Earnings Call Transcript - KBH Q3 2022

Operator, Operator

Good afternoon. My name is Alex, and I will be your conference operator today. I would like to welcome everyone to the KB Home 2022 Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the Company's opening remarks, we will open the line for questions. Today's conference call is being recorded and will be available for replay at the Company's website kbhome.com, through October 21. Now, I would like to turn the call over to Jill Peters, Senior Vice President, Investor Relations. Jill, you may begin.

Jill Peters, Senior Vice President, Investor Relations

Thank you, Alex. Good afternoon, everyone, and thank you for joining us today to review our results for the third quarter of fiscal 2022. On the call are Jeff Mezger, Chairman, President and Chief Executive Officer; Rob McGibney, Executive Vice President and Chief Operating Officer; Jeff Kaminski, Executive Vice President and Chief Financial Officer; Bill Hollinger, Senior Vice President and Chief Accounting Officer; and Thad Johnson, Senior Vice President and Treasurer. During this call, items will be discussed that are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future results, and the Company does not undertake any obligation to update them. Due to various factors, including those detailed in today's press release and in our filings with the Securities and Exchange Commission, actual results could be materially different from those stated or implied in the forward-looking statements. In addition, a reconciliation of the non-GAAP measures referenced during today's discussion to their most directly comparable GAAP measures can be found in today's press release and/or on the Investor Relations page of our website at kbhome.com. And with that, here is Jeff Mezger.

Jeff Mezger, Chairman, President and Chief Executive Officer

Thank you, Jill, and good afternoon, everyone. We delivered another quarter of strong financial results with meaningful year-over-year growth in most of our key metrics, highlighted by more than 600 basis points of expansion in our homebuilding operating income margin to approximately 18%. These results reflect the strength of our company, our larger scale and the size and composition of our backlog. At the end of our third quarter, our backlog stood at over 10,700 homes valued at more than $5.2 billion, placing us in a good position with respect to deliveries in our 2022 fourth quarter and into the first half of 2023. Approximately two-thirds of our buyers are locked on their mortgage rate or paying in cash. And for the most part, these buyers are closing when their homes are completed. Our buyers tend to have an emotional attachment to their purchases that stems from creating their personalized homes on a lot they have selected with features and finishes they have chosen. As to the details of the quarter, we produced total revenues of $1.84 billion, up 26% as compared to the prior year period, and diluted earnings per share of $2.86, which grew almost 80% year-over-year...

Rob McGibney, Executive Vice President and Chief Operating Officer

Thank you, Jeff. We continue to face difficulties in completing and delivering homes in the third quarter. And as a result, we were short about 160 deliveries or 4% relative to the midpoint of the guidance that we provided in June. While we had seen build times improve modestly in May, which we shared with you on our last earnings call, they extended significantly from that point, illustrating the larger industry-wide challenge in finding a consistent footing in build times...

Jeff Mezger, Chairman, President and Chief Executive Officer

Thanks, Rob. Last quarter, we shared with you our expectation of reducing our land investments in light of current market conditions, and then redeploying this cash to our stockholders. In the third quarter, we did just that with a year-over-year reduction in land acquisition and development spend of almost 30%. With near-term visibility limited as to the direction of the economy and its impact on homebuyers, we expect to continue at a lower level of land spend for the foreseeable future...

Jeff Kaminski, Executive Vice President and Chief Financial Officer

Thank you, Jeff, and good afternoon, everyone. I will now review highlights of our financial performance for the 2022 third quarter and discuss our current outlook for the fourth quarter. In the third quarter, we produced measurable year-over-year improvements in most of our key financial metrics, including a 26% increase in our housing revenues, a 610 basis point expansion of our operating margin and a 79% rise in our diluted earnings per share...

Operator, Operator

Thank you. We will now begin the question-and-answer session. Our first question comes from John Lovallo with UBS. Please go ahead with your question.

John Lovallo, Analyst

First one is, I guess, maybe could you help us think about maybe quantify the incentive activity on a sequential and year-over-year basis? What type of incentives are you using? Are buyers responding?

Jeff Mezger, Chairman, President and Chief Executive Officer

John, I can make a few comments on incentives and I'll kick it to Jeff for the specifics on the slight movement to growth. As I shared in my prepared comments, we really don't focus on incentives. We look at providing the buyer with the best value, which, to us, is the most square footage for the best price and then let them personalize at the studio...

Jeff Kaminski, Executive Vice President and Chief Financial Officer

Sure, Jeff. Yes, on the sequential gross margin guide. I think, first of all, it's important to point out with our guide at 25% to 26% at the midpoint is up 310 basis points year-over-year, which is a phenomenal level of improvement on a year-over-year basis...

Stephen Kim, Analyst

Jeff, yes, thanks for that commentary about the nature of the slowdown in demand. Certainly sounds like the issues are more mental than that. And so that's encouraging. I did want to pick up, though, Jeff K., on the comment about the gross margin outlook...

Rob McGibney, Executive Vice President and Chief Operating Officer

Sure. Yes. On the direct, we're starting to see some relief on the front end, and I think that's how we would all expect it to happen because the starts slowed down...

Alan Ratner, Analyst

First one, I would love to get a little bit more color on the roughly 9,000 lots you guys walked away from in the quarter...

Jeff Mezger, Chairman, President and Chief Executive Officer

Alan, I think it would be across the board. You answered some of it. And in some cases, the land sellers are sticky, and they're not willing to reduce price, and they're not extending...

Deepa Raghavan, Analyst

Jeff, appreciating that your backlog cancellation rate, the 9% versus the overall 35% cancellation rate, can you talk through the risk to the backlog you have?

Jeff Mezger, Chairman, President and Chief Executive Officer

Well, we're constantly scrubbing the backlog deeper. The lesson we would want us to have a name on a home that's under construction that isn't prepared to close when the home is completed...

Operator, Operator

Thank you. Ladies and gentlemen, this concludes today's teleconference. Thank you for your participation. You may now disconnect your lines.