KB HOME Q1 FY2025 earnings call

• Market Conditions: Consumers face affordability concerns and lower confidence due to macroeconomic and geopolitical events, leading to slower homebuyer decisions.
• Deliveries: Shortfall of approximately 225 homes, due to fewer inventory sales and wildfire-related delays in Southern California.
• Net Orders: Generated 2,772 net orders, with lower absorption pace initially but improvement in the last two weeks of the quarter.
• Community Count: Had 255 active communities, with an expectation of maintaining 250-260 active communities in Q2-Q3.
• Build Times: Improved to 147 days, the best in 4 years, aiming for 120 days from start to home completion.
• Land Investments: Spent $920 million on land acquisition and development, with lot position up 41% to over 78,200 lots.
• Capital Allocation: Repurchased 754,000 shares of common stock, spending $50 million during the quarter.

In the first quarter, KB Home produced total revenues of $1.4 billion. Housing revenues were $1.39 billion. The number of homes delivered was 2,770, down 9% from the prior year period. The gross margin for the quarter was 20.2%, with a 20.3% gross margin excluding inventory-related charges. SG&A was 11%. The housing segment is the primary product segment, contributing the majority of revenues.

• Revised revenue guidance for fiscal 2025 to $6.6 billion to $7.0 billion.
• Q2 housing revenues expected to range from $1.45 billion to $1.55 billion.
• Full-year housing gross margin projected to be in the range of 19.2% to 20.0% excluding inventory-related charges.
• SG&A ratio for the full year expected to be in the range of 10.0% to 10.4%.
• Effective tax rate expected to be approximately 24% for Q2 and the full year.

• Market Conditions: Affordability concerns, macroeconomic and geopolitical uncertainties impacting consumer confidence.
• Wildfires: Impacted deliveries in Southern California.
• Trade Labor: No significant shortages reported yet, but potential labor issues could arise.
• Lumber Tariffs: Potential impact on costs if tariffs are implemented and not managed.

Q: Good afternoon, everyone. Thank you for taking the questions. Wanted to start with the price adjustments and specifically a question around kinda customer elasticity. I guess, what level or what magnitude of price adjustments would you say was enough to kinda get consumers off of the fence here? And how are you kinda able to separate, you know, what you were doing with these price adjustments, you know, relative to the kind of typical seasonal uptick that you would see in March anyway?

A: Matt, I can make a few comments, and then I'll hand it to Rob for some specifics. There's a lot of things going on in the market, and as we always share, it really is submarket specific and community specific. And as the divisions were working to get sales, in a lot of cases, they fell in the trap of starting to offer what I would call a pocket incentive where you don't advertise it. The consumer doesn't know about it till they get into the sales office, and then they find out there's a $10,000 studio credit available if you buy this weekend and things like that. And as we analyze things, we decided, let's get rid of all that what I would call noise and just take it to price so we can advertise on the website what the real price is, and that we were already offering anyway. So a lot of the moves we made really were cleaning out incentives and taking it to price. So that was step one. Past that, as we analyze each community, if there were communities not selling that were not aligned with the resale data in that submarket or what new home competitors were doing, we took additional steps to pull the price down further as needed. And it's not like you can identify that price will work. You have to keep going till you get your sales momentum back. And we took some steps, and we were bold all the way around. And as I shared in my comments, it was the very first week after that, our sales picked up quite a bit. But Rob can give you some of the detail between offsets by reducing incentives versus pure price adjustments.

Q: Hey, good afternoon, everyone. Thank you for taking the questions. Wanted to start with the price adjustments and specifically a question around kinda customer elasticity. I guess, what level or what magnitude of price adjustments would you say was enough to kinda get consumers off of the fence here? And how are you kinda able to separate, you know, what you were doing with these price adjustments, you know, relative to the kind of typical seasonal uptick that you would see in March anyway?

A: Rob McGibney: Yeah. Just to add some specifics to it, it was roughly half of our communities that we lowered base price. And as Jeff said, at the same time, we were cleaning up some of the clutter with the incentives. It was a range. I mean, just depending on what the sales pace was, where resale levels are trending and tracking, you know, all of those factors kind of into the mix. So range from $5,000 up to $30,000 in some cases. I think the average, if you put them all together of the communities that we decreased, it was $15,000 or $16,000. So, you know, call it 3% on our ASP. But at the same time, when we cleaned up the incentives and the other things that Jeff mentioned that were being offered, the net reduction or impact to margins is much lower than that. In fact, since we've made those moves, the margin roughly on deals that we're seeing coming to backlog is only about 75 basis points lower, and we feel pretty good about where we are right now. Communities where we've made the moves are performing. We've got some that have actually started performing better than what our expectations are. So we've got some opportunity to claw back price and margin. Handful of others that we still need to do some work on, but generally, we feel good about how we're positioned after making those moves, and the consumer has really responded to it well.

Q: Thanks very much, guys. Appreciate all the detail. I guess my first question related to the cycle times. Rob, you talked about the fact the cycle times are down and all the benefits that that provides for the company. And I think you indicated you had not seen any trade labor shortages to date, but we're curious as to are you not seeing have you not seen any, for lack of a better term, ice raids in any of your communities or your neighboring communities. Is that what you meant by no trade labor shortages or are you in fact seeing some of that, but it's just not meaningfully disruptive enough to call out? Then you had said, I think, direct costs were down year over year and quarter to quarter. And so I was wondering if you could quantify that a little bit for us.

A: Rob McGibney: Sure. I'll start with the first one last. So, sequentially, our direct costs are down about 1%. And then year over year, we're looking at about 3%. So that's to quantify that piece. On the labor, I'd say, you know, outside of the normal things that we would deal with outside of any kind of regulatory change or ICE or immigration policy changes, it's really just been the same. We've seen nothing at all related to immigration. I mean, any kind of, you know, normal type of labor shortage we might see on a day-to-day basis in a typical year may still be there, but nothing at all, Steve, related to immigration policy.

Q: Thanks. Good afternoon, everyone. First, I just wanted to and I apologize if I missed this earlier, but it's it's we'll get kind of any regional differentiation across your footprint. You know, when you talk about in particular, adjustments that you needed to make, you know, with incentives or pricing. If there were certain markets or even submarkets that, you know, were kinda more prevalent or at the top of the list and by contrast, which markets might be on the stronger end of the spectrum?

A: Rob McGibney: Sure, Mike. I'll take that. It's Rob. So know, as we always say, it really is market by market or even submarket by submarket. And, I'll talk about resale a little bit here because we've always viewed resale as our biggest competitor regardless of what the new home competition is doing. And we've gotta stay tethered to that pricing with a reasonable new home premium to drive volume. So as far as the regional color, I would say in broad terms that Florida was our softest state in terms of sales demand in the first quarter. And because of that, we took the most pricing action there to find the market. And, you know, I'd say roughly two-thirds of our communities probably the same price range between $5,000 and $30,000, but we had to do more in Florida to find that market. And I'll just start with, like, Jacksonville, for example, using that as a proxy. You know, they've got just under right at seven months of supply. So it's a month or so above what is historical norm would be in terms of resale. Supply or where most people consider a balanced market. And resale is a really efficient market. One positive that see in that market is getting absorbed. So you've got days on market are actually down year over year despite that higher supply, but it's likely because pricing has moved. So we're seeing that market react. We've done the same thing in that market to find where we need to be to sell and where we can offer that new personalized energy-efficient product with a small premium resale, we find that we win. Hey. Look at the rest of Florida. Orlando was similar. They've seen their days on or their months of supply increased to about the same level, have not seen the pricing levels adjust there like they started to in Jacksonville. And there are days on market continues to be pretty elevated. So made some more significant adjustments there. The other business we have is Tampa. You know, they've got it a similar situation, but lower overall months of supply than Jackson, Orlando. So even within those three markets, it's submarket by submarket. Some perform better than others, and we've had to, you know, adjust the moves that we're making based on that. Texas, I would say, the story was a little more mixed. You know, many of our communities continue to perform very well while there were others that we had to adjust in. I'd say Houston and Austin held the best. You know, the moves there were smaller and more surgical where San Antonio required some more broad-based adjustments. But then when you get into the west, really, resale is still very very low in terms of where it's been historically. I mean, most of them are in the three or four months of supply range and haven't had to make a bidding moves in the west and southwest. It's helped better.

Q: Hey. Thanks for taking my questions. The first one I had just wanted to find out, are you guys still having problems getting meters and other things in California as the rebuild has started there?

A: Rob McGibney: You know, it's interesting. We kind of always have problems getting meters in California, but, yeah, it is a little it's still a little more delayed from the impact of the fires. I think we're through the worst part of that. Yeah. A lot of the rebuilding hasn't started. I think that's gonna be a long and ongoing process, but you know, it's a big state, lot of volume, lot of crews, and I just I don't expect that that's going to be an ongoing a significant ongoing drag on our timing to get meters and utility hookups on houses. Still there a little bit, getting better every day, and, you know, think that that'll be back to normal. Fairly soon.

Q: Awesome. Thanks so much. Just looking at your updated delivery guide, it especially on the back of the Q1 orders, just on my very rough math, it looks like we're gonna need to see backlog conversion accelerate in the second half. Can you just break down the balance between, you know, kinda make maybe better cycle times or more spec homes? Because it would seem like, you know, one of those would potentially need to change to hit the revenue guide in the second half. Just hoping to unpack that.

A: Rob McGibney: Yeah. I mean, I think it's all the things that you just mentioned there, whether it's the improvement in cycle time or covering more of the inventory that's available. But, you know, while it does increase from where we were in Q1, we think it's a very achievable number. I mean, you just look at where we were in Q4, it's similar to that. And, you know, we're and we said, we're still targeting 120 days company average on cycle time. So that as we continue to progress towards that, we're going to that helps with the backlog conversion as well.

Q: Thank you. Good afternoon, everyone. My first question is on the design studios. You know, given that the consumer does seem to be under a bit more pressure and you did have to take some actions to improve affordability. Have there been any changes in what you're seeing in the design studios either in terms of what they're choosing or anything in terms of, you know, what you're offering there?

A: Rob McGibney: Not really, Susan. It's interesting. Our percentage of revenue that people are spending in the studio has stayed really consistent. Our square footage of homes has stayed really consistent. As to what they're picking, I think we've seen somewhat of a shift. And really, we started seeing that oh, you know, maybe a couple of years ago when rates moved up, it was less kind of fit and finish type things and spending more on things that buyers knew they couldn't change and that were difficult to change later. Like room configuration, structural options, cabinets, countertops, things like that. But they continue to spend about the same amount in and for the most part, buyer behavior in the studio has been consistent.

Q: Good evening. Thank you for taking my question. First, you talked about closing out of Inspirada and Las Vegas has been a really strong margin market for you guys. Can you talk about what type of gross margins you're earning at in maybe the margin impacts as that closes out? And then what do you expect final sales to be from there?

A: Jeff Mezger: Yeah. But, Trevor, we really don't get into what the gross margin is per community. Rob and I both shared that our Vegas margins are strong and well above the company average. The two land deals that we acquired we had tied up for a couple of years each. Had to take them through the entitlement process. They have a very good basis. Very similar products to what we offer at Inspirada, and we have a lot of builders knocking on the door wanting to get lots from us. So we know we're in a good spot. But our expectation is Vegas will continue to be at the top for us in terms of profitability and margins. So a great team and a very land-constrained market.

Q: Good afternoon, everyone. My first question is on the design studios. You know, given that the consumer does seem to be under a bit more pressure and you did have to take some actions to improve affordability. Have there been any changes in what you're seeing in the design studios either in terms of what they're choosing or anything in terms of, you know, what you're offering there?

A: Rob McGibney: Not really, Susan. It's interesting. Our percentage of revenue that people are spending in the studio has stayed really consistent. Our square footage of homes has stayed really consistent. As to what they're picking, I think we've seen somewhat of a shift. And really, we started seeing that oh, you know, maybe a couple of years ago when rates moved up, it was less kind of fit and finish type things and spending more on things that buyers knew they couldn't change and that were difficult to change later. Like room configuration, structural options, cabinets, countertops, things like that. But they continue to spend about the same amount in and for the most part, buyer behavior in the studio has been consistent.

Q: Thank you. And ladies and gentlemen, that does conclude the question and answer session. And that also concludes today's teleconference. We thank you for your participation. You may now disconnect your lines.