in the release here in terms of just the greater affordability these days. How do you think about that in the first-time buyer versus some of the financing issues these days at the low end of the market?

Donald Tomnitz

Well, as the underwriting criteria continues to change, our buyers continue to find the increased down payment. They have figured out how to qualify for the loans. I think our Homebuyers Club has helped our first-time homebuyers immensely. Our mortgage company has a very successful, what we call HBC, Homebuyers Club. And we're helping people understand what it takes to have a good credit rating and a good FICO score. And those people are increasingly contributing more and more to our sales. So I think irrespective of what happens, I think that we're dealing with it as it changes from day-to-day.

Daniel Oppenheim - Crédit Suisse AG

Okay. Then secondly, wondering just as it relates to communities, given some of the different trends you're seeing across the regions, geographically, where are you looking to add communities over the course of the year? Or is it replacing?

Donald Tomnitz

Anywhere we can make a 20% gross margin, Dan. And Frankly, clearly, there are a number of places, Texas continues to be a strong market for us and the Carolinas, as well as at Las Vegas we're continuing to add communities and also in the state of Florida. So those are our primary areas that we're focusing on today.

Operator

Our next question is from Mr. Josh Levin with Citi.

Josh Levin - Citigroup Inc

Over the last few quarters, you've been a bit more balanced than your peers and more accurate than your peers in predicting the outlook for new home sales for the industry as a whole. How has your outlook for the industry changed compared to what it was, say 1 or 2 quarters ago, are you more optimistic, less optimistic, unchanged?

Donald Tomnitz

Well, as I said clearly, we're excited about the prospect that our profitability levels and closings will be higher in the second half of fiscal year '11 than the first half. In general though, as we look forward over the next 2 to 3 years, we don't expect a significant improvement in the demand because clearly one of the things that drives demand in our business the most is job growth, and we're not seeing the kind of job growth that I think will increase our sales dramatically. So we're preparing the company, as we have over the last 3 to 4 years in of this downturn. We think this is the fifth year of the downturn for us. We're continuing to have a muted outlook going forward. And we want to have an extraordinarily strong balance sheet and continue to keep a conservative approach to the business. We don't see much reason to take any big risk out there on the land and lot side or with the housing side today relative to what we see coming forward in the next 2 or 3 years, contrary to a number of our competitors.

Josh Levin - Citigroup Inc

So just to be clear, so when you think about sales and aggregates in the industry, you're not really expecting that much of an increase over the next 2 to 3 years?

Donald Tomnitz

I think the homebuilding industry over the next 2 to 3 years will be very similar to what it has been for this year with the potential for slight improvements, but not significant improvements.

Operator

Our next question is from Stephen East with Ticonda (sic) [Ticonderoga] Securities.

Stephen East - Ticonderoga Securities LLC

DT, first, if I could ask you about the specs. When we were visiting with you all, there was a belief that you were going to take your specs down. They increased this quarter and I know that's seasonal but they increased quite a bit more than I would have expected. As you all look at your spec strategy right now, where do you think you're going to be going?

Donald Tomnitz

Well, clearly, we're spec-ed up, as I would say, for the selling season. I think we've had a reasonably good selling season. Clearly, a 47% increase sequentially in our sales was an extraordinarily, was a good accomplishment. Although as we look back, and we're talking before the conference call, it pretty much was in the range of our second quarter increase in sales over our first quarter sales over the last 4, 5 or 6 years, so we didn't get a huge pop but we got what was a traditional pop for us in the second quarter. Clearly, as we move into Q3 and Q4, we bring our inventory down and then we build our inventory back up for the selling season typically in January and February. So I would say our specs will be coming down over the course of the next 2 quarters and our inventory will also.

Stacey Dwyer

That's right. It's really moved in line with our total inventory. And while our total specs moves up, as a percentage of our inventory, they've actually decreased this quarter down to 52% from the mid-50s, right around 55% last quarter.

Bill Wheat

And in terms of completed specs, we’re at lowest level of completed specs we've been in 18 months.

Stephen East - Ticonderoga Securities LLC

Okay, that's really helpful. And then if we turn to looking at both your gross margin and your SG&A, the expectations moving forward you said you don't know where pricing will be, what your competitors will do. If we ignore that and really just look at what you all are trying to do internally et cetera, where do you think your gross margins move over the next 3, 4 quarters? And then your SG&A, that was the highest that I think that we've seen it in the downturn, and what's going on there? And where you think, what are you doing to change that? And where do you think that winds up?

Donald Tomnitz

As I said earlier, we're hopeful that our gross margins hold over the course of the next 2, 3 quarters. And we believe they will. I don't think they'll drop dramatically so I think that we're looking at pretty stable gross margins going forward. Our SG&A clearly was a disappointment to us this quarter, but in our own defense, we at the corporate office want to continue to support our divisions and our regions who had a higher closing number budgeted than what we internally thought they could achieve. But we wanted to support them and we didn't want to tell that they couldn't achieve what they thought they could achieve. As it became clear that their expectations were greater than what the market was going to give them, we clearly began cutting our SG&A. And I can tell you as of 2 weeks ago, we had our 4 regional presidents in and they have specific SG&A caps that they have to hit and they're going to be at by 4/30. And we're comfortable that our SG&A in the second half of the year will be dramatically lower than what it was in the first half of the year.

Operator

Our next question is from the line of Joshua with Goldman Sachs.

Joshua Pollard - Goldman Sachs Group Inc.

On your guidance, it calls for better profitability in the second half. You guys lost about $50 million on a pretax basis for the first half and I'm wondering whether or not you're expecting your second half profit to outpace your first half losses.

Donald Tomnitz

We are anticipating, trying to achieve that. I think it's going to be nip and tuck. But our goal for the year, for the full fiscal year is to be profitable.

Joshua Pollard - Goldman Sachs Group Inc.

My second question is back on this first-time versus move-up debate, some are saying that it's just an easier comp for move-up and hence harder for first-time but it seems like the change in your strategy suggests that there's something more structural going on. Could you talk about which of those 2, whether it's comps or better fundamentals that's driving your move to the move-up? And whether or not you're seeing something out there that folks just aren't talking about right now.

Donald Tomnitz

I'll tell you what we clearly see, and as I've mentioned before for the last 2 or 3 years, Don Horton and I have been on the road all the time, and when D.R. was on the road probably 6 months ago going through some of our divisions, he said, "Gee, why are we letting this builder take this segment of the market, and we're not competing against them?" And from a cost perspective, we believe that we can deliver a house in the move-up segment much more cost effectively and offer more competitive sales price than the competition. And as I said earlier, a number of those competitors were small- and medium-sized builders, a lot of them nonpublic builders and so as a result by being in the field, we identified a segment of the market that we believe that we can exploit much more competitively than our competition. So as a result we're moving in that direction in as many divisions as where that market is characterized by what we saw in Texas.

Joshua Pollard - Goldman Sachs Group Inc.

So when you said, you just think that there's easier competition and maybe less expensive lots there that you want to take advantage more so than it being a better group of buyers today?

Donald Tomnitz

Well, first of all, there's no easy competition out there today. And the lots are not any less expensive and there's not any less competition for the lots. It's just a function of the fact that there are buyers in that segment of the market who have, all of a sudden, said, "Gee, I may not be able to sell my house for x, I've had it on the market for a while but I can sell it for 90% of x. I've been in my house for 20 years and I'm not negative. I'm not under water on my mortgage and I'd like to have a new home and I can afford that new home." And so as a result, there are buyers out there who can sell their home and move up. So as a result, I think that's the part of the market that we're focusing on: dominating entry-level portion of our business but we want to add the move-up market to increase our market share across the country.

Joshua Pollard - Goldman Sachs Group Inc.

And Don, if I could just sneak one last one in, the weather in the South has been very newsworthy. You guys have some exposure there, a bit more than most of your peers. I wanted to know if you guys have quantified the effect so far. If you guys have communities that are affected or ultimately, what you think the net result is going to be for your financials?

Donald Tomnitz

Okay. Well, clearly, the tragedies in Texas, which has had millions of acres burned and a number of dwelling units be lost and then what's happened in Alabama and Mississippi and places like that, our prayers are with those people. As far as being adversely affected in terms of our subdivisions, we have not. And clearly as homes have been destroyed, the positive for our business is, is that there are opportunities for us to rebuild homes for those people who have lost their homes and some of those communities' people would move out of and move into communities that weren't destroyed where our subdivisions are located. So generally speaking, I see no negatives associated with our financials and I do see some opportunities for us to help people get into homes who have lost their homes.

Operator

Our next question is from the line of David Goldberg with UBS.

David Goldberg - UBS Investment Bank

Question, DT. In your opening comments you talked about adjusting product and price to hit market and I just want to make sure I understand, are you talking about -- is this what, when you talk about maybe doing more move-up and focusing, is that what you're talking about or are you also talking about maybe de-contenting product and redesigning product? And if it is the latter what kind of opportunities do you think are out there in terms of redesign and de-contenting at this point in the cycle?

Donald Tomnitz

Yes, both parts of it. And one of the things I really want to impress upon people is we continue to drive the cost of our homes down, and that's one of the advantages that we have in the market because obviously we're able to offer a more competitively priced unit. So is there as much on the table with our vendors and our suppliers as what there was 4 years ago, 3 years ago? No, there is not. We just had a board meeting and that similar question was asked, but there are still those opportunities. And as we continue to be the largest builder in the U.S. for the ninth consecutive year and we have higher inventory levels out there and typically have more specs per community than other builders, it provides us a great opportunity to work with our vendors and our suppliers, who obviously are looking for volume themselves and our starts provide them that opportunity of higher volume. And they're looking for business just as we're looking for business and what we're finding is we're getting very competitively priced both products and materials and labor.

David Goldberg - UBS Investment Bank

And just to summarize, there's room for more if we had to take more price cuts, there's some offset potentially.

Donald Tomnitz

It's a day-to-day battle as I told our Board and yes, it is. There are opportunities out there but the opportunities are out there for those who ask. And as D.R. has quoted many times in this company, "You'll never know till you ask", and we continue to ask because we don't know if we can get our prices lower but it's our goal to get them lower.

David Goldberg - UBS Investment Bank

Got it. And then, just a quick follow up here. I want to go back to the question on the land light model and options and I just want to get an idea know of how liquid you think or how much land is in the market right now that you can buy like that? And how concerned you get about at some point in the future, with nobody really developing land at this point, being able to remain land light as we move through the next 2 or 3 or 4 years, whatever it's going to be, if the market really doesn't improve, get some home price appreciation?

Donald Tomnitz

Well, I think it's going to be difficult in terms of land value simply because right now most of the raw land doesn't have much value relative to the development cost and then that related to the finished lot cost. So I think that clearly today, we are in a preferred buyer of developers and banks simply because we continue to be the largest builder and we're starting more inventory and selling more homes and closing more homes than anyone else in the industry. I think there's no question that going forward that it'll become more competitive as we chew through the finished lot supply in this country. And I will say this, we have a commitment in this company that today we want our capital that we invest in land back in 12 to 18 months. Do I see that increasing? I see that increasing slightly, but we have a firm commitment that we are not going to go long on land and to the extent that we need to go and tie up lots from a developer, we're going to be a lot better off to find an investor to hold anything that doesn't meet our underwriting criteria at the time, simply because we'd prefer not to have it on our books and we would rather achieve a lower gross margin on Phase 2 of a 400-lot project, if we feel only comfortable with the first 200 lots.

Operator

Our next question is from the line of Mr. Bob Wetenhall with RBC.

Robert Wetenhall - RBC Capital Markets, LLC

Just curious how much pain in terms of margins you're willing to sacrifice if you turn out in the second half you're not seeing the volume that you anticipated?

Donald Tomnitz

Day-to-day, subdivision-by-subdivision analysis, contract-by-contract that the salespeople bring into their sales manager, clearly there's a point at which we don't want to go below in every community. But it's a community-by-community basis. I believe that if you look at our impairments and where we've got our land on our books today going forward, that added with over 50% of our closings are coming from new deals that we've added since 2009. We'll reiterate that I feel like that our margins, where they are today, are sustainable over the next couple quarters.

Robert Wetenhall - RBC Capital Markets, LLC

Switching over to gross margins, it sounds like you're a little disappointed by performance this quarter. Is it realistic, just for modeling purposes, in thinking about the full year that you guys can bring SG&A under $475 million?

Donald Tomnitz

Well, let's back up. We're very proud of the quarter that we just turned in, in terms of our sales, our closings on a sequential basis in particular. And most importantly, we're sitting on 5,261 units in backlog and our backlog is larger than it was at the beginning of the year, which I think if you apply our traditional percentage of our backlog closed in an ensuing quarter, you'll find that we're in a wonderful position, I think, for Q3 and Q4 to have the prospects of having more closings and higher profitability. Our SG&A is clearly a disappointment, but it was our own fault because we wanted to continue to support our divisions based upon their budgets based upon what they thought they could do in the first half of the year. When we clearly saw that they were not going to be able to achieve that, this company's been built on the lowest SG&A in the industry and we’ve cut our SG&A and we believe that we will be substantially lower in the second half than the first half. You did say that can we come in under...

Stacey Dwyer

$471 million. Yes.

Robert Wetenhall - RBC Capital Markets, LLC

$475 million. Yes.

Donald Tomnitz

Our goals for SG&A for the year are clearly to be below $475 million.

Robert Wetenhall - RBC Capital Markets, LLC

Great. And just one quick question. Can you comment on traffic since the end of the quarter?

Donald Tomnitz

The only thing we count, and I know people sometimes scoop us for this but traffic is not as important as what percentage of people walking through the door that we close. So the real issue is we really count sales and closings. And our sales and closings for the second quarter were up dramatically. And we think that our sales and closings will be good through the Q3 and Q4.

Operator

Our next question is from the line of Jade Rahmani with KBW Asset Management.

Jade Rahmani - Keefe, Bruyette, & Woods, Inc.

I wanted to ask on cash flow, where you think -- well, operating cash flow on the quarter, if there were any one-time decreases in payables and accrued expenses that occurred? And then also post the debt retirement moves you've made, where do you think leverage is right now?

Bill Wheat

Yes. The cash flow, there really weren't any one-time cash flow events that occurred this quarter. The use of cash this quarter is entirely attributable to the increase in our homes and inventory during the quarter so it's working capital that we would expect to return as cash inflows in the second half of the year.

Donald Tomnitz

And clearly, inventory will be coming back in the second half of the year so obviously, that ought to be a positive to our cash flows.

Bill Wheat

Right.

Jade Rahmani - Keefe, Bruyette, & Woods, Inc.

Okay. And any idea post the debt retirement moves that you made subsequent to quarter end, where leverage should be?

Bill Wheat

Well, our gross leverage continues to come down. We're down to around to 42%, I believe, on a gross leverage basis now with the April debt reductions. We have another $106 million that matures in August. We would expect our gross leverage to get down around 40% or maybe slightly lower by the end of the year. We will continue to look in the open market as we have been to see if there are further opportunities to repurchase selective portions of our outstanding debt, that could bring that a bit lower but that's our expectations right now.

Operator

Our next question is from the line of Jay McCanless with Guggenheim.

James McCanless - Guggenheim Securities, LLC

With increasing your presence in move-up, does it make economic sense or will it, at some point in the future, to roll up some of these smaller builders that you're talking about or doing a larger acquisition strategy?

Donald Tomnitz

Clearly, right now we're happy with managing our own business, and we don't have any interest in M&A activity at this point in time.

Stacey Dwyer

We have bought several divisions, though, from smaller builders or smaller developers rather than buying a builder in its entirety.

Donald Tomnitz

Yes, there have been a number of builders, who've just basically said, "I'm going to get out of the home building business, do you want to buy my subdivision or my lot position?" And most of the time we've been able to buy those from them on an option basis as opposed to cashing out the builder because certainly, we don't need any additional employees from that builder nor any additional land on our books. So the preferred way is just to slowly but surely working out of his position or her position.

James McCanless - Guggenheim Securities, LLC

Okay. And then, same line of questioning. Is there opportunities, are there more opportunities in the distressed market, maybe, to buy some move-up subdivisions than there are entry-level at this point?

Donald Tomnitz

Yes, I don't think there's a big difference. I mean, clearly, most of the subdivisions out there we think are in the entry-level portion of the business and it's all tied specifically, and frankly, to the banks determining what asset they're going to sell when. And some of them are moving move-up subdivisions, some of them are moving entry level subdivisions. But then it gets back to truly, what is it in that particular locale because what's move-up in Seattle is not move-up in San Antonio, Texas.

Operator

Our next question is from Alex Barron with Housing Research Center.

Alex Barron - Agency Trading Group

I think you guys have done a really good job of anticipating I guess the length of the downturn and therefore, aggressively paying down your debt. Just kind of wanted to get your outlook for what you guys will continue to do on that front over the next year or 2?

Bill Wheat

We've done quite a bit here in April. We have another maturity in August. We have now taken out our 2012 maturity so we don't have anything really due or won't until May of 2013. I would expect we would still incrementally repurchase some additional debt as we find opportunities in the market. Our pace for those opportunities has slowed this year. We've had a little over $60 million each quarter and so I wouldn't expect it to be a lot different than that. Hopefully, we'll still see opportunities to continue at that pace for a few more quarters. It's really a balance and we're balancing our liquidity with our overall balance sheet and with making sure that we still have some capital available to the extent we see opportunities in our business. And so we have a sufficient working capital to keep the homes in inventory that we need to keep when we see the demand and so that's really the considerations that we're considering.

Stacey Dwyer

And as Bill mentioned, we expect to be closer to 40% in terms of gross leverage by the end of the year and that's a really comfortable level for us in terms of gross leverage.

Alex Barron - Agency Trading Group

Okay. My second question, I guess you guys have already touched on a number of questions related to SG&A but I'm still trying to understand, I guess, a little bit of sort of what drove the sequential increase. Was it more like what I would call the fixed portion of the SG&A went up? Or was it more of variable stuff like commissions and that kind of thing? And I guess I'm struggling a little bit to get to your $475 million number so I'm just trying to get some comfort there.

Bill Wheat

The 2 items that we mentioned in our prepared remarks for the sequential increase of $4.3 million were advertising costs related to the spring selling season. Our sequential increase in advertising costs from first quarter to second quarter was a little over $2 million. We would not expect to continue spending that level of advertising going forward post the spring selling season. And the second factor is a little more than $2 million from payroll taxes. And this is a seasonal factor that occurs every year for us. When the calendar year rolls over, any employees whose earnings are higher than the FICO limitations began paying social security tax again. And the company's portion of that begins being paid in the first part of the year. So we always see a sequential increase in our payroll taxes from our December quarter to our March quarter. And those 2 items fully account for the sequential increase in our SG&A. With those seasonal factors, with the actions that we're taking right now throughout our company, we expect that we can reduce our pace of SG&A in the second half of the year and come in below the pace we've showed the first 2 quarters.

Donald Tomnitz

And just to be clear, we're talking about with the previous caller, we are absolutely confident that our SG&A for the second half of the year is going to come in at under $450 million.

Bill Wheat

That's $475 million. Our goals are to be below $475 million.

Operator

Our next question comes from the line of Kenneth Zener with KeyBanc Capital Markets.

Kenneth Zener - KeyBanc Capital Markets Inc.

With a 40%, if you hit 40% gross leverage by year end, and let's say you get your DTA back, which is perhaps possible given that you might have 2 sequential positive years and if the outlook is positive, what would you guys do with the capital and what does that kind of say about the growth prospects if you get all this equity back? It's obviously not cash but that would just significantly reduce your gross leverage from that 40% number?

Bill Wheat

Well, to the extent when the DTA comes on, I'm not necessarily endorsing your assumption it will come on at year end but to the extent that it does, again, it's non-cash. There's more flexibility on the balance sheet and certainly it puts us in a very strong position when we see opportunities in the market and when we see we feel more comfortable with investing in our business to take advantage of the eventual upturn. It gives us a lot of flexibility. We would have room to increase leverage and have capital to invest in our business at that point.

Kenneth Zener - KeyBanc Capital Markets Inc.

Yes. It will be interesting. I guess another question, it's kind of related to, Don, your comment about a very slow recovery, which I think is an accurate outlook. With a slow recovery, can you comment on the dynamic that you, as well as the public builders, kind of face in terms of profitability to the extent you keep capitalizing interest to inventory? Obviously, you're targeting, not expensing it. But to the extent that the recovery is delayed each year, everybody, including yourself, is picking up maybe 150 bps or a little more of headwind on your inventory dollars that you're carrying. And what does that kind of say about the recovery prospects? I know you're trying to blend in new land, but is there kind of a hurdle that's always being raised to the extent you continue to capitalize interest on the active inventory?

Donald Tomnitz

I think Mike would like to put a little color on that. So...

Mike Murray

On the active inventory, Ken, we're only capitalizing the interest associated with our eligible or active inventory in a given quarter. We're directly expensing the balance of it. And if you look at our capitalized interest roll forward, we're actually expensing, through cost of sales, with our closings in a given quarter a very similar amount, a little bit greater actually than what we're capitalizing in any given quarter. For our inventory that's not currently active, we're not capitalizing any interest. It's not adding to a future drag or a future gross margin reduction that we're going to have to have.

Bill Wheat

And with our reduction in our debt and our reduction in our leverage, our expectations over the next couple of years is that the impact of the interest on our margin will decline. We will actually see some wind at our backs in terms of improvement in margin from interest over the next couple of years because of the debt reductions we've made.

Operator

Our next question is from Michael Smith with JMP Securities.

Michael Smith - Oppenheimer

Just a quick question on some regional land issues. I'm wondering what it looks like regionally in specific metros as far as your ability to find lots to pencil out? We've been hearing a lot about the shortage of land supply and the shortage of lots that are out there, especially in good locations. I'm wondering if you can just give us some regional color on that and if that's in any way slowing your progress in any particular metros?

Donald Tomnitz

We're not really finding a shortage of finished lots in any of our markets currently. In fact, we have more opportunities in those markets than we're actually contracting for and it affords us the opportunity to push for a good lot price in order to enhance our gross margins to meet our underwriting guidelines. The other thing, as I've noticed this year, is that there are more and more banks are actually dealing with their foreclosed assets and a couple of the banks we have been working with for several years, who we haven't gotten very many deals from, are all of a sudden now we're contracting with those banks. So I'm optimistic that there are still plenty of assets out there. Finished lots that banks are holding that are working their way through the system such that we can continue to supplement our lot position. And don't forget, we're still, by virtue of our size and by virtue of what a big percentage we are of each one of our markets, we are definitely the preferred buyer in each one of these markets.

Michael Smith - Oppenheimer

Yes. I was going to a follow-up with that. Do you think that maybe some of the difference between your comments and some other builders and some of the private guys we've talked to or land brokers is that you're in a better position that get whatever lots are out there either on pricing or even just your access to them?

Donald Tomnitz

Absolutely. And as we keep reiterating to everyone is, is that by virtue of keeping more specs than the typical builder does in a subdivision, largely because of the fact that we don't spend as much advertising dollars as many other builders because we rely upon our relationship with realtors to sell those homes more so than a lot of our competition, yes, without a doubt, we continue to add lots.

Stacey Dwyer

And one of the thing’s, I think historically, we've been more willing to do than some other builders that would get very small lot positions. Whether it's 20 lots or 30 lots, we don't rule them out simply because it's a smaller position.

Michael Smith - Oppenheimer

Okay. And then just one quick follow-up. To the extent that you guys are doing a little bit more move-up product and want to move in that direction, do you see that as slowing your conversion rate at all? Or is it something that you feel like you can get a move-up house built just about as quickly as you could something that's a little smaller and more first-time?

Donald Tomnitz

I can tell you, we're turning our inventory faster than we've ever turned it and if you take a look at our construction cycle times today, they are shorter than they've been for many, many years. So as a result, I don't think that we slow our conversion at all and we're not talking about building McMansions, we're talking about building second-time homes, which are slightly bigger with a few more amenities in them than our entry level homes. So it's pretty much the same product, little bit larger, a few more amenities. So it's not a new entry for us at all. We've done this before in the past. We've always had a portion of it as our business, as our core business. We're just increasing it as a portion of our core business.

Operator

Our next question is from Mike Widner with Stifel, Nicolaus.

Michael Widner - Stifel, Nicolaus & Co., Inc.

Most of mine have actually been answered already but just, maybe just following up on the gross margin issues. In some of your peers we've seen some one-timers in gross margins like warranty, reserve unwind, and other sort of one-time charges. Just wondering, I mean, there was a nice bit of a sequential improvement there, I was just wondering if you could talk about that. Is there anything in there that we might not see repeated or any kind of tailwinds or anything like that?

Mike Murray

Mike, we didn't have anything in the quarter that was kind of unusual or extraordinary and it was a very consistent comp quarter-to-quarter in some of those other items. The change for us quarter-to-quarter was really in core.

Bill Wheat

And just to parse it exactly as it will be in Q -- well, actually, we don't talk about sequential in the Q. We had a 60-basis-point improvement; 50 basis points was from core and 10 basis points was from improvements in our interest amortizing through cost of sales.

Michael Widner - Stifel, Nicolaus & Co., Inc.

Got you. So appreciate that. And then, I don't know, just any particular color on parts of the country that are looking better, where you think things may be turning faster and sooner versus other parts that seem to be lagging behind both in terms of buyer demand and then just broad economic conditions?

Donald Tomnitz

I think it's pretty much all pretty soft in most parts of the country. And to differentiate between soft, softer and softest, I'm not sure it makes a whole lot of sense. It's just very competitive in each one of our markets out there. Until we see some job growth in all of those, it's soft, softer and softest.

Michael Widner - Stifel, Nicolaus & Co., Inc.

I love your optimism, Don. It's...

Donald Tomnitz

Let's go back here. The one thing that we want everyone to know and someone has brought up today, we want to make sure that we are telling you exactly what we're seeing out there. Because the last thing we want to do -- we have optimism and we do have optimism for the second half of the year versus the first half of the year. But we don't have a lot of optimism in terms of the next 2 or 3 years being significantly better than what this year is going to be.

Bill Wheat

Yes, we've positioned ourselves to compete in this soft market and we are optimistic about our ability to compete as well or better than anyone else and perform as well as we possibly can in a tough market.

Michael Widner - Stifel, Nicolaus & Co., Inc.

Right. I certainly appreciate that and I guess we also have to just take the personalities into account. And if we think back a couple years, you were on the call telling us all 12 months were going to suck. And so at least you're not saying that. So soft is better than sucking.

Donald Tomnitz

Actually, you know what? I was a little conservative because more than 12 months has sucked.

Operator

Our next question is from the line of Michael Rehaut with JP Morgan.

Michael Rehaut - JP Morgan Chase & Co

Just a couple of follow-ups. You mentioned community count up 20% year-over-year for the quarter, so that obviously implies a much more dramatic decline in sales per community. And I was wondering if that's more because of just the tough comps a year ago, which everyone's aware of. Or in addition, was there anything from perhaps smaller sized communities that reflect perhaps your more conservative approach to trying to focus more on option and quicker turns?

Stacey Dwyer

I think it's definitely a combination. The year ago comp is going be the largest reason out of those. Incrementally in there as we have had some of our older communities that were larger roll off, we have been replacing them with smaller, newer communities. And then we did open communities during this quarter that are probably not producing sales force just yet that should kick in, in future quarters.

Michael Rehaut - JP Morgan Chase & Co

Okay, appreciate that. And just on the 50 bps of core improvement in the gross margin, with incentives flat, then I would assume -- is it more than construction costs being lower or just the higher margin contribution from newer communities? Or is that more or less the same thing?

Bill Wheat

Yes, it's all of the above. It's our continued work on our vertical construction costs. It's our continued to work on our lot costs as well and the increasing role of new communities. As we bring on more new communities that we've contracted for in the current market, those come in at higher margins from the outset. And so as we continue to work newer communities in that gives us the opportunity to improve margins or if a particular market is declining, at least maintain margins. And so all of those things contribute to the continuing improvement and we would hope to be able to continue to do that. What we don't know is what the market will bring to us.

Michael Rehaut - JP Morgan Chase & Co

Right. And then just one last one, I think bigger picture, Don, kind of talking about your broader view over the next year or 2 or 3. Going back 5 years, I don't think many foresaw the type of decline and the degree of magnitude and breadth or period of time. At this point, I think there's still a lot of people in the market that conversely, it's just out of mind to think we could get back to a 30-year average of 1.5 million starts. I'm wondering if given that you said that you really haven't seen a pickup in employment growth, which is really one of the key central drivers to demand. We've had a couple of months right now of 200,000 jobs per month and I'm wondering if that continues as economists kind of -- and economists’ assumptions are very subject or change day-to-day, hour-to-hour. But if we see a 150,000, 200,000 per month rate continue and you're talking about a couple million jobs a year, I'm wondering if that changes your outlook at all.

Donald Tomnitz

Clearly, it will improve our business. And I see those numbers that are being released. I guess I'm somewhat suspect of those numbers. And it seems like so many of the government numbers are revised from month-to-month and quarter-to-quarter. So today, I don't feel warm and fuzzy about the minimal job growth that we've seen. I think we need significantly more job growth. If we're still sitting with the over 8% unemployment rate, your neighbor still doesn't have a job, I also doesn't think that, that incorporates the number of people who have dropped out of the workforce or are looking for a job. So I've read the numbers, where basically our effective unemployment rate is closer to 17% or 18%. So those numbers don't bode well for homebuilding. And those people who are outside the 8%, who are in the 17% or 18%, those people have got to get back in the job market also. So right now, I see minimal effect on our business. If it continues at this pace, it'll help us. But I still ask myself what the real unemployment rate is, how many people are not counted in the 8%.

Operator

Thank you. Our next question comes from the line of Joel Locker with FBN Securities.

Joel Locker - FBN Securities, Inc.

Just one quick question on what were your customer deposits at the end of the quarter?

Stacey Dwyer

We have it, give us one moment. We're at an average of about $2,400 per house...

Joel Locker - FBN Securities, Inc.

So at 1.2% or so, I mean do you guys think about maybe increasing that just to fend off the cancellation rate or keep that lower?

Donald Tomnitz

Frankly, that deposit has very little to do with our cancellation rate. Most of the time if someone's going to cancel, we typically don't keep their earnest money deposit because it creates a lot of ill will. It's more of a sense of, "Yes, I'm interested in buying this home. Let's go forward and see if we can qualify and close." But it's not a good track record to be confiscating people's earnest money out there.

Stacey Dwyer

It's also at somewhat a typical percentage, either dollar amount or percentage by market. And if we were to go outside the norm and require much more money upfront, that could actually put us at a disadvantage in terms of selling.

Operator

Our next question comes from the line of Adam Rudiger with Wells Fargo.

Adam Rudiger - Wells Fargo Securities, LLC

Most of my questions have been answered, but I just had one question. Don, when you were talking earlier, you said that in order to have positive year-over-year orders in the third quarter, you have to have I think roughly sequentially flat orders. And the way you said that suggested to me that you were not expecting to have roughly flat orders. And if you look at your history, there's plenty of examples when you can have higher third quarter orders than the second quarter. So I'm just wondering more specifically what your expectation was for the third quarter relative to the second quarter?

Bill Wheat

You're right, Adam. We have had years in which the June quarter exceeded the March quarter and we've had years in which the March quarter has exceeded the June quarter so it is certainly possible to be flat or better in our June quarter. We are certainly hopeful that, that will occur, but given really the inconsistency that we see from the week to week and market-to-market today, it's difficult to say for sure if our June quarter will exceed our March quarter. But we're certainly hopeful it will.

Donald Tomnitz

And frankly, I would say to you to put a little additional color on it, I think we started the selling season very strong. And I think the selling season is not as strong as what it was at the beginning so that's why we're tempering our expectation of third quarter.

Operator

Thank you. There are no further questions at this time. I would now like to turn the floor back over to management for closing comments.

Donald Tomnitz

We thank you for joining us on our call this second quarter. Clearly, we're very excited about our 47% sequential increase in sales and our 5,200-plus homes in backlog because I think that positions us well for Q3 and Q4. Clearly, our SG&A is an issue to us. We've taken the action that's necessary to bring our SG&A in line. As Bill mentioned, our expectation for the second half of the year is to have our SG&A come in for at less than $475 million, which I think will put our SG&A back in line in Q3 and Q4 to more normalized levels. I want to tell all of our salespeople and all other people in the company, we think you've done a good first half of the year. We have tough competition for the second half of the year. We had great sales. We had great sales force sequentially, in the second quarter over the first quarter. Ninth consecutive year in the row that you're the largest builder in America. We're all very proud of that. As I tell all of our salespeople, “Execute the competition and outperform your competitors.” Thank you and good luck.

Operator

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.

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