KB Home

My name is Alex, and I will be your conference operator today. I would like to welcome everyone to the KB Home 2021 Second 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, kbhome.com, through July 23rd. Now, I would like to turn the call over to Joe Peters, Senior Vice President, Investor Relations. Jill, you may begin.

Thank you, Alex. Good afternoon, everyone, and thank you for joining us today to review our results for the second quarter of fiscal 2021. On the call are Jeff Mesger, Chairman, President, and Chief Executive Officer. Matt Mandino, Executive Vice President and Chief Operating Officer. Jeff Kaminsky, Executive Vice President and Chief Financial Officer. Bill Hollinger, Senior Vice President and Chief Accounting Officer, and Thad Johnson, Senior Vice President and Treasurer. 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. Before I turn the call over to Jeff, I will note that year-over-year comparisons should be considered in the context that our performance in the 2020 second quarter was significantly and negatively affected by the broad economic downturn and the extensive public safety measures put in place across the country beginning in March due to the COVID-19 pandemic. And with that, here is Jeff Mesker.

Thank you, Jill, and good afternoon. We delivered healthy results in the second quarter, marked by one of the strongest quarters for both operating and gross margin performance in some time. Operationally, our divisions are doing an excellent job of navigating this environment of demand strength and well-publicized supply chain constraints as we effectively balance pace, price, and starts to optimize our assets and manage our production. With our full year coming into better view, we are poised for continued returns-focused growth, expanding our scale to about $6 billion in revenues and generating a return on equity of roughly 20%. As for the details of the quarter, we produced total revenues of $1.44 billion and diluted earnings per share of $1.50. We achieved an operating income margin of 11.3%, driven by several factors. In addition to strong market conditions, we are benefiting from solid performance in our newer communities, operating leverage from both the increase in our community absorption rate as well as overall higher revenues, discipline management of our SG&A costs, and the ongoing tailwind from lower interest amortization. Our profitability per unit grew meaningfully on a sequential basis to nearly $47,000. We achieved or surpassed our expectations across our financial metrics, although deliveries were at the low end of our range, as some of our deliveries shifted into the third quarter due to supply shortages and municipal delays. That said, with the benefit of local scale in most of our divisions, we are relying on our longstanding relationships with subcontractors and trade partners to mitigate delays. With the progression of our work in process and our success in accelerating starts, we are confident in our ability to achieve full-year deliveries of between 14,000 and 14,500 homes. Our balance sheet is solid. Having worked through the bulk of our inactive assets, our inventory has rotated into a higher quality portfolio of communities. We've grown our equity while reducing our debt, resulting in a significantly lower leverage ratio, which we expect will decline further by year end. We recently completed a $390 million debt offering, the net proceeds from which, together with a portion of our existing cash, will be used to retire our 21 maturity in full. Ultimately, the offering will contribute to a reduction of our debt levels and lower our average borrowing rate, providing an ongoing tailwind to our future margins. We continue to allocate the substantial cash we are generating in a consistent manner, prioritizing our future growth to drive greater earnings and returns. In addition, our balanced approach includes returning cash to stockholders, primarily through our quarterly dividend, which we have raised in each of the past two years, and reducing our debt, as I just mentioned. In the second quarter, we invested $575 million in land acquisition and development, expanding our lot position sequentially by 7,800 lots to roughly 77,500 lots owned or controlled, with 45% of the total optioned. This growth in active inventory together with improving margins, should help to drive further improvement in our return on equity. As we discussed last quarter, we are assuming a lower monthly absorption in our underwriting as compared to our current pace, and no inflation either in ASP or costs. In addition, we are pursuing moderately sized deals in our preferred sub-markets, averaging between 100 and 150 lots, and staying on strategy in positioning these new communities to be attainable near the median household income for that submarket. We believe using this disciplined approach helps to manage our risk as we acquire land throughout a cycle. While we expect our near-term growth to come primarily from our existing markets, as we work to gain market share and expand our scale, we're also selectively entering new markets, Along with our success in Seattle and recent reentry into Charlotte, we're announcing today that we have started up a division in Boise, Idaho, a top 25 housing market. We see a meaningful opportunity in this fast-growing metro area to offer our personalized homes at affordable prices, and we're excited about extending our market strategy to Boise. We now have over 900 lots under control, and anticipate our first land parcel closing in the third quarter. We successfully opened 33 new communities in the second quarter. However, as a result of the heightened demand for our homes, we sold out of more communities than we had projected and also experienced slippage in some community openings. Jeff will provide more detail on our community count expectations for this year in a moment. Looking forward to 2022, with our strong lot pipeline, we remain on track for double-digit, year-over-year community count growth. As we prepare for the significant acceleration of new community openings over the next six quarters, we have also stayed focused on building our backlog to drive our revenues for the balance of this year and into 2022. Our monthly absorption rate rose to seven net orders per community during the second quarter, even as we manage sales primarily through price increases and secondarily through lot releases in order to balance pace, price, and starts. We're sensitive to affordability as we work to stay within appropriate range near the median household income of each sub-market. Our order ASP has climbed in the past three months reflecting a combination of mix as well as rising prices. Our largest sequential net order increase was in our West Coast region. Although this region carries our highest average selling price, it remains competitive with resales within our submarkets. Our Los Angeles Ventura business provides a good example. This division generated the strongest sequential order growth in the second quarter, And although it operates at a higher ASP, it is still below the median resale price of homes in its sub-markets, which are as much as $100,000 higher and selling within a few weeks of being listed. Resale prices have moved significantly, and our relative position has actually been enhanced. As to lot releases, our approach is similar to how we gauge interest in a new community. Homebuyers complete an application, and go through their initial credit process to join a list of qualified buyers. We then work through that list as we release lots. We are typically raising prices in conjunction with each lot release and have not seen a decrease in the conversion of qualified buyers, even as base prices have risen. Our teams work hard to earn our place as the number one customer-ranked national home builder, and third-party customer satisfaction surveys by prioritizing service and the relationships we have with our buyers, and we're focused on continuing to do so during this time of limited supply. The metrics that we monitor internally for shifts in affordability are stable. Buyers are not adjusting the size of the homes they are purchasing to stay in the market. Although we offer floor plans below 1,600 square feet in over 75% of our communities, buyers are still selecting homes averaging 2,100 feet, which is consistent with their choices over the past couple of years. As is evident in our results, the desire for homeownership is strong, and we believe will remain so for the foreseeable future. There are two primary factors informing our view. The first is an acute shortage of supply stemming not only from limited resale inventory, but also from the underproduction of new homes over the past 15 years. This deficit will take many years to correct, and until inventory reverts to more normalized levels, the imbalance between supply and demand should continue to support new home sales. Another key factor is demographics. The size of the millennial population and the pent-up demand from this cohort, together with the Gen Zs now reaching their home buying years, form a large and healthy pool of prospective buyers. These demographic groups value personalization, and we believe we are well positioned to capture increases in home sales given our expertise in serving the first-time buyer, which represented 64% of our deliveries this past quarter with our bill-to-order approach. Net orders were 4,300, our best second quarter since 2007, with strength throughout the quarter, resulting in year-over-year growth of 145%. This comparison narrowed at the end of May when we experienced a significant acceleration in order rates that has lasted for the past year. We are matching starts to sales, and in the first half of this year, we have quickly scaled up our production to start over 8,500 homes. To put this in context, the homes we started in the past two quarters represent about 75% of the total homes we started for the full year 2020. Almost 95% of the homes in production are already sold, We remain committed to our bill-to-order business model. We value the visibility that our even flow production provides and the flexibility that it affords in positioning our communities to move with demand. Offering a personalized home creates meaningful differentiation for our company, which we view as an advantage because buyers value choice. Nearly 80% of our orders in the second quarter were for personalized homes, which also creates an additional revenue stream from our design studios and with lot premiums. Our studio revenue per unit rose sequentially in the second quarter and is continuing to average about 9% of our higher base prices. We continually monitor the frequency of studio selections and have been raising prices on some products enhancing an already accretive studio margin. As to lot premiums, we have found over time that if buyers can pick the home they want and build that home on a lot they choose, they're willing to pay for that choice, and we can generate additional revenue. Every incremental dollar of lot premium is an additional dollar of margin. Between studio revenue and lot premiums, we're averaging about $40,000 per home today, and believe there is opportunity to continue to grow this going forward. We ended the quarter with a robust backlog value of $4.3 billion, up 126% year-over-year, representing over 10,000 homes. As I referenced earlier, our backlog supports the higher revenues we anticipate this year and sets the stage for another year of revenue growth in 2022. KBHS Home Loans, our mortgage joint venture, continues to be a solid partner for our customers, handling the financing for 75% of the homes we delivered in the second quarter. These buyers have a strong and consistent credit profile with an average down payment of about 13% or over $50,000 and an average FICO score that inched up to 727. the majority of our buyers are opting for conventional loans similar to the past few years. Pitching gears, we published our 14th annual sustainability report in April, the longest running report in our industry. We've been on this journey for over 15 years, and the commitment we have made to sustainable home building has resulted in KB Home being the industry leader in energy efficiency. We have built over 150,000 Energy Star certified homes to date, more than any other builder, and have the lowest published average home energy rating system, or HERS, index score among production home builders. And we're striving to be even better with an aggressive goal to further improve our average HERS score from 50 down to 45 by 2025, a level which translates into an additional estimated reduction in a KB home's carbon emissions of about 8% per year. In closing, we are poised for an incredible year of expansion in revenues, margins, and return on equity as we execute on our ongoing plan to increase our scale while driving a higher ROE. Equally as important, we are positioned for a strong start to 2022 with the expected increase in our year-end backlog and projected community calendar growth next year. We are pleased with how this year has unfolded and look forward to updating you on our continued progress. I'm appreciative of the hard work and commitment of the entire KD Home team, and I want to thank them for their efforts as we navigated through the challenges brought about by the pandemic while never wavering from delivering high levels of customer satisfaction throughout this past year. With that, I'll now turn the call over to Jeff for the financial review.