Jason Lenderman - V P, IR & Treasury Sheryl Palmer - Chairman & CEO Dave Cone - EVP & CFO

Alan Ratner - Zelman & Associates Jack Micenko - SIG Nishu Sood - Deutsche Bank Matthew Bouley - Barclays Carl Reichardt - BTIG Jay McCanless - Wedbush Alex Rygiel - B. Riley Alex Barron - Housing Research

Thank you and welcome, everyone, to Taylor Morrison's second quarter 2018 earnings conference call. With me today are Sheryl Palmer, Chairman and Chief Executive Officer; and Dave Cone, Executive Vice President and Chief Financial Officer.

Sheryl will begin the call with an overview of our business performance and our strategic priorities. Dave will take you through a financial review of our results along with our guidance.

Then Sheryl will conclude with the outlook for the business, after which we will be happy to take your questions. Before I turn the call over to Sheryl, let me remind you that today's call, including the question-and-answer session, includes forward-looking statements that are subject to the Safe Harbor statement for forward-looking information that you will find in today's news release.

These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, those factors identified in the release and in our filings with the Securities and Exchange Commission.

And we do not undertake any obligation to update our forward-looking statements. Now let me turn the call over to Sheryl Palmer.

Thank you, Jason. We appreciate you joining us this morning as we have a number of exciting updates to share.

First up our results for the second quarter of 2018. Our teams across the country have once again delivered by meeting or exceeding all points of our guidance.

We closed 1992 homes during the quarter, which is roughly a 7% increase over the prior year. As I mentioned in our last earnings call, our first-quarter closings were modestly lower than we anticipated due to the lingering impact from the 2017 hurricane season.

We were able to deliver all of those foundation impacted closings in the second quarter and allowed us to meet our expectations for the first half of the year. Kudos to the team for taking a temporary setback and turning it into something positive.

Sales for the quarter were 2342 with an average community count of 297 and a sales pace of 2.6. Our pace for the first half of 2018 is 2.7, flat to our pace from the front half of 2017 and in line with our expectation, which allows us to reaffirm our annual guidance of 2.4 to 2.5 for the year.

Our performance in the second quarter drove an EBT margin of 8.1%, which was a sequential improvement of 20 basis points higher than in our first quarter. That led to $0.52 of diluted EPS, which was an increase of $0.06 over the second quarter of last year.

Our teams across the country continue to embrace ways of working smarter, not simply harder, to enrich both the lives of our team members and our customers all on our quest to achieve operational excellence, one of our three strategic priorities for the year. I am happy to report that one of our larger operational initiatives is now complete and that is our implementation of sales force.

We all know introducing significant system changes can be extremely difficult on the business and taxing on the teams. Fortunately and because of our deliberate approach to the rollout we were up and running in six months across our markets, and feel the new system has already paid operational dividends for us.

It will undoubtedly continue to enhance our customer experience, which is another one of our three strategic priorities. Our third priority for 2018 is smart strategic growth, and as you heard from our call in June announcing our intent to acquire AV Homes.

We believe this transaction is well aligned to this priority. It will create the growth and scale we desire and it fully complements Taylor Morrison’s landholdings, current footprint, consumer segment and product offerings.

Since the AV announcement, our legal, finance and operations teams have been busy working through the standard protocol and required steps to bring this deal to the finish line. In anticipation, we intend to reposition a number of our communities to better synergize products.

As a result of the repositioning there will be a short-term reduction in average community count for the third and fourth quarter. That combined with the early closeouts of some communities due to better than expected sales has led us to adjust our community guidance, which Dave will cover shortly.

To start this acquisition on the right foot following the announcement we immediately turned our attention and focus to the people. AV’s CEO, Roger Cregg, and I recorded a video together addressing each of the AV divisions, introducing Taylor Morrison, discussing our excitement for the transaction, and sharing what they could expect moving forward.

Next Taylor Morrison’s senior management began the important work to evaluate the AV and Taylor Morrison team members in each of our overlapping business units with the intent to design the structure for the combined go forward businesses. In the first 20 business days, we conducted more than 400 interviews across the country with 70 plus members of the AV operating teams and corporate office team members.

I'm pleased to share that the immediate attention and effort was well worth it as we have now conceptualized what a combined personnel structure will look like when the transaction is closed and have communicated those plans. Finally, and most recently, Roger and I, along with members of the Taylor Morrison management team completed a series of division town hall meetings with AV employees in Phoenix, Dallas, Charlotte, Raleigh, Orlando and Jacksonville.

I discussed the vision and the potential of the new combined company, embraced the opportunity to meet all the team members face-to-face, and more importantly took the time to answer all their questions. Based on the positive feedback we have received we believe these were great first steps in cementing the trust necessary to build a world-class people first organization.

The real challenge in M&A is in the integration and we believe that engaging in this process prior to closing will be beneficial and should help build a strong, trusting foundation with the people first. We understand and appreciate that scale matters and our goal of growing meaningfully in ways that complement our product, consumer segment and company culture is big for us and the AV acquisition is exciting step in that direction.

In June, we indicated the transaction would close in late September or early October and we still expect that to be the case. There are few more updates and developments we want to provide to you related to the acquisition and Dave will cover those in his prepared remarks.

Turning to a global outlook for a moment, the usual economic indicators continue to show that we have a steady wind at our backs. The unemployment rate remains at historically low levels and the number of non-farm payroll jobs being added to the economy is showing patterns of consistency with an average around 200,000 per month over the last 12 months.

Consumer confidence is in a healthy place and expectations remain high by historical standards. Some of that is being driven by positive movement in wage growth, albeit small movements thus far.

Also the price of oil has been on an upward trajectory from its low in the $40 range per barrel 12 months ago to where it is now, which is in the high $60 range. From an industry perspective, we are starting to see some loosening in the months of supply for existing homes, which have been in the three-month range for several months until recently, when it increased to the low four-month range.

This isn't a significant move, but one we will continue to monitor and gauge the impact on our pricing strategies. The months of supply for new homes remain in the low-to-mid five month range, which is a bit tighter than it was a year earlier, likely a by-product of the loosening on the existing home supply side.

Housing starts continued to climb and show momentum that is supported by its double-digit year-over-year growth percentages. Household balance sheets are still strengthening and that is largely being driven by homeowners’ equity and real estate growing by approximately 10% from the prior year.

When evaluating the macro data and the industry-specific data we think it all supports our thesis that homebuilding still has meaningful runway and likely returning to the more seasonal and normal traffic sales patterns that were historically well-known in this space. One topic that has been making headlines as of late is affordability and the fact that home prices are rising at a faster rate than wage growth.

The affordability index has recently decreased driven by both small increases in interest rates and simple supply and demand economics, which I just alluded to. While interest rates continue to be very low relative to historic standards they have impacted affordability on a relative basis.

What has interested us about this dynamic is not only how affordability has constricted but how the consumer is behaving in this environment when our internal data points to an average customer having ample room for normal course price appreciation. As we have mentioned in prior calls, our average customer has a few 100 basis points of room in interest rate movement before they are priced [out] for qualification.

Diving a bit deeper we have recently asked our customers a few questions to help us understand the why behind the behavior of spending less on a home than they are qualified to spend. The results are thought-provoking and provide a backdrop for action by catering programs that better serve our customers.

Approximately a third of the surveyed customers were identified as spending materially less than their pre-qualified amount. As you might expect there were numerous reasons as to why they did this, but there were a few in particular that piqued our interest.

For instance, the most cited reason regardless of age group for spending less was to save money for more life experiences such as taking trips and vacationing. We found this to be fascinating because it further solidifies our belief that people are rearranging their priorities to seek out better experiences.

They want to see, live, touch things that leave an indelible memory and imprint on them as a person. I'm convinced we can use this motivation, this innate desire and connect it to both community design and our customer experience efforts.

Buying a home should be a wonderful experience and it should leave an imprint. As an industry we need to find better ways to engage customers and help them see the many benefits of homeownership, including the experience of making that decision and achieving that goal.

The second most cited reason, again across all age groups was to save for their financial future and retirement. We interpret both, saving for life experiences and saving for retirement, to be possible shifts in the cultural norms and remnants left following the recession.

While we don't know if these shifts are temporary or more permanent we are confident there are ways for us to cater programs and outreach efforts to connect with those customers and their current priority in a meaningful way. Looking at this data at a segmented level, there were other revealing learnings among age groups.

One is the desire to save money due to existing debt. Not surprisingly this reason was given at a much higher rate among millennials, followed by Gen Xers and then by baby boomers.

Another interesting result from the study is the least cited reason, which was respondents being worried about job security or put differently those surveyed aren’t worried about their employment status. This is obviously consistent with the overall employment environment and some of the macro data points already mentioned.

These all appear to be intuitive trends and give us confidence in the data and how we are analyzing it. Armed with that confidence and in a refinement of our techniques, we will continue to dig into this information, while growing our database to put our company in the best position to enhance our customer experience.

Regularly gathering feedback from our shoppers and homebuyers, on what is top of mind for them continues to be foundational on how we operate, and ensures that as a company we never grow complacent in that our desire to do better - to be better never wavers. And we are committed to using this form to share these prominent trends from their feedback with all of you.

Overall I am encouraged by the health of our industry and the economy. The data suggests the recovery still has legs and will continue to march forward in the near to medium term.

It is certainly an exciting time to be in homebuilding and an even more exciting time to be part of the Taylor Morrison family. We have a number of items in front of us that can drive both short-term and long-term benefits to our company and we are at the right spot in this cycle to maximize those benefits.

With that, I will turn the call over to Dave for the financial review.

Thanks, Sheryl, and hello, everyone. For the second quarter, net income was $59 million and diluted earnings per share was $0.52.

Total revenues were $981 million for the quarter, including homebuilding revenues of $957 million. Home closings gross margin inclusive of capitalized interest was 18%, and in line with our expectations.

We experienced geographic and product mix shifts during the quarter driving a sequentially lower margin rate relative to the first quarter of this year. We anticipate home closings gross margin to sequentially increase in our third quarter and second half of the year as the geographic and product mix reverts to be more in line with what we experienced in the first quarter.

In addition, we did experience some anticipated cost pressures on the material side, however, we have seen pricing power in many of our communities for the last several quarters helping to offset those costs pressures. On a gross margin basis for the quarter, we came in at 18.2%.

Moving to financial services, we generated more than $16 million in revenue for the quarter, and our mortgage company capture rate came in at 70%. Interestingly enough, we have recently seen in our most competitive markets that larger banks and small non-banks have adopted very aggressive pricing strategies due to the significant decline in the home re-finance market.

We place real value in our TMHF business with controlling our backlog, and greater visibility in managing our pipeline above closing the transaction when our customers are able to obtain a more competitive rate. SG&A as a percentage of home closings revenue came in at 10.5%, which was a decrease of about 20 basis points from the prior year’s quarter, and about a 140 basis points decrease from the first quarter of this year.

Our earnings before income taxes were $79 million or 8.1% of revenue. Income taxes totaled about $20 million for the quarter, representing an effective rate of 25.2%.

Our effective rate is lower than the second quarter of last year due to tax reform. For the quarter, we spent roughly $275 million in land purchases and development.

At the end of the quarter, we had approximately 40,000 lots owned and controlled. Our percent controlled has been increasing over the past several years as we seek out more favorable deal structures.

The percentage of lots owned was about 66%, with the remainder under control. Compared to the first quarter, this ratio has moved by 330 basis points in favor of controlled lots.

That is primarily due to some new positions we have taken in Florida, one of our strongest performing markets. On average, our land bank had approximately 5 years of supply at quarter-end based on a trailing 12-month of closings.

This is also primarily being driven by those Florida positions. From a land pipeline perspective, we are almost exclusively now focused on securing land for 2020 and beyond.

At the end of the quarter, we had 4,742 units in our backlog with a sales value of more than 2.4 billion. Compared to the same time last year, this represents an increase of 7% units and an increase of 13% in sales value for those units.

In addition, we had 1623 total specs which includes 192 finished specs. On a per community basis we had about 5.5 total specs on less than one finished spec per community.

I mentioned this in our last earnings call and I think it's worth mentioning again we've made great progress in selling our inventory homes while they were still under-construction and that is driven our finished spec per community lower. Our inventory management efforts continue to be an encouraging indicator for us and how we handle our specs is a significant driver.

This continued focus has led to asset turns increasing 6% with inventory turns also up nearly 7% for the quarter as we've now driven year-over-year accretion in both these metrics for at least 7 consecutive quarters. Our recent performance fuels our belief that we should drive accretive return on equity year-over-year even before considering the impacts of tax reform as well as the anticipated impacts from our pending acquisition of AV homes.

We ended the quarter with about $321 million of cash in our net debt to capital ratio was 32.1% which we believe is one of the lowest in the industry. This ratio increases as we close the AV acquisition but will remain well within a healthy range in the low 40s.

All things being equal following the AV transaction we'd expect that to fall through normal course of business. Our balance sheet continues to be a point of significant strength and a tool that provides flexibility when developing our capital allocation in growth strategies.

Just in 2018 alone we've been able to buy back $200 million of stock while maintaining options for liquidity that enable us to fund the AV acquisition. All of that is a testament to our financial strength.

As expected with the work on the transaction in Q2 the company did not purchase any stock back but the $100 million authority remains in place for the balance of the year. Now onto our guidance for the year in the third quarter.

For the full year we anticipate closings to be between 8400 and 8800. Our community count will be between 280 and 285 as a result of what Sheryl mentioned in her comments; faster close outs and a change in strategy and some overlapping markets.

Our 2018 monthly absorption base will be between 2.4 and 2.5. GAAP home closings margin including capitalized interest is expected to be accretive to 2017 in the mid to high 18% range.

SG&A as a percentage of homebuilding revenue is expected to be in the low 10% range. JV income is expected to be between 8 million and 10 million and our effective tax rate will be between 24% and 26%.

Land and development spend is expected to be approximately $1.1 billion for the year. For the third quarter we anticipate average community count to be between 270 and 275 which will be our most impacted quarter for the reasons mentioned earlier.

Closings for the third quarter are expected to be between 2050 and 2150. GAAP home closings margin including capitalized interest is expected to be in the mid to high 18% range and while we won't be providing our thoughts on how our detailed guidance will be impacted by the AV acquisition, I do want to take another minute to discuss some of the developments and reiterate the points we have made at the time of the AV announcement.

First, AV will be disclosing its second quarter results later today. We have had the opportunity to review the results and they were as we expected and in line with our underwriting.

Obviously our ability to elaborate on AV's results is limited at this time. Also a few weeks ago we filed the S4 which provides some great color on how the deal came together and it does provide a sense of the combined business based on historical performance.

Next I want to reiterate some financial points we made in June. We still anticipate a good allocation of about 70 million for this transaction.

Our annual synergies estimate has also remained consistent at 30 million and we do expect ROE to be accretive year-over-year in 2019. I'll double down on Sheryl's earlier sentiment and say that I'm extremely excited about the prospects of what this acquisition means looking forward.

Thanks and I'll now turn the call back over to Sheryl.

Thank you Dave. As I mentioned in my earlier remarks one of our strategic priorities for 2018 has been creating a differentiated customer experience.

We're tackling this initiative in a myriad of ways. One of which is to our Taylor Morrison home funding business.

We've named our new mortgage platform Dorothy and just recently launched an online mortgage tool that allows our customers to apply for their mortgage and access us through their personal devices. It's an engaging online experience that includes an easy application and customer portal allowing our customers to securely upload and design documents as well as engaged with their TMHF loan consultant at their convenience.

We are able to speed up their pre-qualification process and provide immediate and factual information regarding credit. This new technology combined with integrating digital and automated verification solutions allows TMHF to provide our customers an efficient and enjoyable finance experience.

Our borrower profile remains strong and as we continue to learn more about customer motivations we plan to leverage that knowledge appropriately to enhance the customer journey. On average our borrows have sturdy credit and personal balance sheet a loan to value of 75% with debt to income ratio of about 38% on a loan amount of approximately 345,000.

Over the last 14 quarters this strong borrower profile has averaged a credit score of 740 or higher and in Q2 that number was approaching 750. This has created an environment that produces one of the industry's lower cancellation rates which was under 11% in the second quarter.

I'd like to finish by hitting on our recent announcement of two additions to our board of directors; Denis Warren a former New York Times executive and Andrea Owen the former Banana Republic Global President have agreed to join our board with their first official meeting happening later this month. Together they bring a diverse skill set and a fresh perspective to our boardroom.

Becoming a fully floated company earlier this year brought forward many exciting opportunities but chief among them was designing our board with independent leaders. Two of our goals in the search was to find candidates that could bring a level of expertise in reaching customers in the digital age and that could help frame home building to be the ultimate retail experience with particular expertise in catering to the younger cohort as that segment continues to grow.

We have hit a home-run on both counts with these two proven leaders and they are the perfect complement to our existing board members all of whom have either a background in finance, home building or both. I'm extremely excited about our two new board members and what they will bring to our boardroom discussions.

To reiterate I'm pleased by how we have started the year and the solid first half performance we have to show for it. Our footprint, our balanced portfolio, our planned expansion with AV and the diverse buyer segments seen across our markets make me optimistic about continuing the momentum in the quarters to follow.

There is a lot of work to be done make no mistake about it but I'm comforted by my confidence in our ability to deliver because of the individuals who make up the Taylor Morrison family. There is no task too daunting, no task too big that our team members won't tackle with the highest levels of enthusiasm and professionalism.

I'd like to close with the thank you to all of our teams for delivering results that support our focus on being a return driven business. With that I'd like to open the call to questions.

Operator, please provide our participants with instructions.

Hey guys! Good morning.

Sheryl, I guess first off before my question just a quick congrats on the recognition in the Glassdoor rankings for top CEOs. It's very well deserved.

Thank you.

I was hoping to dig in just on your comment on the resale inventory. We've heard a few other builders mention the recent increase there and it's obviously still at incredibly low levels from an absolute standpoint.

So I guess it's a little bit surprising just to hear the call out on that and I guess what I'm curious on is if you see the pricing power that builders have had over the last couple of years I think a lot of that's been a function of how tight the inventory situation has been and I guess as you start to see the resale listing start to creep higher, how do you see the current premium of new homes in your market versus a comparable existing home let's say? And how does that compare verses history?

Are we wider than we've historically been and is that going to limit your ability and other builders ability to continue to push price? Or would you say that the current spread is pretty similar to what we've historically seen?

Thanks Alan. On all counts it's been very kind.

You have a few questions in there so let me try to hit them. Let me start in reverse order on the sell market and kind of the pricing we are seeing.

It's an interesting time if you look over the last really decade we're seeing for the first time that difference between you and resale fall under 10%. We really have only seen that one or two quarters in the last 10 years.

So I think that's speaking to a number of different things. One is the kind of inventory that's out there and we're continuing to see that with the limited inventory out there and yes it's creeped up modestly but like you said at a historic levels so very-very low, too low but we're seeing resale homes come on the market multiple offers.

So we're seeing that coming down. At the same time I think we're seeing some significant mix shifts in the new home market and as you've heard on numerous calls you're seeing a lot of shifting to that first time buyer.

So last report I think at the end of June we were just barely over a 9% spread for new to refill compared that to a year ago it was more than two times that.

Thank You Sheryl and would you say because obviously that's mixed effect so I guess what I'm really trying to figure out is that if you look at your communities to the extent you can pick out a comparable existing home in the same school district, similar square footage obviously not new is that 9% representative of what that differential is? I would imagine it would be a little bit wider than that.

It is. I think best that becomes very difficult Alan because in I would tell you core locations the inventory is so limited that in fact I would think that it might be closer than you think and given the limited inventory once again these homes are coming on the market and they are getting multiple offers within the first 24 hours.

So it's actually I think with part of creating that the reduction and gap.

Okay. That's great.

I appreciate that and then one more if I could just on the kind of the product changes I guess you're planning for some of the newer communities is that you're holding off here can you elaborate on that a little bit? Are you changing the targeted buyer of these communities, changing square footage, price point doors and more subtle than that?

Yes. It's a little different in each communities.

It's primarily in the [East] Alan but as you have some communities that have similar target demographics and consumer groups we want to make sure that we're not competing against each other and we align the overall product offering. So sometimes it's actually marrying them and sometimes it's repositioning our product to make sure it better aligns with what they have in the marketplace.

Great. Thanks.

Good luck guys.

Thank you so much.

Thank you. Actually this is [indiscernible] for Stephen.

First question were there any differences in demand between your entry level and move up or active adult buyer and then how is pricing power across those various product lines on the quarter?

With respect to consumer groups we generally saw strength across all product groups. As I look across our portfolio and our markets our percentages around use of the consumers didn't change really at all materially at all from quarter to quarter or year-over-year.

I think we saw strength it really comes down to a local position if anything we had a slight reduction in that first-time buyer market. I think they're feeling a little bit more of the challenges of the interest rate than we're seeing within on the other consumer groups, and I'm sorry the second part of the question is on 60%.

Yes, it was on pricing power also if you look at on average 60% of our communities took price increases this last quarter and probably for the last seven or eight quarters we've been running call it 40% or greater and some of our biggest increases we saw were actually in the West and in our East region.

Okay. Okay.

And then your Midwest orders were good. Were that driven primarily by rebound in Houston and I guess what's the incentive environment like in Houston and has there been any either headwinds or tailwinds as that market recovers from Harvey?

Yes, it's a really good question. We saw a great demand in Houston and like I said in the prepared remarks we've seen the overall market being a better place as crude oil has come back and we've seen increase in rig counts.

I think the market is expected to see moderate growth year-over-year and a new start. There is lots of activities post hurricanes with the trades more than anything but not really on demand.

The only hiccup I would tell you we've seen in Houston over the last few weeks is we are seeing pace is significantly up year-over-year is there is a challenge with that went on for more than a quarter with the mayor granting [indiscernible] in the post Harvey environment and really giving clarity on new development expectations in some of these approvals. So that was a timing thing that finally got resolved in the last 30 days but the market feels good.

We're seeing price movement. We're seeing traffic up.

It's a good time in Houston.

Okay. Thank you.

Appreciate it.

Thank you.

Hi this is [indiscernible] for Mike. I just had one -- I wanted to first hit on the closing you mentioned that there are some unexpected cost pressures this quarter you still had pretty strong gross margin you're able to offload that with price.

Just let me get a little deeper and see what were those cost pressures? What were using for the rest of the year?

And what gives you confidence that you'll be able to get the pricing to meet your guidance for the full year on gross margin?

Sure. I will see on the cost side, so I mean we did expect the cost increases obviously with things like lumber moving around.

We knew that was going to apply pressure in our backlog but overall our direct costs were up relative to Q1 kind of low single-digit range. A lot of that was in lumber OSB.

We're seeing some other pressure around concrete roof insulation steel. Obviously steel tariffs playing a factor mainly in block and retaining walls, brick and tile roofing but overall steel is a small component and we expect that pressure to continue as we move through the year both on the labor and material side but we have put a lot of work around value engineering and good cost work and that's helping to offset and then plus we already talked a little bit about the pricing power we have in our community.

So as we look to the third quarter as well as the full year we have great visibility into our backlog. When we're looking at kind of our upsides we have benefits from our strategic procurement and construction efficiencies.

We are levering capitalized interests and of course pricing is playing a factor. We'll continue to watch the cost side, but we think with some of the work that we're doing from an efficiency standpoint as well as the pricing power that's going to help us to drive towards an annual margin that's going to be accretive year-over-year relative to 2017.

Okay. Thanks.

The other question I had was just on pace it seems like peace dropped off a little bit in June relative to what you guys have said for April and May with it being around 26 just wondering what you're seeing in July and are you seeing like slower trends or seasonality anything that you could share with us would be great.

Yes. Actually we were quite pleased with June.

It's interesting when you look at the year-over-year sales trends for the quarter April to June last year we saw a drop-off, a deceleration of two times what we saw this year. July obviously going with numbers that came in just a few hours ago but it looks like we had a 24 pace and pretty actually pretty consistent with June.

So I'm quite pleased when you look at our annual guidance this continues to put us in a very solid place to achieve that.

Okay. Great.

Thank you.

Thank you.

Hey good morning. Dave first for you if I think through the algebraic equation to get to the guidance number with lower community count that seems to suggest that conversion, backlog conversion would pick up in 3Q and 4Q above historical norms.

A, I want to make sure that's the right way to think about it and B, is that tied somehow to more spec on the ground or how do we think about that?

Yes. It's a great question.

I think when you look at the conversion rate for Q3 we're somewhere typically kind of in the mid 40% range. I think you can expect us there if you take the midpoint of our guidance for Q3 as you push out the Q4 it's going to be a little bit higher than what we typically run.

We're normally in kind of a 62% to 63% range. I think you're going to see us kind of more that low to mid 60s.

Okay. That's helpful.

Thanks and then Sheryl high-level on the survey very interesting responses. I'm wondering you would said okay you're thinking about how to plug that back into the business and I'm wondering what that looks like.

Is that smaller homes? Is that attached?

Does that change the land location targeting? I know you tend to be closer in anyway just thinking your early read as a management team, what's the highlight there on products based on what you've learned?

Yes. I think it has some implications on product design Jack.

I think it has greater implications on community design and amenity profiles and connectivity when you - if you kind of dig into some of my comments around being able to have life experiences, relationships, I think it's around connectivity within communities. Location matters.

It's with amenities within the community, the amenities in external and then I actually think it's about relationships with our team and what that part of the journey looks like in the overall customer experience. Certainly the next layer of that would be how people live in their home to create that same level, but I think we've already started to see that and changes in product profiles in many parts of the country.

So at this point I wouldn't say it really has implications versus small or large product. I think everybody no matter what their family situation is has the same desires.

Okay. Thank you.

Thank you.

Hi thanks for taking my questions. Sheryl and Dave I wanted to followup on the discussion around the community positioning and I'm curious because it sounds like you've worked with AV on some of these things ahead of the close.

What are you seeing from the AV side in terms of are they also actively thinking about the communities for the second half and repositioning those and it's kind of a joint effort there or any color you can provide on that and just how to think about the timeline as 3Q sounds like maybe the low point, but just the next few quarters how long it will take to kind of comeback online?

Yes. No.

Fair question Mike I want to make sure my comments in appropriate context. When you look at the reduction in our guidance for the Q3 and Q4 there's a myriad of reasons that are associated with that.

The primary reason is we've fold out faster in communities and the replacements are coming online until later this year or next. In addition to that so if you say the other half of the reduction comes to us through a few different places one is municipality delays like I mentioned in Houston.

Then there's some strategic decisions that we have made for a couple communities that we think better the business. One of them is the product alignment and we found a couple opportunities in the -- where like I said by holding back we think we can be in a better place.

In addition we've made some decisions on selling two or three communities I think specifically in Atlanta allowing the team to focus on bringing the larger assets to market those might have been 12, 13 unit communities and they take as much time to kind of get to market and process as a 200 unit community. We also had some alignment in Atlanta on the two legacy brand on communities as we shift from more to an in-town product.

So we're not really working with AV it's really stuff that has come through our diligence and as we're looking at the positioning for our future communities and then obviously as we get to the closing table we'll be able to put that in full action and any impact it might have on their actual output.

Got it.

I think most important though it's not changing our sales pace for the year expectations or our closing guidance.

All right. That's okay.

That's helpful color. The second is just a quick followup on the July comments.

Could you just give us some perspective? I don't have it offhand but what were your - what was your July pace last year?

How does the year-on-year compare?

I think it's Q2 to Q4.

We were Q4 this July, July last year we were Q2.

I am sorry. Yes.

Okay. Great.

Thanks.

Thank you. Sheryl, I wanted to focus in on one of the comments I think there's in your press release or the [indiscernible] perhaps about the gross margin obviously came in in line with guidance and you describe that as being encouraging that there wasn't a sacrifice of margin for the additional closings.

So I just wanted to dig into that a little bit. The kind of general consensus view I'd say at the moment is that there's been strong pricing power.

So why would we be worried about having to sacrifice margins for additional closings in this environment of strong pricing. I'm probably just missing it.

I just wanted to kind of dig into that a little bit please.

Yes, and I probably went too deep, I think generally there's an association that you can, communities will focus on price or pace and I think we have a very healthy balance that's determined at a community level and really all I was saying is we didn't sacrifice price for pace. We were able to achieve both.

And I think that was just the comment was focused on where we finished a quarter from a closings perspective relative to our guidance because it was a larger beat. So we didn't want anyone to interpret that to mean that we went after incentives to drive that type of a closing.

It was actually probably in all fairness us being a little bit more conservative on our guidance after the first quarter.

Got it. Got it.

Okay makes sense. And second question.

I know you are not giving guidance including AV until later but you did say that you expect overall accretion to ROE in 2019 if I heard that correct. I wanted to just get the broad buckets understanding from you what are you thinking about when you say that?

Is this faster monetization of assets once you combine the two entities? Is it synergies?

Is it still the capacity to buyback? Is it your land position will go up so maybe you want to have to invest as much in land?

Just wanted kind of a broad buckets understanding of what would drive the accretion and ROE next year post the merger?

Hey Nishu it's a great question. I mean it's several things.

Obviously synergies we are going to play a factor and that a combination of things that we are going to see in the corporate and the field. We are going to get better.

We believe we are going to get better. National rebate will get benefit from the mortgage side insurance as well as overhead.

So that's going to be some of the big drivers. We still have a fair amount of work to do on kind of the soft and hard costs in the construction process from access to trade to production thing.

So we think that's going to provide benefits as well and as a larger organization we go back to national rebate as an example. It's just not additional rebate we are going to get from the AV side of the business being a bigger company we are going to get greater overall rebate and that's going to be a big factor for us.

Top line leverage is going to help and then we do believe we are going to be able to generate significant cash flow enough to reinvest back in the business and increase some free cash flow. And that's going to give us optionality to invest what we think we are going to be able to drive additional long term shareholder return.

Okay. Thanks for the thoughts.

Hi. Thank you for taking my questions.

I wanted to ask about the gross margin outlook for the second half. You called out the benefits from shifting mix in geographies.

Can you just elaborate on which markets you are expecting to drive better performance in the second half and what's kind of giving you the confidence in that? Thank you.

Yes, you bet, I think we are going to see it largely across the board. It's going to take up a little bit in every place.

The East is probably where we are going to see a little bit more of the pickup again from a product mix standpoint and just overall penetration. We are going to see penetration be a little bit higher in Phoenix, Bay, Southwest Florida; these are our highest margin rates, some of our highest margin rate divisions out there and then we'll probably under penetrate a little bit relative to the total company in Southern California.

That typically has a lower margin rate, higher margin dollars but then that will factor in to some of that accretion just from an overall mix perspective.

Okay. That's perfect.

Thank you and then I wanted to ask about SG&A clearly strong leverage in the quarter on the better closings and no change to the annual guide though. So I guess where are we in your - in the operational investments initiatives that you're making?

What's the right way to think about where you think SG&A can get in the longer term? Thank you.

We're going to continue to drive top-line leverage obviously before consideration of AV and getting through that acquisition but we're continuing to invest back into the business and people, process and systems as we've discussed the last several quarters we're kind of at that stage though where we have it built into our platform. So we continue to reinvest.

I think going forward you're going to see us leverage SG&A the way I like to think about it is if you take SG&A and divide it in half and keep half variable to the top-line and the other half kind of treated your fixed costs and grow at about 3% as you model that out you'll see that as the top-line grows you'll drive leverage.

Got it. Thank you very much.

Thanks. Good morning guys.

I wanted to ask a little bit about absorptions again for this particular quarter. So I think we're down seven the first two months and then if I got it right up nine in July and was that in part a function of just comps monthly comps Sheryl?

Or was there something that happened in June related to incentives or anything else that could have helped that number alter?

No, I don't think there's anything specific to call out. Once again when I look at the overall trend I had a really consistent quarter by all account and significantly better than what we saw last year at the same time and then that consistency has continued through July.

So now I think at some level it's hard to say what normal looks like anymore but I do think we're getting into more seasonal patterns and as I look at the first half of the year having been around too long these are the kinds of fluctuation from month to month that I think we should come to expect.

Okay, fair enough. So some may be anti-seasonally good order patterns and end of Q4 into the first half despite your comps is that basically what you're saying maybe -

We had, yes - I am sorry I apologize for interrupting but if you recall we said on the last call if we could get to flat year-over-year for the quarter that would be like a grand slam because our comps were so difficult and we got darn close. So I think the season lasted at least for us we saw continued strength really in the 55 plus and like I said those move up buyers that kept absorption strong through the quarter.

And Carl maybe one other thing we've talked about the first half was our tougher comp for the year. Our comp gets easier in the back half as well.

That's true.

It does and then just second if to drill down into the active [result] and what you guys call the first time or entry level if you sort of independent of region if you if you separate into more affordable price points within those two buckets is there a reasonably different absorption differential between the high end of entry level and the lower end and same and active adult did that happen this quarter?

Well. That was in the detail for sure Carl I would tell you that our highest paces tend to be at our highest price point.

Now that is not generally intuitive and it's really in California and the West. So when I - and then when you really dissect that by consumer group I mean it some of our highest millennial.

So another way to say it is about a third of our buyers for the quarter were Millennials and only about 20% first-time buyers of our sales for the quarter. So it really is a very community actually division by division focus but unfortunately no I can't it would be a mistake to kind of paint a broad brush across the consumers because we see very different behaviors in different parts of the country at different price point.

That's great color. Thanks so much Sheryl.

Thank you.

Thanks for taking my questions. So on the central I know you all discussed Houston but wanted to see if you can maybe give us some insights on Dallas and how things trying to [indiscernible] during the quarter?

Yes. I think Dallas Jay has been on the radar for a while.

I think we go back to our last few calls we've talked about kind of the pricing power we have in that market. Prices ran quite fast there for the last couple of years and I do think we've seen some kind of over saturation in certain sub-markets specifically [prosper] when I look at the market as a whole there's a couple things.

Job growth continues very, very strong. I think it's at 120,000 projected.

Reloads seem to be down and when we look at start they're setting a new record I think 12% year-over-year for the first half closing drop-off about our low double digits. So I think there's a little bit of a mixed bag there.

I think you've got some markets that are a little bit over-saturated. I think we've seen price eat in the market that are slowing making the consumers kind of take a little pause but overall our sales are pretty much in line with our expectations.

Yes, and I'd say from a pace standpoint for second quarter year-over-year we were basically flat and year-to-date we were slightly up.

It's good to know. And then I am going to do a two-part question here.

Could you maybe give the same diagnosis on Atlanta but then also what you talked about with one third of the buyers being Millennial this quarter what were your percentage of 55 plus and/or self-identified empty-nesters because we see that trade down business still being a big part of a lot of the public builders sales book right now.

Yes. So we look at it a couple different ways Jay.

First I would tell you as we've been talking about for a while kind of a [third in the third] our portfolio a more than half of that third on the active adult is in [indiscernible] communities and then the other 50-plus would be within our more traditional family community, but as we look through the portfolio they're still from a ability to qualify from our cash in the mortgage environment, our cash picked up so they continue to be very helpful part of our portfolio. I think the second part of your question was Atlanta.

The market continues to exhibit really strong growth and I think overall healthy economic conditions. Retail demands at an all time high supplier very low still which is pressuring affordability.

Recent prices are up about 9%. As I mentioned I think earlier our business is seeing some shift with the two acquisitions.

We're seeing a little bit more of a shift to the in-town product and as we rationalize the business model we're moving away from some of the smaller positions and like I said we've sold a couple land positions really so we can focus on some greater opportunities that we're seeing in the marketplace.

Okay. Sounds great.

Thank you.

Thank you.

Thank you. Two quick questions.

First has the consumer changed its appetite or you changed your strategy around spec as interest rates rise? Do they turn quicker?

I wouldn't say our strategy has really changed. We target call it roughly 5 best for community.

But our focus is to earn more significantly over the last call it 18 to 24 months has been on the finished spec side. We are just trying to manage that as part of overall managing inventory but we like specs.

It's an important aspect of the business and one that we are very focused on making sure we put in the right floor plan on the right light and the right community. So for us it's just really managing on the finished spec side of the business.

And maybe I will add to that when you look across the sector generally there are larger discounts associated with spec and so when we look at our mix and being more heavily concentrated on the to be built side it actually gives you an overall better margin but today we keep up pretty what's less than 1 per community at some level we almost [indiscernible] sure we had a few more.

And then as it relates to options have you seen the consumer willingness for options change in the last three to six months?

We are running a little bit higher I would say for the first six months of this year. They are taking just slightly more.

We are normally kind of [mid-teens] were slightly above that here for this year.

And also because of our mix of [indiscernible] right?

Yes that's the mix that's going to help.

Thank you.

Thank you.

Thanks guys. I was hoping you could comment on what it was that you found most attractive about AV, is it the people, was it the markets, was it the product that you are serving and also why now and then also what is your current kind of exposure to active adults and entry-level and how's that going to shift after the deal?

Yes, happy to share without being pure redundant of what I said on the June call and in my comment I tell you that the more we learn the more excited about the opportunity if the deal closed we are. As I shared in the June call our strategy around scale in certain markets and really doubling down in Charlotte and Raleigh really putting this as a market leader in Orlando, in Phoenix and you compliment the consumer segments where they definitely have a greater focus on the first-time buyer as well as the active adult.

We've been talking about this viable approach for a number of quarters really where our focus is and look at their land position, their product portfolio, excited about the immediate traction we'll get in synergies as Dave talked about in purchasing locally, nationally financial services, marketing just to name a few Alex, and like I said I'm even more thrilled with the opportunity and how we underwrote it. And we're making great progress on preparing the company for closing day as I talked about in my prepared comments.

And the second half of the question was active adult. Like I said when you look at their lot, their real focuses is that same [barbell] coming before AV joins us we had about a third of our lots under control active adult this will tick it up just a couple percentage points and it will put it squarely in that first third being first-time buyers and the more affordable group.

Well, thank you very much. Appreciate you are being with us today and letting us share our results for Q2.

Have a wonderful day and week.