KB Home

Good afternoon. My name is John, and I will be your conference operator today. I would like to welcome everyone to the KB Home 2022 fourth 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 February 11th. And now, I would like to turn the call over to Jill Peters, Senior Vice President, Investor Relations. Thank you, Jill. You may begin.

Thank you, John. Good afternoon, everyone, and thank you for joining us today to review our results for the fourth 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 details 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. Good afternoon, everyone, and Happy New Year. We are pleased with our financial results in 2022, during which we produced revenues of $6.9 billion, a year-over-year increase of 21%, net income of $817 million, a rise of 45%, and diluted earnings per share of $9.09 of 51%. Our top-line growth Together with the expansion of our operating margin to over 15%, drove our return on equity of 470 basis points to 24.6%, and contributed to 27% growth in book value per share to over $43. I'm proud of our team and their hard work in generating one of the strongest years of financial performance in our company's history. Although we acknowledge that the homes we delivered this year were sold under different market conditions than we are navigating today, we also recognize these remarkable results were accomplished despite numerous obstacles, including supply chain issues and municipal delays that significantly extended our construction times, as well as persistent inflation and rising interest rates. Given the current market environment, we are providing guidance today for our 2023 first quarter. And for the full year, we are only giving a range of expected housing revenues. As we begin 2023, we do so with a significant backlog of over 7,600 homes valued at roughly 3.7 billion, supporting our revenue projection for the year. While our backlog had become overextended relative to historical levels, due to longer build times, we are committed to reducing our cycle times to achieve deliveries within a more traditional timeframe of between six and seven months from sale to close. With our built-to-order model, our buyers tend to have an emotional attachment to the homes they select, choosing their floor plan on their lot and personalizing the home with their preferred features and finishes. For the most part, Buyers are closing when their homes are completed, and roughly 90% of our deliverable universe did close during the quarter. Although the cancellation rate on our beginning backlog increased sequentially, it was still below our historical average. And after peaking in November, cancellations declined in December, and we anticipate a further moderation in January and February. A significantly higher percentage of our buyers are locked on their mortgage rates as compared to our 2022 third quarter. These buyers, together with our buyers who are paying in cash, which has also increased slightly sequentially, represent close to 80% of our backlog, giving us confidence in our ability to convert our backlog to closings. With respect to the fourth quarter, we generated total revenues of $1.9 billion and diluted earnings per share of $2.47, representing a year-over-year increase of nearly 30% in earnings. We achieved an operating income margin of 15.8%, up 290 basis points year-over-year, excluding inventory-related charges, driven by both a higher gross margin and lower SG&A ratio, as we focused on effectively managing costs. We remain committed to balancing our overhead with our revenues as we continue to open new communities and navigate current market conditions. I acknowledge that we missed deliveries relative to what was implied in our guidance, stemming from a combination of cycle time extensions at the latter stages of construction, higher cancellations on homes that were close to or at completion, and ongoing challenges with utility companies in getting communities and homes energized. We continue to believe that the long-term outlook for the housing market remains favorable. The demographics of the Millennials and Gen Zs are advantageous for our business as we primarily serve the first-time and affordable first move-up buyers, market segments traditionally comprised of these large and growing cohorts. Although existing home inventory has risen recently, there remains an undersupply of resale homes, particularly at our price points. And with housing starts now down roughly 40% on an annualized basis, the industry is falling further behind in serving the underlying demographic demand. That said, the current housing market continues to be weak in the face of higher mortgage rates, persistent inflationary pressures, and an uncertain economic outlook, which has made buyers more cautious since the middle of last year. Our net orders were 692 as compared to 3,529 in the year-ago fourth quarter, stemming from a low level of gross orders and an increase in cancellations. Let me discuss each of these components separately. Given the size of our backlog at the start of the fourth quarter and with only 210 finished homes available for sale, We prioritize delivering our backlog and protecting our margins rather than pursuing incremental sales in a softer demand quarter. To frame this another way, entering the quarter, we had an average of nearly 50 homes in backlog per community at very solid margins. Had we elected to discount our pricing to a level similar to other new home builders to get more sales, we estimate that the impact to our backlog value would have been in the hundreds of millions of dollars. On our last earnings call in September, we shared that with the rise in interest rates to above 6 percent, we had seen a softening gross orders trend sequentially. As rates continued higher in October, hitting 7 percent late in the month, our orders declined further. Then, with rates moving slightly lower in November, Gross orders stabilized roughly at October's level. For the quarter, our gross orders were 2,169, a year-over-year decline of 47%. On a per-community basis, our gross absorption pace was 3.1 orders per month. With respect to cancellations, due to the unusually low level of gross orders and our large beginning backlog, we believe looking to cancellation relative to backlog is a good way to understand the dynamics during the quarter. At 14%, our cancellation rate on the 10,756 homes we had in backlog at the start of the fourth quarter represented a sequential increase, although it was still slightly below our historical mid-teens average. The primary reason for cancellation continued to be buyers' lack of confidence to move forward in these uncertain times, even though they qualified for their home purchases and many were locked on their loans. For the quarter, we continued to align starts with our growth sales pace, starting roughly 2,000 homes, and ended the quarter with about 8,800 homes in production, of which 80% were sold. Having returned to this 80-20 split on sold and unsold production, the strategic range we have historically targeted, we expect to continue to manage our business to these levels. Our priority has been and remains selling built-to-order homes, but we have always offered quick-moving homes in each of our communities. We are monitoring local market dynamics and individual community performance. While we continue to emphasize delivering our still large backlog, we are also selectively getting more aggressive on pricing reduction and other concessions on a community by community basis ahead of the spring selling season. By the end of the first quarter, we expect to be taking steps in most of our communities as we will have delivered more of our existing backlog. Through the first five weeks of our 23 first quarter, a slower demand period, our net orders are down 72% relative to the comparable prior year period. To support our 23 projected revenue range, and given the actions we are taking, we are targeting net orders in the first quarter to be down 50%, between 50% and 60% year over year, versus an incredibly strong comparison in the prior period. This translates into net orders of approximately 1,900 at the midpoint of this range. Concurrent with the pricing and concession moves, we are pursuing significant reduction in our construction costs and cycle times. This will enable us to start homes at lower cost, to help offset the steps we are taking to work with buyers, and achieve our sales and delivery targets. With that, let me pause for a moment and ask Rob to provide some color with respect to our sales approach as well as an operational update.