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 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 21st. 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 second 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 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 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, and good afternoon, everyone. We delivered strong results in our second quarter, including a significant sequential improvement in our net orders. Our divisions executed well, improved their cycle times, reduced build costs further on new starts, and open new communities, all of which will benefit us in the quarters ahead. As to the details of our results, we exceeded the high end of the guidance we provided in March with total revenues of $1.8 billion and diluted earnings per share of $1.94. Our backlog continues to provide stability in deliveries and revenues with 3,666 homes closed during the quarter. This was higher than our implied delivery guidance by about 700 homes, driven by improved build times, fewer cancellations, and better conversion of our unsold inventory. At 11.7%, our home building operating income margin, excluding inventory-related charges, reflected a solid gross margin of over 21%, and a healthy SG&A expense ratio below 10%. This performance, along with the cumulative benefit of several quarters of share repurchases, drove our book value per share to $46.72, up 24% year over year. The long-term outlook for the housing market remains healthy. Market dynamics are characterized by low existing home inventory and limited availability of new homes at our price points, as well as demographics that are particularly favorable for our business, given that we primarily serve the first-time and affordable first move-up segments. With respect to demand, buyers are adjusting to higher mortgage rates, and the continuation of a more stable rate environment is a positive factor. In addition, with the lack of resale inventory that I mentioned, and market prices now starting to increase, Buyers are demonstrating a higher sense of urgency than we saw earlier this year. As we discussed on our first quarter call, we had begun to see a sequential improvement in demand in February, which continued throughout our second quarter. As a result, we generated net orders of 3,936, significantly above our guidance, reflecting a year-over-year increase in our gross orders and a cancellation rate that is moderating back toward historical levels. On a per community basis, our absorption pace averaged 5.2 net orders per month, which is consistent with our historical second quarter average prior to the pandemic-driven volatility. Our strategic goal continues to be optimizing each asset, which generally results in a monthly absorption pace of between four and five net orders per community and generating high inventory terms. We typically experience a peak in absorption in our second quarter, coinciding with the spring selling season, and then see a sequential decline in our third and fourth quarters. While we do not usually provide guidance on net orders, we recognize it is helpful to investors considering the soft comparison in last year's third quarter when interest rates had started their rapid increase. Demand has remained strong in June, and while our 2023 third quarter net orders could be influenced in either direction by an increase in resale inventory levels or a move in interest rates, we project a range of between 3,000 and 3,500 net orders. Our business spans geographic markets that were selected for their long-term growth potential. With the diversification provided by our ongoing expansion of our southeast region, which we discussed our earnings call in March, our footprint is more balanced today than it was just a few years ago. Much has been written about the California market, and over the years, building homes in this state has moved in and out of favor from the investor perception point of view. I want to spend a moment sharing some facts with you and our thoughts about the opportunity we see here. While numbers differ depending on the source, some public policy firms peg the existing shortfall of housing production relative to the 40 million people living in California at more than one million homes. For a number of reasons, including a challenging regulatory environment, the state is severely undersupplied and there are not enough new homes built each year to overcome the deficit, let alone achieve equilibrium between supply and demand. In addition to this shortage, California's housing stock is aging, with approximately 75% having been built before 2000, higher than most of our markets. According to a recent report from Moody's Analytics, the state is projected to have above average job and income growth longer term which, together with the factors that I just referenced, point to a highly attractive market opportunity in California. Within the state, our business has become better balanced across our served markets, with our inland divisions benefiting from work-from-home trends and affordability, while our coastal price points are now more affordable as we've rotated out of most of our $1 million-plus price communities. We have long tenured teams in California that are well versed in identifying and acquiring land that meets our return requirements, navigating the complex regulatory environment, and running profitable businesses. From a regional standpoint, our West Coast business is now also augmented by our operations in Seattle and Boise, which provide further diversification and growth. We believe we are well positioned to leverage our scale and capture the sizable opportunity in our west region while also continuing to expand across the remainder of our operating footprint. Our backlog at the end of the second quarter stood at nearly 7,300 homes valued at approximately 3.5 billion. This marks the first sequential growth in our backlog in the past year. With our built-to-order model, we work from a large backlog and see value in the visibility and stability in deliveries that our backlog provides, particularly in times of challenging market conditions, as we saw during the past year. With the improvement in our build times, which Rob will speak to in a moment, we expect to be able to convert our backlog to deliveries more quickly in the future than we have seen over the past two years. During the quarter, We started 3,556 homes, aligning our starts with net orders, and ended the quarter with more than 7,300 homes in production, of which over 75% are sold, consistent with our targeted split of built-to-order and inventory homes. We expect to ramp up our starts in the third quarter, and while we continue to prioritize our built-to-order model, we are supplementing our starts with additional inventory homes given market conditions and a lack of supply. With that, let me pause for a moment and ask Rob to provide an operational update. Rob? Thank you, Jeff.