KB Home Q3 2024 Earnings Call Transcript

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

Question: Matthew Bouley - Barclays - Analyst : Good afternoon, everyone. Thank you for taking the questions. Maybe I'll start on that $7.5 billion revenue outlook for 2025, see if we can unpack that a little bit. It sounds like you're talking to an ASP of around $510,000 here in Q4 due to mix, but I'm not sure if we should really draw that into next year. So I guess when you talk about $7.5 billion, is this going to be more kind of volume-driven, price-driven, and I guess how does the community growth sort of play into that volume side? Thank you. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 24, 2024 / 9:00PM, KBH.N - Q3 2024 KB Home Earnings Call

Question: Matthew Bouley - Barclays - Analyst : Okay. Fair enough. Thanks for that, Jeff. Secondly, you mentioned your strategy of sort of focusing on adjusting home prices rather than really toggling incentives to a significant degree, if I heard you correctly. Obviously, now you've got lower mortgage rates relative to a few months ago. So, my question is really around how you will approach a lower-rate environment between -- it sounds like you're willing to kind of pull back a little on the mortgage concessions here in Q4, but what should we expect around home prices, right? How did that trend as you got into August, as you did start to see demand improve? And is there a scenario where you could, sort of turn around here and start adjusting home prices in the other direction, given where rates have gone, or is that a little bit too early? Any color on how you're going to approach that lower-rate environment? Thank you.

Question: Stephen Kim - Evercore ISI - Analyst : Yeah. Thanks very much, guys. I'm going to follow up on Matthew's question. Just because that $7.5 billion is a really encouraging figure, and it implies closings probably of $15,000 or more. And so, you know, you've talked about -- I think you addressed absorptions. I just want to make sure that I'm understanding the interplay of absorptions and community count from this point forward. Is it right that you think that there's headroom on your absorptions from the level that you're, currently at? And in terms of community count, it's going to be, I think, kind of flattish, here in the next couple of months. But when is this inflection in community count likely to happen? Is it imminent or is it something that you expect to sort of, reach by the end of next year?

Question: Stephen Kim - Evercore ISI - Analyst : Great. Well, I mean, it's certainly a higher level of revenues than I think most people were looking for. So that is encouraging to hear that you're targeting that level and you see the internal opportunity for it. From a longer term perspective, I wanted to talk about your margin. If I think about your operating margin, I know over the past several years, you've had issues like, the mothballed communities, you had your interest expense running through cost of goods sold. And, by the time at this point, I think most of those issues are kind of behind you and things have improved. So I'm trying to figure out whether or not the long term operating margin opportunity for the company is materially higher than where you're at today. Call it like 11% or so or not. So can you give us a sense for what you think is kind of an appropriate long term operating margin range for the company?

Question: John Lovallo - UBS - Analyst : Hi guys. Thanks for taking my questions as well. I know you gave some of the factors on the gross margin, but I'm just curious in the quarter, the 20.7% relative to the 21.4% outlook. Just maybe if you could just kind of bucket those a little bit, help us understand what the delta was there. And then along the same lines, what's the driver of that sequential increase as we move into the fourth quarter, please?

Question: John Lovallo - UBS - Analyst : Okay. That's really helpful. And I can tell you that some of the more cautious feedback that we're getting from folks is that, well rates are coming down. This is not a new story, but that existing home inventory is going to come back into the market. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 24, 2024 / 9:00PM, KBH.N - Q3 2024 KB Home Earnings Call We are already seeing the builders put a lower than expected gross margins as they're battling that. That doesn't seem to be the case. You guys are talking about existing home inventories to being pretty much in check going up in some markets and the expectation that you will be able to pair back on incentives as rates come down. Just -- I want to make sure I'm understanding your thoughts on that correctly and how you do sort of see that dynamic of existing home inventory coming back in certain markets.

Question: Alan Ratner - Zelman & Associates - Analyst : Hi guys, good afternoon. Thanks for all the details so far. First, I guess, Jeff K, on the '25 outlook, and I'm going to be very careful not to ask you to parse it too finely. Your message was clear. But one of the things that you mentioned that gives you the confidence in growth next year, you pointed to your backlog and kind of the homes under production. And I just want to make sure I'm thinking about this right because on a year-over-year basis, your backlog has been pretty consistently down roughly 15%. I believe the homes under production number you gave was roughly flat

Question: Alan Ratner - Zelman & Associates - Analyst : Got it. Okay. That's helpful. And then second question, kind of on the balance sheet, asset efficiency side. You guys have done a really great job with the capital allocation, buying back stock. As I look at your cash balance today and the cash flow year-to-date, you're roughly breakeven on a free cash basis. Your option share of land has increased, but the owned supply is still kind of sitting three years to four years, which is similar to where it's been of late. So how should we think about your free cash generation going forward? Other builders have kind of set a target of roughly 100% conversion earnings to cash flow. I'm assuming fourth quarter will be a solid cash generation quarter for you guys, but it would seem like in order to get to that 100% number or something close, you would need to see that your supply of owned land move closer to maybe one or two years where some other builders are.

Question: Rafe Jadrosich - Bank of America - Analyst : Hi, good afternoon. Thanks for taking my question. First, I just wanted to -- you mentioned that direct cost had come down a little bit. You've seen some opportunity. Can you talk about the outlook going forward on the direct cost side? And then also, what are you seeing on land inflation today?

Question: Rafe Jadrosich - Bank of America - Analyst : Just what you're seeing in terms of land cost today, what level of inflation and how has it changed?

Question: Rafe Jadrosich - Bank of America - Analyst : And then second question is just where is your spec versus BTO mix right now? And how do we think about the margin differential between the two segments?

Question: Trevor Allison - Wolfe Research LLC - Analyst : Hi, good afternoon and thank you for taking my questions. I want to follow up on Alan's question regarding your land-bank. Your option lot percentage has really jumped the last couple of quarters. Is that a function of just timing? Or is -- has there been a different approach there? And REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 24, 2024 / 9:00PM, KBH.N - Q3 2024 KB Home Earnings Call do you expect that to stay near these higher levels or over the next several quarters kind of gravitate back towards your 25% option level that you've been at recently?

Question: Trevor Allison - Wolfe Research LLC - Analyst : Yeah, makes a lot of sense. And then a second question on geography. Clearly, Florida and Texas have gotten a lot of attention in the last few months from an order standpoint, it looks like the central was maybe a little bit softer for you guys sequentially, but the Southeast was improved relative to the overall company average, it only moved down modestly quarter-over-quarter. Can you talk about how Florida and Texas demand trended throughout the quarter and how that compares to your business overall? Thanks.

Question: Jade Rahmani - Keefe, Bruyette & Woods, Inc - Analyst : Thank you very much. Absorption pace dipped to 4.1%. Could you just comment on what your target is and what you're expecting, say, for next year?

Question: Jade Rahmani - Keefe, Bruyette & Woods, Inc - Analyst : Thank you very much. And honing in on California, how would you characterize the demand trends you saw in the quarter since that's your largest market?

Question: Susan Maklari - Goldman Sachs - Analyst : Thank you and thank you for taking the questions. My first question is around buyer sentiment. The election, housing has gotten a lot more attention from both of these candidates? Do you think that, that's having an effect on people's decision-making process and their willingness to perhaps step into the market today? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 24, 2024 / 9:00PM, KBH.N - Q3 2024 KB Home Earnings Call

Question: Susan Maklari - Goldman Sachs - Analyst : Yeah. Okay. That's helpful color. And then just one last question on the design studios. As we move through the quarter and you saw the movements on the demand side and thinking about the outlook for the fourth quarter and even into next year. Any changes in the options and things that people are picking there and the amount that they're spending in the design studios?