KB HOME Q3 FY2024 earnings call

• Achieved double-digit y-o-y growth in revenues and diluted EPS in Q3. Projected $6.9 billion in revenues for 2024 with a gross margin exceeding 21%.
• Focused on growing community count, maintaining customer satisfaction, and executing Build-to-Order model. Generated 3,085 net orders in Q3, flat y-o-y. Monthly absorption pace per community was 4.1 homes.
• Production: Started nearly 3,000 homes in Q3, ending with over 7,700 homes in production. Build times compressed to about 150 days, aiming to reduce to four months.
• Land investment: Invested $845 million in land acquisition and development in Q3, a 50%+ y-o-y increase. Ended Q3 with over 69,000 lots owned or controlled.
• Share repurchases: Repurchased ~1.9 million shares worth $150 million in Q3, with $800 million remaining under authorization.

Total revenues for the third quarter of fiscal 2024 were over $1.75 billion. Housing revenues grew 11% compared to the prior year, reaching $1.75 billion. The gross margin was 20.6%. Housing revenues for the quarter were driven by an 8% increase in the number of homes delivered and a 3% increase in the overall average selling price. The West Coast region had a mix shift in homes delivered, impacting the gross margin. Revenue contribution from segments varied, with the West Coast having lower margins compared to the company average.

• For 2024, expects ~$6.9 billion in revenues with a gross margin exceeding 21%.
• For 2025, initial guidance for revenue is about $7.5 billion. Anticipates improvements in housing gross margin and SG&A expense ratio in Q4 2024, aiming for an operating income margin range of 11.4% to 11.8% assuming no inventory-related charges.
• Believes the Federal Reserve's rate cut will benefit consumer confidence and affordability, setting up strong year-over-year comparisons for Q4 2024 net orders.

• Macroeconomic factors: Uncertainty around interest rates, economic slowdown concerns, and election results can impact demand.
• Resale inventory: Rising resale inventory in some markets, though still below historical normalized levels and limited at price points.
• NAR settlement: Impact on broker relationships and buyer participation, with realtor participation down sequentially in Q3.
• Land and development costs: Continued pressure on land and development costs, though stabilized at higher levels.

Q: Could you unpack the $7.5 billion revenue outlook for 2025 and how community growth plays into volume?

A: KB Home provided high-level guidance for 2025, citing community count, backlog, starts, and absorption assumptions as supporting the $7.5 billion estimate. Details will be discussed in January.

Q: How will KB Home approach a lower rate environment, particularly with home prices and mortgage concessions?

A: Focused on selling the value of the home vs. mortgage incentives. Lowered prices in some communities to drive pace in Q3, and expects to lower mortgage concessions in Q4 with lower rates. Will manage each asset individually based on market needs.

Q: What's the long-term operating margin opportunity for KB Home?

A: With scale growth through market share gains and community count expansion, there's potential for operating margin improvement. SG&A ratio has been in the double digits, and pullback in incentives could incrementally increase gross margin.

Q: What drove the gross margin delta in Q3 and the sequential increase in Q4?

A: Q3 gross margin was impacted by West Coast mix (lower margins), pricing, and incentives. Q4 expects improvement due to reduced West Coast mix delta and margin improvement in West Coast divisions.

Q: How is KB Home addressing existing home inventory coming back in certain markets?

A: Resale inventory is rising in some markets but still limited at affordable price points where KB Home operates. Believes they are well-positioned to compete favorably as resale inventory opens up.

Q: What's the outlook on build cycle times and spec vs. BTO mix?

A: Build times aim to reduce to four months, with some divisions already at lower times. Spec vs. BTO mix is roughly 60-40, with a focus on BTO to maintain higher margins.

Q: How is KB Home handling the NAR settlement and broker relationships?

A: Watching the settlement process, requiring buyers to show compensation agreements with realtors. Realtor participation in Q3 orders was down, but values relationships and will adjust strategy as the process evolves.

Q: What's the free cash generation outlook and land-bank strategy?

A: Focus on inventory turn and build time reduction as cash generators. Option lot percentage has increased due to competitive land markets, with plans to continue expanding land portfolio while maintaining underwriting standards.

Q: How are demand trends in California and other markets?

A: California, particularly Southern California and Inland Empire, has been strong. Other markets like Florida and Texas saw resale inventory climb, leading to price adjustments to maintain sales pace.

Q: How does buyer sentiment factor into home buying decisions, especially with election impact?

A: Encouraged by candidates discussing housing, but consumer decisions are driven by life events. Interest rate reductions led to increased leads and traffic in August, with the election's direct impact on decisions being less principal.