Good afternoon. My name is Devon and I will be your conference operator today. I would like to welcome everyone to the KB Home 2019 First Quarter Earnings Conference Call. At this time, all participants lines are in a listen-only mode. Following the company’s opening remarks, we will open the lines for questions. Today’s conference call is being recorded and will be available for replay at the company’s website kbhome.com through April 26. Now, I would like to turn the call over to Jill Peters, Senior Vice President, Investor Relations. Jill, you may begin.

Thank you, Devon. Good afternoon, everyone. And thank you for joining us today to review our results for the first quarter of fiscal 2019. With me are Jeff Mezger, Chairman, President, and Chief Executive Officer; Jeff Kaminski, Executive Vice President and Chief Financial Officer; Matt Mandino, Executive Vice President and Chief Operating Officer; Bill Hollinger, Senior Vice President and Chief Accounting Officer; and Thad Johnson, Senior Vice President and 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. These statements are not guarantees of future results and the company does not undertake any obligation to update them. Due to factors outside of the company’s control, including those detailed in today’s press release and in 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 turn the call over the Jeff Mezger.

Thank you, Jill, and good afternoon. We had a solid start to 2019 with first quarter results that reflected continued execution on our returns focus growth plan, particularly in our balanced approach to allocating the significant cash flow we have generated to achieve our objectives. We made considerable progress in three key areas, continued to expand our gross profit margin, further strengthening our capital structure, and realizing growth in our community count. Our capital allocation priorities have been very consistent since the start of our plan in 2016. Investing in our future growth and reducing our debt. In just over two years, while continuing to invest in land acquisition and development, we also repaid over $800 million of debt, which has meaningfully reduced the amount of interest incurred per home and created a tailwind to our gross margin. In the first quarter, this interest reduction benefited our gross margin by a full percentage point year-over-year. During the quarter, we repaid the $230 million that was due on our convertible notes, decreasing our diluted share count by $8.4 million shares, which will benefit our earnings per share this year. Our debt-to-capital ratio in the first quarter was down about 500 basis points year-over-year, reflecting significant progress. An additional highlight for the quarter was our community count growth. While we began to see year-over-year growth in our average community count in the 2018 fourth quarter, we anticipated a bigger step-up in 2019 first quarter and we achieved it. Our average community count growth of 10% reflected increases across each of our four regions and both our average and ending community counts were the highest they have been in several years. Moving up from the quarter’s results, as we look at the health of the U.S. economy, it remains on solid footing. Consumer…

Thank you, Jeff, and good afternoon everyone. I will now review highlights of our financial performance for the 2019 first quarter as well as provide our outlook for the second quarter. While the year-over-year reduction in our net order and backlog values during the second half of last year, negatively impacted our first quarter housing revenues, SG&A expenses ratio, and operating income, we believe we are well positioned for the remainder of 2019. We are anticipating several factors to positively impact the business in the second quarter, including opening over 35 new communities, attracting incremental home buyers with our additional offering of smaller floor plans designed to address affordability concerns, and generally stronger demand resulting from increased consumer confidence and steady interest rates. In the first quarter, our housing revenues declined by 8% from year ago to $798 million, reflecting a 5% decrease in our overall average selling price and a 71 unit or 3% decline in homes delivered. The primary driver of these decreases was the lower first quarter unit deliveries in our West Coast region, along with specific community mix impacts within our Bay Area operation, particularly the absence of fixed communities with average selling prices of $1.1 million to $1.8 million that closed out in 2018. We ended the first quarter with a backlog value of $1.66 billion, down 16% from the year earlier period, which was our highest first quarter backlog value in over a decade. The decline largely reflected the 14% year-over-year decrease in beginning backlog value, along with the impact from the close out to higher priced Bay Area communities that I just mentioned. We believe our backlog value supports second quarter housing revenues in the range of $900 million to $950 million. In the first quarter, our overall average selling price of homes…

Thank you. [Operator Instructions] Our first question comes from the line of Stephen East with Wells Fargo. Please proceed with your question.

Thank you, and good afternoon, guys. Congratulations on a good quarter in a very tough environment. And I guess, I'll start with that tough environment. As you all looked at, your gross margin was better than we expected. Your California orders were better than expected. As you look at the incentive environment, what are you all seeing in your primary markets? And I'm thinking more about California, but if there are other markets you need to talk about, go ahead? And then how are you all responding on that incentive front versus what your competitors are doing?

Stephen, as you would expect, it's a mixed answer depending on where you are in our business and our footprint. But I would say at a high level, our incentives in November, December were pretty aggressive. A lot of builders were clear in their year-end inventory and whatnot. We stayed out of that game. We held to our business model and worked on sales. And while our sales were off in the – in December, we elected to wait and see what January and February would bring to the business. And as – sometimes you're lucky, but the business showed right back up again in January and February. I think, it's a combination of the start of the spring selling. Interest rates came down. The consumer feels better, so demand came right back. And at the same time, I think, builders backed off of their incentives a little bit. As we talk with our management in any given city, somebody is out there doing something to clear inventory, but it's not broad-based like it was in the fourth quarter. But we stay away for incentive payments. As you know, we're more focused on giving the best price and value, let them create their value in the studio and we've attracted more by offering lower footages and holding to our value proposition.

Okay, gotcha. And on the demand front and offering the lower square footages, it sounds like you're seeing a pretty good take there. As you look at the progression through the quarter and you gave us some good info there. As you got into March, it sounded like you were seeing the same acceleration. Is that a fair analysis of what you said? And do you think you all are starting to see any incremental acceleration from the rates – the recent drop in rates?

As we shared in the comments, Stephen, January was better and then February accelerated again. I think, the acceleration that we saw in February is probably more than just a coincidence when the rates started to pick back down a little more quickly. March is only three weeks into it, so I don't know that you can say that we got this trend we can talk to on a weekly progression or anything like that. But the dynamics in the market, our traffic levels, sales pace, what's going on is typical that March is a little better than February, and that's what we’re seeing it. I call it a pretty normal spring selling cycle right now.

Our next question comes from the line of Alan Ratner with Zelman & Associates. Please proceed with your question.

Hey, guys, good afternoon. Thanks for taking the question, and nice quarter. So, first question just on the demand trends through the quarter, Jeff, obviously, there's a – there was a lot going on busy quarter for you guys opening communities. Is it possible to rank order the impacts of what really drove that better sales pace through the quarter on a year-over-year basis between strong reception to new communities that you opened up, some of the company specific things that you did on the product offerings versus just kind of a broader market strengthening as rates came down, and kind of the environment stabilized?

I can try on that, that’s a tough one to answer. What we're seeing with our new openings and we've explained this before on these calls. Our community counts on average and if they’d opened the third week of February and opened to great success, it really doesn't help your absorption pace calculations for the quarter, because it's counted as a community. And even though it may have strong sales, it's only a couple of weeks of sales. So, I would say, on the community count side I'm encouraged as the Q1 openings mature, they're performing very well. We have a lot of communities coming in the second quarter and depends on when they open and how they've seasoned and what that does to sales. But I wouldn't attribute our sales improvement necessarily to just grand openings. And on the product side, we're just now getting on the ground. We're continuing to introduce the plans. We've had some models open up. They're selling well. It's incremental business for us. We don't see it as a broad-based driver, as I shared in the comments, get you more traffic. It may get you to a different buyer pool that couldn't otherwise afford that location and they want to live in that area. So, we see it as incremental, but beneficial to our business. And while we are introducing those interest rates ticked down a little bit, so it took a little of the affordability pressure off. But we like the positioning for – if interest rates were to rise again, we're far better positioned than we were a year ago. So, I would then go to the economy and job growth interest rates coming down. And I would say, that's a real driver right now of what we’re seeing and selling for.

Very helpful. Thank you for that. And second question, if I could for Jeff K. Just on the gross margin guide for 2Q, you guys typically do have some seasonality in your margin. So, I think your guidance kind of implies flattish sequential margins, maybe down a touch, which is pretty unusual for the 2Q versus 1Q, and you kind of walk through the mix dynamics there. I think, you mentioned you expect meaningful improvement in the back-half of the year. Just I know you're not giving official guidance, but should we think about your normal seasonal lift that you generally see as a pretty good guide to how we should think about that, or are there going to be other puts and takes to that?

No, I think that's the right way of thinking about it just from the point of view of the Q2 versus Q1, as well as the third and fourth quarter. It is a little unusual we're seeing in the second quarter. We did want to highlight that in the prepared remarks, that's why we added a little bit of color around the guidance and talking about just some community and regional mix factors impacting us. But we do see that coming back in the third and fourth. And a lot of it is driven by what we're seeing on the California community count growth with relatively higher margins, particularly in the Bay Area at high ASPs, with delivery scheduled off in third and fourth quarters, so all that will be helpful. But I think, you're looking at the right way for sure.

Our next question comes from the line of Nishu Sood with Deutsche Bank. Please proceed with your question.

Hi. This is actually Tim Daley on for Nishu. So, my first question is in regards to the land spend in the quarter. So, land spend was down around 17% year-over-year after around 25% growth that was put up last year. So, given the high-level of activity that we saw last year, how are you thinking about the budgeting for land investments in 2019? And should we kind of expect this trend of kind of maybe declines on a year-over-year basis to continue into the remaining quarters of the year?

Well, I'll make a few comments on the land spend. First of all, the year-over-year decline was really specific to a couple of large deals that we acquired in the first quarter of last year as opposed to any change in strategy you’re scaling back or anything like that in the first quarter of this year. So, it was really just – literally just a couple of large deals that happened in the first quarter last year, they didn't repeat this year. We will continue to use the same approach on our land spend as we move forward, and we evaluate market conditions. We also evaluate what we need to fill out our expected deliveries and top line revenues in future years and then drive really the whole company in order to acquire the right parcels and develop them and open up for sale that'll help us hit those top line revenues. So, we don't really use a budget approach with any of our divisions. Although at the corporate level, we know what our cash flow capability is and we'll try to stay within that. And we did actually a couple of years back, really pulled back from specific guidance on land spend, because it really depends on the full projects. And we've – like I said, had consistent discipline around the projects, around approvals, and we will judge it more on that basis. So, we're in a really good position right now with company liquidity and the cash flow we're generating from operations, where we don't feel really constrained at all on land spend side. But we do want to make sure we're investing in good solid deals that will drive returns in the future, and that's how we’ll continue to operate.

That's very helpful description there. So, I guess, the second question is more for Jeff M. You mentioned in your prepared remarks that you expect the Southeast to be a larger contributor to the overall company performance this year as kind of everything gets online growth community count. So that region's gross margin had been lagging relative to the overall company in others. I’m just curious, was – were you guys able to close that gap a bit in the first quarter of 2019? And maybe is that going to be contributing to a bit of the improvement that you're expecting in the gross margin in the second-half of the year?

There was a little bit of growth in the first quarter, and we would expect the trend to continue. If you look at what I shared four quarters in a row, we've had order growth in every business. And you need to get orders before you get revenue, before you get scale, before you get margin, and this region has been challenged in that regard for many years, and is now finally coming out of the cloud. We're opening more communities. We're executing well. We have great teams on the ground, and we expect more profitability and a lot of growth coming out of that region going forward. We think it can be a real tailwind for us.

Our next question comes from line of Stephen Kim with Evercore ISI. Please proceed with your question.

Yes, thanks a lot guys. Jeff K I guess, I just want to make sure that we were hearing you clearly with respect to your comments on absorption and community count and the intersection in 2Q. Basically what I'm hearing you, if you get absorption rates in line or equal to what you did in 2Q 2017 was about 4.8 orders of community, your community count up about, I think, I believe you said 15% to 20 % in 2Q. That would imply a range of about 0% to 5% auto growth in 2Q and I just wanted to make sure that – that is basically what you're trying to lead us to?

Right. Your math is accurate.

Okay, great. Second question I had relates to the recent news about FHA making some tweaks to the scorecard, the announcements [indiscernible] suggested you have about 10% of your business with FHA higher than DTI, with DTI is higher than 50%. I was wondering whether or not you, what your view was on the willingness of the company to increase exposure to product with consumers that may be using high DTI's like that. And if that’s something that you’ve kicked around in the C suite with respect to this change that happened, and just to get some contacts from your perspective as to that recent change?

Stephen let me make a few comments, we didn't touch on this in our prepared comments, but we're really pleased with the progress that we’re seeing in our execution in our joint venture with Stearns, our capital rate, retention rate whatever you called in the quarter was the highest it's been, since we started, we’re up in the 64% range and it's growing by the quarter so we're having higher costumer service levels and more predictable deliveries, which is a good thing. I wanted to reference the JV and that the underwriting is done by Stearns not KB. We have no influence whatsoever on the underwriting. If you look at our current book-of-business, our FHA is about 24% of our overall business and within that as we analyzed our backlog, less than 5% would have been kicked out to the manual underwriting instead of what they call the black box underwriting. So, it's 5% of 24%, it's really not much of a percentage of our overall business at all. So, we don't see that as a big mover for us or frankly the industry and the resale business relative to cutting of demand or taking underwriting. I don't think it's that big of a thing. I think it is more FHA trying to balance out their risk and their portfolio. Having said that, what we are also seeing in our borrower profiles improving credit metrics. I was noticing this morning, our FICO scores are up, our LTV's are going down. The credit profile of our buyers actually been strengthening and we’re not displeased with our sales, you already like more sales. But we don’t see the need right now to go stretch anything on the underwriting we’re doing just fine with the current loan programs that are out there, that are conforming loans for the most part.

Our next question come on line of Mike Dahl with RBC Capital Markets. Please proceed with your question.

Hi, thanks for taking my questions. So, first question on the absorption environment, I think Steve just touched on it in terms of what it implies for 2Q specifically. But also, just wanted to ask again around kind of the demand environment. Jeff M, you talked about it being a pretty normal spring. And if I look at the sequential improvement in 2Q versus 1Q absorptions. Kind of looks that way as well compared to history. If we comp to 2017, think you guys were doing a little under four sales a month for the entire year. Do you think that's a reasonable way to think about the balance of this year, or do you think just based on the improvement that you have seen in March you have the potential to kind of accelerate through and potentially do better than normal seasonality in the back half?

Well we continue with our strategy of balancing price and pace with every asset, over the last few years, we've kind of optimized that four a month and will take some more margin if we can above the four a month. As you look back and compare 2018 to 2019 for us, in 2018 pretty good market conditions and we actually built a bridge to revenue growth by running communities a little faster and the strategy was, we have to do that to keep growing revenue until we can achieve the community count growth that we have been chasing for a few years. We’ve now done that here in the first quarter. I shared in my comments we have the highest community count, not for a quarter, for a whole year, in many years right now and we expect it to continue to grow. So, we have more communities to farm our sales growth from and I don’t think you'll see it necessarily go much above the four month an average for a year. May spike above at this quarter or be a little below that quarter but we will continue with our four-month targeted discipline and try to go for margin above that.

Okay. Got it. That's helpful and that’s certainly good thing on the community count. In terms of the second question shifting over to margin side, I guess a two-part question for Jeff K. Could you remind us, I think the guide have been – that this accounting shift would impact gross margins by 50 basis points and SG&A by 70 basis points in 1Q, I guess, first is that impact what the impact was? Second, how should we think about that? In the context of that 2Q guide and then, I guess this will be third part, the interest amortization obviously a huge benefit year-on-year in 1Q. I think you've talked about it being a little more modest for the full-year in the past, but just any update on how we should be thinking about cap interest for the year?

Sure. I'll take your three-part single question. No problem. So, as it relates to Q1. Yes, we did guide 50 and 70 and we were off a little bit on both of those. Actually, the margin impact was a little more favorable than we had anticipated and the margin impact was about 70 basis points. On the SG&A side, it was actually a little more negative than we anticipated. We thought it would be a 70-basis point hit to SG&A and it was actually about a 100-basis point. So, the net operating margin hit we took in the first quarter due to the accounting change is about 30 basis points and again just as a reminder, the reason for it is, the model expenses of now, with the new accounting converted from a variable cost through a fixed cost, so they get more impacted by top lines volume and that's what we saw in the first quarter. The second quarter we think will be right around those same numbers that we saw in the first, 70 basis points on the gross and 100 basis points on the SG&A. And then we should see those turning in the third and fourth quarter, and basically what we think of the gross margin will stay relatively stable because it was a variable cost in the past. So, we think that’s 70 basis points or probably be about the impact for the full-year, but the SG&A with the higher revenues in the third and fourth quarter should reduce and impact so that by the end of the year full-year altogether we may see a slightly negative may be 10 basis points, may be 20 basis points negative to operating margin overall. Obviously over the medium term that goes to zero because the expense is…

Our next question come from the line of Jack Micenko with SIG. Please proceed with your question.

Hi. good afternoon. The land sales in the quarter were a little bit larger than you have seen, and I just want to draw on that a little bit, is that an acceleration of some of the monetization of some of the lower margin loss that are still left out there or is there something else and how do we think about that through the balance of the year?

It was a bit unusual, I mean, I would say, you know they were ordinary course sales. We don’t have really that many ordinary course sales, and that came from acquiring a couple of parcels that had either more loss and we cared to try to work though on pace. Part of the parcel was actually built or entitled for an apartment building. So, we made that sales to an apartment builder. The other ones were just lot sales to reduce some exposure. So, it really wasn’t related to the re-activation strategy or the debt side of things at all, just normal cause it just happen to lumpy in this quarter.

Okay, okay and then you know the quarter really sounds like it was, maybe really the tail of two quarters in terms of the difference in activity from beginning to end, was it the pause in November, December, was that enough to meaningfully change the labor environment and pricing power, just curious, you know about any labor observations you guys have over the last 3 or 4 months since we last talked.

It’s a little spotty depended on the market. We’re hearing anecdotally of more labor availability. I’ve actually in some market seen were apartments starts to weigh down that may have freed up some of the labor. Labor is still tight, but it seems to be easy in a bit. And one of the initiatives we’re on right now as a company is to expand our labor base and shrink back some of the build time we lost, with the labor pressure we saw over the last few years, but costs are still going up a little bit, but labor is a little loser that it was 6 months ago.

Our next question comes from the line of John Lovallo with Bank of America Merrill Lynch. Please proceed your question.

Hi, guys, thank you for taking my questions. The first one here, you guys indicated that the second quarter gross margin will be flat to down slightly, then third quarter and fourth quarter would step up pretty nicely seasonally, is it fair to think that the seasonally step up in the third and fourth quarter could be more pronounced than usual given the amortization benefit that you talked about and also I think lumper should start flowing to at point as well.

I don’t know how much detail we want to get into it. I mean, the reason we made the comment on the back half of the year was because it was a little unusual to a see a second quarter step down. We’re still not really providing full year guidance for a couple of different reasons. We’re not sure how the spring is going to finalize and they were still kind of right in the middle of it, beginning phase of it. And second, the third and fourth quarter deliveries, a lot of those deliveries are going to come from communities that had either just opened for sales or are going to open for sales in the very near future. So, it is all pretty hypnotical right now. And we do except to see a big mix shift in communities between what we have opened this year and last year for no other reason just from the pretty large step-up in community count that we are seeing. So, I don’t know that would predict anything outside of the normal. At the moment, we’re not even really going that far. We just wanted to give some directional flavor or color around what we think will happen in the third and fourth quarter.

Okay. Got it. And then second question is, the second half of the year you’re expecting year-over-year revenue growth and operating profit growth in the fourth quarter, I mean in terms of operation margin in the fourth quarter how should we think about it? I mean I know you are [indiscernible] but we could think that directionally that could actually be up on the year-over-year basis?

Yes, that’s what we’re saying by that comment, operating margin.

Perfect. Thank you.

Our next question comes from the line of Michael Rehaut with JP Morgan. Please proceed with your question.

Thanks, good afternoon everyone. Thanks for taking my question and congrats on the quarter. First question I just had, you know Jeff I think referenced earlier in the call that as you had highlighted in your prior call, December orders were down 15% obviously you’ve seen some good sequential improvement throughout the quarter that you said continued into March. I was just hoping to get a sense of what January and February orders the months were as a year-over-year percentage and, you know – I’ll leave it at that and maybe just any color around the sales pace on a year-over-year basis as well.

Mike as we shared in the comments, if you end the quarter down 4, and after a month, you’re down 15, you have to do better in the other two quarters. I hate to give monthly trends, because it depends on what a week cuts off and what holiday and what Super Bowl and all these other factors. But we shared that in January that we closed the gap and February was good. So that the momentum built through January and into February and the February momentum has continued here in March.

Right. Right, now understood. I guess, I was just trying to get a little more granular, but obviously, also the color on the second quarter sales pace is very helpful as well. So, we appreciate that. Secondly, just circling back to the gross margin cadence and you certainly appreciate the help there and how to think about it. When you mentioned the significant increase that you expect in gross margins in the back-half, which combined with revenue growth, you'd expect operating margin improvement in 4Q year-over-year. I was just trying to get a sense, I think, most people would be kind of interested if that would be more driven by an improvement in gross margins year-over-year, or more SG&A, maybe reaching below 9% we did in 4Q 2018, or would it be a combination? How are you thinking about the bigger drivers of that operating margin improvement at this point?

Right. Well, let me just walk you through a few things relating to gross margins first, then I’ll talk a little bit about the SG&A side. When we look at the back-half of the year, we have a number of what we think are tailwinds that will see coming at us or behind us, I should say. We'll see increased leverage on our fixed costs. We'll see continued good news on a year-over-year basis from the 606 adjustments, that’s about 70 basis points a quarter. I highlighted in detail about the interest amortization gains that we're expecting was the mix shift, both regionally and within communities that will go towards higher-margin communities in the back-half. And at least for the second and third quarter, we'll see some benefit, I believe even more benefit from the lumber cost reductions as we're on a look back cost on our lumber cost of the businesses. So, as we're closing the homes, where the lumber cost was at the trough, we'll see some good news there. Who knows where it's going over the next few months, but at least for the next three, four, five months or whatever, we'll see some positives? On a headwind side, the things we don't know right now, worse pricing power going to be added as we move through spring and through the back-half of the year. We think that's less of a risk now than it was maybe last quarter because of the recent rate moves, so that's a good thing. We're seeing more or less normalized input cost inflation. So, it's not out of bounds there and particularly, when you combine it with the lumber cost decreases, that's really well controlled right now, although that is still potentially a headwind. And the largest unknown force right now…

Our next question comes from the line of Scott Schrier with Citi. Please proceed with your question.

Hi, good afternoon. I wanted to just ask a little bit if you could talk about the weather in California, weather from a community opening standpoint or traffic or activity. And if you've seen a rebound – and if any kind of weather has caused any issues in terms of the pace you expect to open communities in California in the balance of 2019?

Weather – we stayed away from it, because we know it just sounds like an excuse. And everyone knows, we've had a lot of weather if you go back to last fall and hurricanes and all the rains and fires, we've had here. The snow in Colorado a couple of weeks ago had an impact on our communities there. So, we've been taken the hits, if you will, on delays in getting communities open. And that's in part why we're a quarter or two behind in our community count ramp up and now it's finally here. The guidance that we've given you for where we're headed right now with the community growth and our revenue growth and all that is tied to our current assumptions on what is going to take to get communities open, when they reopen and how much will they drive revenue. So weather is out there. We're just continuing to fight it and manage through it as best we can.

Thanks. And then for my follow-up, I wanted to ask about your earlier comment on creating value in the design studios and taking into account lower base prices with respect to smaller plans. What are you seeing there? Are you seeing that, because maybe the base prices of the smaller plans are there that folks are maybe buying more in the design studios or conversely are, they still pulling back and just thinking about any kind of gross margin impact that you might extrapolate from those trends into some of the commentary you talked about for gross margins up going forward?

It's a good question. We – as I shared, we’re early in the roll out of these plans. So, I don't know that we have enough data yet to tell any – to pick up on any trend. I shared that was – it's incremental business for us and it's helping with traffic and marketing. If it's 3% of our sales for the year, it’s not going to move the needle at all in the studios. If it's 10% of sales, it might a little bit. But we're seeing the studio revenue as a company hold pretty standard. And I like to remind people, it's not just the price point you're at, it could be a 2,000 square foot home for $1 million, or 2,000 square foot home for 200 grand, and the carpet is the carpet in the home. So, it doesn't necessarily go to the price point, it goes to what people want to put in a similar footage home around the country. But so far, over the last couple of years, our studio results have held pretty steady.

Our final question will come from the line of Matthew Bouley with Barclays. Please proceed with your question.

Hey, thank you for taking my questions. I wanted to ask about the community repositioning, again. I think, Jeff M, you mentioned in the comments that there was that one community that's operating above company averages on gross margins and you're seeing some pace driven by the reduced square footage offerings. So, are you saying that those product offerings specifically are already generating higher than company average margins, or I guess, just what else can you say around what the margin impact has been?

In that example, there's no question that those two floor plans are generating sales and the community is average enough to generate in a margin higher than our company average. Another one I can reference, because they're not all the same communities and the ones that we shared, we introduced the 1,400 or 1,500 square foot home below our community that was originally going to be 1,600 to 2,400. We just opened a community in Mesa, where we introduced a smaller floor plan, albeit bigger than the example I used on the call in a community called Allred Ranch in Mesa. We introduced an 1,800 square foot model. And since we opened, it's been 60% of the sales in that community and, again, it's that margins and pace higher than our company average. So, these aren't necessarily 900 square foot homes. They're smaller than what we were putting out there before, an 1,800-foot home can leverage a lot just like 2,200-foot home. It just – it brings you price point down and you sell more houses.

Okay, that's really helpful. And then I was curious if you've potentially started to see any impact of the solar panel rule in California, that's going to take effect next year? And I guess, if not yet, how would you anticipate seeing that effect in ASPs or margins as we start to look towards the second-half of this year? Thank you.

We're continuing to evaluate the roll out and what it means as a company, we're the largest builder of solar homes in California already. Probably close to half of our business is solar in the space, something in that area. So, as it rolls out, we actually think it'll move prices for that other half that don't have solar today. We’re evaluating LEED programs, which may not move the pricing at all, and we’re still trying to get our arms around on how to comply what does it mean. Today, it really hasn’t impacted anything other than what do in the normal course.

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