KB Home
Q1 2013 Earnings Call Transcript

Published: 21 Mar 2013

[Operator:]

Good morning. My name is Sarah, and I will be your conference operator today. I would like to welcome everyone to KB Home 2013 First Quarter Earnings Conference Call. [Operator Instructions] Today's conference is being recorded and a live webcast is available on KB Home's website at kbhome.com. The company will make a presentation and then open the line for questions. [Operator Instructions] KB Home's discussion today may include forward-looking statements that reflect management's current views and expectations of market conditions, future events and the company's business performance. These 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 its control, including those identified in its SEC filings, the company's actual results could be materially different from those expressed and/or implied by the forward-looking statements. A reconciliation of non-GAAP measures referenced during today's discussion to their most directly comparable GAAP measures can be found in the company's earnings release issued earlier today and/or on the Investor Relations page of the company's website. I will now turn conference over to the company's Chief Executive Officer, Mr. Jeff Mezger. Sir, you may begin.

[Jeffrey T. Mezger:]

Thanks, Sarah, and good morning to everyone. Thank you for joining us today for a review of our first quarter financial results. With me this morning are Jeff Kaminski, our Executive Vice President and Chief Financial Officer; and Bill Hollinger, our Senior Vice President and Chief Accounting Officer. I will start today's call with an overview of our first quarter results, followed by a more detailed discussion on many of the operational drivers behind our performance, and then provide an outline of the key priorities we have set for 2013. Next, Jeff Kaminski will take you through the details of our financial results. After which, I will conclude our prepared comments with a few remarks before we once again open up the call to your questions. Over the past few years, we have worked diligently to reposition our communities with a focus on 2 primary components. We prioritize our investments in select, more dynamic housing markets and optimize our product designs and model offerings for today's consumer preferences with the expectation that these 2 moves would accelerate our progress towards our goal of sustained profitability. Our hard work on all fronts is now paying off, and we are pleased that our first quarter results reflect meaningful improvement in our financial and operational metrics. While we recognize we still have work to do in achieving normalized profit levels, our actions have now positioned us for profitability and growth. Some of the highlights of the quarter that illustrate our progress include

[Jeff J. Kaminski:]

Thank you, Jeff, and good morning. Our results clearly reflect another quarter of progress in improving our operating performance, as most of our financial metrics are considerably better than the first quarter of 2012. For the first quarter of 2013, we reduced our net loss by over $33 million or $0.43 per share, as compared to the same period of the prior year. Higher top line revenues, combined with significant improvements in our housing gross margin percentage and SG&A expense ratio accounted for the majority of the improvement. As a result of the 29% increase in homes delivered and 24% higher average selling price, our first quarter total revenues of $405 million increased by 59% versus Q1 of the prior year. All 4 of our geographic regions reported increased housing revenues for the first quarter, with the strength of our West Coast region continuing to account for the majority of the increase. In the West Coast region, our revenues were up more than $100 million or 96% from the first quarter of 2012, with the Southeast and Central regions up 68% and 33%, respectively. As Jeff described earlier, our strategic land investment in highly desirable land-constrained submarkets, combined with our trend of increasing square footage and a general market price lift, has extended our streak of year-over-year average selling price increases to 11 consecutive quarters. Our overall average selling price for homes delivered during the first quarter was approximately $271,000. This represents a significant year-over-year increase of over $52,000 or 24% and is off slightly higher on a sequential basis as compared to the fourth quarter of 2012. Average selling prices were higher in all 4 regions, with year-over-year increases ranging from 13% to 22%. We expect to see a continuation of the trend in our overall average selling price with both year-over-year and sequential improvements in each of the remaining quarters of 2013. We anticipate that our ASP for the full 2013 fiscal year will be over $280,000, an improvement of at least 14% as compared to $246,500 for 2012. Moving now to housing gross profit margin. We recorded a first quarter result of 14.8% as compared to 8% in the same quarter of 2012. Excluding the $6.6 million impairment charge in the prior year quarter, we realized a 420 basis point improvement, driven by community mix, pricing actions, improved leverage on fixed cost and lower closing cost allowances, partially offset by the impact of higher direct construction costs. The current quarter gross profit margin also reflected a slight sequential improvement as compared to the fourth quarter of 2012, despite the negative impact from the loss of fixed cost leverage due to lower revenues. As noted in our press release, we reclassified the expense relating to closing costs allowances provided to certain homebuyers from SG&A expense to construction and land cost in order to be more consistent with the practice of other public homebuilders. Prior period amounts have been reclassified to conform to the current treatment. We will include a schedule in the first quarter investor presentation that we will post on our website later today that summarizes the 2012 quarterly gross margin and SG&A results reflecting this reclassification. For the remainder of the year, we expect to see sequential improvement in our quarterly housing gross profit margin. While we are focused on top line growth and gross margin expansion, we also maintain a close watch on controlling our overhead costs as a key component of our plan to continue to improve our operating margins. As a result of our ongoing efforts over the last few years to reduce overhead expenses, we are well positioned to leverage our lower-cost platforms at higher delivery volumes, which will further improve our bottom line. This can be seen in our first quarter results. Even as our revenues increased significantly during the quarter and we implemented accelerated profitable growth initiatives, we continued our cost containment discipline and realized a meaningful improvement in our SG&A ratio. Our selling, general and administrative expenses for the quarter were $59 million or 14.7% of housing revenues as compared to $51 million or 20.4% of housing revenues in the first quarter of 2012. This represents the lowest first quarter levels since 2007 and reflects the year-over-year improvement of nearly 600 basis points. For the first quarter of 2013, we increased our year-over-year housing revenues by over $150 million while holding our SG&A expense increase to less than $8 million. We expect further improvement in our overall SG&A expense ratio, as we continue to contain costs while growing our quarterly housing revenues through the remainder of the fiscal year. In addition, as a result of the expense reclassification that I explained earlier and other previously implemented cost reduction initiatives, the variable component of our SG&A expense is now running at approximately 5% of housing revenue. The significant improvements in both our housing gross margin and SG&A expense ratio drove a 12.5 percentage point increase in our operating income margin, as we reported $0.5 million of operating income in the first quarter of 2013, as compared to an operating loss of approximately $31 million in the same period of the prior year. We expect to realize continued year-over-year improvement, as well as better sequential performance in our operating income margin for the remainder of the year. On the fourth quarter 2012 earnings call, we told you that we were considering a revision to our community count definition. We have completed the review of our methodology and have raised the threshold for an open selling community to 5 lots left to sell in order to improve consistency with the rest of the peer group when comparing absorption rates. As you may recall, our community count previously represented communities with one or more lots left to sell. We are reporting our community count results for all periods using the revised methodology and will continue to do so in the future. Later today on our website, we will include a schedule that summarizes our community count for each quarter of 2011 and 2012 reflecting this methodology. Our community count was relatively flat for the first quarter of 2013, as we opened 15 new communities and closed out 16. As of February 28, 2013, we have 171 communities open for sales. The average for the first quarter was about 172 communities as compared to an average of 193 communities for the first quarter of 2012. Despite the 11% decline in average community count, our net orders were up 40% year-over-year, reflecting an increase in our absorption rate of 56% from 6.2 net orders per community in the first quarter of 2012 to 9.7 in the same period of this year. This improvement reflects both the positive effects of our community repositioning, as we opened 60 new communities over the past 4 quarters, as well as the strengthening housing markets in the cities where we operate. We anticipate that our community count will increase sequentially for each of the remaining quarters during 2013, more heavily weighted towards the second half of the year, as our land acquisitions and development activities convert into open communities. We still plan to open a total of more than 120 new communities during the fiscal year. We believe we can increase our fourth quarter average community count in a range of 15% as compared to prior year period, depending on absorption rates and the resulting pace of closeouts. We invested approximately $345 million in land acquisitions and development during the first quarter, including land acquisitions partially funded by seller financing. This brings our total investment over the past 4 quarters to almost $800 million, driving our planned committee account expansion, a key component of our profitable growth strategy. We plan to continue to aggressively invest in land assets that meet or exceed our return expectations and anticipate that our total investment for the 2013 fiscal year will exceed $1 billion. To continue to fuel this driver of community count growth and in turn, top line revenues, we added over $500 million of liquidity since the end of the fiscal year. During the first quarter, we enhanced our balance sheet and better aligned our capital structure for accelerated growth through the execution of concurrent public offerings of common stock and convertible senior notes. These offerings were heavily oversubscribed with full exercises of overallotment options for both issuances. We raised net proceeds of $333 million from these 2 transactions. Following the success of the capital market transactions, we recently finalized an unsecured revolving credit facility in an initial principal amount of $200 million with an option to potentially increase the principal amount to $300 million. We obviously are extremely pleased with the success of these transactions and the meaningful impact that will have on driving future profitable growth for KB Home. During the first quarter, we had a net cash usage of $211 million from operating activities, as compared to a net usage of $109 million for the same period of 2012. However, excluding cash used for land and development initiative -- investments from both periods, we generated $110 million of operating cash in Q1 2013, a solid improvement of almost $107 million compared to the $3 million generated in the first quarter of last year. We ended the quarter with $669 million in total cash to support our community expansion plan and profitable growth strategy. Now I will turn the call back over to Jeff Mezger for some final remarks.

[Jeffrey T. Mezger:]

Thanks, Jeff. Before I make my concluding comments, let me first take a moment to thank the talented KB Home employees, who continue to work hard everyday to maximize shareholder value, drive our business forward and help deliver the dream of homeownership to our customers. I would also like to underscore today's key messages. We have momentum in our business and expect to continue to generate improved quarterly financial results as the year unfolds. The pace of the market recovery is accelerating, providing a tailwind to our actions. While we are pleased with the significant progress we have made in our financial metrics, we know that we have more work to do to achieve normalized profit levels. Our investments and product strategies are working. And as a result, we are experiencing higher sales rates per community, while also driving significant growth in our average selling price. Even though we are investing in higher-priced submarkets, we remain committed to the core first-time and first move-up homebuyers. We have rolled out our 2013 priorities of enhancing profitability and accelerating top line growth. As part of these initiatives, we have specific actions with goals in place for revenue enhancement, direct cost reduction and community count growth with every division, and our progress against these goals is tracked monthly. We will capitalize on our Built to Order business model to continue to capture additional opportunities for improvement in our operational and financial results. We intend to accelerate our top line growth by investing more than $1 billion on land acquisition and development during 2013. Finally, although the pace of the housing market recovery is gaining momentum, it is important to keep in mind that we are still in the early stages of the recovery. And there's a long way to go before the industry reaches normalized activity levels. Between the market recovery, our business momentum and our go-forward strategies, we have confidence that we will not only achieve profitability this year, we will leverage the spring coil in our growth platform to drive profitable growth going forward. Now we will be glad to take your questions.

[Operator:]

[Operator Instructions] Your first question comes from the line of Michael Rehaut from JPMorgan.

[Michael Jason Rehaut:]

First question, I just wanted to focus on the gross margins. You had nice improvement there. And I know you pointed to several areas that could drive further improvement and, of course, also guided to sequential improvement throughout the year. So in terms of the gross margins, can you give us any sense of where you think you might be able to end the year, given what you already have in backlog given some of the trends? And when you talk about option or lot premiums, I believe you said 1% below in studio revenues, another 1 or 2 points of margin. Just want to make sure I understand those are longer-term opportunities that, in aggregate, would be another 200 to 300 bps to the gross margin?

[Jeffrey T. Mezger:]

Okay, Mike, I did use those numbers and they are over the long term, and that would be closer to what we've achieved in what I keep referring to as our normalized market. I wanted to walk through those items in that, frankly, they may not be available to all the other builders. Our business model provides some real opportunity to pull levers that are visible for us. And in working with our Built to Order consumer, you know where you can push a little bit here, a little bit there on price and you can also lever a little bit differently on the cost. You didn't hear me talk about banging on contractors on the cost side because they will just go run to another community somewhere. So I think they are differentiators. And I think they'll start to illustrate real benefit moving forward. Same holds true on the lot premium side and everything I talked about because most of those are tied to experiences in our past over the last 15 years of running the business model. At this time, we're not going to give you a specific guidance on the gross profit for the rest here other than we expect the sequential improvement. We'll see how the spring market unfolds and how things work out for the rest of the year.

[Michael Jason Rehaut:]

Okay. No, I appreciate that, Jeff. I guess, the second question is around your land spend and your community count growth that would result from the acceleration you are putting in place right now. With the guidance, which is appreciated of 4Q average being up roughly 15% year-over-year, it would seem that there's still a lot more runway looking into fiscal '14 in terms of additional community count growth than -- obviously, you haven't given guidance for fiscal '14, but it would seem to me that given the material increase in land spend, it would be safe to assume at least a double-digit or at least a 10% incremental growth on average for fiscal '14. Is that fair to say, Jeff? And I guess, I'm talking not just to Jeff Mezger, but Jeff Kaminski, as you're looking at some of those acquisition outlays.

[Jeffrey T. Mezger:]

Sure. Well, Mike, there's no question we expect to continue a strong growth trajectory. That's our goal. And I shared the high side number. We've already delivered in these markets in the past. There isn't a single market we're in that's even close to the maximum market share that we're comfortable with. So we have a lot of upside in every market that we're in, and they're now all recovering and there's opportunities in every city to push community count growth. One of the things that slows it down a little is that the more desirable locations don't typically have a lot of finished lots on the ground. So that's what I referred to as when '13 unfolds, you'll see us open more communities because we're having to do some development or all the development to get them open. And as we continue to increase our spend, we expect to continue to grow our community count and what moves around a little bit, it's how fast you sell out of the existing. But Jeff shared the number for the year, and we're certainly not going to stop there. We want to keep pushing the envelope because we think it's the right time.

[Michael Jason Rehaut:]

Okay. Any thoughts around that 10% minimum number for fiscal '14 or you're not going to go there at this point?

[Jeff J. Kaminski:]

Mike, I think at this point, we're still really focused on profits and setting up a growth trajectory going forward out in the future years and prefer not to guide on '14 right now. But your overall assumptions and the way you're thinking about it, I think, are correct. I mean, we spent $800 million over the last 4 quarters. We just sort of talked about today $1 billion target for the current year. And yes, we hope to drive community count growth moving forward as a result of that. I think it will be hard not to if we achieved with those land spend goals. Now all at the same time, upholding our discipline on returns, et cetera, and making sure we're making wise investments with the funds available. But yes, that's the goal of the company, is to continue to drive the top line with community count increases.

[Operator:]

Your next question comes from the line of Robert Wetenhall from RBC.

[Unknown Analyst:]

This is [indiscernible] for Bob. So I wanted to get -- I just had a question about backlog conversion rates. It looks like this quarter sort of above trend of declining rate on a year-over-year basis. So I was hoping to get more color on that, along with what you're seeing in terms of labor, availability and cycle times and how that will impact the conversion rates going forward?

[Jeff J. Kaminski:]

Right. I guess just to start with the conversion rates and I don't know, Jeff, want to go after that. But the -- on the conversion, yes, we did -- we came in at what we call more or less normalized. I mean, the high 50s, we're looking at right around 60% as being normalized, I think. Second quarter last year, third quarter last year, first quarter this year, we're already in that range. Fourth quarter is typically a little bit higher. We had a bit lower conversion rate in the first quarter of last year. But I'd say that 60% run rate is more or less normal for us.

[Jeffrey T. Mezger:]

Really, in our business model, if it gets higher than that, it's -- because we didn't have enough backlog in the earlier stages for the future quarters' delivery. So in our normal rhythm, we'll typically range either side of 60%. So it is a fairly typical expectation for us going forward. On the subcontractor side, there's definitely some issues, depending on which city and which trade you talk about. And I think it's one of the strengths that we have due to our long-standing relationships or the benefits of our business model, that we have an opportunity, do a better job in retaining contractors. It comes and goes. There's nothing that's holding us up from really slowing down our construction cycle. You just -- you move through it and deal with it and as I always say, it's a much nicer problem to have than having too many subs and not enough houses under construction. So it's just part of the challenge of an industry that's recovering. But we're able to successfully navigate it and deliver on our expectation.

[Operator:]

Your next question comes from the line of Megan McGrath from MKM Partners.

[Megan McGrath:]

I wanted to follow up a little bit on your conversation about your shift in strategy to these higher-income submarkets. Looking forward, let's go another year or so, where we're into the recovery, so the volume is higher. Do you imagine that you would sort of prefer to pursue that strategy in new geographies and target those kind of buyer, let's say, in a new city? Or do you see yourself rather moving outward to perhaps a lower income, lower-priced consumer, but taking advantage of the fact that you're already in a particular geography?

[Jeffrey T. Mezger:]

Megan, as I shared in the prepared comments and mentioned on a previous question, we have significant upside in the markets that we're in, whether it's the -- our market share, frankly, even at today's scale in those markets and the activity level in the cities, or where they could head to. And you're always going to make more money staying in markets you know and leveraging your current team and platform as opposed to going into a new city. At some point in time, to keep your growth trajectory, you have to go into additional cities and there were some that we've been in before. We don't see that for some time as a requirement. If there's the right opportunity, we may consider it. But we think there's a lot of upside where we're at. And as these recoveries continue to mature and accelerate, what it does is open up more submarkets where there's a nice balance of supply and demand, and there's an adequate buyer pool to fuel growth at a little bit lower price point. And then, lastly, I think if mortgage underwriting were to stabilize and normalize, you'll see a lot of demand unleashed as well. So we're -- in our business model, we have the ability to react and be nimble and fluid and go where the opportunities are. And right now for the rest of this year, we see this as an incredible opportunity, how we're positioned today.

[Megan McGrath:]

Okay, great. And then I wanted to follow up a little bit on your comments around value engineering. And there's a lot of folks talking about this. And it's a little bit surprising that we're -- honestly, that we're still kind of hearing about it now. I mean, I would assume that during the deep part of the downturn, everyone was trying to squeeze every possible cost out of construction that they could. So I guess -- and could you tell us a little bit about what's new to this process now versus a couple of years ago? And what are you able to kind of get out now? I would assume that this -- maybe I'm wrong, but would have been a big part of what you were trying to do over the past 5 years or so.

[Jeffrey T. Mezger:]

It's a never ending process, Megan. As your business evolves and your product evolves and -- we keep shifting our product line, whether it's a smaller footage or a larger footage, and at different price points, you think you need to have different features. And then you find out maybe you didn't. And you're constantly testing it. And along the way, there's always something in the house that you fail to recognize before that you can go back and deal with and lower your cost. So it'll -- whether it's a spec-level item or a structural item, we never compromise structure. But there's things you can do in framing all the time in the way things are framed, where there's little opportunities here and there. So I'm not looking for major, major reductions in cost. Right now, we're trying to hold cost because there's a lot of pressure on that side. And we think there's opportunities through our approach to do that. In the long run, I think there's opportunities that walk-through, whether it's leverage in our scale or you take this out over here. But keep in mind, if we have a home that we build a couple of thousand of our -- around a system, a floor plan, and you save $1,000, it's a meaningful number when you can leverage it across your company. So that's why I said, none of these on their own are going to be major impact to the bottom line. But over time, a little bit here, a little bit there starts to add up, it is a process -- ongoing process.

[Operator:]

Your next question comes from the line of Dan Oppenheim from Credit Suisse.

[Daniel Oppenheim:]

I was wondering, you talked about some of the initiatives and priorities for 2013 in terms of maximizing revenues and such, but then no one talked about the absorption here at the start of the year. I guess, wondering, do these priorities get really in full swing at the start of the year? Or is it more here in the second quarter as it is now? I guess, thinking about those absorption levels, I want to think that you could potentially be pushing the pricing even a bit more than you are.

[Jeffrey T. Mezger:]

Good question, Dan, and maybe I wasn't clear in my comments. But we have a lot of communities that are in great situations, where there's incredible demand, strong price and it's a land constraint situation and you will meter the sales out to optimize pricing. But not all your communities are absolute screaming home runs. And we're not going to push the pace higher in the winners. You go there to keep it in balance and I keep saying, optimize the asset. But in every city, we have communities that are not performing at the level you would like. So those are the ones you go attack. And if is something doing 2 a month, then you can get it to 4 a month, where you have a lot of lots, so that's not selling like you would want it to. That's where you go. You hold the winners and you monitor your success, which is what we've been doing for 1 year, 1.5 years and -- on the desirable ones. And on the underperformers, well, well, those are the ones we'll go attack and figure out ways to make them sell better.

[Daniel Oppenheim:]

Great. And then a second question, just wondering about land, I think at the end of the last fiscal year, about half the land investment was in the West Coast. You've been talking about in the first quarter, majority in California, so the West Coast. As you think about the $1 billion for this year, will it be similar, majority in the West? Or what balance are you thinking for in terms of targeting?

[Jeffrey T. Mezger:]

It'll continue to be the majority in the West, in part the lot costs are much higher than many of our other states. But we're looking to push growth in all of our states, but California is more capital intense. I don't know if you want to give them percentage in the quarter.

[Jeff J. Kaminski:]

Yes, in the quarter, we invested about 75% of the total acquisition development dollars into the West region. And as Jeff said, we see that trend more or less continuing. The mix of the business, as you know, our revenues are slightly over 50% in California and the land costs are higher. So just naturally, if we were just going to replicate our current mix, we'd be up over the other regions in investment in the state.

[Operator:]

Your next question comes from the line of Stephen Kim from Barclays.

[John Coyle:]

It's John filling in for Steve. I wanted to address volumes really quick. Back when you guys preannounced the volumes for January 18, things were running off 54%. But since then, it seems like things have slowed, be an up 30% year-over-year. With the tougher comp in 2Q, how do you feel about your order trends heading into the second quarter? And could you give any color as to early -- earlier read on spring selling season?

[Jeff J. Kaminski:]

Right. I think, first of all, you should probably check your math a little bit on the quarter. The absorption rate, actually, in the second half of the quarter accelerated versus the first 7 weeks. What changed was the year-over-year comparison, and that was the guidance, actually, we put into that original release, that where we said the increase would moderate, the variance would moderate year-over-year, but not the orders. So the orders did accelerate for the second half of the quarter. But as Jeff has mentioned a couple of times, we are watching the pace versus price trade-off. We do know most of our community count increase will be in the second half of the year. So we're being careful in how we're managing our committees and what we have open and the pace of sales. And as long as we sell strong through the spring, we're going to be well set up to hit our business plan, top line revenues for the year and therefore, our profit objectives.

[John Coyle:]

Got it, okay. Switching gears just to the home community JV. Can you maybe give us any color, like the -- or any impact at the recent QM regs pertaining to the affiliated mortgage services and the proposed 3% cap? How that's affecting how you're looking at structuring the JV and what businesses you may or may not be involved in. Are you looking to be involved in title insurance appraisals or is it more going to be strictly mortgage origination?

[Jeffrey T. Mezger:]

For starters, QM is in a review mode, I'll call it. The regs don't kick in 'til next January, and a few of them are actually still being written. So our industry group is working on all that, first, to understand it, so you can then link it to each company's business and they can see how it impacts them. In our case, in our venture with Nationstar, this is -- we're going into this purely as a mortgage originator to service our customers and possibly some outside business, depending on the strategy down the road. We do have a small business in title insurance and homeowners insurance that we operate under KB. And if you just put the 3% with -- and we're still trying to understand which of those regs will apply to a venture. And whatever the regs are, we'll comply with them. But as we said here, we don't see a big impact to our business combined with this venture because of the 3-point cap.

[Operator:]

Your next question comes from the line of Buck Home from Raymond James.

[Buck Horne:]

Quickly, I was wondering, could you give away or give an idea how many mothball communities you have? And maybe with the dollar value on the balance sheet of inventory associated with mothball communities?

[Jeff J. Kaminski:]

We have right around 100 communities, about $650 million, I think, it will be in the Q in the details.

[Buck Horne:]

Okay. And any idea of that, how many are coming back this year or next? Any schedule there?

[Jeff J. Kaminski:]

Well, like, we were porting last year. I mean, we activated about 21 committees fairly recently over the last few months. Some are still in the process of being activated. We review the communities on a very regular basis. Monthly in, at least quarterly in, in every community. And as the market conditions continue to improve and as our current portfolio shifts, we'll continue to activate committees. And what I mean, by that, if we have a committee down the road that's already open, obviously, we'll wait for that to close out or approach close out and transition over to some of the new ones. There's -- they're on various states of development and analysis, and it's a focus area for the company. We'll continue to focus there.

[Buck Horne:]

And I know this may be a little bit hard to do. But how much of the ASP increase that you're seeing right now? Is there a weight that you can estimate how much of that is product mix or geography mix versus core same plan-type price increases? Do you have an idea of kind of what same product price increases you're putting through are right now?

[Jeff J. Kaminski:]

Right. It's a little difficult because, as you can imagine, with a churn of communities in and out, it's never same for 2 periods in a row. But we would say about 2/3 of the increase is really result of the strategy, the repositioning of the communities, of the increase in the square footage, which is coming from things like modeling larger models, offering larger plans, et cetera. So we think fully 2/3 of it is coming from that area. Obviously, we are going and achieving and enjoying, actually, some sales price increases in various markets. But we think 2/3 is actually coming from the strategy.

[Buck Horne:]

So maybe like 7%, 8% kind of core price increase, like true price increase?

[Jeff J. Kaminski:]

It could be in that range. I mean, we think -- I would say it's probably in the 5% to 10% range.

[Operator:]

Your next question comes from the line of David Goldberg from UBS.

[Susan Maklari:]

It's actually Sue for David today. Looking at your energy-efficient products and some of the solar home programs and things that you talked about around those, as you move into these better located markets where you have a stronger first-time buyer or move-up buyer, are you seeing any change in how the buyers value that and maybe in the sort of benefit that, that can be longer term to improving your profitability?

[Jeffrey T. Mezger:]

Sure. As I've mentioned it, we're a great consumer laboratory in this area because of the way we can test products with various consumer segments and run it all through our studio. So we can see how the buyer respond. One of the things I didn't mention that's a big part of this is educating the buyer. First-time buyers, in particular, don't spend a lot of time thinking about their utility cost until they live in a home and get the first bill. And my general summary would be all consumers are interested in lowering their utility bills. The higher up you go in the income levels, the more they're willing to pay for it because it will take a longer time for the payback. But they'll make that investment to get the payback over time. A great example is our solar programs in California have rebates where you can actually upsize your solar all the way to a net zero house. And the more you go up in kilowatts, the bigger the rebate from the federal government for the upgrade. And in an odd way, the upgrades are basically offset. The cost of the upgrades are offset by the amount of the rebate. So you pay for it now and you get it back through your tax benefit. And in the first-time buyer communities, there's not a lot of upgrading going on because it may be, it's just too complex or they don't have the tax structure to see the benefit. As you go up in the income levels, it becomes a more popular option. So that's a great example of the different consumer behaviors. And today, there's not a lot of inventory out there. Our biggest competitor in normal times is resale. And with the age of much of the resale stock in the most desirable areas, it's an even bigger compelling reason. We have examples around the system where people's utility bills are down $300, $400, $500 a month from what they were paying in their resale that they moved out of. So I think the more the consumer understands it and the more technology advances and cost continue to come down, for the products, I think you'll see this become a very significant and integral part of homebuilding.

[Susan Maklari:]

Okay. And then in terms of the sort of the premiums, the kind of options that people are taking. Generally speaking, as the homes are getting bigger and maybe people are willing to take on a little bit more, are you seeing any general changes in those trends and what they're choosing for options and upgrades?

[Jeffrey T. Mezger:]

A little bit. It varies by city. My summary comment would be the people buying the homes today are buying them to live in them. And as we went through the housing cycle, it started becoming viewed as an investment. So that approaching the peak, people are buying the biggest house because they could, not because they wanted it, needed it and intended to live in it. And today, we're seeing more money spent on kitchen upgrades and things like that or room additions and structural things to cater to their preferences because they're going to live there. In the past, it was more about give me the biggest home and put more frills in. It's more of a value-oriented play today for the consumer.

[Operator:]

Your next question comes from the line of Alan Ratner from Zelman & Associates.

[Alan Ratner:]

My first question on the SG&A. So if we take the 5% variable number that you gave and kind of back that out, that assumes that the fixed component there is running kind of somewhere in the $39 million to $40 million per quarter range, which I think is pretty flat with where you were through 2012, but obviously, well down from where you were a few years ago. So my question is, I guess as a go forward and your community count ramps and understanding the 15% growth this year, is -- should we be thinking about that number creeping higher as community count grows? Or is that something you think you can keep at the current levels for a while?

[Jeffrey T. Mezger:]

Well, our goal is to keep it at the current levels. We are putting a lot of pressure on cost. And like Jeff mentioned, it's cost containment really, right now is the game. We don't think there's a lot of huge benefits to accrue to the company from trying to rip off more cost at this point in the cycle. But we do want to enjoy the leverage benefits of an increasing revenue line and holding our cost as fixed as we can keep them. So that is certainly the objective. In certain cases, we have made some strategic investments in expenses and resources. We talked about it in a fair amount the last couple of quarters of last year, where their growth drivers and things are very associated with construction and customer facing functions where we see stress in those functions, we made to put some resources back and spend a little bit more money, but only to improve the bottom line. So we're being very cautious on it. We are going to continue to keep a very heavy discipline on the SG&A side. Of course, as revenues continue to tick up the way they have been, it becomes more and more difficult to do it. But we've been very successful over the last 3 or 4 quarters, especially where we see nice revenue increases and been able to keep the cost down.

[Jeffrey T. Mezger:]

And Alan, if you break it down a little more by component, we can do significantly more volume with our management structure today. And when I say management, that would be a corporate or down at a division level. Many of our divisions delivered 3, 4, 5x in units from where they are today with the same teams. So if we ramp up community count, you're not adding to your management fix, you have the community fix tied to the model cost, a superintendent, things -- utility bills and the models. But with the way our committees are performing as we open them, the revenue is far outpacing and the margin is far outpacing any of the community specific overhead that you have to add. So we're very solid. As Jeff said, in cost-containment, there's a strategic element here or there where we incur a little bit of cost, but we -- our plan here is to continue to push revenue in very incremental, at best, fixed cost increase.

[Alan Ratner:]

Great, that's good to hear. And my second question, on the California orders this quarter, year-over-year gain was very strong. That was on a pretty easy comp. And when I look at it sequentially, your California orders were actually down about 15%. And I think if you go back in your first quarter, you generally see a little bit of a lift there. So given the strengths you're seeing in that market, is there something else going on there, either kind of timing of getting communities open or maybe pushing price intentionally to slow that volume that would have caused that sequential drop in orders?

[Jeffrey T. Mezger:]

Well, you hit on a lot of it, Alan. The timing in California in and out of communities when you grand open. We had a few grand openings late in the fourth quarter. And then they carried over early in the first quarter. But we've been applying our discipline of don't let the sales run too hot and keep pushing the price where you can without giving up any of your sales pace. So we have a nice balance. I wouldn't overreact to 1 quarter of comps, because there's too many things that can influence. And I am very bullish on California in general. Right now, I would say the housing markets here, the recovery is far outpacing what we're seeing in most of the markets. So there's no sales issue here. It's how much money can we make.

[Operator:]

And your final question comes from the line of Michael Roxland from Bank of America.

[Michael A. Roxland:]

Just really one question. Wondering if you could just comment more on the land market and the continued competitive environment you're particularly seeing for land in California. On this call, on past calls, it seems like you guys were able to acquire some really interesting properties. And maybe you can just expound on how you're finding those opportunities?

[Jeffrey T. Mezger:]

A lot of it has to do with what I referenced in our prepared comments. When you have a land team on the ground for a couple of decades in the same market, and you have a company that's headquartered here and knows all the nuances, you do become the buyer of choice for land sellers. And there were things that came to us just in the first quarter that were somewhat opportunistic, but right in the wheelhouse of our product price and geography strategy. And I keep raising it because as these markets continue their recovery, I think you'll start to see differentiation among the builders, where people have more expertise in one state than they do in another. And the example I always use is while -- we have a stronghold in California, we really like our business here and we have great land teams, we're new to DC. And there's others that can do in DC what we couldn't dream of doing because we don't have the expertise or the seasoning that we will have at some point in time in our land departments. And I could name of bunch of other cities, and every builder has a different profile. But here in California, we continue to see success in finding real opportunities to continue to acquire in very high demand, very valuable location.

[Michael A. Roxland:]

Got you. And then just real quick. Are there any other opportunities or region, cities that you're particularly interested in expanding into at this point?

[Jeffrey T. Mezger:]

No, not really. We're going to push the envelope in the cities that we're at -- that we're in. And there isn't a city we're in today that doesn't have a lot of opportunity. The California recovery has become strong enough. And I've been and talking about it for the last probably 6 earnings calls, but every city we're in has a similar recovery occurring, where there's a desirable area with no inventory, a lot of price movement upward, and then the recovery will ripple out to the other areas adjacent and so on and so on. So we're hard at it seeking growth opportunities in every one of the 33 cities we're in today.

[Jeffrey T. Mezger:]

Okay. Well, I guess that's it for now. And once again, I'd like to thank all of you for joining us this morning. Have a great day, and we look forward to talk to you again soon. Thank you.

[Operator:]

And this concludes today's conference call. You may now disconnect.