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 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 21st. 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 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. 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 various 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 is Jeff Mezger.

Thank you, Jill. And good afternoon, everyone. We delivered another order of strong financial results with meaningful year-over-year growth in most of our key metrics, highlighted by more than 600 basis points of expansion in our home building operating income margin to approximately 18%. These results reflect the strength of our company, our larger scale, and the size and composition of our backlog. At the end of our third quarter, our backlog stood at over 10,700 homes, valued at more than $5.2 billion, placing us in a good position with respect to deliveries in our 2022 fourth quarter and into the first half of 2023. Approximately two-thirds of our buyers are either locked on their mortgage rate or paying in cash, and for the most part, these buyers are closing when their homes are completed. Our buyers tend to have an emotional attachment to their purchases that stems from creating their personalized homes on a lot they have selected with features and finishes they have chosen. As for the details of the quarter, We produced total revenues of $1.84 billion, up 26% as compared to the prior year period, and diluted earnings per share of $2.86, which grew almost 80% year over year. While we achieved a low end of our revenue guidance, we experienced an extension in bill times due to ongoing supply chain issues, which affected delivery in the quarter. Rob will provide more detail on cycle times and a supply chain shortly. Our gross margin of 27 percent is a particular highlight of the quarter, demonstrating the impact of our internal initiatives along with our effective management of pace, price, and starts to optimize each asset during the robust demand environment earlier in our fiscal year. In addition, we successfully managed costs driving our SG&A expense ratio down 100 basis points year over year. We remain committed to balancing our overhead with our revenues as we continue to open additional new communities. The factors supporting demand for homeownership remain strong, including favorable demographics, population and job growth in our served markets, and rising rental rates. coupled with a limited supply of homes due to the industry's underproduction of new homes and low levels of existing home inventory, particularly at the more affordable price points. Although the long-term outlook remains positive, many prospective buyers have paused and moved to the sidelines amid higher mortgage rates, along with ongoing inflation and a range of macroeconomic and geopolitical concerns. As we manage through these uncertain times, we remain committed to our bill-to-order approach. Our focus is to provide the best value to customers based on their budget and the features that are most important to them, and not to offer the best incentive on a standing inventory home. Homebuyers are making the largest investment of their lifetime, and many desire a personalized home with the ability to select their lot, floor plan, included or upgraded interior finishes and exterior elevation. This flexibility is also important to our customers if affordability is a constraint as our buyers can select a smaller square footage home at a lower price with the same number of rooms and functionality and also reduce their spend in our studios. We believe our approach is compelling and can make the difference in whether a customer is able to purchase a home. By emphasizing choice and personalization, as well as the partnership our community teams offer, we provide an important service to our buyers. We think this is a key driver in our consistent achievement of the highest customer satisfaction rating among production home builders. Net orders of 2040 We're down relative to a strong 4,085 in the year-ago third quarter. Let me discuss the components of our net orders by first providing some color on our gross orders with a separate discussion of cancellations. At the start of the third quarter, given the size of our backlog and with only 69 finished homes available for sale, we made the decision not to chase sales. The quarter unfolded. with June's average weekly gross orders coming in softer than May's. July's gross orders held consistent with June's, and we then experienced an acceleration in gross orders in August. We had taken steps in July with respect to pricing in some underperforming communities, while at the same time mortgage rates had declined slightly since June. We were pleased with the activity in August, But following Labor Day, interest rates have again risen, and we've experienced a softening orders trend. We will continue to monitor market dynamics and individual community performance and will adjust pricing as necessary to maintain the balance between preserving our backlog and achieving minimum absorption rates to optimize each asset. Over the years and throughout cycles, we have typically generated one of the highest sales rates per community in the industry, and that remains our objective going forward. With respect to cancellations, due to the unusually low level of gross orders and large beginning backlog of 12,300 homes, we believe looking at cancellations relative to backlog is a better way to understand the dynamics during the quarter. At 9%, Our cancellation rate on beginning backlog did increase sequentially, but it was still well below historical levels. The number one reason for cancellation was buyer's remorse. It was not necessarily that the buyers did not qualify. They did not feel comfortable moving ahead with the purchase. We ended the quarter with only 12% of our homes in production unsold, consistent with our second quarter level, and with less than one finished and unsold home per community. We expanded our community count in the third quarter due to fewer communities selling out, partially offset by some deferred openings. In this market environment, we are not opening communities for sale until models are 100% completed to optimize the selling effort, which contrasts with the past 12 months during which we opened for pre-sales while models were still being constructed. We expect another sequential increase in our ending count in the fourth quarter and year-over-year growth in 2023. This will be an important contributor to our future net orders, given the moderation in absorption rates. The credit profile of buyers that use our Mortgage Joint Venture, KBHS, home loans remains strong and consistent sequentially. For loans funded during the third quarter, 67 percent of these customers qualified for a conventional mortgage and nearly all used fixed rate products. The average loan to value ratio was 84 percent, translating to a cash down payment of over $80,000. The average household income of these buyers was $130,000, and their FICO score was 734. While we target the median household income in our sub-markets, we are attracting buyers above that income level with healthy credit that are able to qualify at higher mortgage interest rates. With that, let me pause for a moment and ask Rob to provide an operational update. Rob?