KB Home Q2 2025 Earnings Call Transcript

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

Question: John Lovallo - UBS Group AG - Analyst : The first one is, I think the flexibility that you guys are demonstrating makes a lot of sense on the production front. The question is on SG&A though. Despite the 6% cut at the midpoint, of revenue. SG&A is only going up by about 20 basis points versus the previous outlook. I'm just curious what steps you're taking to kind of pull back here on some of this fixed overhead costs. What specifically are you guys doing? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JUNE 23, 2025 / 9:00PM, KBH.N - Q2 2025 KB Home Earnings Call

Question: John Lovallo - UBS Group AG - Analyst : Makes sense. And then maybe switching over to the gross margin. The outlook was 19.2% to 20%. It went to 19.0%, 19.4%. I mean, obviously, you tightened it a bit and lowered a bit. But maybe just help us sort of bucket the drivers between volume, lower ASP mix, maybe higher land costs, if you could?

Question: John Lovallo - UBS Group AG - Analyst : Understood.

Question: Stephen Kim - Evercore ISI - Analyst : (laughter) Thanks, not anymore. Not for a long time, actually. It's Steve Kim from Evercore. Guys, I appreciate all the color. The guidance -- it does seem to imply a pretty robust closing outlook. Rob, I think you specifically cause for the fourth quarter. it seems to suggest that you're either going to have a very high backlog turnover ratio, maybe in the 80s or something or you're going to have an awful lot of orders in the third 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. JUNE 23, 2025 / 9:00PM, KBH.N - Q2 2025 KB Home Earnings Call And typically, I would think that the third quarter absorption cadence would be a little lighter than 2Q, but just wondering if you can help us think through -- I know you've given us a lot of guidance already. But just struggling a little bit to try to figure out which lever you're going to be really pulling to get the fourth quarter closings somewhere in the vicinity of 4,000 or something?

Question: Stephen Kim - Evercore ISI - Analyst : Okay. So anything in particular on the -- regarding backlog turnover ratio or absorptions, sequentially?

Question: Stephen Kim - Evercore ISI - Analyst : Yeah.

Question: Stephen Kim - Evercore ISI - Analyst : Got you. And certainly, with the cycle times being back to normal and even get pressing ahead, that would -- okay, I guess, explain a lot of it. Can you help us -- give us a little bit more color regarding the community delay? It was kind of interesting. You mentioned that you were delayed. You had some communities that kind of opened up late in the quarter. And kind of, I think, pushed, I would assume, that weighed a little bit on your order pace a little bit. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JUNE 23, 2025 / 9:00PM, KBH.N - Q2 2025 KB Home Earnings Call So I was wondering if you could elaborate on that at all? And to what degree would you say that your community count and particularly these grand openings, which I know it can be pretty important from an order perspective. To what degree did you maybe not get the full benefit of that like you normally would have expected?

Question: Michael Rehaut - JPMorgan Chase & Co - Analyst : Thanks for taking my question. Good afternoon, everyone. Wanted to first try and dive in a little bit to the gross margin cadence in 3Q, 4Q. I believe if the math -- if our math is right, we're looking for a decent rebound in gross margins in the fourth quarter to the low 19% range, I believe, from the 18.1% to 18.7% guidance in the third quarter. So I just wanted to understand what's driving that outlook and if there's any anticipated change within that outlook in terms of incentive levels that closings would have in 4Q versus 3Q?

Question: Michael Rehaut - JPMorgan Chase & Co - Analyst : Okay. Perfect. And then also, I think earlier in the prepared remarks, it was referenced that there are some communities that lowered price during the quarter, obviously, in response to the softer demand. I was curious what percent of communities did see price reductions? And what was the rough average of those price reductions in those communities? And perhaps which markets were those reductions may be more prominent?

Question: Matthew Bouley - Barclays Global Capital - Analyst : Yeah, thanks, guys. I hope you can hear me this time. So my question is on -- back on the topic of ASP and your sort of price philosophy incentives. And I just kind of wanted to understand exactly what you guys were saying. So obviously, you enacted that strategy back in Q2, and it sounded like April and May, maybe ended up a little disappointing relative to expectations. But as we look forward, you're talking about optimizing the assets. Snd obviously, you need to sell through some spec here in the second half. So just kind of curious around -- were you messaging that maybe you will kind of pull back a little bit on this philosophy a little? Or was the idea that in order to make sure we hit that full year delivery guide, that we will continue to be active with adjusting base prices to kind of make sure we get that volume.

Question: Matthew Bouley - Barclays Global Capital - Analyst : Okay. Fair enough. Secondly, the adjustment to land investment and hear you loud and clear on the decision you're making around kind of therefore, leaning more into share repurchase. Especially when you're trading below book value, all kind of well understood and adjusting to market conditions. But obviously, just the result of that and the thought around growth going forward? I think I heard you say you're going to say around kind of 250 communities for the balance of this year, and please correct me if I'm wrong. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JUNE 23, 2025 / 9:00PM, KBH.N - Q2 2025 KB Home Earnings Call But as you have pulled back or are pulling back on land development spend, and how should we think about the outlook for community growth kind of going beyond 2025 and setting up for '26?

Question: Stephen Mea - RBC Capital Markets - Analyst : Hey, everyone. You've actually got Stephen Mea on for Mike Dahl today. I wanted to ask a question about the backlog here. I fully understand the backlog and all your other initiatives like build time are supportive for the volume goals for fiscal '25 here and without asking for a specific guidance. I was hoping to get a sense of how you're thinking the backlog might shake out at the end of the year and how that may affect your thoughts on potential growth through 2026? Thanks.

Question: Stephen Mea - RBC Capital Markets - Analyst : No, that's super helpful. And then I guess, moving closer in time, I wanted to ask about the fourth quarter and kind of how you're looking at that from a margin perspective, that we have the numbers for the third quarter and the full year kind of implies a similar-ish range for the fourth quarter, but a slight uptick at the midpoint. Just kind of how you think margins might play out sequentially from the third to fourth quarter, especially in the context of you guys doing a good job of adapting to the market with price adjustments? Thanks.

Question: Alan Ratner - Zelman & Associates LLC - Analyst : Hey, guys. Good afternoon. Thanks for all the detail as usual. Much appreciated. First question, just drilling in a little bit on the pricing strategy. Obviously, you guys are focused on kind of getting away from incentives and more adjusting the base prices were necessary. I'm just curious because we've seen from other builders kind of moving in the opposite direction? If anything, it seems like incentives have continued to increase here through the spring. And as you think about your order results and March being strong, April, May, a bit weaker, how do you guys deal from a competitive perspective when other builders are increasing incentives? Are consumers coming into your communities asking for those incentives? Do they understand how your strategy differs? And do you feel like the pullback in orders you saw later in the quarter? Was it all due to other builders becoming more aggressive with incentives?

Question: Alan Ratner - Zelman & Associates LLC - Analyst : Got it. I appreciate the thoughts there. Second question on the cost reductions you guys have been able to realize, are you able to break that down at all by input? I'm just curious. If you look at that 3% plus reduction, how much of that is due to lower lumber, which is more of a commodity and maybe a little bit less in your control versus either labor or other inputs that you've directly been able to negotiate lower?

Question: Rafe Jadrosich - Bank of America Securities - Analyst : Hi, good afternoon. Thanks for taking my question. I just wanted to follow up a little bit on the land spend. Can you just help us understand how much land inflation is flowing through your P&L today sort of in the back half of the year and land that you're contracting today are you seeing any relief on NAND prices? Has that come down at all with the softer market? And is there a point here where we could start to see sort of land prices come down as we go out into 2026?

Question: Rafe Jadrosich - Bank of America Securities - Analyst : Okay. That's helpful. And then just maybe help us understand the quarterly cadence on gross margin. What's the amount of fixed cost that you have in your cost of goods? And how does it vary by quarter? Just how does that contribute to the lower gross margin guide given the revenue reduction in that sort of 40 basis points sequential step-up that you're talking about in the fourth quarter? So just how much of the second half gross margin at is just from deleverage?

Question: Richard Reid - Wells Fargo Securities LLC - Analyst : Thanks. Just wanted to ask about some of the lot options that you walked away from during the quarter. I believe it was about 9,700 lots. Would just love some perspective on some of the metrics that you might be using internally to determine when it makes sense to walk away from a lot. And then looking forward, could you just give us a sense as to what gives you confidence that you're optimized from a lot standpoint? And that there's not a risk that you might need to walk away for more options in the second half of the year.

Question: Richard Reid - Wells Fargo Securities LLC - Analyst : No, that's helpful. And then just switching gears on third-party broker relationships. There might be a few of your peers that are actually leaning into these as the market slows. So to that end, could you just remind us where your broker attach rate set in the second quarter? How that compare to Q1? And then were there any quarter-over-quarter differences in the commission rate you paid in Q2 versus Q1 that might be worth calling out? Thanks.

Question: Jade Rahmani - Keefe, Bruyette & Woods Inc - Analyst : Thank you. I was wondering if you could talk about how much of the orders weakness relates to existing home inventory? Do you have any data as to sales prospects you're losing to the existing home market where we've seen a meaningful uptick in homes for sale?

Question: Jade Rahmani - Keefe, Bruyette & Woods Inc - Analyst : And on the average selling price, which was down 8% year on year, do you know how much to that related to outright price stuff versus geographic or product mix?

Question: Susan Maklari - Goldman Sachs & Co LLC - Analyst : My first one is on the build times. You mentioned that you do think that you could see further improvement there. Can you talk about where that can go -- how much of it is being driven by perhaps some of the weakness in the market and maybe a loosening of labor? And how we should think about the sustainability of any of those gains when the market does turn.

Question: Susan Maklari - Goldman Sachs & Co LLC - Analyst : Okay. That's helpful. And then maybe a question for Rob. He's coming into this role -- can you talk a bit about what you're most focused on? How you're thinking about the positioning of the business given the environment that we're in? And any initiatives that we should be aware of?