KB Home

Good afternoon. My name is Alex, and I will be your conference operator today. I would like to welcome everyone to the KB Home 2021 third 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 October 22nd.

now i would like to turn the call over to jill 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 third quarter of fiscal 2021 on the call are jeff mesger chairman president and chief executive officer matt mandino and rob mcgidney executive vice presidents and co-chief operating officers 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. 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 including those detailed in today's press release and in our filings with the Securities and Exchange Commission, actual results could be materially different from those stated or implied in the forward-looking statements. In addition, a reconciliation of the non-GAAP measures referenced during today's discussion to their most directly comparable GAAP measures can be found in today's press release and or on the investor relations page of our website at kbhome.com. And with that, here's Jeff Mesger.

Thank you, Jill, and good afternoon. Our performance in the third quarter was reflected significant year-over-year increases across the majority of our key metrics as we produce solid results in a housing market experiencing great demand while also facing industry-wide challenges in getting homes completed and delivered. These results will help drive our returns-focused growth as we continue to expand our scale while generating a higher return on equity. Before I get into the highlights of the quarter, and there are many, I want to address our shortfall in deliveries and revenues. Disruptions to our supply chain intensified as the quarter progressed and along with municipal delays resulted in our build times extending by about two weeks sequentially. This pushed many deliveries into our fourth quarter and will similarly delay some fourth quarter deliveries into our 2022 first quarter. We are taking aggressive steps to manage through these delays, including expanding our subcontractor base, partnering with our national suppliers, and simplifying our products to stabilize our build times. We produced total revenues of $1.47 billion, up nearly 50% as compared to the prior year period, and diluted earnings per share of $1.60. We achieved an operating income margin of 12.1% excluding inventory-related charges, which grew 250 basis points year over year, driving a 40% expansion in our profitability per unit to nearly 52,000. This was accomplished even with the leverage we lost from the delayed deliveries. Our related gross margin of 22% was a particular highlight and demonstrates that we are effectively managing pace, price, and starts to optimize each asset. As to capital allocation, we continue to take a balanced approach with disciplined investments in growth remaining our top priority. In the third quarter, we invested about $780 million in land acquisition and development. We expanded our lot position to almost 81,000 lots owned or controlled with our inventory continuing to rotate into a higher quality portfolio of communities. In addition to these investments, we return a significant amount of cash to stockholders through both our regular quarterly cash dividend and the repurchase of $188 million of our stock. These repurchases will further enhance our return on equity in 2022 beyond this year's expected 20% level especially when combined with our projected increase in scale to over $7 billion in revenue and higher operating and gross margins. Since we embarked on our returns-focused growth strategy, we have produced meaningful expansion in our ROE. While we recognize that returns across the industry have expanded, our rate of improvement is meaningful, and we believe a return on equity in the low to mid-20% range is sustainable. During the quarter, we announced the promotion of Rob McGidney to Executive Vice President and Co-Chief Operating Officer, a role he shares with Matt Mandino. We created a co-COO structure with two simple objectives in mind, to accelerate the profitable growth of our responsible for our west coast and southwest regions, and Matt is responsible for our central and southeast regions. In addition to their regional responsibilities, Matt and Rob each have oversight of key strategic corporate functions as well. The operating environment within our industry has become more complex over the past 18 months given the supply chain issues and municipal delays that I mentioned earlier and their impact on build times. Having two proven leaders running our operations will allow for a more hands-on approach that is geographically focused, enabling greater day-to-day collaboration with our regional and division leadership. Matt and Rob will join me to respond to questions later on this call and can speak more specifically as to what is being done in their regions to compress build times. We successfully opened over 40 new communities in the third quarter, marking the start of a sequential improvement in any community count that we anticipate will continue over each of the next five quarters. With the strong and growing lot pipeline that I referenced driving an acceleration in new communities, we expect to expand our community count to roughly 260 by year-end 2022. Our monthly absorption per community accelerated to 6.6 net orders during the third quarter, from 5.9 in the year-ago quarter, and reflecting a more typical seasonal pattern sequentially, while remaining at a historically elevated level. Net orders were 4,085, representing a small decline year-over-year, against a strong result in the prior year quarter. However, with our actions in taking price and moderating pace, our net order value was up more than 20% year over year. We continued to manage our selling pace to production, limiting our lot releases to prevent our backlog from getting overextended, and started over 4,000 homes during the quarter. This comparison starts in the year-ago quarter of about 3,400. We currently have approximately 9,000 homes in production, with 93% of these homes already sold. Only 240 of these homes are unsold past the foundation stage, and our focus right now is on compressing our build times to deliver our backlog. With the rise in our net order value to 2 billion, we are laying the foundation for future margin growth. Our pricing power is solid, while our pace remains strong, and the demand for our homes at higher prices tells us that our price points remain attainable. The credit profile of our buyers is above our historical level with an average FICO score of 731 and down payment of 14%, translating to almost $60,000, which is noteworthy for a first-time buyer. In addition, the internal indicators that we monitor for changes in customer behavior, including the square footage of homes purchased or spending in our design studios, remain stable. Our backlog now stands at roughly 10,700 homes, representing future revenues of over $4.8 billion. Our backlog value is up nearly 90% year-over-year, with significantly higher margins within this backlog. This is an excellent position from which to finish 2021 and support another year of growth in revenues and expansion of margins in 2022. Homeownership remains compelling and attainable, and we believe that drivers are in place to support healthy market conditions for the foreseeable future. An insufficient level of supply exists at our price points to meet the demand from millennials and Gen Zs which together number roughly 140 million. These two cohorts value the personalization and choice in our built-to-order business model, which is a significant factor in why our absorption rates have consistently been among the highest in the industry. This, together with our experience in serving first-time buyers, who represent 61% of our deliveries in the third quarter, has us well positioned to capture demand going forward. Switching gears for a moment, I want to highlight our recent achievement in sustainability. KB Home received a record 25 Energy Star Market Leader Awards from the EPA, further demonstrating our leadership position as the most energy efficient national home builder. We are proud to continue moving our environmental program forward which is helping to lower the total cost of home ownership for our buyers while doing our part to reduce the carbon footprint of our homes. Before I wrap up, I would like to recognize and thank all of our employees for their outstanding efforts every day in working through the industry-wide challenges of material shortages and municipal delays. We have a remarkable team that is focused on execution and committed to customer service. In closing, we are growing into a bigger business that is operating at meaningfully higher margins and generating considerably improved returns. We anticipate a return on equity this year of about 20% and further expansion in 2022, supported by double-digit growth in revenues and community count with higher margins, as well as our recent share repurchase. Beyond next year, we believe our return on equity is sustainable in a low to mid 20% range. With that, I'll now turn the call over to Jeff for the financial review. Jeff. Thank you, Jeff, and good afternoon, everyone. I will now review highlights of our financial performance for the 2021 third quarter, discuss our current outlook for the fourth quarter, and summarize expected improvements in several 2022 metrics. In the third quarter, we produced measurable year-over-year improvements in nearly all our key metrics, including a 49% increase in housing revenues that drove a 93% expansion in our earnings per unit share. We also made substantial investments in land and land development to support continued growth and completed a significant share repurchase that, among other things, will enhance future returns and per share earnings. Our housing revenues grew to $1.46 billion for the quarter from $979 million for the prior year period. This improvement reflected a 35% increase in the number of homes delivered and an 11% rise in their overall average selling price. As Jeff discussed, our current quarter deliveries were tempered by industry-wide building material shortages and labor constraints, that extended build times in most of our served markets. We anticipate similar challenges will apply to our fourth quarter and have considered these factors in our outlook. Our ending backlog value expanded 89% to over $4.8 billion, driven by strong increases in each of our four regions. Considering our quarter-end backlog, the status of our homes under construction, and expected construction cycle times, We anticipate our fourth quarter housing revenues will be in the range of $1.65 to $1.75 billion. In the third quarter, our overall average selling price of homes delivered rose to approximately $427,000 from approximately $385,000, reflecting the strength of the housing market. For the fourth quarter, we are projecting an overall average selling price of approximately $450,000, which would represent a year-over-year increase of 9%. Our third quarter home building operating income improved to $169.9 million as compared to $88.9 million in the year earlier quarter. Operating income margin increased 270 basis points to 11.6%, due to improvements in both our gross profit margin and SG&A expense ratio. Excluding inventory-related charges of $6.7 million in the current quarter and $6.9 million in the year earlier quarter, our operating margin was up 250 basis points year-over-year to 12.1%. For the fourth quarter, we expect our home building operating income margin, excluding the impact of any inventory-related charges, will be approximately 11.8% compared to 10.7% in the year earlier quarter. Our housing gross profit margin for the quarter was 21.5%, up 160 basis points from 19.9% for the prior year period. This margin expansion mainly reflected a favorable selling price environment supported by healthy housing market dynamics and lower amortization of capitalized interest. Excluding inventory-related charges, our margin for the quarter was up 140 basis points year-over-year to 22.0%. Our adjusted housing gross profit margin, which excludes inventory-related charges as well as the amortization of previously capitalized interest, was 24.5% for the third quarter compared to 23.7% for the same 2020 period. Assuming no inventory-related charges, we believe our fourth quarter housing gross profit margin will be in the range of 21.6% to 22% reflecting the impact of peak lumber prices when our forecasted fourth quarter haul deliveries were started. Our selling general and administrative expense ratio of 9.9% for the quarter improved by 110 basis points as compared to 11.0% for the 2020 third quarter, primarily due to increased operating leverage, partly offset by higher costs associated with performance-based employee compensation plans, and additional resources to support growth. As we position our business for growth in 2022 housing revenues, we believe that our fourth quarter SG&A expense ratio will remain roughly the same as the second and third quarters of this year, or approximately 10%. This would represent an improvement from 10.3% in the 2020 fourth quarter. Our effective tax rate for the quarter was approximately 14% of income tax expense, net of 21.5 million of federal energy tax credits.