KB Home

Good afternoon. My name is Devin, and I will be your conference operator today. I would like to welcome everyone to the KB Home 2020 First Quarter Earnings Conference Call. At this time, all participants 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 at kbhome.com through April 26. Now, I would like to turn the call over to Joe Peters, Senior Vice President, Investor Relations. Joe, thank you. You may begin.

Thank you, Devin. Good afternoon, everyone, and thank you for joining us today to review our results for the first quarter of fiscal 2020. On the call are Jeff Mezger, Chairman, President, and Chief Executive Officer. Matt Mandino, Executive Vice President and Chief Operating 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 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 to Jeff Mezger.

Thank you, Jill, and good afternoon, everyone. We're finding creative ways to adapt to changing conditions as the country deals with the COVID-19 outbreak. While Jeff and I are in the office today practicing social distancing, the rest of our team is on this call from different locations. These are unprecedented times, and our main priority continues to be the health and well-being of our community of employees, customers, and business partners, and their families. While we are reporting excellent first quarter results today that showed strong momentum across our footprint, given current market conditions, we are withdrawing our guidance for this year. Rather than follow our standard approach for these quarterly earnings calls, my remarks today will focus on how we are responding to the COVID-19 related challenges, the actions we are taking to navigate this uncertain environment, and the strength of our positioning to manage through it. We began the process early last week of temporarily closing our sales centers, model homes, and design studios to the general public. During this time, we have shifted to appointment only, following appropriate protocols, to help ensure the health and safety of our employees and customers. We're also leveraging our virtual sales tools, including home video tours, interactive floor plans, and an online design studio to give customers the ability to shop for a new home from the comfort and safety of their mobile device or personal computer. In addition, we are also actively engaging with customers by phone, email, FaceTime, Skype, and other online tools. We are seeing an increased response to our digital efforts. Month to date in March, visits to our website are up nearly 50%, and conversions to sales leads are up over 20%, both as compared to their respective prior year periods. In addition to the temporary changes we have made at our communities, we have also shifted our corporate and division office functions working remotely we will continue to monitor the situation and follow the guidance of the Centers for Disease Control and Prevention as well as state and local authorities in most of our markets there are restrictions on activities commonly called shelter-in-place orders but these orders usually exempt residential construction categorizing it as an essential activity Our company is better positioned than perhaps we have ever been to deal with this type of disruption. The tremendous progress we made over the past three years under our return-focused growth plan has truly transformed KB Home. We are now a larger, more profitable company with a higher gross margin supported by a solid balance sheet which has no goodwill and over $1.2 billion in liquidity. Our leverage ratio has steadily improved in the past few years and continued to progress in the first quarter both year-over-year and relative to year-end 2019. In addition, we have a better mix of assets as a result of both our discipline in acquiring land as well as the ongoing reduction in our inactive inventory. Our approach to land acquisition has primarily focused on communities that provide a roughly one to two year supply of lots in preferred sub-markets with price points that are attainable by the median household income. Our lots owned at the end of the first quarter represented a 3.1 year supply based on our last 12 months of deliveries. In these challenging times, housing is an even more essential need as home buyers want a place of their own for many reasons, including safety, security, and health. Throughout the first quarter, low mortgage interest rates and a strong economy, together with limited resale inventory, fueled home buyer interest. And demand held steady for the first two weeks of March, with our net orders up 7% relative to the comparable prior year period. As news of the coronavirus intensified, and we temporarily closed our sales centers, as I mentioned earlier, traffic and sales slowed in the third week of March, with net orders now down a cumulative 5% quarter to date as compared to the prior year period. Our cancellation rate is currently healthy at 17% quarter to date, although both our order and cancellation rates could change as we go forward, depending on how conditions evolve from here. With our built order business model, our buyers are vested in their purchases when we start their home, given the time they have devoted to selecting their lot, floor plan, and structural options, then personalizing their home in our design studios, along with obtaining mortgage approval. We believe this process helps to reduce our risk of cancellations after start. At the end of the first quarter, Our backlog increased year-over-year to 5,821 homes with a value of $2.1 billion, up 28% relative to the prior year period. We remain in regular contact with our buyers and backlog, and with its high capture rate, KBHS, our mortgage services JV, gives us both an additional avenue to support and communicate with our customers, as well as better predictability to manage through the closing process. Operationally, the Built to Order model allows us to align our business to demand and build to our sales pace and not to a targeted delivery goal, minimizing our spec starts and mitigating inventory risk. Under this model, we also scale our land acquisition and development spend to sales. In addition, having already rotated our product offerings down in square footage to promote affordability, we have expanded the choices that buyers have in our communities. Our long-tenured leadership team has successfully managed the company through a variety of economic cycles. One of the many benefits of experience is learning to quickly adapt to changing market conditions. Given the uncertainty surrounding the duration and extent to which COVID-19 will impact the U.S. housing market, we are focused on being both prudent and strategic with our cash resources. We continue to close homes with our quarter-to-date deliveries ahead of the comparable period of last year, providing us with cash inflows, and we are closely monitoring cash outflows. As such, we have curtailed land acquisition and land development for now. This public health crisis has interrupted many businesses and government services, and we have found land sellers and developers to generally be accommodating in extending closing dates. We are also shifting to more targeted phases of land development aligned to our sales pace. We have longstanding relationships with many of our land sellers and developers, and we are working collaboratively with them to carefully and thoughtfully manage our business. In closing, we had an excellent first quarter and demand remained resilient in the early weeks of our second quarter. Although these data points are in the rear view mirror, they do provide a good sense of the strength of our business and the strong desire for home ownership. We believe we are well positioned with a solid balance sheet, strong liquidity, and an experienced leadership team that is communicating daily across our organization to ensure that we are focused on the right priorities with consistency. In addition, we have an effective core business strategy and a built-to-order model that provides flexibility and mitigates risk. I would like to thank all of our employees for their dedication to KB Home and determination to support our customers and each other. I also want to thank our trade partners who have responded to the call from our company and our industry colleagues to participate in a national campaign under the hashtag BuildersCare by contributing protective masks and eyewear for our heroic healthcare workers across the country who desperately need these supplies. I'm confident in our team's ability to lead our company through this period of uncertainty. We look forward to the eventual stabilization of market conditions and updating you on our progress along the way. With that, I'll now turn the call over to Jeff for the financial review.