KB Home (KBH) 2017 Q1 法說會逐字稿

Good afternoon. My name is Darin and I will be your conference operator today. I would like to welcome everyone to the KB Home 2017 first-quarter earnings conference call.

(Operator Instructions)

Today's conference call is being recorded and will be available for replay at the Company's website at kbhome.com through April 23. Now I would like to turn the call over to Jill Peters, Senior Vice President, Investor Relations. Jill, you may begin.

Thank you, Darin. Good afternoon, everyone, and thank you for joining us today to review our first-quarter results. With me are Jeff Mezger, Chairman, President and Chief Executive Officer; Jeff Kaminski, Executive Vice President and Chief Financial Officer; Bill Hollinger, Senior Vice President and Chief Accounting Officer; and Thad Johnson, Senior Vice President and Corporate Treasurer.

Before we begin, let me note that during this call, items will be discussed that are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The statements are not guarantees of future results and the Company does not undertake any obligation to update them.

Due to a number of factors outside of the Company's control, including those detailed in today's press release and in our filings with the Securities and Exchange Commission, actual results could be materially different from those stated or implied in the forward-looking statements.

In addition, a reconciliation of the non-GAAP measures referenced during today's discussion to their most directly comparable GAAP measures can be found in today's press release and/or on the Investor Relations page of our website at kbhome.com. And with that, I will would turn the call over to Jeff Mezger.

Thanks, Jill. Good afternoon, everyone. We're off to a solid start in 2017 with healthy results in the first quarter as we sustained the trends from 2016 and once again delivered double-digit revenue and pre-tax income growth and steady expansion of our operating income margin. We entered the year with a backlog of $1.5 billion, which we converted into a 21% increase in housing revenues to over $800 million in the first quarter.

We grew deliveries by 14% with increases across all four of our operating regions, led in particular, by strength in the West Coast. Our results for the quarter in deliveries, revenue, and net orders show what is possible through the effective execution of our core KB2020 strategy, which includes increasing the scale of our business within our existing geographic footprint.

The strategy has many associated benefits, one of which is the opportunity to leverage our SG&A. We continue to drive healthy leverage from our expanding revenue base, producing a 160 basis point improvement in our SG&A ratio to 11.5%. This is the lowest first-quarter SG&A ratio in our history and illustrates the power of our growing scale.

This SG&A improvement more than offset the gross margin decline in the first quarter, resulting in an increase in our operating margin. While we achieved our gross margin projection for the quarter, we recognized we have more work to do and we have many initiatives in place on both the revenue and cost side.

Based on our backlog and current margin trends, we do expect sequential gross margin improvement each quarter over the balance of the year with a cross-over to a positive year-over-year comparison in the fourth quarter. As Jeff will share, based on our solid first-quarter results and a robust backlog entering the second quarter, we are raising our revenue outlook for the year and incrementally increasing our gross margin and operating margin expectations.

We now project the midpoint of our expected operating margin range, excluding any inventory-related charges will increase to 6.1%, a 40 basis point improvement over 2016. For the first quarter, our revenue growth and higher operating margin produced a 34% increase in pre-tax income to $22 million. Excluding the charge for the early retirement of debt this year, and inventory-related charges from both years, our pre-tax income increased by 73%.

Another key area of solid performance was our net orders. Market conditions remained strong throughout the quarter and we are very encouraged with the start of the Spring selling season. We increased our net order value by 32% to $1.1 billion on a 14% increase in net orders.

This underscores the strength of our strategy and offering consumers a compelling combination of affordability, choice, and personalization and operating in the right markets. Our build-to-order model enables us to build the home the customer wants, with features that they value.

As a result, we sustained one of the highest absorption rates per community in the industry. During the first quarter, we achieved 3.6 net orders per community per month, an increase in absorption of 16% year over year with improvements in all four of the regions.

In particular, our West Coast region performed very well, with a 49% increase in net orders and a 73% increase in net order value. This positive result came from across the state, as all five divisions in California posted a double-digit net order comparison.

While this region had experienced a softer selling environment in last year's first quarter, absorption pace improved by 33% in the first-quarter of 2017 to the highest net order rate of our four regions, exceeding four net orders per month. We are seeing very favorable order activity from the 30 new communities that we have opened in the West Coast during the past 12 months.

Healthy economic conditions in California, including GDP expansion, steady job growth, and a growing population are fueling the demand for new homes. We are well-positioned in California, our largest market in terms of revenues. With year-over-year increases in average community count expected for the balance of 2017, we are poised to continue to capitalize on the strong demand along the coast as well as the growing demand in the inland areas.

Affordability remains a key factor in driving more growth inland as prices continue to rise on the coast. As result of the strong orders, our West Coast backlog is up over 40% in units and more than 60% in value, supporting our outlook for an increase in our revenue growth for this year.

Our Southwest region produced a 27% net order comparison, led by Arizona. The momentum that we experienced in Arizona during the second half of last year continued in the first quarter.

Las Vegas also produced positive net order growth, driven by an increase in absorption to over four per month, one of the highest absorption rates in the Company. We continue to build scale in Las Vegas and expect this division will approach 1,000 deliveries this year.

Net orders in our central region were up 7% in the quarter, with our San Antonio division, generating particularly strong net order growth. We are continuing to increase market share in San Antonio from an already solid number 2 position in the market.

Our Houston division, once again, produced a positive net order comparison for the third consecutive quarter. We are continuing to experience steady demand in Houston at a more affordable price points which today averaged about $240,000. Finally, in the Southeast region, absorption per community also improved in the first quarter.

Net orders were down due to a lower community count, in part, tied to the line down of our Metro DC division. Jacksonville demonstrated significant improvement with community order rates above 4 per month. At these levels, we expect continued positive order comparisons in Jacksonville as we look ahead. The region, as a whole, is improving its execution and performance. While we still have work to do, we are making very good progress.

As I mentioned, we are encouraged by the start of the Spring selling season. We have now established a scale in our business that can drive improving profitability. With the backlog in place to support our revenue growth projections for 2017 and as we approach our absorption targets, we are now shifting our selling efforts to also capture more price.

Favorable market conditions have created an opportunity in most of our markets for pricing power and we intend to capitalize on this to the extent possible. The solid net order growth for the quarter contributed to the continued expansion of our backlog, providing us with good visibility for our revenue growth projections for 2017.

With a 25% increase in value, our backlog now stands at $1.8 billion, representing nearly 4,800 homes. This backlog is evenly distributed throughout the construction cycle based on our even flow build-to-order approach and it is one of the key elements in having improved our predictability. Approximately 30% of this backlog is sold and not started and has us well-positioned to continue to achieve our even flow targets for daily and weekly starts.

We believe this is a more efficient approach for us and also for our subcontractor base, giving them greater visibility to the steady pace at which we release homes for production, which helps them to more efficiently manage their labor and materials. Utilizing standardized floor plans and options across the system allows us to achieve high production levels and efficiencies while retaining the ability to offer choice to the consumer.

For these reasons, combined with our growing volume levels, we believe we are becoming even more of a builder of choice with our subcontractors in our served markets. For the quarter, our build times were stable relative to a year ago, with an average build time of between four and five months depending on product type and market.

We view stable build times as a positive given the labor constraints that the industry has been facing. We also have initiatives in place to improve build times going forward as part of our effort and efficiency focus and we are starting to see early results from these efforts in many of our divisions.

We continue to believe that housing market will remain on a steady path of recovery this year; increasing household formations, job and wage growth, and high consumer confidence should all contribute to strong demand for homes. The overall economy appears to be gaining momentum with insufficient levels of inventory available to meet this growing demand.

On the resell front, The National Association of Realtors announced this week that resell inventory was at 3.8 months supply in February, the lowest February level since the Association began tracking the data. At the same time, for sale housing starts continued to lag behind historical levels. It is the supply/demand imbalance and improving national economy that drives our belief that the housing recovery will remain on this positive trajectory for some time to come.

Even with the expected interest rate increases this year, we believe consumers, including first-time buyers, will still find buying a home a compelling and affordable opportunity, positively influencing our outlook for the year. As I said at the outset of my remarks, 2017 is off to a good start. Our first-quarter performance was solid across our key financial and operational metrics.

Our results are becoming more consistent and predictable as we continue to execute on our core KB2020 business strategy and our strong backlog is supporting our elevated outlook for the year. With that, I'll now turn the call over to Jeff for the financial review. Jeff?

Thank you and good afternoon, everyone. Since our financial results for the quarter are relatively straightforward, with most metrics ahead of expectations, I will keep my comments on our first-quarter performance relatively brief. As per usual practice, I will also provide our outlook for future quarters and the full year.

In the first quarter, our housing revenues grew 21% from the year-ago to $811 million, reflecting a 14% increase in homes delivered and a 6% rise in our overall average selling price. All four of our homebuilding regions generated double-digit year-over-year increases in housing revenues, ranging from 12% in the Southeast to 25% in the West Coast.

The significant growth in housing revenues was largely driven by the 19% higher backlog value we had at the start of 2017 as compared to the prior year in combination with solid operational execution during the current quarter. We entered the first quarter with a backlog value of $1.8 billion which increased 25% from the year earlier period and marked our highest first-quarter levels since 2007.

We believe our backlog value strongly supports both our second-quarter and full-year housing revenue expectations. We currently anticipate second-quarter housing revenues in the range of $880 million to $940 million. For the full year, we expect an increase in housing revenues as compared to our prior guidance to the range of $4 billion to $4.3 billion.

Over the past five years, our second half revenues on average have comprised approximately 60% of our full-year housing revenues, with approximately one-third of our revenues generated in the fourth quarter. The current year revenue cadence is expected to approximate our typical seasonal pattern.

In the first quarter, our overall average selling price of homes delivered increased to approximately $365,000, reflecting increases in all four of our homebuilding regions. For the 2017 second quarter, we are projecting an overall average selling price in the range of $387,000 to $392,000.

Due to the strength of our first-quarter West Coast Region net orders and net order value, we have increased our full-year forecast for average selling price relative to prior guidance. We believe our overall average selling price for 2017 will be in the range of $385,000 to $395,000, representing a year-over-year increase of 6% to 9%.

Our expectation of a continued strong Spring selling season with enhanced pricing power across many of our markets could provide an additional uplift to our ASP in the fourth quarter. Homebuilding operating income increased 33% from the year-earlier quarter to $25 million, including total inventory related charges of $4 million compared to $2 million in the prior-year period.

Excluding inventory-related charges from both periods, our first-quarter homebuilding operating margin increased 50 basis points to 3.6% as improvement in our SG&A expense ratio more than offset the decline in the housing gross profit margin. For full-year 2017, we expect our homebuilding operating income margin, excluding the impact of any inventory-related charges, to be in the range of 5.8% to 6.4%.

Our housing gross profit margin of 14.6% for the first quarter was negatively impacted by $4 million or 50 basis points of inventory impairment and land option contract abandonment charges. Excluding inventory-related charges as well as amortization of previously capitalized interest, our adjusted housing gross profit margin was 19.9%, down 80 basis points compared to the same period of 2016.

The year-over-year decline was primarily due to increased land cost, trade labor cost inflation, and an increased percentage of deliveries from the reactivated communities. We expect to generate sequential gross margin expansion through the remaining quarters of 2017, driven by improved leverage on fixed cost from increasing quarterly housing revenues, deliveries from recently opened higher-margin communities, favorable regional mix, and community specific gross margin improvement action plans.

Assuming no inventory-related charges, we expect our gross margin for the second quarter of 2017 to increase sequentially by 50 basis points to approximately 15.6%. We also anticipate sequential margin improvements of 70 to 100 basis points for both the third and fourth quarters.

This progression represents a continued narrowing of the year-over-year gap in the second and third quarters and a cross-over to a favorable year-over-year comparison in the fourth quarter, our highest revenue period. The sequential quarterly improvements result in a slight uptick in the range of our projected 2017 full-year housing gross profit margin to 16.1% to 16.5 %.

Our selling, general & administrative expense ratio of 11.5% for the first quarter improved 160 basis points from the year-earlier quarter, reflecting our ongoing cost control initiatives and a favorable leverage impact from higher deliveries and housing revenues. We believe there is room for further progress and expect to extend the favorable year-over-year trend into our second quarter with a projected ratio of about 11.2%. We currently anticipate that our full-year SG&A expense ratio will be in the range of 10% to 10.4%.

Income tax expense for the quarter of $7.2 million, which is a predominantly non-cash charge against earnings due to our deferred tax asset, represented an effective tax rate of approximately 34% and included the favorable impact of $1.1 million of Federal Energy tax credits relating to qualifying energy efficient homes delivered in 2015.

Assuming these tax credits are not renewed for 2017 and statutory tax rates remain unchanged, we expect our effective tax rate for the remaining three-quarters of 2017 to be approximately 39% and for the full year to be in the range of 38.5%.

Turning now to community count, our first-quarter average of 238 communities was down 2% from 244 communities in the same quarter of 2016. We ended the quarter with 240 communities, about flat from the year ago and up 2% or about 5 communities from year end. Of the 240 communities, 42 communities, or 18%, were previously classified as land held for future development.

Although our ending community count for the quarter was essentially flat with the prior year, we continued the favorable trend of increasing the proportion of West Coast communities. We are seeing particular strength in this region, with significant growth in the first quarter net orders and net order value, as Jeff outlined earlier.

Our average community count in the West Coast region increased 14% year over year, partly offsetting the decline in the Southeast region stemming from fewer community openings over the past year and the wind-down of our Metro DC division.

On a year-over-year basis, we anticipate our second-quarter average community count will be approximately flat as compared to the 242 communities in the second quarter of 2016. We also continue to expect our average community count for the 2017 full-year to remain relatively flat with the previous year.

During the first quarter, to drive future community openings, we invested $302 million in land, land development, and fees, with $133 million of the total representing new land acquisitions. We ended the quarter with total liquidity of nearly $600 million, including $352 million of cash and $244 million available under our unsecured revolving credit facility.

During the first quarter, we completed the optional redemption of $100 million in aggregate principal amount of our 9.1% senior notes, our highest interest rate debt, using internally generated cash. Our interest expense for the first quarter included a charge of approximately $5.7 million, largely due to the make-hold positions associated with this redemption.

Our growing scale and favorable operating results in 2016 and the first-quarter of 2017 positioned us to support both our future growth through land investments and this initial step towards deleveraging our balance sheet. At the end of the first quarter, our net debt to capital ratio of 55.3% reflected 340 basis points of improvement versus the prior year. We believe we are firmly on track to achieve our stated mid-term goal of 40% to 50%.

In summary, we delivered solid first-quarter results with measurable progress in most key financial metrics and we expect to generate further improvements during the remainder of 2017, as we continue executing on our road map for returns to focused growth.

We are driving strong and consistent execution within our operating divisions and believe we are well-positioned to meet our improved financial objectives for the year, including higher revenues, operating margin, and earnings as well as a lower leverage ratio. We will now take your questions. Operator, please open the lines.

(Operator Instructions)

Alan Ratner, Zelman & Associates.

Congrats on a really strong quarter. Jeff, in the spirit of no good job or no -- good deed goes unpunished here, I just wanted to ask about California and some of the headwinds that are going on there given the strength you are seeing in your business today. The first is, of course, California has had a very wet spring so far and as your order growth clearly demonstrates, it hasn't impacted the demand side of the equation.

I'm curious as you see the year unfolding there, what impact, if any, do you think that rain may have either on your future community openings or probably more specifically, deliveries in the back half of the year?

And second question related to California just on AB-199, just curious to get your thoughts there as well in terms of what likelihood you see of that passing and if it does, what impact that could have on your business out there? Thanks and sorry for the more negative questions on a very good quarter, but was just hoping to get you guys to clarify that because it is such a big part of your business. Thank you.

Sure. Okay. Well, thanks for the recognition, Alan, and they are good questions that we are dealing with. First off on the weather, let me say a few things. For starters in California, we had very, very seasoned teams that have been in place a long time and know how to deal with that rare thing called rain that we get occasionally out here in California.

My analogy would be it's a speed bump. It is not a major hit to the business. In fact, with the raise in revenue that we just guided to, it's already assumed in our projection so whatever it delayed, it already delayed and we've taken into consideration on our guidance. It delayed a few grand openings about a month because we couldn't get landscaping in and couldn't get energized and those type of things.

So we had some openings actually push from January into February and February into March, may have rolled -- May into two months and may have rolled deliveries a month to two months; but all that's factored in and we think we have arms around it and we've already taken that hit so we are moving forward. On AB-199, it is a classic California political hot potato.

Our industry has come out very strongly in opposition to it, as have a lot of other industries and organizations in the state. It's bouncing around on the assembly floor; don't know if it will pass. We are certainly working to make sure it doesn't pass. And however that plays out in the political arena we will deal with it at that time.

It is a pretty onerous threat relative to the cost of goods but we are going to fight and hopefully it doesn't get pushed through just like many other things that we've had to deal with over the years out here in the state.

Great, thanks a lot. And good luck, guys.

Nishu Sood, Deutsche Bank.

Obviously, an increase in the revenue guidance and that is obviously encouraging and reflects the good demand in the performance in California. Only a 10 basis point increase, I believe between the two margin components. You mentioned obviously that as we progress through the year, better leverage should benefit both gross margin and SG&A.

Shouldn't the increase in revenues have resulted in a little bit bigger tick-up to margins, especially with California performing so strong and the Southeast diming as a contributor since that's I think, where your lower margins were?

Right. I can respond to that a bit. On the revenue side, as we put our guidance together and as we did for last quarter, our range does contemplate the range of revenues. Our revenue range last quarter was $3.8 billion to $4.2 billion and both our gross margin and our SG&A ranges took that into consideration as we went forward.

Right now, what we did was we lifted the bottom end -- or the worst case, I will call it, of both of those metrics and I think actually, we are incrementally more positive obviously, due to the strength of the first quarter and what we're seeing happen on the guidance that we did put out last quarter. So we adjusted the ranges a bit.

We are still very optimistic, in fact, more optimistic about the year at this point to the year as opposed to when we did our first-quarter call -- or our call during the first quarter, excuse me. But right now, we have a lot of ground to cover. The Spring selling season is still early. The early indications are very favorable.

We would like to see a few more weeks and a couple more months of sales on that. And we will bubble up at the end of the second quarter and let you know how we feel about the rest of year at that point.

Got it. That makes sense. So just really into the SG&A a little bit more. I think now this is your second quarter in a row of record low SG&A. Certainly makes a lot of sense with the community density concept that you have been pushing through in your operations. So how -- given that we are at record lows here, how do you think about the potential for further decreases?

You are already in uncharted territory. Is there some metric on community density that you think about relative to absorptions perhaps? Are we reaching a limit maybe in terms of how much -- how many more efficiencies you can squeeze out of it? How much further, I guess, bottom line can we go here?

Well, the way I like to look at it -- there's a couple things I will comment on it. First of all, the first quarter beats versus our expectation, I think Street expectation, of about 20 basis points of that beat came from the leverage. So we came in at $811 million housing revenues, midpoint of our range about $790 million on revenues for the first quarter, so about 20 basis points came from that.

The other 30 basis points are just basically from net other good news on expenses during the quarter and very good cost-containment. It amounts to only about $2.5 million so it wasn't a dramatic shift there but we were quite pleased with the 11.5% in the first quarter. When we look to the future, we're really looking to keep doing what we have been doing.

We've been having tremendous amount of success, driving down SG&A; it starts with cost-containment. We are not looking to cut expenses at this point because we do have a growing business. We are looking to efficiently run the business and cost-containment, number one. Number two, our revenue growth has come from a very efficient source, which is higher pace from current open communities. And we've also been growing right in line with our strategy of growing our scale in our existing markets.

Both of those two factors are really giving us, what I call, efficient growth and that efficient growth has allowed us to continue to work down the SG&A. As we often guide on SG&A, when we look at it incrementally quarter to quarter when you look at topline revenues, we generally say around 5%, sometimes we say 5% to 6% of incremental revenue should drop to SG&A expense.

And in that matter, as long as 5% or 6% is lower than the current SG&A, we should be able to continue to leverage higher volumes with more SG&A efficiency. We did guide to more efficiency as we go through the remainder of the year and we do see SG&A sequentially improving in every quarter this year and we think we're going to have a pretty nice year on SG&A and leverage on that side. So, so far so good and I think 2017 is going to -- spell some good things for us on the efficiency side. Nishu, if I could add to that. What we shared at our investor conference and we are talking about here is continue to grow our scale in our served markets and yes, we've tilted more to California. And as well as we are doing in California, we like the business; it is still less than half of what we did in our peak year in the state. You have a management team in place today that twice the volume we once did so the additional growth, the opportunity in the state is still significant.

And if we add a communities, you add a superintendent or you add the cost of a model park, you don't necessarily add to the senior team. Why I'm sharing that for California, you have the same situation in Arizona, Nevada, Texas, Florida, where we intend to continue to grow the topline through take and share, and getting back to the scale we were, not so there's -- we're not guiding to whatever our target is three or four years down the road, but there's a lot of benefits that -- where we can capture.

Got it. Thanks.

Michael Rehaut, JPMorgan.

This is Neal BasuMullick in for Mike. So I guess starting with reactivated communities. So you have a bit more visibility in this quarter so what do you expect in terms of contribution from reactivated communities versus [toll] deliveries and has that increased a bit maybe with [key] exceeding KB average or what are you seeing?

Yes, on the reactivated communities, as I mentioned, it is right now about 18% of our total community count. In general, those communities carry lower ASPs than what we call our core communities, so as far as a percent of revenue goes, we anticipate seeing somewhere in the low double digits to maybe as high as 15% of revenue coming off those communities.

But basically, I would say the best way to describe it right now is we're expecting to see relative consistency in those metrics as we travel through 2017. We are not expecting to see a big uptick or large fall-off in either the revenue percentage or in the percent of communities. So the impact is having on the gross margins should remain relatively constant.

As we talked about in the past, it's about a full percentage point of negative impact on an absolute basis and quarter over quarter, year over year, there's a little bit more back-and-forth on that depending on how the two quarters lined up; and this participate quarter is about 30 basis points of headwind as far as a comparison goes year over year.

Because it did tick up a bit. What we saw in the back half of last year was the absorption improvement coming from underperforming communities and not just the reactivated communities but our core communities as well and that did drive a little higher revenue this quarter coming from a bit -- like I said, I think it'll remain relatively constant as we move forward.

Okay. That makes sense. I guess a follow-up, just looking at the improvement in cancellation rate. Despite the moving mortgage rate, is that a relationship you are seeing or what is it that you are really doing right, I guess, maybe in attracting higher-quality buyers or --?

Right. On the cancellation rate, it is pretty much like the comments we made last quarter. I think there's three things working for us on that side. One is improving market conditions, low inventory, people wanting to buy homes. We're seeing the market conditions helping on that side where people -- and they are also seeing price movements, where I think people are less inclined to want to back out of a deal that's already been signed.

I do believe we are seeing higher-quality buyers coming to the table and we are able to get then gain and hold mortgage improvements as they run through the process. And then finally, again, as we talked about last quarter, we have made process improvements on that side, particularly on the upfront, recording gross sales. That's also helping the rate so it is a combination of the three factors.

Okay. That's all for me, thanks.

Stephen Kim, Evercore ISI.

Wanted to follow-up on the build times; good news about holding them steady. But I wanted to ask whether or not you thought seasonality played a role at all in that and how that informs your outlook for build times and labor constraints, and I guess what I mean is, that there's generally a little bit of a lull after your fiscal year end in the winter months and was curious as to whether or not you thought that this was a period of time where it was a little easier to maybe get caught up on labor.

But that as we got into the busier times of the year that this may be something that re-emerges as an issue, so if you could just talk about in the context of seasonality?

Stephen, the comp to last year was for the same period so it is the same season in both years and it held. We are working diligently. You've tracked us a long time, but when we get the scale we are at and now you have a larger pot of build-to-order buyers and you can start talking with your subs about starts six weeks out, eight weeks out and you are setting up your start pace for the community, they want to stay there because they can manage their materials and their labor with us.

So there's no spike if -- with [respect to own], you start ten at a time and you don't start any more until you saw those ten, you lose that continuity. Then the subs really value continuity so we've been working hard right now to lay out starts for the next three months around our system and getting the subs' commitments. And we are actually hoping that we can shrink our build times year over year going forward because of our scale now and becoming more of a builder of choice in our markets.

I think just one added comment with respect to seasonality, last year, we actually got better with build time as we entered the year. Our first quarter of last year was actually our highest build time so we don't see a -- we're not overly concerned on that seasonality factor.

Got it. Okay, that's helpful. Then I was wondering if you could talk a little bit about the pricing outlook. I think that's obviously very important in light of the stronger demand that we are seeing out there. I was curious about your margin outlook that you have given in the context of your commentary about the pricing outlook. Was curious as to first of all, whether your margin outlook includes achieving better pricing which you felt you might be able to do or if that's -- you left that still on the table to achieve and you haven't built it into your guidance?

Our -- in the comments, Stephen, we touched on our backlog, our current trends and that's what's driving our guidance for the year. At the same time, I observed we're going to try to take price and if you look at our sales rates now, we are at the level we've set as our optimal for managing our assets. And you want to keep holding that pace now and it is time to go for price.

And if you think about it our absorptions were up 16% as a Company year over year; it tells you there's strong demand out there. And we're going to go to try to capture the price and if we get it, hopefully, it brings upside and in our cycle, it will bring upside down the road.

Got it. That's great. Thanks very much, guys.

Mike Dahl, Barclays Bank.

Jeff, I just wanted to follow-up on those comments around price. I guess I'm curious in some of your markets, you are still dealing with issues around FHA limits and the need to stay below those, especially when you're talking Inland Empire, Phoenix, Vegas and then depending on the path of mortgage rates, you may still have some your buyers facing some headwinds there. So is there any quantification you can provide to give us a sense of how you're thinking about potential magnitude for pricing opportunity?

On simple terms, as much is we can get, I don't know how we could quantify that on this call and if you think about the FHA limits, they absolutely are governor in those markets and it starts with being a governor with resell before you get to new homes in Phoenix or Inland Empire. And our industry is working with FHA right now, okay, what can we do about some of these?

And hopefully we can get some progress there but those limits have been in place now for over two years and we have been managing around it and through it and in a stronger demand environment like we have in the Inland areas, it is a stronger buyer profile; they have more money to put down. They have higher incomes because it is a stronger demand.

That's probably, in part, why our Inland areas in California or Arizona, we are seeing sales lift and seeing some price lift. This isn't limitless. I get it that there is a point when consumer just can't afford it but I don't think we are anywhere near that today with the type of demand strength we are seeing.

Okay, you are not seeing in your backlog that your buyers are right at the limit under the guidelines right now?

Well, it's -- no, to answer you directly, it is more -- most of our buyers are struggling with either the down or the credit; it is not the income.

Okay, thanks and then the second question, then specifically to California, just wondering if you could give us a little more color on where the upside relative to your expectations came from within California regionally? And then how we should be thinking about ASP going forward and in the West region, just given it can vary quite a bit depending on the submarket you're in there?

I can have Jeff try to quantify it for you. For years now, we have been sharing the coasts are very strong and the coast remain strong. They are desirable places; there's not a lot of inventory. There's a lot of job growth and prices have moved a bunch in the last few years.

As those presses have lifted, they are pushing more demand Inland because there is only so much an income can qualify for. And I would say, like I did in my prepared comments, we saw strength across the state. The coast remained very strong, both north and south; and Inland, both north and south, we are seeing an uptick in pace and an uptick in price because the demand has finally strengthened.

You would have to summarize it that a normalized recoveries finally occurring and it seems to have legs because we've been dealing with this now for six to nine months where prices lift on the coast and it pushes more demand Inland where there is more buildable land and you will get more volume in the inland areas. As a Company, our California ASP can influence our overall ASP quite a bit but also within the state, as you touched on the mix, a couple of multi-million dollar communities in the Bay Area versus a $500,000 house in Inland Empire or Sacramento can move your ASP quite a bit even within the state relative to mix.

I'll provide a bit more detail on the West Coast. We don't guide ASP by region but I will give you some data. In the first quarter, we were up about 5% ASP in the West Coast, about $587,000 versus about $559,000 last year. Orders this quarter, our ASP was up almost $100,000 relative to last year. So if you look at our order value and divide it by the number of orders for the year, it was up quite significantly so that is a combination.

It's obviously not just all price, same community year over year, $100,000 up in price, because I don't want to imply that at all, part of that comes from a mix of the business and the mix of communities, and a very wide range of price points that we have in the states and how that could impact. Our full-year guidance range of $385,000 to $395,000 in ASP for the total Company is really a result of two things.

One, an increasing mix of California that we see coming through in the back half of the year as well as the pretty sharp increase that we've seen in overall California ASP. So the combination of those factors really have seamed together to form our guidance range for the full Company and that's what drove it.

Okay.

John Lovallo, Bank of America.

The first question is on the order growth throughout the quarter, maybe you can give us a little color on how it progressed on a monthly basis and then maybe how March will look through the first few weeks of the quarter?

Okay. Well, I think at our year-end call in January, we shared that at that time, we were up 11% through the second week of January so about halfway through. For the quarter, we were up 14%. So incrementally up a little bit year over year. But I don't like to get too caught up in the monthly trend because it depends on when the weeks are and if something grand opened here or there, it can move things around.

My summary comment would be through the quarter, throughout the quarter, our demand was pretty constant at a pretty high rate so things were very good. We don't, again, typically don't share orders two weeks or three weeks into a quarter so I won't give you that, it would be a general comment. The market conditions remain very good right now.

Okay. Thank you and then I guess what are you guys expecting in terms of lumber inflation for the year?

Well, lumber is one of those categories right now where we have our eye firmly on. There's a lot going on in the lumbar commodity category, both with the situation with Canada and everything else that we are seeing. What we had typically have done is we try to protect our backlog first and foremost with our suppliers.

So we try to lock in our pricing on our current backlog so we are not seeing unanticipated cost increases on that piece of it. But I think overall, my comment would be a -- it's a category that we are very watchful of right now. And we will continue to see where the trends are going. We do lock lumber prices on a forward basis with our suppliers. We don't buy forwards but we lock prices in and try to roll through it, so we have some mitigating factors there but it's certainly a concern area for us on the material cost side.

Thanks, guys.

Bob Wetenhall, RBC Capital Markets.

This is actually Michael Eisen in for Bob today. I was just hoping you guys could give a little more color on the opportunity that inactive currently represent on the balance sheet, maybe how much value of these communities continues to be and the number of communities that can still be open. And then in turn, how much cash that potentially can provide for debt refinancing since you aren't having to buy more land to open communities?

Right. I think one thing is we are still looking to buy new land to open new communities is because we like to continue the core community growth that we've had in the Company and we would like to continue that. Obviously at better margins than we're seeing on the reactivated side so it's not for, in our mind, a substitute but it is a nice source of cash for the Company.

We talked about last October at our investor conference that we have our eyes set on getting the total level of land held for future development below $150 million by the end of 2019. We believe we are on track to get there; if you look at the multi-year trend, we've done a really nice job of reducing that number. We've done about $360 million at the end of the first quarter.

We will continue to activate communities and work down that balance but that's our current target is to be at or below $150 million, which would take us down to about 4% of our total inventory.

Very helpful. That just as one follow-up, as I'm looking out some regional trends you guys reported, can you touch on what's been going on in the Southeast, maybe if there's differences in community counts there and what is driving some of the softer demand trends compared to the rest of the portfolio?

Mike, I touched on that in my prepared comments, but our absorptions per community in the Southeast were actually up a little bit. The number gets blurred because we shut down our DC business and we've been repositioning some of the cities where we've been working through actually a lot of reactivations and getting through that before we invest in a lot of new growth.

So our community count is down a little. Our sales pace per community actually was up. The markets over there are performing well and demand is growing just like we're seeing in every other city we are in.

Mark Weintraub, Buckingham Research.

You've really actually covered a lot of it so maybe I will use this opportunity to make sure I understood it and clarified it. It sounded like on the ASPs, because you did show a nice increase and a partial mix and partial including the higher pricing from California, you were also talking about just a better environment so does that mean if that continues, you might see higher push up in ASPs and some other regions and California, too? Is that one potential source of upside that we should be contemplating?

Yes. Look, in our first quarter, California wasn't even the largest uptick in ASP on -- based on deliveries. We're almost at 6%, right in ASP in our central region, and almost 6% in our southeast region, and California is up about 5%. So we're seeing it kind of across the business so it's -- there's been a lot of discussion about California, but the rest of the business is also operating quite well and quite effectively.

The difference is in California because there's such a large difference in the base ASP in the West Coast region relative to other regions, in particular, Southeast region, if you get a mix shift between those two regions, it really pushes up the total Company and that is that is -- that has a very large outside impact on it.

But I would say across the business, we are seeing rising ASPs and in many cases, due to community mix as much as it is due to market increases. That's where we are at on that one.

And then I guess on the flip side, it seems cost is the other way, where the building material side, et cetera. I guess I was just really trying to get a better sense. You noted that you built in -- you had locked in on where most of your backlog would be. Now would that have been prices that are current or would that essentially cap prices that are lower than where it were lumber, for instance and frankly, wallboard, and structural panels have gone up a fair bit, too.

Would that -- so are the prices that are rolling through from where they were six months ago? Or would they be where they are now and would be so -- that if prices were to stay where they are, is there some inflation you're going to have to deal with or is it already in the types of results you are reporting?

No. What we try to do is we try to lock the backlog once a home starts so once it's sold and we get it started, we try to lock the cost in at that point. In some cases, we are successful, quite frankly, and in some cases, we see continued cost pressure even after start which we really prefer not to see and prefer not to see that behaviour from our supply base.

But it does happen, particularly in tight labor markets. So we do believe though there will be continued cost inflation during the year because it is another indication of a strong market and as long as we get some incremental price, we think we can offset it. But certainly, part of any incremental price that we do see would go towards offsetting potential upward pressure on cost and that is something that we have been dealing with and probably expect to deal with, at least through the end of 2017.

Great. Thank you.

Jade Rahmani, KBW.

Wanted to see if you could comment on potential tax reform? Just looking for a big picture thoughts with respect to your DTA. My sense is you may have been hesitant to either issue a lot of capital or enter into strategic transaction because of change in control. Just wondering if lower corporate tax rate could change that calculus. Would it improve your strategic flexibility?

We never had any issues strategically with contemplating anything to do with equity or M&A or anything else relating to DTA. We've always been mindful of it. We haven't issued equity in several years now and it hasn't really been part of the factor. I think our capital strategy has been pretty clearly laid out, where we are looking at delever the balance sheet, not take on additional capital, continue our dividend, and use capital for growth of the business.

So that's really where we are targeted and I would say potential changes in tax policy have very little, if any -- will have very little, if any, impact on that strategy.

Thanks and then as a follow-up, can you just give your thoughts maybe on potential mergers and acquisitions? We've seen an uptick in the homebuilding space and is this something management would be interested in?

Over the years, we have been an acquirer, significant acquirer many years ago. Right now, we would look at it as a growth opportunity. In our certain markets, our state of goal is to really rebuild our scale in the cities in which we operate and if an opportunity came along that would bolster our lot count in our business [activity], we would look at it.

We are not looking to do anything with anybody to go in a new markets or different markets or different buyer products. We like our business model and we will stay focused on that for now.

Thanks very much.

Ladies and gentlemen, this concludes today's teleconference. Thank you for your participation You may now disconnect your lines.