Q4 2020 KB Home Earnings Call
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Good afternoon, everyone. My name is Kevin and I'll be your conference operator for today's call I would like to welcome of you once the Kb home 2024th quarter earnings Conference call at the time of participants are in a listen only mode. Following the company's hoping remarks, we will open the lines for questions. Today's conference call is being recorded on will be available for replay of the call.
The news website Kb home Dotcom thing for.
Every 12 now I would like to turn the call over the Jill Peters Senior Vice President Investor Relations Jill you may begin.
Thank you David and good afternoon, everyone and thank you for joining us today to review our results for the fourth quarter of fiscal 2020.
On the call are Jeff Mezger, Chairman, President and Chief Executive Officer.
Net net Dino Executive Vice President and Chief operating Officer, Jeff.
Jeff Kaminski Executive Vice President and Chief Financial Officer.
The Hollander senior Vice President and Chief Accounting Officer, and Thad Johnson, Senior Vice President and Treasurer.
Before we begin let me note that during this call items will be the Skus that are considered forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995 debt.
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 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 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 Kb home dotcom and with that I will turn the call over to Jeff Mezger.
Thank you Jill.
Good afternoon, Im happy new year, we Holger holidays are enjoyable damn free for you and your families.
We finished 2012 on strong producing fourth quarter results that include remarkable net order growth and gross margin expansion.
As we continue to rotate into a high quality mix of communities effectively manage our cost per.
The reduce our amortized interest.
We're generating significantly higher margins.
And our balanced approach for optimizing pricing stays in this robust demand environment is for.
On further support.
We begin 2021 with momentum.
With our backlog value of over 60% year over year and the potential of generate as much of the $6 billion on housing revenue. This year as we focus on building our scale.
We are poised for profitable returns focused growth.
Given the composition of our backlog of strong lineup of community openings and our leaner more efficient cost structure.
All contributing to an expected double digit operating margin this year.
As for the details of the quarter, we generated total revenues of $1.2 billion and diluted earnings per share or $1.12.
While our deliveries the revenues were down year over year. This one of the expected, reflecting the covert related disruption at our second quarter net orders on housing starts.
Having said this we earn more on a per unit basis.
For the housing gross margin of 21%, excluding the inventory related charges of.
The 110 basis points year over year.
The strength of our gross margin was the key factor driving improvement in our operating income per units to over $44000.
On a sequential increase of $7000 per home.
Our balance sheet is in excellent shape.
And we are clearly in the solid position for the for the bar of the expansion of our scale.
The investing in land acquisition and development remains our top priority for deploying the substantial operating cash flow we're generating.
In the fourth quarter, we increased our land investments by over 60% of year over year to $650 million.
With disciplined execution, we grew our lot position by 7000 lots since the third quarter to end the year with over 67000 lots owned and controlled.
Our land position is well diversified both the cros and within our regions with our own lots, representing 3.8 years of supply and.
On a higher level of option lots now comprising 40% of our total.
We own all of the lots that we need for the sizable increase in delivery volume anticipated for 2021.
And on or control all of the lots we need for further delivery growth in 2022.
In addition to investing in our future we continue to focus on increasing shareholder return.
With another substantial increase in our quarterly cash dividend implemented in the fourth quarter the.
This is the second consecutive year, we have meaningfully increased our dividend, which is now six times its level from two years ago.
Our goal with respect to expand on our scale is the increase our market position in each of our served markets.
While we expect our growth to come primarily from our existing markets. We're also selectively entering new markets.
Seattle is the good illustration of our organic approach the growth.
We began with the small startup operation less than three years ago, which turn profitable by the end of year two.
This division is now on a path to more than double its profit this year and contribute more significantly to our overall performance.
We are encouraged by the success, we have had in Seattle.
And we are extending our market strategy in the Carolinas and area that we already know well.
With the improved execution in our Raleigh businesses over the past couple of years, we have now re entered Charlotte, where the similar startup approach share.
While it is the top 10 homebuilding market and we hired an industry veteran with deep Bruce and an extensive network the lead this effort.
Which has allowed us to move quickly on three land deals.
We expect first deliveries in Charlotte in 2022.
Our top priority the to expand our community count and.
And we successfully opened 38, new communities in the fourth quarter, including for communities that opened the ahead of schedule.
Thats. The 21, we expect the low point in our ending community count to occur in the first quarter with sequential growth in each quarter thereafter, Rick.
The resulting in year over year community count expansion in our third and fourth quarters.
Looking beyond 2021.
We are well positioned with the lots, we own and control to sustain this growth sequentially throughout 2022 and.
And we are committed to growing our community count on the.
Minimum of 10% next year.
The targets that we believe is realistic given our balance sheet cash flow level of profitability and the infrastructure already in place.
Our monthly absorption pace per community accelerated the 5.6 net orders during the fourth quarter, representing a year over year increase of 51%.
We achieved this higher pace, even as we increase prices and over 90% of our communities the.
Balancing pace on price in each community to optimize our assets and returns.
Our absorption pace has consistently ranked among the highest in the industry for many years.
We believe our success is driven by choice on personalization delivered at at an affordable price points, which.
Which are the cornerstones of our build to order model.
Given the increased focus that investors of had with respect to affordability in the past few months.
Just on a moment sharing our thoughts on this point.
Our long standing approach the product positioning is the target. The median household income in each sub market and to remain flexible and adjusting our product offerings through higher density and slightly smaller footprint to stay close to the median income levels.
By doing so we believe we make homeownership attainable for the largest demand segments, the millennials and gen. The.
Our divisions are executing well on our product strategy, enabling us to generate solid margin at our targeted absorption rates.
With our average selling price in nearly every division below the median new home price and in many cases below the median resale price as well.
This last point this particularly resonant as resale is our largest competitor.
Given these dynamics, we believe that our homes remain affordable.
The prices continue to rise we are well positioned.
During the buyer pause of late 2018 and early 2019.
When the effect of both the rising home prices and rising interest rate sensitive affordability we.
We proactively took steps to reposition our product offerings.
We quickly introduce smaller square footage plan.
From our product series of models expat.
The expanded the choice of available to our buyers across the square footage ban and lowered the specification levels for standard features than most of our communities.
Together these steps reduced the starting base price in many of our communities.
Thereby broadening our affordability for.
Today, we continue to offer the smaller square footage plan.
With nearly 60% of our communities.
The operating plan below 15 orders square feet.
Moving just a little up the footage fan of.
On 75% of our community offer plans that are below 1600 square feet.
Floor plans on this 1500 to 1600 foot range are well suited for millennials.
In addition, the offering more choice in the size of our floor plan the flexibility in our built to order model.
Whether an extra bedroom for the full bathrooms, the home office or of done provides the options that meet the needs of today's buyers.
With respect to the macro environment as I've already mentioned housing market conditions remain robust.
As the pandemic has helped to fuel demand for home ownership.
The existing single family home on inventory has been and continues to decline now sitting at just 2.3 months supply.
And below that level in many of our markets, particularly that our price points.
This limited level of resale inventory and a non underproduction of new homes over the last decade.
Together with favorable demographic trends.
The especially with respect first time buyers.
For continues to drive demand for the foreseeable future.
We believe this last point is very favorable for us given our experience in serving first time buyers who accounted for 61% of our deliveries in the fourth quarter, an increase of eight percentage points year over year.
At the time of our last earnings call on September our net orders were up 32% for the first three weeks of our fourth quarter.
The demand remained strong throughout the quarter, resulting in year over year net order growth of 42% to nearly 4000 homes.
While we experienced some seasonality in the quarter. It was negligible as november's order activity on close to october's levels.
Which is atypical the illustrating the depth of demand for our homes.
Geographically, our strength extended across our footprint with healthy year over year growth in each of our for regions.
Similar to the trends we experienced in the third quarter, the underlying buyer data for our orders in the fourth quarter remain favorable.
Millennial buyers continue to lead our buyer cohorts.
Representing 57% of our net orders, increasing six percentage points year over year.
In addition buyers continue to demonstrate on preference for build to order on which represented over 90% of our net orders compared to just under 70% in the prior year period.
Net order growth in the fourth quarter drove a 50% year over year increase in our net order value.
Which in turn fueled the expansion of our backlog value to $3 billion, an increase of 63% year over year on roughly 7800 units.
Given the higher backlog, we are confident in our increased revenue expectation for this year.
We accelerated our pace of home starts in the fourth quarter by 40% year over year.
And have continued to do sell on the first quarter as we line our starts to net orders.
Given our strong net order trends throughout the fourth quarter, our backlog continues to be more heavily weighted to the early stages of construction.
The the run started for assassination with those two buckets, comprising roughly 55% of our backlog as compared to about 44% in the year ago quarter.
This will affect our backlog conversion relative to historical first quarter levels all.
Although we are expecting a sequential increase in deliveries in our first quarter for the first time in my Kb home career.
As for the net orders in the first quarter of 2021.
They are up 44% for the first six weeks over the comparable prior year period.
Demand remains solid through the holidays and into the new year. However.
However, we acknowledge the tougher weekly net order comparisons we have for the remainder of the quarter as well as an anticipated decline in community count.
As a result, we expect our net order growth to moderate by the end of the quarter from the current level.
On the mortgage side, our joint venture KVH at home loans wrapped up another very productive year.
The growth in the JV is capture rate to 81% in the fourth quarter produced a 20% year over year the increase in its income despite the lower deliveries in the quarter.
Reflecting on more profitable business.
The JV of steadily increasing its contribution to our overall performance and for the full year generated year over year income growth of over 70% to $21 million.
In closing we finished 2020 strong.
And we are poised for a tremendous 2021 and the resumption of our growth into a larger more profitable company.
While we remain very mindful debt the pandemic is not over.
And that it retains the potential to disrupt our business and builds brought under control.
We are also confident in the strength of our position.
We will expand our scale with our considerable backlog.
Together with continued robust market conditions.
Contributing to the potential for as much of $6 billion in revenues in 2021.
We have multiple factors supporting our higher gross margin this year.
Including the composition of our backlog overhead.
Overhead leverage from our higher revenue the effective cost management and lower amortized interest.
As well as margin enhancements specific to our built to order model such of lot premiums and studio revenue.
As a result, we're expecting our operating margin hit double digits, thereby driving our projected return on equity to above 17% compared to roughly 12% in 2020.
Simply put.
We are in the strongest position we have been in over a decade within the experienced dedicated team solid balance sheet. The healthy lot position the cash flow to invest in community count growth and a business model the generates high customer satisfaction and has demonstrated appeal to home.
On buyers.
We are excited about 2021 and look forward to share in our results as the year unfolds.
With that I'll now turn the call over to Jeff for the financial review Jeff.
Thank you, Jeff and good afternoon, everyone.
I will now cover highlights of our financial performance for the 2024th quarter as well as provider of 2021 first quarter and full year outlook.
During the fourth quarter, we continued to produce sequential improvement in our key profitability and credit metrics and generated outstanding growth in our net orders, which contributed to a significant year over year increase in backlog value two of highest level in 15 years.
In the fourth quarter, our housing revenues of $1.19 billion were down 23% from the year ago, reflecting a decrease in homes delivered debt was partially offset by a 5% increase in the overall average selling price of those hopes.
The lower delivery volume was due to the negative impact the onset of the COVID-19 pandemic and public health control measures had on our second quarter net orders and housing starts.
Looking ahead to the 2021 first quarter, we expect to generate housing revenues in the range of $1.14 billion to $1.22 billion.
For the 2020 on full year, we are forecasting housing revenues in the range of $5.5 billion to $6 billion up $450 million at the midpoint as compared to our prior guidance.
Having ended our 2020 fiscal year with the backlog value of approximately $3 billion. We believe we are well positioned to achieve the topline performance.
In the fourth quarter, our overall average selling price of homes delivered increased to approximately $414000.
For the 2021 first quarter, we are projecting an average selling price of approximately $390000 due to a regional mix shift of homes delivered.
We believe our overall average selling price for the 2021 full year will be in the range of 400000 to $410000.
Homebuilding operating income for the fourth quarter totaled $115.7 million compared to $162.5 million for the year earlier quarter.
The current quarter included inventory related charges of $11.7 million versus $4.1 million a year ago.
Our homebuilding operating income margin was 9.7% down 80 basis points from the 2019 fourth quarter.
Excluding inventory related charges, our operating margin was 10.7% for both periods as the gross margin improvement in the current year quarter is entirely offset by an increase in our as DNA expense ratio debt reflected reduced operating leverage for lower housing revenues.
For the 2021 first quarter, we anticipate our homebuilding operating income margin, excluding the impact of any inventory related charges will be in the range of 9.0% to 9.3%.
For the 2021 full year, we expect this metric to be in the range of 10.4% to 11.0%, which represents a year over year improvement of 230 basis points at the midpoint.
Our 2024th quarter housing gross profit margin improved 40 basis points to 20.0%.
Excluding inventory related charges, our gross margin for the quarter increased by 110 basis points to 21.0% from 19.9% for the prior year quarter.
This improvement primarily reflected the impact of higher selling prices shifts in the geographic and community mix of homes delivered.
And lower amortization of previously capitalized interest.
Assuming no inventory related charges.
We are forecasting a housing gross profit margin for the 2021 first quarter in the range of 20.0% to 20.3% of.
More than 200 basis points as compared to the prior year period.
We expect our 2021 full year gross margin, excluding inventory related charges to be in the range of 20.5% to 21.1% with margins of 20% for above in each quarter.
Our selling general and administrative expense ratio of 10.3% for the fourth quarter was up 120 basis points from the year ago, mainly due to the unfavorable impact of decreased operating leverage from lower housing revenues.
Partly offset by the effects of our ongoing focus on reducing overhead costs.
We are forecasting our 2021 first quarter ASG in a expense ratio to be in the range of 10.8% to 11.2% as we continue to prioritize containing overhead costs and expect to realize favorable leverage impact from an anticipated year over year increase in housing revenues.
We expect that our 2021 full year as seen on a expense ratio will be approximately 9.9% to 10.3%.
Our income tax expense of $20 million for the fourth quarter, which was favorably impacted by $8.6 million of federal energy tax credits represented in the effective tax rate of approximately 16%.
We currently expect our effective tax rate for both the 2021 first quarter and full year to be approximately 24%.
In December federal legislation was enacted which among other things extended the availability of energy tax credits for building energy efficient homes through December 31, 2021.
With our industry leadership, and sustainable homebuilding and energy efficiency. The extension of the tax credits will favorably impact on 2021 effective tax rate and is reflected in our first quarter and full year estimates.
Overall, we reported net income of $106.1 million or one dollar on 12 cents per diluted share for the fourth quarter compared to $123.2 million or one dollar and 31 cents per diluted share of for the prior year period.
For the 2020 full year, our net income of $296.2 million or $3 in for 13 cents per diluted share.
Rose, 10% compared to 2019.
Turning now to community count our fourth quarter average was 230 for of 230 for was down 8% from 253, and the corresponding 2019 quarter, primarily due to accelerated closeouts in the second half of the year driven by strong net order activity in the.
Both the third and fourth quarters.
We ended the year with 236 communities down 6% from a year ago for.
With approximately half of this decline due to rate due to a reduction in the number of communities that were previously classified as land held for future development.
We expect our community count to decrease sequentially in the first quarter to what we believe will be the low point for 2021 as closeouts, resulting from the expected continued strong net orders outpaced openings for the period.
On a year over year basis, we anticipate our 2021 first quarter average community count will be down by a low double digit percentage.
We expect the quarter on community count to increase sequentially, starting in the second quarter and continuing through the remainder of the year we.
We anticipate ending the year with a mid to high single digit percentage, the increasing our community count supporting additional topline growth in 2022.
As Jeff mentioned, our goal is to drive an increase in community count of at least 10% in 2022 to support further market share gains and growth in housing revenues.
During the fourth quarter to drive future community openings, we invested $651 million on land and land development with $376 million or 58% of the total representing land acquisitions.
In 2020, we invested nearly $1.7 billion on land acquisition development and generated $311 million of net operating cash flow.
At year end total liquidity was approximately $1.5 billion, including $788 million of available capacity under our unsecured revolving credit facility.
Our debt to capital ratio was 39.6% at year end and we expect further improvement in 2021, given our anticipated earnings growth.
We expect the generates significant cash flow in the current year to fund the levels of land investment sufficient to support our targeted 2021, and 2022 growth in community count and housing revenues.
Our year on stockholders equity was $2.67 billion as compared to $2.38 billion at the end of the prior year.
And our book value per share increased by nearly 10% to $29 of nine cents.
Given our community of our current community profile on backlog allow.
Along with expected continued strength in the housing market. We are very confident in our ability to significantly improve the profitability credit and return metrics in 2021.
During the year, we plan to further execute on the principles of our returns focused growth strategy with an emphasis on significantly increasing our returns by expanding our community count and topline.
While continuing to improve our operating margin.
In summary.
Using the Midpoints of our guidance ranges.
We expect a 39% year over year increase in housing revenues and significant expansion of our operating margin to 10.7% drew.
Driven by improvements in both gross margin and our SGN a expense ratio.
These anticipated scale on margin improvements should drive our return on equity to above 17% of over 500 basis points year over year.
These expected results reflect our view that our continued emphasis on the returns focused growth strategy will enable us to further enhance long term stockholder value.
We will now take your question for Devon. Please open the lines.
At this new conducting the question and answer session. If you would like to ask question. Please press star one on the telephone keypad approximation total indicate your line is in the question queue, New construction, if you would like to remove the a question for the Q for participants using speaker the equipment in the necessary to fit the per head simple for pressing the star key as a reminder, please on.
The assets a one main question and one follow up.
Our first question comes along and so on the bulk of Bank of America. Please proceed with the question.
Hi, guys. Thank you for taking my questions Tonight.
The first one is on on the gross margin outlook of 21%, which is clearly.
Impressive.
Are you in and basically implying that pricing is going to be sufficient to offset of what we're seeing in lumber and structural panels for than probably what we'll be seeing down the down the road of flavor inflation and I'm. Just curious may I know you guys talked about affordability to some degree of versus existing homes, but how do you how to think about it versus the other alternative product.
Rentech.
But there is a few questions on we tried the.
To illustrate in our prepared comments that our our margin in our the improvement in gross margin is not necessarily just as we're able to take pride summit as I look at the on the puts and takes over a year of the markets are good home prices.
Costs go up the typically.
They'll catch up with each other over 90 or 120 in a period of the markets are good land prices below the markets are tough on price will go down costs go down land prices may go down so the kind of work and other than what we're accomplishing right now in our gross margin improvement is that the combination that we out.
And we have a far better mix of of the quality of the communities that were operating in the look on our southeast region, Thats really picking up steam and margins or enhance the within the inland, California picking up steam and margins our enhanced because we're we're operating better.
And the it's a better mix of communities venue you go over to the capitalize interest.
Is the amortized interest is continuing the come down and net tailwind because of what we've done over the past.
Three to four years in our returns focused growth and then third you get leverage because were picked up our pace the little bit per community in the lot of the cost is run on that community don't increase with the pace. So you get some margin expansion due year levered. So we have all those things going on on.
And what we feel we still have upside of momentum there are new if we get price on top of the.
We will take it and we've been able to new so for our to take on the price the cover any and the cost creep increases along the way.
Growth relative to the the for rent market I don't really think about debt too much on our our buyers are home buyers they want to be homeowners today, they want their own place and it's rare that somebody comes in and says I'm comparing your home year to the home for rent down the street.
And I can't make up on mind, we just on here that that often Jeff.
Okay Thats helpful. And then you mentioned.
The small ganic moves into into new markets interest in pretty interesting largest ships Seattle the in Charlotte.
Organic kind of the way you guys plan on doing things or are there opportunities from payable in M&A standpoint, they could expedite the.
The move in certain markets.
Yes.
Well there are two levels of organic for us on one would be just growing our business, where we exist today and we have a great footprint then we're nowhere near Max in our market share in many of the markets were in the world will keep pursuing of a bigger market presence in every city. We're in we quietly expanded in the.
Seattle, a couple of years of the owned in say much about it because we wanted to.
On the mature and get traction.
And it's non that now on its worked very well.
Then if you go over to the Carolinas.
Where we were in Charlotte at one time will not hold.
Back in the the fiscal the crash and Raleigh shored up for always performing wall well the raleighs on on a nice growth trajectory and as its logical to expand right back in the Charlotte and were taken the same approach we did in Seattle, where you go in with the team you get some deal flow the apparel for year.
The overhead with your revenue growth than and we'll have our first deliveries in Charlotte and in 2022 of the view if you look at Seattle or what were expecting out of Charlotte. It takes time for those to build into a real contributor to our results will take two years three years.
But.
Don't pay a dumb tax you don't have the integration challenge there is no premiums the whole accounting issue no goodwill hitting your balance sheet. So it's on much cleaner entry. If you can do it and so as a result, we have this one two punch, where we can grow organically on our served markets and continue to bolt on.
On on these other very.
Very strong housing markets that that we're able to ensure that we're not in right now I think thats the better approach for us than M&A, we look at M&A.
Premiums are typically pretty eye of you've got the other things I I mentioned, so if we can hit our growth targets.
We certainly have a growth trajectory right now for 21, we can hit our growth targets and the key fuel on this thing organically, that's what we're going to do.
Jeff.
Our next question comes from the line of Steve Kim with Evercore ISI. Please proceed with the question.
Hi, maintenance of the show all of my on for Steve Thanks for taking our questions.
Out of the third off discussing your community count goals. The 2021 of 2022, new thanks for all the great detail there on the growth targets for each of those years that the.
The high singles next year in the double digits year. After I heard the comment regarding the moderation of quarter growth in one Q on the tougher comps, but our question is if you continue to see the strong order growth throughout 2021 say, 25% of better are you still on the position the hit both of those goals.
The Joel on the I'm not sure I understand the question are you saying of.
If.
If sales rates flow do we hit the goals or of sales rates accelerate at the goals.
So it may be a deceleration from the 40 or so percent, but if it stays strong like for the 25 plus range.
Is that kind of continue to sell out faster than you can replace.
Are you at risk of to the IV of still hitting those targets.
No I don't think so that all of those things were considered in our our guidance, we're actually powering through that right now it's it's right in front of us and net the.
The second half sales strength that we saw.
The playing through in the it will hit the low point in Q1, and we're continuing below the end more as we go out ahead of US I share, where you own and control everything for 22, let alone. The 21 is right in front of the so we absolutely are committed to the those community count growth targets.
But whether second grade in the whole older the lump or go down we'll get to the commodity.
Awesome, Thats really encouraging and the unrelated note with respect to the land spend you mentioned the $650 million in the prepared remarks more than I think you've done in any quarter. The at least in recent history here on I.
Appreciate that positions the well for growth the next couple of years, but for.
First question were there any projects being the that you pulled forward just that made sense to take on now and then second could you help us understand a little bit more about the composition of that spend on bringing in different types of land, maybe more move up assets or taking advantage of the work from home trends by buying it further out regions. Thanks again.
Sure.
Actually I think.
In part the number was outsized in Q4 for the year because of the deferral of out of Q2 and in Q3.
For the year, we spent a little bit more than the prior year and we're positioned now where we expect to spend more in 21 to fuel our.
Growth in terms of our strategy on the investment side, it hasn't changed relative to buyer profile and the price points, we want to play on denim the shared comments I talked about our our strategy of positioning the product. So it's attainable by the median income did net submarket and we are committed to the.
Net that's where the biggest the.
Segments of demand are in every sub market and Thats, where we want the play.
On.
So the for the profile of the communities really hasn't changed the.
We're a little more willing to go into the B minus sub markets, where there is little more land because the market for good but.
Overall, we're tired and the on the.
The median incomes and.
There's plenty of demand if you can bring the less the market and that's what we're working on.
All right, thanks, very much Jeff.
Thanks.
Our next question comes the line of Matthew Blair of Barclays. Please since the question.
Hi, good afternoon, everyone.
The taking the questions.
Question on the orders into Q1 here.
It sounds like you didn't really see the normal seasonality in Q4, but you're talking about.
Offer this 44% quarter the day growth expecting some deceleration.
My question is I guess to what degree of that deceleration basically our own efforts to meter out sales pace.
The of price or simply a comp dynamic I guess the question is are you actually expecting sales pace to maintain somewhat close the current levels, the and comps get tougher and perhaps there is a little more of the community GAAP or is there actually somewhat of the euro and efforts to meter out sales pace of there. Thank you.
Primarily Matt is that our comps get tougher last year in January and February we had some very strong selling months of it's hard to hold of of 40% comp as strong as our sales were in January and February of equity one wants to do that.
There is a little bit of price and slowing down in communities that aren't replace the moeller have a limited lot supply.
But it's primarily just the comp if you think of our backlog position in the the.
The starts that were rolling through right now we can afford to take some price and slow things down the is primarily the of the stronger comps on January February.
Okay got it thank you for that and then.
I guess secondly, you mentioned the backlog of I'm curious if you have a sense.
I guess of what the gross margin in backlog looks like today, if you can remind us kind of what the what the Kb home model.
What would cause the margin of backlog today to change upon the delivery, whether there can still be I guess incremental studio upgrades on the one hand versus what your exposure would be the construction costs on the other hand, just what would cause current margin and backlog the change.
On the cab any sense of what that looks like today. Thank you.
Jeff you want to take balance sheet.
Sure.
The other one as we look at our our guidance and as we forecast out the future. It's a very good point they make about our backlog of new very large back on to start the year. So at over 7800 units. We have very very good visibility to really the first and second quarters deliveries and related gross margin coming off of the.
Those deliveries and what what we have basically in the backlog we have contracted sales prices. So we know the price on those units we know the price at the deliver at for anything that started new basically of locked in costs and we lock in our cost with the vast majority of our vendors of ourselves on.
On starts so we're not really taking any inflation risks way of be labor materials or anything else on our started homes and net providers. So like I said really nice visibility on our on our gross margins as we look out.
The other I guess, a little bit on non variable is not all the homes of been true studio and Ed is generally.
A bit of the lift the margin as we go to studio we make that estimate also as we go through the the forecast in our guidance numbers. So really the the largest on known for US is just what the future sales of B.
For both from a sales price point of view and then as we deliver out those homes with the cost to build the B book.
We generally forecast sat at current costs turn on selling prices in the as Jeff mentioned earlier, we rely on that dynamic thats been pretty consistent between selling.
Selling prices and costs. So we feel of we haven't really nice visibility.
As far as margins go that debt backlog supports our guidance on our forecast I think quite well.
On the higher revenue numbers next share which were up significantly versus 2020 provides the additional overhead leverage.
Because we do have of fixed cost component of our cost of sales. So that's the real positive and Jeff mentioned some of the other fact as earlier so.
We're on.
We're pretty pretty comfortable and secure with our margin guidance in a range looking forward to sienna of for year, where we're about 20% of the quarter and the.
The achieved the take number that we talked about for the full year.
Our next question comes the line of Alan Ratner with Zelman and Associates. Please proceed with your question.
Hey, guys happy new year and congrats on the great results.
I appreciate you taking my question.
Jeff Yes, several years ago, when your margins were lower than when the when and where they are today you provided a really helpful roadmap to kind of talk about why the margins were being pressured by some of the legacy land that you had that you were moving through and at the same time as some of the newer deals you you were underwriting too much higher margin.
Came to market that would provide a tailwind and it obviously has come to fruition. So.
I'm, hoping that you can maybe give us a little bit of insight into the land you are underwriting today, and how you're thinking about that underwriting relative to the guidance for game for 21, because you're obviously tying up a ton of land today. Your competitors are doing the same thing it would seem like it's a pretty competitive land market. So can you talk a little bit about you know when you look.
At your absorption rate, where you're at today for and a half per month for your margins of 20% to 21% what type of assumptions are being embedded within the land here, you're tying up today for 22 in the on.
We are happy happy new year to you and on as well.
When we underwrite brand, it's the combination of the the.
Margin and also the on our on the assets solar the take a little lower margin. If you get on much higher on our together on that business.
The combined threshold for us on our ER.
Our underwriting in terms of just the margin today would be in the 19, the 21% range so pretty similar to.
To what we're seeing in the the revenue that we're generating.
Lands always the competitive environment Theres Theres no city that we operate in where it's not competitive exists the EPS to be the.
Focused and one of the range that the we like about our our land efforts that we think is an advantage is theres clarity among the divisions on.
For the product strategy is what the price point is what the financial hurdles on our and we can move pretty quickly from on.
Feasibility two of committed deal because of the clarity that we have and I think that is on an advantage for us as the company but.
In the rhythm of our business, we're not we're not banking on price, we're not assuming the inflation to get Theres got to underwrite today today's sales prices on todays sales pacing in the city.
And I'd say as 19 to 21.
On the growth side.
That's really helpful. I appreciate that and then my second question is just as we think about these communities coming on line. Obviously you provided very detailed guidance for 21, which is helpful. I know in the past and occasionally when you've had day growth in community count there's been some overhead expenses that have to be pulled forward.
Or you have to add some net cap to satisfy the type of growth kind of curious should we think about that and maybe 22, just is there going to be need to add additional headcount to support the the level of type of growth that you're you're anticipating.
Yes, actually we don't want to get into the weeds too much on what fitness DNA in and out of the gross margin in the fourth quarter that we just finished but if you think about it there were 38 community openings, which is the most we've had in the quarter in quite some time, so were already absorb that overhead and the costs there.
Earn.
Our business is getting more evenly distributed among our regions sales the grow your community count on.
On the EUR 20 side Thats one of the city.
To the city, so there's not a lot of overhead associated with the there is some cost to run the model Park. Once you get the community open but it should should self funded has debt 0.9. So we think we're past the the increase in overhead for the community count growth, we've already incurred sales there there are.
The some incremental costs.
For 22, but not the middle really moves the needle versus our core growth the industry M&A you have any other comments for thoughts on net Jeff.
So I think you hit on the hedge EPS on 38, and the Grand openings annualize, it's over 150 Grand opening.
Supported by the fourth quarter.
Expense base and overhead base. So we think we're in really good shape, particularly as we work through 2021 on supporting our growth targets.
Our next question comes from the line of book Horne with Raymond James. Please proceed with the question.
Hey, Thanks for the time appreciate it.
Was curious if you're noticing any.
Changes in the buyers preferences in terms of.
Trying to understand if youve got any Intel on.
Work from home habits, if you're seeing the buyers are.
There is a big uplift in the home office upgrades that you guys have offered is that getting traction.
And or.
Are you seeing the buyers crossing state lines more often or some of your whether it's Texas or Florida for Colorado are you picking up the that people are are migrating to the two different markets from high cost of in any greater numbers.
For.
I'll make a couple of comments barking on ticket of net men Dino. The gave you the insight on the buyer profile, but it's interesting we shared on our last quarterly call, while our buyer mix of tilting to incrementally more first time buyers of the 60 in the percentile now our studio of sales growth.
Actually picking up they.
They were up in the third quarter of Europe again on the fourth quarter, not big numbers, but the.
The $1000. The units 1500 2000, the unit, which is contrary to what you of bank for the first time buyer that may not as high as Eitan income so.
On the studios continue to work.
On net you want to get many any comments on the.
Where are the buyers of common from going through and what they are taken.
Yeah, but.
Well I think.
As I as I hear your question their sales are we seeing the outcome.
Out of the exits from California, and what's interesting while a market like the Vegas or of data for the we do see some of that moved from California.
Even within the state of California, we're seeing quite a bit of end state.
Our sales performance, especially in light inland Empire.
Has been incredibly strong and so.
While it does exist.
The box at some level, it's not necessarily just moving across state lines.
It's actually pretty interesting.
We.
We also took the look back is it coming out of cities and Jeff.
Getting to the suburbs we.
We do see some of that but much of what we're what we've seen in the fourth quarter was within the suburbs itself. So.
Not quite the dynamic bucked the that you might think.
No understood that's very helpful feedback I appreciate that.
Im curious just in terms of the land market as well follow up on the on this one given that it seems like finished lot availability is becoming increasingly constrained and maybe that the a bigger picture question for for the industry at large I mean.
With the with everyone out there searching for land and the demand is so strong.
Are you going to have to continue to put more cash to work in and land that you need to self develop internally.
How does that change the the timeline to which you can bring communities off of and just change the the margin profile for self.
Self developed blocks.
The two excellent question bucket of something we've been dealing with for quite some time. There's very few finished lots on the ground. That's why the included in my prepared comments that we on and control everything for 22.
You couldn't go down the street and buys from finished lots on where a day and help your fourth quarter of 21 necessarily and.
And so you have to include any of your timelines in your projected community growth for revenue growth. The extended time it takes to get things entitled and then developed and then.
Brought to market so.
If you think back to 20.
We started the year with.
Expectations of delivering on a few thousand homes more than debt.
We own those lots at the time in order to do that and then with the on the pandemic disruption, we did or Didnt hit our delivery numbers, but we still have the lots of what it's done for US has set up of.
Stronger lot count in pipeline for on a 21 deliveries and in turn we had already targeted growth for 22 back in January of.
20, so we already have the Q and on and control what we need to meet our growth targets. We're actually working now on what we need exiting 22 in order to of growth in in 2003, and it sounds like a warm lay off put us entitlements take take 18 months and a lot of the cities if not.
Longer in California.
It will be here before you know what's the word our horizon has definitely extended and I think the whole industry has in terms of once you have to do in order to the fuel for growth.
For whereas as we've said a few times on this call we've already got it for 21.2.
Our next question comes the line of Michael Rehaut with JP Morgan. Please proceed with your question.
Hi.
Good evening, everyone. Thanks for taking my question in the congrats on the results for all of the one is the healthy out there.
On.
The first question I just wanted to zero in on the the gross margin guidance for a moment and try and break down if it's possible.
On a full year basis, how you're thinking about.
Interest amortization.
In the on a dollar basis or on the percentage basis, I believe as a percent of sales.
Interest amortization was down about 40 bips in fiscal 20.
Tim maybe roughly about $130 million on a dollar basis, so how you're thinking about that in 2001 and.
You know what the remaining core expansion ex interest in gross margins ex interest.
Mike the or in the driven by.
Mr Kaminski.
The but thought that was kind of my way of thanks for the thanks. Thanks for the let me take that so Mike just starting with the interest.
You know, it's been trending down pretty consistently year over year.
And we think there is still some fairly significant opportunity over the next several years to continue that trend.
On a standalone basis for 2021.
Right now our forecast is showing about 30 basis points of improvement.
Really that's probably a little bit on the light side I think there is some opportunity to be above that but thats, what we baked in our guidance about 30 bips on that piece in at the midpoint of our guidance that would leave about 90 basis points.
Towards other factors as I mentioned earlier the.
The margin for the first couple of quarters as more or less baked into our backlog. So what we're seeing on there is not only the leverage impact on our fixed costs on cost of goods sold which is pretty significant if you think about a day increase.
The increase year over year of nearly 40% on the top line or see some nice leverage impact flowing through our margin line, but I think as importantly of NAV more importantly, adjusted the composition of our current communities.
The improvements that we've been putting in place throughout the company.
And really the end result of some of the efforts we've been working really hard on on for last several years is the than Outcroppings of our returns focused growth per.
Plan.
And Jeff was mentioning earlier some of the underwriting on on the new land.
And thats been another big benefit for us in that a lot of the land that we've been bringing to market with new community openings in 2020 and expect to bring in 2021, we're under revenue in a different market environments. They were underwritten some of those parcels of the year year and a half ago.
And we've been developing that land and land grant of eventually Grand opening net and pricing is actually different we've seen some margin expansion just coming from market movements and our ability to maintain his best best as possible cost control. So.
Those are the components are really important so that other 90 basis points. It's what we're seeing in the backlog combined the.
Mix impacts from some of the new communities opening up in some of the pricing moves versus the cost moves that we've been on.
Seeing the we've reflected all at end of the guidance.
Great. Thank the Jeff.
Appreciate that.
Secondly, I just wanted to hit on RMBS DNA side of the equation of while.
The guidance for the full year.
Some of the or low 10% I guess pinpoint one of the midpoint of.
So actually a little bit slightly higher than where you were in 2018.
Despite an outlook for a building to greater in terms of revenue at the midpoint. So just wondering and obviously as new a nice amount of leverage year over year, which is obviously very important but new York.
Just in terms of how you think about the yourselves over the next two or three years.
Wondering.
What was the further potential for leverage going forward as it appears you've been kind of flirting with getting below 10, but.
Im just wondering about where the ultimate.
Number two debt to assuming consistent double digit topline growth and obviously embedded in that question is.
The.
Variable SDMA versus fixed.
As we continue to grow the top line.
Right, Yes, your day side.
Similar to what what we talked about on a couple of the other questions in anticipating community count growth and supporting growth in the business, we're very growth minded right now.
Our view is that we fixed a lot of the fundamental issues that we are facing in the business. We made improvements across the capital structure across the balance sheet. We made the vast improvements across the community portfolio and we're really in a position very strong position right now of being able to expand the top line and grow the company had very strong return.
The levels and really drive shareholder value as a result of that so I think part of what you're seeing and yes, DNA outlook, particularly for 2021 is enough resources in the business to continue that growth and to continue the excessively.
Net excessively but to continue to expand that topline as we move forward.
And.
You need you need some level of resource to do that I do believe you know if you're talking longer term and thats one of the reasons why our our guidance starts at a single digit, albeit 9.9% I do believe the single digit SDMA.
The expense ratio is very achievable for this company and as we see our scale expand further.
And basically get on this cadence of of strong growth year over year, I think we'll be able to achieve that but one year of that at the time as we always say so weve forecasted out as best as we as we can see it today.
And Thats, where its coming in at the right around that 10% of 9.9, the 10.3% as we guided.
The Jeff and compare and 18 wasn't for an accounting change on model cost on.
Our GAAP very good point, yeah, that's true we day.
Good day implement the new accounting standard and some of that shifted into I seen a fair amount of cost. So thats thats, a really good point, Jeff for by actually below the two if you pull that out.
For the first on wasn't the.
Yes.
Our next question comes from the line of news from suit with the New Yes. Please proceed with your question.
Thank you.
I wanted to.
Revisit the kind of.
The order pace the demand pace for us is versus your start you had a very nice acceleration in demand.
You know threeq to Fourq Q and it looks like it persisted consistently for the quarter and into your first fiscal quarter as well how much of that was in the market and how much of it was the nice pickup you saw it in and starts which were you know.
About the same range. So did your increased pace of starts allow you to sell a little bit.
Further out or yes, I just was wondering if you could help us break that debt.
Okay nice job on tickets to.
Matt during the minutes to give you some color, but if you think of our business model is the fact that prime the engine of the engine gets going in net.
Once you sell the home then it takes some time to for the buyer of finalizing the studio and we get a permit the.
The good for loan approved and then go for there is of the lag.
Lag the 60 days or so between contract.
And start the as you look back the the sales really started to pick up June July and August and so on and the the starts will pick up.
60 days thereafter, and I went through a comment and of the prepared remarks in our normal year for the spring selling season makes our year. It's the strongest selling environment. Then you have the 60 days when you start the home and our fourth quarter's always are our highest deliveries quarter by other.
On due to the timing of of them and for us as the spring selling season. This year for the first time in my career, we're actually going to deliver more in the first quarter than we did in the fourth quarter, because the spring selling season got delayed.
With the the pandemic disruption and then when it when net the when the cloud started the clear of it and there is such strong housing demand that home. So long it has us on this growth trajectory for Q1, and Q2 ramp up stronger than that.
The in Q4 was I've never seen before in my career growth.
Kb over a lot of year, but that's sort of pretty interesting and it speaks for the out of strong as the demand is right now, but net you want to talk about the timing of our our sales force starts and how we pay for citizen orders.
Sure and New York.
Yes.
And that debt sales really does does drive it for us and we view that that sale as the first step in the process and as Jeff touched on it what what we've seen over the last couple of months for the system.
Really strong.
Absolutely no signs of letting up.
There was not a holiday lagged debt, we usually see add any day.
If anything we historically think about the Super Bowl as being the kick off for the selling season I can tell you as the season has already started and so so with that.
That really does drive the process in which the our customers go through our studio.
And make select sales and we move forward get permits and starts at home.
We have also done some things relative to that upfront.
Of the process of.
And studio selection of.
It was for us due to coal bed, but putting tools in place that has allowed us to have virtual studio appointment.
Now actually getting traction and we're saving time so.
As we move forward you are going to continue to see hopefully starts.
Continue to walk that up to.
To to match, the and stay in strength with the with the great sales activity that Weve sales.
Gotcha catching on that Thats very helpful.
The cell since it was it seems like it was primarily demand driven.
The the strong strong border acceleration that you folks on the has continued and tap into this year. It really doesnt seem like the renewal of locked down so, especially in California in important stay too.
It does seem like Thats really affected demand I was just wondering if you could think of.
Comment on that a little bit further I imagine your organization is now well adjusted to operating in this in this new reality and I said it seems like consumers weren't warrant.
Warrant aren't this weighted bye bye.
The increased locked down there maybe you could just could discuss add on that please.
Sure and you know we have.
Well.
We have not seen it flow and.
What we have seen though is.
When they do so they are ready to go.
So much of the interaction that would normally take place in our models.
As of now happening on.
For the fall or over zoom call al.
And early on that I want to go back to where we were in March.
We rolled out pretty extensive training program for all of our sales teams and how the use these virtual tools.
I don't see that necessarily going away.
While it makes it difficult Jeff to monitor foot traffic because what we see today is a different environment than what we had a year ago.
The net of what we're getting through with buyers ready to go and move forward has been very positive so.
That's the.
Light assessment of where we're at the.
And anticipate that that's going to continue in this environment and I also anticipate the use of some of these virtual tools service.
Surviving post vaccine distribution.
I think Nishu. It's also a fair comment that as as the locked down sales of.
Free occurred and tighten up its actually heighten the people's desire.
Hi on home because they want their on place and they want the our own backyard and they want their own.
Refuge that they may not get the thinner a renter somewhere.
It's an interesting dynamic.
And with that ladies and gentlemen. This concludes today's teleconference. Thank you for your participation you may now disconnect your lines and have a wonderful day.
Okay.
Okay.