KB Home Q2 FY2025 earnings call

• Delivered solid financial results meeting or exceeding guidance ranges. Repurchased $200 million of shares in Q2. Strengthened business by reducing build times (7 days sequentially, back to pre-pandemic levels) and lowering direct costs. - Market conditions: Soft demand in spring selling season due to affordability challenges, mortgage rate variability, and macro/geopolitical uncertainty. Revised fiscal 2025 guidance. - Second quarter results: Total revenues $1.5B, diluted EPS $1.50. Exceeded delivery expectations due to faster build times. Gross margin 19.7% (excluding inventory-related charges above guidance). SG&A at low end of guided range. Book value per share increased to nearly $59 (10% y-o-y). - Net orders: 3,460 in Q2. Actions to reposition communities led to strong net orders in March, but declined in April/May. - Build-to-order mix: Goal to steer business back to historical range, which is core competency and drives higher gross margin. - Operational updates: Divisions executing well, maintaining customer satisfaction, improving build times (140 days in Q2, 20% faster than prior year quarter), lowering direct costs (3.2% lower y-o-y for homes started in Q2). Backlog at end of May: 4,776 homes valued at $2.3B. - Land investment: Scaled back land spend, redirected capital to share repurchases (expect to repurchase $100M-$200M in Q3).

In the second quarter of fiscal 2025, KB Home produced total revenues of $1.5 billion and diluted earnings per share of $1.50. The gross margin was 19.7%, and excluding inventory-related charges, it was above the guidance range. SG&A was at 10.7% of housing revenues, contributing to an operating income margin of 9%. Homebuilding revenues were $1.52 billion, a 10% decrease from the prior year. Housing gross profit margin was 19.3%, while adjusted housing gross profit margin (excluding inventory-related charges) was 19.7%. SG&A expenses as a percent of housing revenues were 10.7%, a 60 basis point increase from the prior year.

• Revised fiscal 2025 revenue expectation to between $6.3 billion and $6.5 billion. - Anticipate ~13,200 deliveries in fiscal 2025, need to sell ~2,500 homes to achieve. - Q3 housing revenues expected between $1.5 billion and $1.7 billion. - Full year 2025 housing revenues expected between $6.3 billion and $6.5 billion. - Q3 average selling price expected between $470,000 and $480,000; full year 2025 average selling price expected between $480,000 and $490,000. - Housing gross profit margin (assuming no inventory-related charges) expected 18.1%-18.7% in Q3 and 19%-19.4% for full year. - Q3 SG&A ratio expected between 10.3% and 10.7%; full year SG&A ratio expected between 10.2% and 10.6%.

• Soft housing market demand due to consumer lack of confidence in the short term, affordability challenges, and elevated mortgage rates. - Macro and geopolitical uncertainty impacting home purchase decisions. - Municipal delays in final utility sign-offs and certificates of occupancy for model homes affecting community openings. - Potential fluctuations in land costs and price variability affecting margins.

Q: About SG&A, what steps are being taken to pull back fixed overhead costs?

A: We are adjusting headcount to align with new revenue projections and looking at all buckets to save money, aiming to get the ratio back under 10% as in previous years.

Q: On gross margin drivers, bucket them between volume, lower ASP mix, higher land costs?

A: A lot is operating leverage. Land cost on a relative basis and mix between communities and regions have impacted margin, but reduced construction costs have offset some pricing pressure.

Q: Regarding community delays and its impact on order pace?

A: Community delays were more significant than usual, missing a couple of hundred sales, and we're making changes to forecast better and open communities faster.

Q: On gross margin cadence in 3Q, 4Q and what drives it?

A: The 40 bps difference between 3Q and 4Q is from operating leverage. Deliveries expected to be up in 4Q, providing margin uplift through operating leverage.

Q: On pricing strategy and response to other builders using incentives?

A: Our teams sell the value in price, and while some customers ask for incentives, we're happy with results since changing to our approach. It's our core way of operating.

Q: On land spend and its impact on growth?

A: Land investment is scaled back, and community growth will be driven by market conditions for the communities needed, with a platform for growth from current lot count.

Q: On backlog and its impact on 2026 growth?

A: We expect to grow backlog by offering best value, depending on market conditions, setting minimum run rates for communities to support 2026 strategy.

Q: On cost reductions breakdown by input?

A: Can't break down 3.2% reduction further, but includes various factors like mix, lumber, and other cost decreases not just from commodities.

Q: On lot options walked away from and metrics for that?

A: It's a fluid process with market updates tied to submittals, walking away from lots where market movement didn't hit returns.

Q: On third-party broker relationships?

A: Broker participation rate was ~70% in Q2 (compared to ~68-67% in Q1), commission rate ~2%.

Q: On orders weakness related to existing home inventory?

A: Markets with higher resale inventory are more competitive, while markets with suppressed resale supply have better results.

Q: On build times further improvement and sustainability?

A: Target is 120 days, achievable, and sustainable with current market conditions and labor availability, though may see diminishing returns once target is met.

Q: On Rob Dillard's focus and initiatives?

A: Focused on stabilizing the team, aligning initiatives to add value, and continuing shareholder-focused strategies like share repurchases.