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 2022 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 22nd. Now, I would like to turn the call over to Thad Johnson, Senior Vice President and Treasurer. Thad, 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 2022. On the call are Jeff Mezger, Chairman, President, and Chief Executive Officer, Rob McGibney, Executive Vice President and Chief Operating Officer, Jeff Kaminski, Executive Vice President and Chief Financial Officer, and Bill Hollinger, Senior Vice President and Chief Accounting Officer. 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 various factors, including those detailed today 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 is Jeff Mesger.

Thank you, Fab. Good afternoon, everyone. We delivered strong financial results in our second quarter with 19% year-over-year growth in revenues. Alongside our increased scale, we significantly stepped up our profitability, expanding our home building operating margin by more than 400 basis points to over 15%. As a result, we grew our diluted earnings per share by 55% to $2.32. With a backlog of more than 12,300 homes and a value of over $6.1 billion, we are well situated as we have sold all the homes that we need to achieve our delivery and margin expectations for the year. We are also beginning to shape our fiscal 2023 and have most of our first quarter deliveries in backlog as well. The size, and composition of our backlog provide us with good visibility toward achieving our guidance midpoints of about $7.4 billion in revenues and roughly a 26% gross margin, contributing to a return on equity of over 27% this year. KB Home is a much stronger company today with greater scale, solid profitability, and a healthy balance sheet including an excellent portfolio of performing communities. Our business has a more geographically diverse footprint with less concentration in our West Coast region as illustrated by the distribution of our future revenues in backlog. We are maintaining our scale in the West while at the same time growing our other regions. We believe the strength of our company together with our built-to-order business model, will enable us to navigate the changing market dynamics. Order rates are moderating from the exceptional levels that the industry experienced beginning in late 2020, as higher interest rates and increased home prices, along with other inflationary pressures, are impacting current demand. That said, we believe the factors underlying long-term demand continue to be healthy. particularly with respect to demographics and the work from home trends, coupled with an ongoing undersupply of new homes and low existing home inventory. Our net orders were 3,914, down 9% versus a year ago when we reported the highest second quarter net orders in the prior 14 years. While our gross orders were flat year over year, a higher cancellation rate created the negative net order comparison as some buyers were affected by the larger monthly payments from the increase in mortgage rates. For the quarter, our cancellation rate remained below historical averages with about one-half of the cancellations occurring on unstarted homes. Our cancellations reported after start remained in single digits, and we ended the quarter with only 69 finished unsold homes in inventories. At 6.2 net orders per community in the second quarter, our monthly absorption rate was aligned with our production starts as we continue to manage, pay some price to optimize our assets. As to community count, the second quarter marked the beginning of our planned growth with anticipated sequential quarterly increases in our ending count for the remainder of the year. New community openings typically garner strong interest and demand from homebuyers, driving these communities to perform above our company averages. With absorption rates moderating, we anticipate our higher community count, as well as more reliance on our virtual selling efforts, will help support our net orders going forward. We believe our built-to-order model also contributes to our industry-leading customer satisfaction levels. Together with offering the most energy-efficient homes among national home builders, these factors help us generate among the highest absorption rates in the industry. The differentiating feature of a built-to-order home is the choice that we provide the customers based on their budget and what they value. We believe the flexibility to rotate into a smaller square footage home at a lower base price with the same number of rooms and functionality is a compelling benefit in today's environment when affordability is under pressure. This can be the difference that makes our homes attainable for buyers, and we already have these floor plans available in our communities. In addition to the size of the home, our customers have other choices as well, from the location of their lot to upgrading their finishes in our design studios or not, as buyers can also select from included finishes, again, based on their preferences and ability to spend. Our business model allows us to move with demand in responding to what buyers want and need. And this strength is reflected in our first-time and first move-up buyer percentages, the largest demand segments, holding steady sequentially in the second quarter at 56% for first-time buyers and 78% for the two combined. The credit profile of our buyers that use our mortgage joint venture, KBHS Home Loans, remain strong. For loans funded during the quarter, about two-thirds of these customers utilize the conventional mortgage. Loan to value ratios held steady at 85%, translating to an average cash down payment of roughly $75,000, and close to 100% of buyers use fixed-rate products. The average household income of these buyers was about $125,000, and their FICO score showed a slight sequential improvement to $734,000. While we target the median household income in our submarkets, we are attracting buyers well above that income level with healthy credit who recognize the value of a personalized, built-to-order home in their preferred locations. Our buyers' incomes and credit metrics provide them with the flexibility to adjust the type of loan program they choose, if needed, whether fixed or adjustable rate mortgages or conventional versus FHA loans. In addition, KBHS has been proactive in working with buyers who wanted to lock their rates. As of the end of the second quarter, we estimate that buyers who have locked their rates or will purchase with cash represented roughly two-thirds of our backlog, providing us with good visibility on deliveries. The KBHS team, together with our community team at each location, are both in weekly communication with our customers, a standard process for them, and rates can generally be locked at any point during the construction cycle. With that, let me pause for a moment and ask Rob to provide an operational update on build times and production. Rob?