Q1 2020 Earnings Call
Good afternoon, My name is Devon and I'll be your conference operator today I.
I would like to welcome everyone to the Kb home 2021st quarter earnings Conference call. At this time, all participants are in listen only mode.
Following the Companys opening remarks, well open the lines for questions.
Today's conference call is being recorded.
We'll be available for replay at the company's website at Kb home Dotcom through April 26, now I will like to turn the call over to Joe Peters Senior Vice President Investor Relations. Joe. Thank you you may begin.
Thank you Devin good afternoon, everyone and thanks for joining us today to review our results for the first quarter fiscal 2020 on the call, Jeff Metzger, Chairman, President and Chief Executive Officer, Batman, Dino Executive Vice President and Chief operating Officer.
Jeff Kaminski Executive Vice President and Chief Financial Officer, So Hollander, Senior Vice President and Chief Accounting Officer, and Bad Johnson, Senior Vice President and Treasurer.
Before we begin let me note that during this call items will be discussed 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 factors outside of the company's control, including those detailed in today's press release, and then filings with the Securities and Exchange Commission actual results could be materially different from the stated or implied in the forward looking statements.
In addition, a reconciliation of the non-GAAP measures reference 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 web site at Kb home Dot com and with that I will turn the call over to Jeff Metzger.
Thank you Jill and good afternoon, everyone.
We're finding creative ways to adapt to changing conditions at the country deal with the covert 19 outbreak.
Well, John and I are in the office today practicing social discussing the rest of our team is on this call from different locations.
These are unprecedented times.
And our main priority continues to be the health and wellbeing our of our community of employees customers and business partners and their families.
Well, we're reporting excellent first quarter results today that showed strong momentum across our footprint.
Given current market conditions, we are withdrawing our guidance for this year.
Rather than follow our standard approach for these quarterly earnings calls my remarks today will focus on how we are responding to the covert 19 related challenges.
Actions, we're taking to navigate this uncertain environment.
And the strength of our positioning to manage through it.
We began the process early last week of temporarily closing our sales centers model homes and design studios to the general public.
During this time, we have shifted to appointment only following appropriate protocol to help ensure the health and safety of our employees and customers.
We're also leveraging our virtual sales tool.
Including home video toward interactive floor plans and an online design studio.
Customers the ability to shop for new home from the comfort and safety of their mobile device or personal computer.
In addition, we're also actively engaging with customers by phone email save time, Skype and other online tools.
We are seeing an increase in response to our digital efforts.
Month to date in March visits to our website are up nearly 50%.
And conversions to sales leads are up over 20%.
Both as compared to their respective prior year period.
In addition to temporary changes we've made in our communities.
We have also shifted our corporate and division office functions to working remotely.
We will continue to monitor the situation.
And filed the guidance of the centers for disease control and prevention.
As well as state and local authorities.
The most of our markets there are restrictions on activities, commonly called shelter in place orders.
But these orders usually exempt residential construction.
Categorize it as an essential activity.
Our company's better position than perhaps we have ever been to deal with this type of disruption.
The tremendous progress we made over the past three years.
Under our returns focused growth plan has truly transform kb home.
We're now a larger more profitable company.
With a higher gross margin supported by a solid balance sheet, which has no goodwill and over 1.2 billion in liquidity.
Our leverage ratio has steadily improved in the past few years and continued to progress in the first quarter, both year over year and relative to year end 2019.
In addition, we have a better mix of assets.
As a result of both our discipline and acquiring land as well as the ongoing reduction in our inactive inventory.
Our approach to land acquisition has primarily focused on communities that provide a roughly one to two year supply of lots.
Preferred sub markets.
Price points that are attainable by the median household income.
A lot out at the end of the first quarter represented a 3.1 year supply based on our last 12 months of deliveries.
And these challenging times housing as an even more essential need as home buyers want to place of their own for many reasons, including safety security and help.
Throughout the first quarter low mortgage interest rates and a strong economy.
Together with limited resale inventory field home buyer interest.
And demand held study for the first two weeks of March with our net orders up 7% relative to the comparable prior year period.
As news of the Corona virus intensified and we temporarily closed our sales centers as I mentioned earlier.
African sales slowed in the third week of March with net orders now down a cumulative 5% quarter to date as compared to the prior year period.
Our cancellation rate, that's currently healthy at 17% quarter to date.
Although both are ordering cancellation rates could change as we go forward.
Depending on how conditions evolved from here.
With our built to order business model, our buyers are invested in their purchases when we start their home.
Given the time they have devoted to selecting their lot floor plan and structural options.
Then personalizing, our home and our design studios, along with obtaining mortgage approval.
We believe this process helps to reduce our risk of cancellations after start.
At the end of the first quarter, our backlog increased year over year to 5821 homes, where the value of 2.1 billion.
Up 28% relative to the prior year period.
We remain in regular contact with our buyers and backlog.
And with its high capture rate KVH us our mortgage services JV gives us both an additional avenue to support and communicate with our customers.
As well as better predictability to manage through the closing process.
Operationally adult order model allows us to align our business to demand and build to our sales pace.
Not to a targeted delivery goal.
Minimizing our spec starts and mitigating inventory risk.
Under this model, we also scale, our land acquisition and development spend to sale.
In addition, having already rotated our product offerings down in square footage promote affordability.
We have expanded the choices that buyers have in our communities.
Our long tenured leadership team has successfully managed the company through a variety of economic cycles.
One of the many benefits of experience is learning to quickly adapt to changing market conditions.
Given the uncertainties surrounding the duration and extent to which cobot 19 will impact the us housing markets.
We are focused on being both prudent and strategic with our cash resources.
We continue to close homes.
With our quarter to date deliveries ahead of the comparable period of last year.
Providing us with cash inflows.
And we're closely monitoring cash outflows.
As such we have curtailed land acquisition and land development for now.
This public health crisis has interrupted many businesses and government services.
And we have found land sellers and developers to generally be accommodating and extending closing date.
We're also shifting to more targeted phases of land development aligned to our sales pace.
We have long standing relationships with many of our land sellers and developers.
And we are working collaboratively with them.
Carefully and thoughtfully manage our business.
In closing, we had an excellent first quarter.
And demand remained resilient in the early weeks of our second quarter.
Although these data points or in the rear view mirror. They do provide a good sense of the strength of our business and the strong desire for homeownership.
We believe we are well positioned with a solid balance sheet strong liquidity and an experienced leadership team that is communicating daily across our organization.
To ensure that we are focused on the right priorities with consistency.
In addition, we have an effective core business strategy and a build to order model that provides flexibility mitigates risk.
I'd like to thank all of our employees for their dedication to Kb home.
And determination to support our customers and each other.
I also want to thank our trade partners, who responded to the call from our company and our industry colleagues.
Participated in a national campaign under the hash tag builders care by contributing protective maps and eyewear.
Our heroic healthcare workers across the country, who desperately need these supplies.
I'm confident in our team's ability to lead our company through this period of uncertainty.
We look forward to the eventual stabilization of market conditions and updating you on our progress along the way.
With that I'll now turn the call over to Jeff for the financial review.
[music].
Thank you and good afternoon, everyone I will now briefly cover highlights of our financial and operational performance for the first quarter, followed by comments summarizing the strength of our significantly improved financial position and the solid liquidity supporting our plans strategies to navigate through these uncertain times.
Created summary of our outstanding first quarter performance is a strong reminder of how well we have continued to execute our differentiated strategy.
This same strategy and level of execution drove the tremendous improvements in our profitability returns financial position liquidity and capital structure generated under the returns focused growth plan, we launched in 2016.
Our performance during the first quarter and for the past several years gives me great confidence in our ability to execute during this market disruption.
During the first quarter, we generated improvements in virtually all of our key profitability measures and ended the quarter with a robust balance sheet and solve liquidity. It short it was a very strong quarter of financial performance for the company.
Our first quarter housing revenues were up 34% from a year ago to $1.1 billion, reflecting a 28% increase in homes delivered and a 5% rise in overall average selling price.
Housing revenues were favorably impacted by our sizable backlog at the beginning of the quarter, which was up 24% year over year as well as strong market conditions and outstanding execution throughout the quarter with several of our divisions significantly outperforming forecasted delivery results.
Homebuilding operating income was $60.2 million for the quarter increased 92% year over year from 31.3 million in our operating margin rose 170 basis points to 5.6%.
Our housing gross profit margin from 30 basis points, a 17.4%, including total inventory related charges of $5.7 million into 2020 quarter and 3.6 million in the year earlier period.
Excluding the impact of inventory related charges, our gross margin for the quarter was 17.9% compared to 17.6% for the prior year quarter.
This improvement reflected the favorable impacts of increased operating leverage due to higher housing revenues and lower amortization of previously capitalized interest.
These favorable impacts were partly offset by a shift in the mix of homes delivered toward communities with lower gross profit margins.
Our selling general and administrative expense ratio of 11.8% improved by 160 basis points from last year's first quarter ratio, mainly as a result of the increased operating leverage from higher housing revenues.
And our continued focus on cost containment.
Our net income for the quarter was up 99% year over year to $59.7 million and diluted earnings per share more than doubled to 63 cents.
We ended the quarter was stockholders' equity of over $2.4 billion and book value per share of $27.
Against this backdrop of our strong first quarter performance I will now provide an overview of our crop financial position.
During last quarters earnings call. We described several initiatives that contributed to the success of our returns focused growth plan in achieving our capital allocation and efficiency objectives, and improving our financial risk profile.
These included measurably growing our total inventory investment, while reducing our inactive inventory.
Substantially de leveraging our capital structure.
Meaningfully expanding the borrowing capacity under our revolving credit facility.
We obviously appreciate even more significant progress you've made in these areas given the current uncertain market environment.
We believe our strengthened financial position in liquidity profile produced through our focus execution. These initiatives will provide financial flexibility and support our ability to capitalize on opportunities as we operate through this period of uncertainty.
At the ended the first quarter, our leverage ratio of 41.7% improved another 60 basis points from the end of our 2019 fiscal year.
Our net debt to capital ratio finished the quarter at just over 35%.
In addition to the favorable impact on our leverage ratio the refinancing activities completed in 2019 lowered the expected amount of incurred interest in 2020 by nearly $14 million and extended the weighted average life of our senior notes to just under five years as at the end of the first quarter.
In January 2020 standard and Poors financial services.
Created our credit rating to double B from double B minus and changed a rating outlook to stable from positive.
We ended the first quarter with $430 million, a cash and total liquidity of over $1.2 billion, including available capacity under our unsecured revolving credit facility.
In addition, we had no outstanding borrowings under our revolver at any point during the first quarter and we do not have any senior note maturities until December 2021.
As we previously reported we completed an amendment to our credit facility in the 2019 fourth quarter, increasing its borrowing capacity to $800 million from 500 million.
And extending its maturity by more than two years to October 2023.
Given the current macro environment, we're pleased with the additional financial flexibility available to us with this enhance liquidity.
During the first quarter after investing $405 million in land and land development, we utilized only $10 million of net operating cash.
We have consistently generated positive net operating cash flow in each year since 2015, while funding and the average annual land investment in excess of $1.4 billion over that period.
Our ability to efficiently and effectively react to changes in the market environment and control our level of land investment is a significant lever available to us as we manage liquidity.
We expect to continue to make selective investments as we implement the land related actions, Jeff outlined earlier.
In conclusion.
As this unprecedented health crisis continues to evolve we believe we are well prepared to navigate through this volatile period.
We also believe that the combined strength of our built to order business model consistent operational execution and focus on offering affordable products will enable us to capitalize on the eventual return of more normalized market activity.
Our financial position and liquidity profile, our stronger today than at any point over the past decade, and we're proud of the many successful initiatives, we have implemented to reduce our financial risks and enhance the quality of our balance sheet.
We will now take your questions Devin Please open the lines.
Thank you at this time, we were conducting a question and answer session.
During this time, we ask that you limit yourself to one main question and one follow up if you would like to ask questions. Please press star one on your telephone keypad a confirmation till indicate your line is in the question Q.
Let me first start to fuel, let Jim will your question from the Q.
For participants using speaker equipment and maybe this soon to pick up your hedge of before pressing the star keys our first.
Our first question comes the line of Alan Ratner with Zelman and Associates. Please state your question.
Hey, guys that good afternoon. Thank you for this time and hope you are all doing well and the team is doing well and.
In addition.
First I guess.
Questions here, just digging in thinking about the backlog at the 5800 homes. There just curious if you could just talk a little bit about that obviously a lot of focus on getting those homes delivered in its encouraging to hear March closings up year over year can you talk a little bit about maybe the percentage of that backlog that was scheduled to deliver in the upcoming quarter.
Her and kind of what steps, you're taking with those buyers in backlog to to help hopefully facilitate them getting to the closing line there and on the homes that are newer maybe haven't started yet are you doing anything differently, there as far as maybe putting off.
Starting those homes or any anything along those lines that might be.
Might be mitigating some of the potential cancellation risk in the future.
There are lot of questions Alan.
I'll do my best really just give you a state of play in how.
We manage our backlog as you know our backlogs typically five to five and a half month supply of deliveries and a portion of that is in the on started bucket and the rest of scattered through from foundation of final and we try to get into a rhythm of.
Of even flow deliveries monitoring the backlog in the starts.
Couple of things for a while we are continuing to complete homes and as I shared our March closings are ahead of last year.
Total company is the mortgage companies escrow companies city finals everyone's finding ways to creatively accomplish their task along the way.
And.
One thing I tried to communicate in my prepared comments the buyers definitely want to close we haven't very motivated by are right now that values homeownership and the safety.
Security that goes with it.
We because of the protocol.
And the social distancing, there's fewer subs working in the homes today. So we're expecting that are as we get deeper into the production cycle Bill times will extend a little bit in that you can't have three or four different contractors in the home.
And any one time and we're working right now too.
Spread out the.
The production with so that we don't have the these chunks, where you're just stuck because you don't have the capacity with the subs being spread out.
And so were extended out the whipped cycle right now we're closing homes that were all within 30 days a completion on March one and that'll be the first priority and as we extended out a little bit them will.
We will follow that up on the start side with the on started backlog all of that predicated on the quality of the backlog and what are the conditions.
We're seeing on the ground frankly any city the cities all.
We have a different story right now on what kind of shutdowns they have.
The economy's working how the coven 19 paces are what level there are and how it's impacting things so very fluid daily focus and.
Right in our backlog pretty stable.
Great and I appreciate that Thats very helpful.
Related to this I guess, but the mortgage market Thats, obviously very important getting those homes closed seems like there's a lot is kind of turmoil going on especially in the secondary market in servicing side of things and I'm not sure. If that's impacting your buyers ability to get loans, but we have heard some originators are actually putting in some overlay.
As to tick kind of mitigate their risk in terms of selling alone. So just curious if you could talk about I know, it's changing everyday but.
How is the mortgage market right now in terms of your ability to get loans closed.
Well, we're closing homes. So it's not an issue today, there's been some nibbling around the edges with.
Whether it's the.
The investors are the servicers or the.
The equity line at the mortgage company, where there's little requirements that are being introduced none of them on their own a a game changer. So we're continuing to operate.
Great to have a business partner, that's performing with Stearns and as you've seen the fed is absolutely committed to ensuring liquidity in the mortgage market. So they're very active buyers.
By mortgage backed securities on a daily basis. The numbers software yesterday was 50 billion in one day, so there's a lot of liquidity.
And the processes working pretty well for us not an issue today.
Great. Good luck to everybody. Thank you.
Our next question comes online.
So in person Wells Fargo assumed a question.
Hi, good afternoon, guys and thanks for taking my questions.
[music].
First wanted to start off thanks for giving more March order trends.
We've heard from contacts that orders have stayed fairly elevated due to prior backlog in prior contacts but.
Looking more near term and maybe I'm splitting hairs, but could you maybe parse out how traffic.
Has actually trended in the past couple of weeks.
On a year over year basis.
Yes, it's hard to.
Hard to comp that Truman because we closed our sales offices last week. So any any walk in traffic. We may have seen we didnt want us to keep our employees save we'd love to see him and the rights that conditions, but we we shut our doors last week. So the the traffic in the leases that were working right now are all internet based.
By appointment only once we get past.
The internet process and are on the Internet side things are doing fine I shared where were up year over year on Internet leads but we've closed doors for the walk in traffic.
Any any way you could net those out between you know the walk in traffic and Internet traffic.
I mean is really hard to for the okay.
Okay.
Okay.
And then.
Positive you all are managing your cash flows.
Could you just discuss how you're pulling back on the land spend are you rotating more toward optioned land are you doing the land closing dates to purchase or you just really pulling back on only and altogether.
Good question driven over for starters eye for all the questions. We get I just want to remind everybody. It's very fluid and this hasn't been around that long. If you think are.
Earnings release, we just put out was based on results that end to 25 days ago. So were 25 days.
I don't have a very successful quarter and now navigating through all this this disruption in our view right now has been touched by time.
We're not going to people and negotiating discounts were not doing anything like that is let's all work on this and by some time in the in the process. We've curtailed spend on entitlements, which can add up to a lot of money across the system in many cities. So they canceled the public.
Hearings in the short run so over the lifetime money on an engineer if you can't get a map approved so we've stopped all that work were.
Continuing to poke around on the land search side, but right now will be a little more cautious with commitments.
And we're working with our partners on land sellers in the land developers, let's just pause give us some time and let's see how things settle out over the next 60 days.
Our primary focus right now.
Through that process, you're going to spend less on land in the next 60 days.
Our next question comes the line of Mike Dahl with RBC capital. So it's a question.
Hi, Thanks for taking my questions and.
First and foremost hope that you all in your teams are staying safe and healthy.
And it's good to see taking a proactive approach here.
I guess I just wanted to ask first a little more detail about how you are approaching the appointment process when it comes to new sales because.
On your website at simply says that things are temporary temporarily closed but it sounds like.
Maybe your funneling then internet leads into still some some any person visits.
To the sales center, but.
Can you just walk us through that a little more what is the process to get someone into.
Model home at this point for an in person visit and.
Likewise.
Give us a little insight into then design center phase, which ends up being pretty crucial to your closing process.
Sure.
Well, we're already funded might get this was making us a better company and that we're testing our brains on virtual selling and the internet are more than we did a couple of months ago and the buyer is responding. It's also changing the buyers thought process on what it takes too.
Two.
Choir home or go through the personalization profit. So were we closed our sales offices to walk in traffic.
Our first priority as the safety of of our employees and in turn our customers. So were complying with everything that we thought we'd move quick and close to walk in traffic past that.
If we have a sales office with two sales consultants in it they are actively working remote right now through all the virtual tools, we have the online tools communicating with people demonstrating product and.
Our criteria is if you get through all that.
The buyer expresses an interest in visiting the model Park and our sales team in that location is comfortable.
Given them a private tour just the that group.
And they comply with all the CDC protocol will go ahead, and so on the models and Thats, what we have in place across the system. So we have a little all almost half to align and then we'll we'll open up the miles and telephone interestingly on the studio side people are very comfortable making their selection bottom line.
We actually final than our studios last week 225 buyers.
Last week that went through the process and we're finding things we can do along the way like our carpet supplier great partner in Shaw is willing to ship on each of our buyers carpet samples of what they selected and ship 'em up quickly. So they can.
From wherever the samples gets shipped to we're bringing it to them for the choice as opposed to.
Them coming to us so there's a lot of things like this going on right now with the studios are functioning well in a remote process.
Okay. That's really helpful. And then my second question.
You've mentioned a handful times now how fluid it is and I think we all understand that.
With respect to the shelter in place orders, it's good that initially.
Largely constructions bit exempt, but we've heard.
A couple instances where.
Construction is initially exam, but then there is some.
Some question of.
Whether or not there's been some.
Some shift in that were areas are going to rethink construction and whether that should be exempt and then.
What specific activities.
I would be considered part of that the.
The the in person appointments, which which I think you mentioned is subject to all the other criteria. So.
Have you seen any large markets that have initially kind of extent construction, but now you're hearing that may end up being more restrictive.
Yeah, Mike as you touched on and I have it is very fluid and.
Fortunately the process.
In many cases the.
Whether it's a state order of Citi order or the federal order are not clearly written so there's a lot of interpretation.
And as the order comes down from the the governors of America's or the County Commissioner, it's all subject to some of these interpretation and the way. The bills are written so there's there's cities where.
The order would come out.
And we would interpret the order as you can't work than our industry would work with that governmental entity and they would clarified and now it's okay. You can go to work, there's others, where we thought it said you could work and they've come out and said no you can't work and as we're sitting on this call and this is.
Moving around by the hour as we sit on this call right now Seattle Metro King County, as of Friday, as shutdown to construction and they've made the decision there that.
It's not an essential business for us Seattle's not a very big part of our business. So.
We'd like to see it opens so we can continue to advance our progress there and we're doing well in Seattle, but as of Friday night Seattles close down if you go over to Texas Theres. Some confusion in Austin, where the mayor has come out and.
And.
I'd like where construction would not be.
And essential business and less of for affordable housing.
Our government housing and.
We're working with the mayor we the industry working with American the governor to try to get clarity there and does that apply to the city of often are all of Travis County, or all of Metro Austin and Theres a lot of confusion in the system other than those two I'm not aware of anything where there is a conflict today.
We're open for business here in a state of California there.
You can actually read the rules and it would suggest even to the customer that it's okay to go visit.
Community, because it's an essential business.
But it's pretty varied out there, but other than my two anecdotes on Austin in Seattle.
Everything else is operating today.
Our next question comes a lot of Stephen Kim with Evercore ISI. Please so it's a question.
Thanks, and thanks, very much guys, obviously, a very unusual times an obvious.
Really my question relates to how you're adjusting your the what youre going to be managing things at the community level, specifically with respect to pricing.
In this kind of a highly unusual time now in your case, because you shut down your sales centers and that sort of thing maybe the answer is a two stage answer but my question is effectively.
This demand drop off is not really tied to price.
The typically when sales slowed down division presidents modulator pricing discounts to maintain a certain level of pace I mean, that's just the way the business kind of runs and.
In this scenario and as you move forward and hopefully get to more normalized environment, but still with the probably some lingering effects of coded on your traffic and sales are you going to continue to.
Leave the pricing decisions up to the division presidents or are you preparing to are you doing now or are you preparing to.
Address pricing with a little bit more about centralized and little bit more of a centralized manner to so that you don't so you don't have price cuts or increase discounts.
Which would be done to try to raise traffic or volumes when that's not really be issue keeping volumes down.
Steve Thats up so good question.
You're absolutely right. This it is different right now, we're we're not slowing down in demand because of subprime mortgages or up pop in pricing for lack of demand or anything like that its.
This terrible pandemic and then a.
The government decision.
And I guess it would depend on the the duration right now in the short run were taken the view that we have a nice backlog to continue to generate revenue out of we don't have a lot of inventory out there to go quote liquidate so we don't see an urgency to go.
Do anything with price today.
If anything the inventory has got a higher value today, if theres people out there to want to move into home very quickly.
Because of these.
For the health and the safety and security.
Talked about so our our view right now is.
Let's take our time wait until there's clarity continue to.
Cell phones like we are.
Continued to mine in our backlog for deliveries, which we are and dependent on how things settled in each market will revisit it but.
Unless this thing was is really extended I don't see major price moves here I think this was more timing in the quality of the process with the customer.
Yes, that's a that's encouraging and certainly we don't we certainly haven't heard of anything suggesting that pricing industrywide is has been weakening.
And so thats good to hear now you've you've said that cancellation rates have held steady buyers and motivated to close assuming that's because in part they see that pricing is holding steady. My question. My second question relates to how this may play out in terms of the existing home market influencing the new home market typically the exist.
Being home market and the new home market tend to move somewhat together since they're both tied to similar economic factors and consumer confidence and all that but today's different the new market. The new residential construction market is much better equipped in my view to deal with social distancing, then the resale market and it looks like.
I mean, certainly this could continue to depress existing home transactions and be a problem in the resale market much more so than the new market.
So are you concerned and are you.
Preparing in any way to educate your dps or your buyers.
That to not be reactive if you see pricing from folks in the resale market to really do need to sell cutting their prices.
Are you worried at all about that bleeding over into the new market.
Or do you think that theres, an ability to keep that separation and keep that if you will somewhat quarantine to the resale market, while the new market is able to retain pricing.
I'll actually add another one Steve I think you're going to see a shortage of liftings. Because you have people that are content with the safety and security of their existing home.
So I think you'll see it was whenever that settles and goes back in the other direction I think you'll see a tighter resale market than you have even today because people aren't necessarily.
But in their home on the market and.
On the other side work, we're doing what we can maintain the infrastructure and the subcontractor base and the momentum we have so whenever it settled we can move quickly.
I'm in the industry and I'm, an optimist about being a homebuilder, but but I'm expecting when you get out the other side of this is going to be strong demand and people really wanting to own their own home.
So we want to be ready for that.
Our next question comes a lot of Bokorney with Raymond James. Please proceed with your question.
Hey, Thanks, good afternoon.
One of the first asks about the supply chain and just see if you see anything on the horizon, whether its imported materials from China or other markets anything that could be disruptive in terms of.
Continue into the cadence of home closings that that may or may not extend out here in the coming weeks.
But we're not seeing any disruptions.
Right now when this thing.
First hit in China, and support foreclosed and they didnt have trucks to.
Move the product to the ports and all that we quickly mobilize will all of our suppliers to understand their pipeline and their product availability.
And.
Many of them have more than even a year of supply of their product. So we didnt have any real signals that.
The supply chain was going to be too tight and.
Thats certainly how it's playing out for US today, we're not seeing any issues whatsoever. If anything if you think about it with the drop in Chinese demand.
For products that may even help the availability here in.
For us right now.
Another sound bite and we'll see how it plays out.
China's growth stopped their demand for lumber stopped with it in the Canadian lumber markets have a lot of inventory right now so that pressure that we saw in lumber that was occurring in the first couple of months of this year, but actually end up going the other way due to the inventory this building up right now so.
This is fluid is everything else, we're dealing with but right now we're we're not seeing any real cost pressure on supply.
In the last month and of product as readily available.
Very helpful. Thank you.
And second one.
If you could parse out maybe this is the first few weeks of March so small sample size, but im just wondering if within your communities. You. If you went down price point, we're hearing that the entry level communities. There was a further down price points seem to be holding up much better through the early weeks of this crisis that theres still lot of more.
Demand.
And maybe even a sense of urgency among multifamily renters in particular.
Particularly trying to exit certain communities, where they may or may not feel quite as safe in that type of environment wants to get a single family houses their own for security reasons.
Have you detect anything like that or have any corroborating evidence that the entry levels doing better like that.
Well I do think it is we we really didn't comment on it in our.
Prepared remarks, but our first time buyer percentage did pick up in the first quarter, we're not a 57% of our delivery. So it's slightly higher than it was I'd say that because it's always been a big part of our business.
And.
It could speak to wire sales have held.
In the margin.
I was a observing the other day to somebody here in the office, if I'm living in a one of those.
Hi, downtown towers, where the common hallway with 20 other renters I'd much rather be in my own home in the suburbs right now and I think I think we will see more of that going forward.
Alright, thanks congratulations.
Our next question comes on line and met.
With Barclays. Please proceed with your question.
Hey, good afternoon.
Thanks, everyone saw the details through this.
I wanted to ask on the cross upside again.
Strohm come on websites cross linking lead conversion, but presumably a lot of models will close in the one person profit levels was only scenario, where you might consider build a little more spot.
Perhaps some products available.
And when there was a recovery or.
Status quo. This drop in sales or however, long it is clinically and move flows into closings in five months, how you guys.
Thank you.
Right.
Right now Matthew I I'd like to stick to our business model or margins are higher on our build to order sales have been for years.
And.
We believe that's the right way to go and.
I'll never say never because there could be some community somewhere where it makes sense to do that but right now we'll stick to our our process and make as much money as we can process.
Okay got it things of that and then I want to go off of the community side.
Presumably with with sales and as models closing or delaying opening.
I will numbers you could put around.
Bob.
Out of a backlog or community openings that might.
Emerge perhaps would be available to open later anymore.
We don't know with no, but I mean, our processes continue forward on the Grand openings were not having being grand opening of France, where we're gathering hundreds of people around blends in hot dogs, but we're we're opening the communities were not holding up any any community openings or maybe other external things that could prevent us from opening but.
We are certainly trying to move ahead with the openings and trying to keep the business running.
In a typical opening will have a.
Waiting list or.
Contact list of several hundred.
When we get the models completed so what we're doing is complete in the models.
Merchandising getting ready to open will staff from we're doing the same thing with.
The virtual selling effort and by appointment only and we would open for sales were just not having a big promotional events that we typically do.
Our next question comes a lot of John Lovallo with Bank of America, Hey, soon with your question.
Hey, guys. Thank you for taking my questions here as well.
The first one is im just curious.
How much skin the typical kb buyer has in the game in the sense of what are they putting down for a down payment that downpayment generally refundable and you know maybe it's in certain situations in a down payment was not refundable in the past you guys, making exceptions today kind of given the extenuating circumstances in the pressure on the consumer.
Well if the if they can't qualify for a loan done we always refund the money.
If we haven't started into home and May change their mind, we'd like to keep them for another day, so you'd refund the money and.
Past that.
Our deposits vary by city.
And if the homes completed and.
And.
The loans approved and they.
They don't want to perform at this time, our first stuff would be the same pause that we're doing with land sellers were going to off from a 30 day 60 day window, Okay lets call time out.
Keep everything ready to go and let's see how though the world settles.
No.
First up right now is not managing the deposits as managing our our customers and keep them in the game.
Okay. That's helpful and then.
I understand this is going to be project by project in Munich community by community, but is there a rules. Some that you guys think about where a margin business gross margin what pricing on a project would have to go in order to trigger impairment on the land.
Okay like on the impairment side, there's three big factors surrounding yet one is a macroeconomic situation and.
What we're seeing right now is completely different than what we saw going in the last downturn big downturn for housing is not financial sector driven.
We don't believe we'll see the same level of distressed inventory, we didn't have easy credit situation everything else I think everything pointing to a much better conditions in the macro if you look at our land portfolio and the quality of our land portfolio. Thats also improved tremendously we've been pretty cautious with land investments.
Still investing in the best Submarkets.
Relatively modest slot counts were stand right down the minimal strategy as far as.
Setting up or communities to be at the lower price points shorter duration land position. So the second component of that our land portfolio is looking very positive and then finally kind of getting to your question. Then you start looking at community level performance and if you look back over last 12 month period gross margins are right around the 19%.
Range at that level, there's still quite a bit of room as you can imagine before year on discounted cash flow.
Becomes negative and before we start looking at pricing, we do have other levers available to us.
So just simply cutting price we.
Certainly look at the besides the homes were building an offering the savings on the cost reduction revenue adjustment strategies that we can do so we think we're quite away quite a ways away from that we think theres a lot of room on that piece.
Always risk when there's market disruptions, but we believe we're much more favorably position then.
At any point in the last decade, or so as far as make into through this and we also don't expect to see huge market disruptions that we saw in terms of pricing.
Our next question comes from the line of Michael We deal with JP Morgan. Please proceed with your question.
Thanks, I appreciate it and I hope everyone is.
The whole Kb team is healthy and say.
First question I had was maybe just kind of circling back in talking a little bit about the backlog from another perspective.
Obviously over the next month or two.
There is going to be dramatic changes in the country with regards to unemployment in you saw the.
Sure you might have seen the unemployment claims spike.
Today.
I was just curious if you you talked about being perhaps proactive or working with different buyers.
If there's any in any initial efforts over the last week or two.
Around reaching out to you know whatever percent of backlog it may be.
That might be more susceptible to some of the employment trends or some of the tougher industry is being hit right now.
As it relates as to the shutdowns.
That is that are ongoing and if you have any early sense around.
What percent of the backlog.
You know might might be kind of in that.
Yes susceptible or.
Subject to those types of tougher hit industries.
Yes, Michael a couple of things come to mind.
And yet the headline of the number so you try to understand that if you look in.
Just California number was 287000.
In the state so thats, a it's a big number but it's a stay with 20 million unemployment or something like that so it's.
Relatively small percentage and you think about.
The buyers behavior.
They purchase Burke.
We're one of the first calls they make if they've lost their jobs.
Discipline.
Can't get in and they either.
Classifieds they'll go get another job hang in there or whatever so we know pretty quickly. If people are have lost employment or situation is this drastically changed and.
It's one of the benefits of having a mortgage company partner like we do mill.
A much higher capture rate. So we we have a pulse of the bias.
I'm not aware.
Of away for us.
I was concerned frankly, that's been raised.
On an industry or city.
Where there's a lot of can it be at the unemployment number say at this level for a long period of time you have to assume that the can rate is going to go up but we're not we're not seeing it yet.
We weekly thing and we're being very logical.
Okay understood.
Yes.
I'm sorry.
Yes, yes.
Second question was just kind of more around.
Personnel management and kind of a tough question, but.
Obviously.
No there's lot of uncertainty in terms of lengths in this downturn and also the.
The the ability to the economy to bounce back.
I was just curious if you know as you're looking at business certainly.
Today, it's pretty premature.
To think about adjusting staffing levels or anything of that nature or perhaps.
You know, even slowing or whatnot, but.
Are there any thoughts around you know if this were to last for another three months six months email and the recovery might be at.
Softer levels, given theres persisting unemployment I don't mean to between gloomy of course, but.
I was just trying to get a sense for the flexibility that you might have in India person now be it across the sale centers or the design studios or other parts of the fixed costs fixed cost structure change.
If thats something you've started to give any thoughts towards.
But to opening Fox one already shared that the.
Hey figure in the security of our employs a top priority for us for me around here.
The second top priority for me.
Very strong desire to.
Maintain the organization that was operating as such a high level 25 days ago, we have a very strong machine here and it's a credit and attribute of the employee base. So we're going to do what we can to to retain and.
Motivate and reward the employee base if it's a short cycle you just you keep everybody you go back to work. If this thing extends out per month to month, we've shared.
At our.
Our build pace than our land base is tied to our sales pace. So if your your sales pace six or eight months out you expect to be off dramatically you have to do what you can unfortunately to.
To preserve and protect your profitability of your organization. So I think it's way too premature to settle out there right in our view is let's let's maintain this organization this operating so well.
And the bunker down cut our overhead where we can and and see how things go as it starts to flow.
Our final question comes from the line of Susan.
Goldman Sachs. Please proceed with your question.
Hi, Thank you good afternoon, everyone. Thanks for squeezing me in.
My first question is just can you give us a little bit of color around what you're seeing in your Vegas communities.
Has anything changed their significantly and how you're thinking about that market, obviously, given its reliance on tourism, then and travel.
But as you know Susan Vegas as a top performing.
As for Us.
Big business and.
Even in March at good sales.
It's like the comments I'd, just make Michael we're not seeing a big rash of unemployment yet or our backlog is still relatively stable. We're closing a lot of houses in Vegas.
It has been flat because of the industries that are there.
That it's got the potential for more layoffs.
The study is more diversified than it was so it's not just casinos anymore and it's like our other cities we're monitoring its too early to.
The call right now but.
That team as one of our investment reacting to market condition. So we'll deal with it as it has a comes up.
Okay. Thanks, and then my question relates a little more broadly.
The change in and how you're communicating with buyers and trying to get buyers through the web site in traffic such as that have you made any changes to the marketing strategy or your marketing approach. How are you making to that you stay top of mind with potential buyers, especially maybe as we think about.
Community openings and not having the same kind of the bench in the same level Oh, maybe attraction that they otherwise would attack.
Well, we have shifted almost totally too.
Internet based advertising, there's very little spend anymore on radio newspaper magazine, all the old traditional things that we did over the years and has as we continue to refine and enhance we know.
Which vehicles online and get us the mostly.
And the most sales so you're constantly refining your your spend in online marketing to what you know works and.
You do that you can geo fence your traffic. So you know the buyer profiles.
Who's buying in that area you can target them with your your most effective online outreach and Thats working pretty well if it's very interesting process right now that we're we're still learning, but it's going to make our industry a lot better.
We're finally able to use technology to.
The promote our homes as opposed to a Billboard and a newspaper.
Okay. Thank you.
Ladies and gentlemen, this concludes our question and answer session as well as today's conference call. We thank you for your participation you may now disconnect your lines and have a wonderful day.