KB Home Q1 2025 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Matthew Bouley - Barclays Bank - Analyst : I wanted to start with the price adjustments and specifically a question around kind of customer elasticity. I guess what level or what magnitude of price adjustments would you say was enough to kind of get consumers off of the fence here? And how are you kind of able to separate what you were doing with these price adjustments relative to the kind of typical seasonal uptick that you would see in March anyway. So yes, just any more detail around the magnitude and thinking about sort of protecting the backlog as well and customer elasticity.

Question: Matthew Bouley - Barclays Bank - Analyst : And I guess that leads me then to the next question around the margin. I think the way you implied the kind of gross margin cadence, I think you even said the operating margin should be improving sequentially by the second half relative to Q2. So I think I heard you say that leverage on some of your fixed cost is a driver of that. But you just mentioned that there's a 75 basis point hit from the kind of net price adjustments. If I think about kind of what's going on with land basis and development costs, other type of inflation, you mentioned lumber on top as well. Can you just kind of bridge all those pieces together and pluses and minuses and give a little confidence on what drives that step up in margins in the second half?

Question: Stephen Kim - Evercore ISI Institutional Equities - Analyst : My first question relates to the cycle times that Robby talked about the fact that cycle times were 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. And 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.

Question: Stephen Kim - Evercore ISI Institutional Equities - Analyst : And then, I guess, if you could just mention, I think you gave a very nice discussion about how you've eliminated the pocket incentives, and you sort of went to sort of putting these base prices on the Internet and all that. It sounds like you're talking about this as a permanent change. And I just want to make sure that I'm interpreting that correctly, is this, you referred to it as I think cleaning up and getting some of the noise and all that kind of things. So I just wanted to understand, is this something that you feel no longer has value? Or is there something maybe more nuance that you want to message there?

Question: Michael Dahl - RBC Capital Markets - Analyst : I guess I want to press on gross margins a little bit more. Maybe just remind us kind of in the current environment with what your guidance incorporates for the revenue ramp as the year goes on? How would you normally think about how that translates to seasonal gross margin uplift? Just trying to get a sense of really like -- Yes. The flat top guide in second half at face value doesn't seem awfully conservative. So maybe you can just help us think through and remind us what the seasonal component actually is from a quantitative standpoint.

Question: Michael Dahl - RBC Capital Markets - Analyst : And my follow-up is still on the same line, and it's more -- why is that really the base case assumption when like you just saw in a short period of time, the need to make some changes. Your competitors are making changes based on what we see in terms of price, the demand environment has been very uncertain. There's an uncertain cost environment. Your sales pace is -- its great year that it picked up, but it's still down year-on-year. So why not -- why is assuming that conditions will remain stable the right base case under the current conditions?

Question: Michael Rehaut - JPMorgan Chase & Co - Analyst : First, I just wanted to -- and I apologize if I missed this earlier, but if -- love to get kind of any regional differentiation across your footprint. When you talk about, in particular, adjustments that you needed to make with incentives or pricing, if there were certain markets or even submarkets that were kind of more prevalent or at the top of the list. And by contrast, which markets might be on the stronger end of the spectrum?

Question: Michael Rehaut - JPMorgan Chase & Co - Analyst : I guess secondly, I'd love to shift towards the balance sheet. And if you could just kind of remind us how you're thinking about leverage over the longer term? And kind of the dividends and share repurchase and perhaps what the potential is for that over time?

Question: Alan Ratner - Zelman & Associates - Analyst : My question on the price adjustments. I'm just curious if you can look at the last five weeks of solid order results following those adjustments. Would you say that those have been driven more by kind of going back to buyers that were already in the pipeline, giving yourselves for the tools to kind of go back and say we've made these adjustments and that kind of pulling them off the sidelines given the hesitancy? Or would you say that it's actually translated to significant increases in new traffic maybe coming from the website advertising and actually pulling through more sales from new individuals coming into the pipeline? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MARCH 24, 2025 / 9:00PM, KBH.N - Q1 2025 KB Home Earnings Call

Question: Alan Ratner - Zelman & Associates - Analyst : And then I think what we've heard in the past is one of the -- I guess, trickier things for build-to-order builders making base price adjustments is the large backlog that you guys have. And I'm curious how you're dealing with your backlog. Are you proactively reaching out to them in the 50% or so of communities where you have adjusted prices? And are you offering those same adjustments? Are you taking it on a case-by-case basis as they get closer to the closing dates? Any color there would be helpful.

Question: James McCanless - Wedbush Securities Inc. - Analyst : The first one I had, I just wanted to find out, are you guys still having problems getting meters and other things in California as the rebuild has started there?

Question: James McCanless - Wedbush Securities Inc. - Analyst : And so in the 50% of communities where you didn't adjust pricing, I guess, were you able to raise prices in some areas? And if so, maybe highlight one or two that did well during the quarter or highlight one or two regions that did well during the quarter. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MARCH 24, 2025 / 9:00PM, KBH.N - Q1 2025 KB Home Earnings Call

Question: Sam Reid - Wells Fargo Securities LLC - Analyst : Just looking at your updated delivery guide, especially on the back of the Q1 orders just on my very rough math, it looks like we're going to need to see backlog conversion accelerate in the second half. Can you just break down the balance between kind of making better cycle times or more stack homes? Because it would seem like one of those would potentially need to change to hit the revenue guide in the second half? Just hoping to unpack that.

Question: Sam Reid - Wells Fargo Securities LLC - Analyst : And then just a follow-up to something in the prepared remarks. You delivered, and I believe, slightly fewer inventory homes during the quarter than you were expecting. Can you just talk to why that number was a little bit lower. I think it was about 150 units. Apologies if I missed. And then can you just remind us what the gross margin spread historically has been between your build-to-order and your inventory homes and was there any mix benefit in the first quarter from that lower inventory home sale volume that we should be aware of?

Question: Susan Maklari - Goldman Sachs Group, Inc - Analyst : My first question is on the design studios. Given that the consumer does seem to be under a bit more pressure and you did have to take the 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 what you're offering there?

Question: Susan Maklari - Goldman Sachs Group, Inc - Analyst : And then you mentioned that you are walking in your lumber for a bit longer, just given the potential inflation or the inflation that we're already seeing in that product. Can you talk a bit more about how long that goes out for? How we should think about the potential impact if lumber continues to move from here? And what you're seeing in other wood products as well? Has there also been upward movement in some of those two?

Question: Trevor Allinson - Wolfe Research, LLC - Analyst : First, you talked about closing out of Inspirada in 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 Inspirada and maybe the margin impacts as that closes out? And then when do you expect final sales to be from there?

Question: Trevor Allinson - Wolfe Research, LLC - Analyst : And then second question is on spec reduction levels. We've heard several builders talk about pulling back on spec production. Given the slower start to the year, are you guys adjusting your spec production as well? And then what are your expectations for spec mix as a percentage of 2025 deliveries? And how does that compare to your spec mix as a percentage of 2024 deliveries?