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 2023 first 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 April 22nd. And now I would like to turn the call over to Jill Peters, Senior Vice President of 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 first quarter of fiscal 2023. On the call are Jeff Mezger, Chairman, President, and Chief Executive Officer, Rob McGibney, 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 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 measure of adjusted housing gross profit margin, which excludes inventory-related charges, and any other non-GAAP measure referenced during today's discussion to its most directly comparable gap measure 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. We delivered solid financial results in the first quarter, which highlights the value of our bill-to-order model. Working from a large backlog has provided stability in our delivery at healthy margins while we navigate turbulent selling conditions. I want to thank our entire team for their outstanding effort in serving our homebuyers and persevering through the challenges of a volatile housing market. As to the details of our results, we generated total revenues of $1.4 billion and diluted earnings per share of $1.45. We held our earnings essentially even with the prior year quarter, due to a strong gross margin of 21.8 percent, excluding inventory-related charges, and an improvement in our SG&A expense ratio, which offset a slightly lower level of deliveries. Relative to the guidance we provided in January, we came in at the high end of our revenue range and exceeded our guidance on both operating and gross margins. Our performance, together with our ongoing share repurchases, drove our book value per share higher to $44.80, up 27% year over year. Although KB Home is perceived to be a California builder, our business is becoming more diversified, and we like the balance of our geographic footprint. Our southeast region has grown into a larger business, approaching 20% of our revenues this year, as compared to only 11% five years ago. This region has significantly improved its profitability and returns over this timeframe, and we look forward to its continued growth. During the quarter, we achieved our first deliveries in Charlotte, which is a dynamic and growing top 10 housing market. We are currently selling homes in two communities in Charlotte, with four additional communities scheduled to open this year. We expect Charlotte to further enhance the growth we are achieving in our Southeast region. We also produced our first deliveries in Boise during the quarter. Boise has been one of the fastest growing areas in the country, which created strong demand amid limited supply, and as a result, home prices appreciated rapidly. The market is now adjusting, and we will remain selective with additional land investments until we see stability in pricing. Over time, we believe Boise will be a growth market for our company. The long-term outlook for the housing market remains favorable. As we have said in the past, the demographics of the millennials and Gen Zs are advantageous for our business as our primary buyer segments are first-time and first-move-up buyers. While these demographics are a strong underpinning for demand, we are also still facing low levels of inventory especially at our price points. Just yesterday, February resales were reported, representing the first sequential increase in activity in 13 months, leaving resale inventory levels at 2.6 months supply. At the same time, new home inventory continues to be limited. As to our orders, demand in the back half of our first quarter improved significantly, with a sequential increase in net orders in both January and February. This was in line with the expectation we shared with you on our last earnings call. We generated net orders of 2,142 for the quarter, down 49% year over year, as compared to our projected range of down between 50% and 60%. As I did on our last call, Let me discuss gross orders and cancellations separately. We have continuously worked to balance pace and price to optimize each asset. With a sensitivity to our large backlog in many communities, we held off on adjusting pricing until more of that backlog was delivered. In the first quarter, we continued to convert our backlog to deliveries, while now also reducing prices in many of our communities or offering other concessions. The timing for these actions was favorable, given the seasonally stronger selling period. In addition, a more stable mortgage rate environment during January and February, where rates had settled in to a low to mid 6% range, was also beneficial in moving potential homebuyers off the sidelines. Buyers seemed to be acknowledging that these higher rates are the new normal as they return to the markets. Our gross orders improved significantly on a sequential basis, with January's orders increasing 64 percent relative to December and February increasing 58 percent versus January. For the quarter, our gross orders were 3,357, a year-over-year decline of 29 percent. On a per-community basis, our gross absorption pace reached 6.6 orders per month in February, above our long-term average for that month, contributing to an overall monthly pace of 4.5 gross orders per community for the quarter. We had a number of divisions that outperformed this average, including Inland Empire, Sacramento, Las Vegas, Phoenix, and Orlando. For the quarter, our total cancellations moderated sequentially And generally, homes in backlog are closing when they are completed. As we continue to deliver out the backlog of older sales that were written last summer during a lower interest rate environment, our cancellation rate should decline further. In the early weeks of March, our net orders have remained strong. For the first two and a half weeks of our 2023 second quarter, our net orders are down 24% against a very strong comparable prior year period. Although we do not typically provide an intra-quarter update on this call or a projected range for net orders because we are only a few weeks into the quarter, we believe it is helpful for investors due to the volatility in market conditions. While interest rate and economic uncertainties pose a large risk to the near-term demand, we are encouraged with our recent order trends. Our strategic goal continues to be a monthly absorption pace of between four and five net orders per community, which we think we will achieve for the second quarter, resulting in a projected range of between 3,000 and 3,700 net orders. At the midpoint, this will represent a net order decline of 14% year over year. Our backlog at the end of the first quarter stood at over 7,000 homes valued at over 3.3 billion. This position will continue to provide consistency in deliveries and margins and supports our revenue projection for the year. During the quarter, we started 1,500 homes and ended the quarter with roughly 7,400 homes in production, of which 77% are sold. We are ramping up our starts in the second quarter as we continue to balance starts with sales and as we look ahead to year-end deliveries. We are committed to our bill-to-order model, which is defined by the choice that we offer to buyers, including the selection of the floor plan, lot, square footage, and personalized finishes. An important complement to this offering of choice is the availability of quick move-in homes in each of our communities to serve the buyer who prioritizes a near-term move-in date over personalization. In this regard, we always have some inventory available in each community. During the quarter, approximately 37% of our deliveries were from inventory sales, whether a speculative start, a rewrite of a cancellation, or a model sale. At the end of the quarter, we had roughly 640 finished and unsold homes available, the majority of which we expect to sell and deliver in our second quarter. We know buyers value our bill to order approach as we achieve high customer satisfaction scores and typically one of the highest absorption rates per community in the industry. At the same time, there are some key financial benefits to this approach as we can capture incremental lot premiums and studio revenues. As a result, our gross margins are higher on our bill to order sales. In the first quarter, we generated nearly $52,000 per delivery in lot premium and studio revenues, consistent with our quarterly average in 2022, representing about 11% of our housing revenues. 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. Rob?