KB Home (KBH)

Q3 2012 Earnings Call

September 21, 2012 11:30 am ET

Executives

Jeffrey T. Mezger - Chief Executive Officer, President and Director

Jeff J. Kaminski - Chief Financial Officer and Executive Vice President

Analysts

Joshua Pollard - Goldman Sachs Group Inc., Research Division

Nishu Sood - Deutsche Bank AG, Research Division

William Wong - JP Morgan Chase & Co, Research Division

Robert C. Wetenhall - RBC Capital Markets, LLC, Research Division

Ivy Lynne Zelman - Zelman & Associates, Research Division

Megan McGrath - MKM Partners LLC, Research Division

Michael Dahl - Crédit Suisse AG, Research Division

Presentation

Operator

Good day, everyone, and welcome to the KB Home 2012 Third Quarter Conference Call. Today's conference is being recorded and webcast on KB Home website at kbhome.com. The recording will be available via telephone replay until 3:30 p.m. Eastern Time on September 29 by calling (719) 457-0820 and using the replay pass code of 7442358. The recording will also be available to KB Home's website for 30 days.

KB Home's discussion today may include certain predictions and other forward-looking statements that reflect management's current expectations or forecasts of market and economic conditions and the company's business activities, prospects, strategy and financial and operational results. These statements are not guarantees of future performance. And due to a number of risks, uncertainties and other factors outside of its control, KB Home's actual results could be materially different from those expressed and/or implied by the forward-looking statements. Many of these risk factors are identified in the KB Home's filings with the SEC, which the company urges you to read with care.

The discussions today may also include references to non-GAAP financial measures as defined in Regulation G. The reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures and other Regulation G required information is provided in the company's earnings release issued earlier today, which is posted on the Investor Relations page of the company's website under News Releases on the left-hand side of the page.

I will now turn the conference over to Mr. Jeff Mezger. Please go ahead, sir.

Jeffrey T. Mezger

Thank you, Anne, and good morning to everyone. Thank you for joining us today to discuss our third quarter results. With me this morning are Jeff Kaminski, our Executive Vice President and Chief Financial Officer; and Bill Hollinger, our Senior Vice President and Chief Accounting Officer.

On today's call, I will take you through highlights of our third quarter financial results, then I will provide insight in the KB Home strategy and business evolution over the past few years, after which I will provide you with an update on our progress to position the company for profitability and long-term growth. Jeff Kaminski will then take you through our detailed financial results, after which I will make a few closing comments. And I will be pleased to take your questions.

The most encouraging theme I want to express during this call is that we are making real and substantial progress towards our objective of profitable growth. We are pleased with our third quarter results, which reflect improved performance on all of our key financial metrics.

Our third quarter revenues increased 16% over the same period last year. We generated positive operating income. And our net income for the quarter was $0.04 a share as compared to a loss of $0.13 a share for the prior year.

We grew our backlog substantially, ending the quarter with $745 million in potential future housing revenues, a 33% increase over the prior year and the highest third quarter backlog level since 2008. Net orders increased in both units and value with value for the quarter increasing 16% over the same period a year ago.

We reduced our SG&A ratio significantly and improved our gross margin. We ended the quarter with $467 million in cash and invested $187 million in land and land development.

While we still have more hard work to do, our path to profitability is now clear, and we are turning our focus to also driving top line growth.

Turning back the clock to 2009. We recognized at that time that our top priority was to rebuild a profitable foundation for the company. We elected to withdraw from many markets that were not achieving returns, and we reduced our investment in other key markets until they stabilized. Many of the markets that we decided to exit had been entered late in the peak years of the last cycle, which made it extremely challenging to be profitable in those markets as the downturn continued. We narrowed our focus to our core markets where we had greater scale, stronger management teams, a proven ability to execute and a great brand.

The markets in which we operate today generated around 26,000 deliveries in our peak year, so we believe we have retained a substantial growth platform we can leverage as the housing market continues to gain momentum. Most notably, we maintained our strong #1 position in California by a wide margin, which is a significant competitive advantage for KB Home that I will elaborate on further during the course of this call.

In essence, our strategy was to concentrate on fewer markets with larger businesses in key submarkets with the right product while retaining a spring coil for growth. This evolution has taken time to manifest in our financial results as we continued to reduce overhead, build margin and bring our SG&A into alignment with revenues. But clearly, we are turning the corner in 2012.

As a result of our actions, during the past few years, we are positioned to be profitable at much lower delivery levels. We now have a much higher average selling price, a higher gross margin, and our SG&A ratio is approaching a more appropriate level. The fundamentals of our business are much stronger as a result of this evolution. In fact, now that we have a clear path to profitability, we are ready to leverage our current structure and business model for meaningful growth.

During our last call, I made the statement that KB Home is going on offense. I want to explain a little further what I meant by this because it is much more than just increased spending on land. Having positioned the company for profit, Going on Offense is my rally cry for growth. Now it is time to start moving forward again as a leaner, more efficient, better positioned company to take advantage of a market that is clearly recovering. It is a fresh mindset, and it is energizing for our team. Around the company, I am encouraging everyone to be bold and aggressive in pricing, gross margin enhancement, model opening timelines, land acquisition and compression of cycle times. As I said last quarter, going on offense is my personal #1 priority for this company.

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