Q1 2023 KB Home Earnings Call
Speaker 1: ?
Speaker 1: The.
Speaker 2: Good afternoon, my name is John and I will be your conference operator today.
Speaker 2: I would like to welcome everyone to the KBHome 2023 first quarter earnings conference call. At this time, all participants are in a listen-only mode. Following the company's opening remarks, we will open the lines for questions. Today's conference call is being recorded and will be available for replay at the company's website, kvhome.com through April 22nd.
Speaker 2: And now I would like to turn the call over to Jill Peters, Senior Vice President of Investor Relations. Thank you, Jill. You may begin. Jill Peters, Senior Vice President of Investor Relations Thank you, Jill. You may begin. Thank you, Jill.
Speaker 3: Thank you, John . Good afternoon, everyone, and thank you for joining us today to review our results for the following webinar.
Speaker 3: first quarter of fiscal 2023.
Speaker 3: On the call are Jeff Mesker, Chairman, President, and Chief Executive Officer. Rob McGibney, Executive Vice President and Chief Operating Officer. Jeff Kaminski, Executive Vice President and Chief Financial Officer. Bill Hollinger, Senior Vice President and Chief Accounting Officer.
Speaker 3: and Thad Johnson, Senior Vice President and Treasurer.
Speaker 3: During this call, items will be discussed that are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
Speaker 3: These statements are not guaranteed for future results and the company does not undertake any obligation to update them.
Speaker 3: Due to various factors, including those detailed in today's press release and in our filings with the Securities and Exchange Commission.
Speaker 3: Actual results could be materially different from those stated or implied in the forward-looking statements.
Speaker 3: In addition, a reconciliation of the non-GAAP measure of adjusted housing gross profit margin, which excludes inventory-related charges, and any other non-GAAP measure referenced during today's discussion to its most directly comparable GAAP measure can be found in today's press release.
Speaker 3: and or on the investor relations page of our website at kvhome.com. And with that, here's Jeff Mesker.
Speaker 4: Thank you, Jill. Good afternoon, everyone.
Speaker 4: We delivered solid financial results in the first quarter, which highlights the value of our built-to-order model.
Speaker 4: Working from a large backlog has provided stability in our delivery at healthy margins while we navigate turbulent sowing conditions.
Speaker 4: I want to thank our entire team for their outstanding efforts in serving our home buyers and persevering through the challenges of a volatile housing market.
Speaker 4: As to the details of our results, we generated total revenues of $1.4 billion and diluted earnings per share of $1.45.
Speaker 4: We held our earnings essentially even with the prior year quarter due to a strong gross margin of 21.8%, excluding inventory related charges.
Speaker 4: and an improvement in our SG&A expense ratio.
Speaker 4: which offset a slightly lower level of delivery.
Speaker 4: Relative to the guidance we provided in January , we came in at the high end of our revenue range and exceeded our guidance on both operating and gross margins.
Speaker 4: our performance, together with our ongoing share repurchases.
Speaker 4: drove our book value per share higher to $44.80, up 27% year over year.
Speaker 4: Although KBHome is perceived to be a California builder, our business is becoming more diversified and we like the balance of our geographic footprint.
Speaker 4: Our southeast region has grown into a larger business, approaching 20% of our revenues this year, as compared to only 11% five years ago.
Speaker 4: This region has significantly improved its profitability and returns over this timeframe, and we look forward to its continued growth.
Speaker 4: During the quarter, we achieved our first deliveries in Charlotte, which is a dynamic and growing top 10 housing market.
Speaker 4: We are currently selling homes in two communities in Charlotte, with four additional communities scheduled to open this year.
Speaker 4: We expect Charlotte to further enhance the growth we are achieving in our Southeast region.
Speaker 4: We also produced our first deliveries in Boise during the quarter.
Speaker 4: Boise has been one of the fastest growing areas in the country, which created strong demand amid limited supply.
Speaker 4: And as a result, home prices appreciated rapidly.
Speaker 4: The market is now adjusting and we will remain selective with additional land investments until we see stability in pricing.
Speaker 4: Over time, we believe Boise will be a growth market for our company.
Speaker 4: The long-term outlook for the housing market remains favorable.
Speaker 4: As we have said in the past, the demographics of the Millennials and Gen Z's are advantageous for our business.
Speaker 4: as our primary buyer segments are first time and first move up buyers.
Speaker 4: While these demographics are a strong underpinning for demand,
Speaker 4: We are also still facing low levels of inventory, especially at our price points.
Speaker 4: Just yesterday, February resales were reported, representing the first sequential increase in activity in 13 months.
Speaker 4: leaving resale inventory levels at 2.6 months supply.
Speaker 4: At the same time, new home inventory continues to be limited.
Speaker 4: As to our orders, demand in the back half of our first quarter improved significantly, with a sequential increase in net orders in both January and February .
Speaker 4: This was in line with the expectation we shared with you on our last earnings call.
Speaker 4: We generated net orders of 2,142 for the quarter.
Speaker 4: down 49% year over year, as compared to our projected range of down between 50% and 60%.
Speaker 4: As I did on our last call, let me discuss gross orders and cancellations separately.
Speaker 4: We have continuously worked to balance pace and price to optimize each asset.
Speaker 4: With a sensitivity to our large backlog in many communities,
Speaker 4: We held off on adjusting pricing until more of that backlog was delivered.
Speaker 4: In the first quarter, we continued to convert our backlog to deliveries, while now also reducing prices in many of our communities or offering other concessions. The timing for these actions was favorable, given the seasonally stronger selling period.
Speaker 4: In addition, a more stable mortgage rate environment during January and February
Speaker 4: where rates had settled in to a low to mid 6% range, was also beneficial in moving potential home buyers off the sidelines.
Speaker 4: Buyers seem to be acknowledging that these higher rates are the new normal as they return to market.
Speaker 4: Our gross orders improved significantly on a sequential basis, with January's orders increasing 64% relative to December , and February increasing 58% versus January .
Speaker 4: For the quarter, our gross orders were 3,357.
Speaker 4: A year-over-year decline of 29%.
Speaker 4: on a per community basis.
Speaker 4: Our gross absorption pace reached 6.6 orders per month in February , above our long-term average for that month.
Speaker 4: contributing to an overall monthly pace.
Speaker 4: of 4.5 gross orders per community for the quarter.
Speaker 4: We had a number of divisions that outperformed this average.
Speaker 4: including Inland Empire, Sacramento, Las Vegas, Phoenix, and Orlando.
Speaker 4: For the quarter, our total cancellations moderated sequentially.
Speaker 4: And generally, homes and backlog are closing when they are completed.
Speaker 4: As we continue to deliver out the backlog of older sales that were written last summer during a lower interest rate environment, we will continue to deliver the
Speaker 4: Our cancellation rate should decline further.
Speaker 4: In the early weeks of March,
Speaker 4: Our net orders have remained strong.
Speaker 4: For the first two and a half weeks of our 2023 second quarter, our net orders are down 24% against a very strong comparable prior year period.
Speaker 4: Although we do not typically provide an intra-quarter update on this call,
Speaker 4: or a projected range for net orders because we are only a few weeks into the quarter.
Speaker 4: We believe it is helpful for investors due to the volatility in market conditions.
Speaker 4: While interest rate and economic uncertainties pose a large risk to the near-term demand,
Speaker 4: We are encouraged with our recent order trends.
Speaker 4: Our strategic goal continues to be a monthly absorption pace of between four and five net orders per community, which we think we will achieve for the second quarter.
Speaker 4: resulting in a projected range of between 3,000 and 3,700 net orders.
Speaker 4: At the midpoint, this will represent a net order decline of 14% year over year.
Speaker 4: Our backlog at the end of the first quarter stood at over 7,000 homes.
Speaker 4: valued at over $3.3 billion. This position will continue to provide consistency in deliveries and margins.
Speaker 4: and supports our revenue projection for the year.
Speaker 4: During the quarter, we started 1,500 homes and ended the quarter with roughly 7,400 homes in production.
Speaker 4: of which 77% are sold.
Speaker 4: We are ramping up our starts in the second quarter as we continue to balance starts with sales and as we look ahead to year-end delivery.
Speaker 4: We are committed to our built-order model, which is defined by the choice that we offer to buyers, including the selection of the floor plan, lot, square footage, and personalized finishes.
Speaker 4: An important complement to this offering of choice is the availability of quick move-in homes in each of our communities to serve the buyer who prioritizes a near-term move-in date over personalization.
Speaker 4: In this regard, we always have some inventory available in each community.
Speaker 4: During the quarter, approximately 37% of our deliveries were from inventory sales.
Speaker 4: whether a speculative start, a rewrite of a cancellation, or a model sale. At the end of the quarter, we had roughly 640 finished and unsold homes available.
Speaker 4: the majority of which we expect to sell and deliver in our second quarter.
Speaker 4: We know buyers value our built-to-order approach as we achieve high customer satisfaction scores and typically one of the highest absorption rates per community in the industry.
Speaker 4: At the same time, there are some key financial benefits to this approach, as we can capture incremental lot premiums and studio revenues.
Speaker 4: As a result, our gross margins are higher on our built-to-order sales.
Speaker 4: In the first quarter, we generated nearly $52,000 per delivery in lot premium and studio revenues.
Speaker 4: Consistent with our quarterly average in 2022.
Speaker 4: representing about 11% of our housing revenues.
Speaker 4: With that, let me pause for a moment and ask Rob to provide some color with respect to our sales approach as well as an operational update.
Speaker 4: for a moment and ask Rob to provide some color with respect to our sales approach as well as an operational update. Rob?
Speaker 4: Thank you, Jeff. We are encouraged by the improvement in both demand and our sales results since early January .
Speaker 4: The initiatives we are utilizing are working and potential buyers that have moved to the sidelines and returning to the market.
Speaker 4: On our last earnings call, we shared with you two different sales strategies that we had implemented based primarily on how many homes we had in backlog in a community.
Speaker 4: For our high backlog communities with more homes already sold than remaining to sell, the emphasis was on our interest rate buy down and lot programs to support sales, as opposed to cutting price and putting our backlog at risk.
Speaker 4: For communities with either smaller backlogs or where only a small percentage of the backlog would be impacted, we adjusted prices to find the market.
Speaker 4: During the first quarter, we continued to utilize these strategies and reduce prices in about one half of our community.
Speaker 4: At the same time, considering the results that previous pricing actions generated, together with an improving demand environment, we increased prices in some of our other communities as they were selling at a faster than targeted pace.
Speaker 4: As Jeff spoke to earlier, buyers responded to our actions as we saw a sequential improvement in our orders in January and February .
Speaker 4: As to build times, we continue to make progress on the front end of the construction cycle, although we, along with most other new homebuilders, again experience delays in the latter stages of construction due to the large volume of homes in construction that are nearing completion in our served markets.
Speaker 4: As to our deliveries in the quarter, build times were up 7 days sequentially, but for new starts during the quarter, our build times improved by over one month between slab start and hanging drywall.
Speaker 4: We anticipate the improvement we are seeing in the front half of the construction schedule to flow through to our deliveries by the end of this year as we work to return to historical levels.
Speaker 4: Supply chain volatility continued to impact us in the later stages of construction.
Speaker 4: For example, appliance availability improved, but is not yet fully resolved. At the peak of the supply chain disruption, we had about 400 loaner appliances in place across our system due to back orders or delivery delays, and by the end of the first quarter, we had less than 20.
Speaker 4: In addition, ongoing municipal delays and the availability of transformers and electrical equipment contributed to delays in finalizing homes.
Speaker 4: We have many completed homes with loan approved buyers waiting on transformers and estimate that over 100 additional homes would likely have closed in our first quarter had transformers been installed, a situation that was exacerbated by the hurricanes in Florida.
Speaker 4: While supply chain disruptions will likely continue at some level for the foreseeable future, with ongoing shortages in flooring, heating and cooling materials, and insulation,
Speaker 4: We are encouraged by the improvements we are seeing in many areas which we believe will provide greater predictability for our business and for our customers.
Speaker 4: Another critical area of focus of our operations is driving direct cost reductions.
Speaker 4: As we analyze the data, we continue to recognize savings on new starts, which are down relative to their peak last August by about $19,000 per unit.
Speaker 4: it, helping to offset the price decreases we took.
Speaker 4: Although we are working to reduce trade labor costs, they are proving to be sticky and the market improvement in early 2023 is resulting in increasing starts across the industry that may slow our progress. But we remain committed to driving additional savings as we progress through the year. While we negotiate lower costs on our existing product array, we continue to focus on offering smaller floor plans,
Speaker 4: with simplified and value engineered elevations and interiors that live bigger for less, providing a more affordable product that meets the needs of our customers.
Speaker 4: and leveraging our scale and consistency in STARTS. And with that, I will turn the call back over to Jeff. Jeff? Thanks. Thanks Rob.
Speaker 4: Buyers for about 80% of the loans funded during the first quarter financed their homes through our mortgage joint venture KBHS Home Loans.
Speaker 4: and their credit profile continues to be strong. About 66% of these customers qualify for a conventional mortgage.
Speaker 4: and the vast majority of KBHS customers are using six straight products.
Speaker 4: The average cash down payment was 15%, which equates to over $74,000.
Speaker 4: At the income levels, the average household income of these buyers was over $130,000.
Speaker 4: and their FICO score was 733.
Speaker 4: While we target the median household income in our submarkets, we continue to attract buyers above that income level with healthy credit who can qualify at higher mortgage rates and make a significant down payment.
Speaker 4: As to our land investment activity during the quarter, we maintain our conservative approach with investments in new land purchases of only $50 million, down 86% year-over-year. We expect to stay highly selective with respect to additional land investments.
Speaker 4: until markets settle and there's clarity in pricing.
Speaker 4: to gain confidence in achieving our required returns. We continue to develop land that we already own, investing $317 million in development and related fees.
Speaker 4: As part of a regular review of our land portfolio, we have been active in renegotiating land contracts to reduce purchase prices and extend closing timelines.
Speaker 4: We are also canceling contracts that no longer meet our financial criteria.
Speaker 4: including contracts to purchase approximately 3,800 lots during the first quarter.
Speaker 4: Our last position stands at 62,400 owner controlled, down about 30% year over year, but still providing the lots we need to achieve our growth targets in 2024 and 2025.
Speaker 4: Approximately 46,000 of our lots are owned with roughly 18,000 finished. Of these finished lots, roughly 8,100 have a home under construction, including models.
Speaker 4: We continue to balance our development phasing with our start space to limit building up a large inventory of finish slots.
Speaker 4: In addition, we are generally developing lots on a just-in-time basis.
Speaker 4: creating smaller phases and reducing our cash outlays.
Speaker 4: We like our current land and land position.
Speaker 4: and believe we can afford to be patient, waiting until the time is right to be opportunistic with our capital.
Speaker 4: With a healthy level of cash generated from our operations, we increase the amount of cash that we return to shareholders during the quarter, with repurchases of $75 million or 2% of our shares outstanding. Over the past 24 months, we have been able to increase the amount of cash that we return
Speaker 4: We have now repurchased about 12% of our shares at an average price of $35.74
Speaker 4: We turn in a total of over $515 million to shareholders, including our quarterly dividends.
Speaker 4: The repurchases are accreted to our earnings and book value per share and will support a higher return on equity in the future without compromising our growth.
Speaker 4: We also announced today that our board of directors authorized the repurchase of up to $500 million of our common stock.
Speaker 4: This new authorization provides us with the flexibility to continue to repurchase our shares on an opportunistic basis.
Speaker 4: With our stock currently trading at a significant discount to our book value, the buybacks provide an extremely attractive return on the investment.
Speaker 4: In closing, we are off to a solid start for the year.
Speaker 4: And although there are some key unknowns with respect to interest rates and the economy, we are confident in our ability to navigate market conditions.
Speaker 4: Although there are some key unknowns with respect to interest rates and the economy, we are confident in our ability to navigate market conditions. As a result, we are confident in our ability to navigate market conditions and the economy.
Speaker 4: We have resumed providing guidance for the full year, highlighted by expected revenues of about $5.5 billion.
Speaker 4: and a healthy gross margin of roughly 21%. We look forward to continuing to update you on the progress of our business as we move throughout the year. With that, I'll turn the call over to Jeff for the financial review. Jeff.
Speaker 5: Thank you, Jeff, and good afternoon, everyone.
Speaker 5: I will now cover highlights of our 2023 first quarter financial performance, as well as provider second quarter and full year outlooks.
Speaker 5: Given the challenging housing market environment, we are pleased with our execution during the first quarter.
Speaker 5: With our revenues essentially even with the prior year period, our healthy gross profit margin and expense containment efforts produced over $125 million of net income.
Speaker 5: down only 9 million as compared to our strong result in the year earlier quarter.
Speaker 5: In addition, we are providing an expanded four-year outlook rather than the limited guidance we provided in January .
Speaker 5: In the first quarter, our housing revenues of $1.38 billion were basically the same as a year ago.
Speaker 5: as a 3% decrease in the number of homes delivered was mostly offset by a 2% increase in the overall average selling price of those homes.
Speaker 5: From a regional perspective, an 18% decline in our West Coast region's housing revenues
Speaker 5: was largely offset by double digit growth in our other three regions.
Speaker 5: with the southeast region generating the largest increase of 23%.
Speaker 5: Looking ahead to the 2023 second quarter, we expect to continue to successfully navigate the improving, albeit still challenging, supply chain conditions and generate housing revenues in the range of $1.35 to $1.5 billion.
Speaker 5: For the full year, we are narrowing a range of expected housing revenues to $5.2 to $5.9 billion.
Speaker 5: We believe we are well positioned to achieve this top-line performance.
Speaker 5: supported by our first quarter ending backlog value of approximately $3.3 billion.
Speaker 5: Our higher community count.
Speaker 5: and our assumption of current housing market conditions continuing for the remainder of the year, along with expected improvement in supply chain performance and build times. In the first quarter, our overall average selling price of homes delivered increased 2% year-over-year to approximately $495,000.
Speaker 5: As increases of 10 to 12% across three of our regions were mostly offset by a 5% decrease in our West Coast region.
Speaker 5: due to a community mix shift in our Southern California business where several communities with $1 million plus selling prices
Speaker 5: delivered out in 2022.
Speaker 5: For the 2023 second quarter, we are projecting an average selling price of approximately $480,000 as we expect a mixed shift composed of a lower proportion of deliveries in our higher priced West Coast region.
Speaker 5: We believe our overall average selling price for the full year will be in a range of $480,000 to $490,000.
Speaker 5: Home building operating income for the first quarter was $156.5 million compared to $169.6 million for the year earlier quarter.
Speaker 5: The current quarter included abandonment charges of $5.3 million versus $0.2 million a year ago.
Speaker 5: Our home building operating income margin decreased to 11.4% compared to 12.2% for the 2022 first quarter, reflecting a lower gross margin, partly offset by a slight improvement in the SG&A expense ratio.
Speaker 5: Excluding inventory related charges, our operating margin for the current quarter of 11.7% decreased 50 basis points year over year.
Speaker 5: For the 2023 second quarter, we anticipate our home building operating income margin.
Speaker 5: excluding the impact of any inventory related charges.
Speaker 5: will be in the range of 9.5 to 10.5 percent.
Speaker 5: For the full year, we expect this metric to be in the range of 10 to 11 percent.
Speaker 5: Our 2023 first quarter housing gross profit margin was 21.5% as compared to 22.4% in the year earlier quarter.
Speaker 5: Excluding inventory related charges in both periods, our gross margin decreased by 60 basis points to 21.8%.
Speaker 5: The decline was mainly driven by slightly higher construction costs and an increase in home buyer concessions. Assuming no inventory related charges, we are forecasting a 2023 second quarter housing gross profit margin in a range of 20 to 21%.
Speaker 5: We anticipate quarterly gross margins will be relatively consistent sequentially for the last two quarters of the year.
Speaker 5: resulting in an expected full year margin, excluding inventory-related charges, in a range of 20.5 to 21.5%.
Speaker 5: Our selling general and administrative expense ratio of 10.1% for the first quarter improved 10 basis points from a year ago, reflecting slightly lower expenses on approximately the same top line revenue.
Speaker 5: We are forecasting our 2023 second quarter SG&A ratio to be in the range of 10.3 to 10.8 and I expect our full year ratio will be approximately 10 to 11 percent.
Speaker 5: Our income tax expense of $36.7 million for the first quarter represented an effective tax rate of approximately 23%.
Speaker 5: and an improvement from roughly 25% in the year earlier quarter. We continue to expect our effective tax rate for both the 2023 second quarter and full year to be approximately 24%.
Speaker 5: Overall, we generated net income of $125.5 million, or $1.45 per diluted share for the first quarter, compared to $134.3 million, or $1.47 per diluted share for the prior year period.ress the
Speaker 5: The stock repurchases over the past two years favorably impacted the first quarter earnings per share by approximately 15 cents or 10%.
Speaker 5: Turning out a community count, our first quarter average of 251 was up 18% from the corresponding 2022 quarter. In the current quarter, we opened 24 communities and had fewer sellouts as compared to the prior year. We ended the quarter with 256 communities.
Speaker 5: 23% from a year ago with increases in all four regions.
Speaker 5: We believe our second quarter average community count will be up in the range of 15 to 20% year over year and the full year average will be up in the low double-digit percentage range.
Speaker 5: This larger portfolio of active selling communities will help offset the impact of weaker housing market conditions as compared to last year.
Speaker 5: Due to the soft market conditions and our healthy existing land pipeline, we continued to moderate our investments in land acquisitions and development during the first quarter, with our total expenditures down 48% to $367 million.
Speaker 5: As Jeff mentioned, land acquisitions represented only $50 million as a total first quarter investment, an 86% decrease.
Speaker 5: At quarter end, our total liquidity was approximately $1.24 billion, including over $983 million of available capacity under our unsecured revolving credit facility and $260 million of cash.
Speaker 5: During the quarter, we repurchased nearly 2 million shares of our common stock at an average price of $38.16, which is 15% below our quarter-end book value per share.
Speaker 5: With our board's recent $500 million repurchase authorization, we intend to continue to repurchase shares with the pace, volume, and timing based on considerations of our cash flow, liquidity outlook, land investment opportunities and needs, the market price of our shares, and the
Speaker 5: in the housing market and general economic environment. Our quarter-end stakeholders equity was $3.7 billion and our book value per share was up 27% year-over-year to $44.80.
Speaker 5: In conclusion, we plan to continue to execute on our operational priorities throughout the remainder of the year.
Speaker 5: focusing on improving build times, reducing costs, driving net orders across our footprint, and generating and deploying cash in line with our capital allocation strategy.
Speaker 5: As I mentioned earlier, we plan to continue our measured approach to share repurchases supported by our strong balance sheet and expected operating cash flow. We expect this repurchase strategy to continue to generate a tailwind to our financial results, incrementally improving our EPS.
Speaker 5: As I mentioned earlier, we plan to continue our measured approach to share repurchases supported by our strong balance sheet and expected operating cash flow. We expect this repurchase strategy to continue to generate a tailwind to our financial results, incrementally improving our EPS, book value per share, and returns.
Speaker 5: Driven by our anticipated operating performance in 2023, we expect further increasing in our book value per share, as well as a low double-digit return on equity for the year, as we continue to focus on stockholder value creation.
Speaker 2: We will now take your questions. John , please open the lines. Thank you, sir. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue.
Speaker 2: And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Speaker 2: We ask that you please limit yourself to one question and one follow-up. Thank you.
Speaker 2: that you please limit yourself to one question and one follow-up. Thank you. One moment please while we poll for questions.
Speaker 2: And the first question comes from the line of Steven Kim with Evercore ISI. Please proceed with your question.
Speaker 4: Yeah, thanks a lot guys. Yeah, really, really impressive job. Appreciate all the guidance as well. So thanks for that. You gave a lot of really interesting stats. I'm sure, you know, my, my, my peers will, will, will clean up a lot of them. But the one that I wanted to focus in on was your commentary about, um,
Speaker 4: for how much higher your margins are on bill to order, has that relatively changed? And then the share, that 37% of deliveries that are, you know, were sort of not BTOs. What does that look like historically and what is assumed in your guide?
Speaker 6: Yes, a lot, Dave, and we'll try...................
Speaker 6: As I shared in the comments, we did deliver more inventory in the quarter and in part it was due to the cancellation spike we experienced in Q3, Q4 and early Q1, so we had to cover those. We always have strategic specs we put in the ground, whether a multi-family product, whether
Speaker 6: or the odd lot on a cul-de-sac we want to build out, or if it's a strong performing community, we'll throw more starts in the ground. So we always have some strategic specs. And then we have models, which we really don't talk about too much, but we view them as an inventory sale as well.
Speaker 6: Historically, that's higher than our average. We like to maintain on a starts basis.
Speaker 6: 80% sold, 20% unsold. That's what we have been targeting over time. But as you think about that, if you start 80% and then about 10% of it cans over the life of the construction cycle, you're really 70-30.
Speaker 6: is our typical ratio over time. So if you break down that way, not too far off from historical, but up a little bit, then we're glad that we were able to move them.
Speaker 6: move on to Q2. Our built to order margins right now are typically two to three percentage points higher. Depends on the city and there's always a story on the community but typically two to three percentage points higher. I touched on a lot premiums and
Speaker 6: studio revenue. When you have an inventory home, it's a lot harder to get a lot premium because that's the first thing that gets discounted on the selling floor if someone's making an offer on a spec. So we do better on lot premiums on our built to order, but also we don't have to incentivize the sale as much.
Speaker 6: And what we like to say is we're the buyers creating their own value versus us forcing a value through discounts and incentives. So typically there's a little bit more incentive to convince a customer to go...
Speaker 6: you know, purchase a home that's already built. I know there's a lot of noise on this metric in the industry and everybody probably measures it a little different but if you're...
Speaker 6: predominantly a spec builder. I can see where your margins would be higher on a spec that's completed. Why would somebody buy a spec at frame stage if their choice is a completed home? But in our case, our buyers still tilt to the preference of personalization.
Speaker 6: So, in the quarter, it's a blended margin that we reported 21.8. Our built order was a little higher, inventory a little lower, and it came out to the average. And with the selling mix that we're looking at going forward over the balance of the year,
Speaker 4: It all ends up summarized in the guidance that Jeff gave for the year. So I think I covered all those questions. I don't know if there's anything I missed, John . No, that was really great and comprehensive, so I appreciate that. Next question I had related to your outlook.
Speaker 4: Jeff, you gave this a lot of detail and what it looks like is you're certainly expecting
Speaker 4: expecting to see some strong closings and strong orders that you've already experienced thus far in March and so your volumes are gonna be pretty solid here in 2Q which leads to the back half of the year. It does seem that you're being pretty conservative here with your closings outlook if I assume you know that your orders per community remain and you know anywhere close to that
Speaker 4: sort of stay stubbornly kind of low? Cuz I would assume that that would move back kind of to the reigns that you had maybe pre-COVID or approaching that by the fourth quarter, just because of some of the things that Robin Gibney was talking about with cycle times improving and things of that nature. So can you help me understand why the closings guidance seems kind of low?
Speaker 6: starts in Q3. It'll be more of an early 24 benefit than it will 23. And I think what I was trying to message if you think about it, our business model went through a whipsaw where interest rates spike.
Speaker 6: We had buyers that hadn't locked their loan. Can rate goes way up. We're still protecting our backlog. So we're not doing things to get gross sales. We're getting hammered with cans. And now we're coming out of that. Our can rate, we expect, will continue to moderate back to historical levels. At the same time, we've taken steps to get our gross orders up. So the guide is reasonable for the year. We are projecting a little higher than what we expected.
Speaker 4: the questions. So just a question on the margin outlook and the sort of guidance you gave around kind of relatively consistent margins trending into the back half of the year. Just looking at the order ASP during the quarter, recognizing there was some mix in that, I think it was down, it could be wrong, maybe 50 to $60,000 sequentially.
Speaker 4: I think you also mentioned you're starting homes with about $19,000 of cost reduction in there. So, you know, maybe part of the answer is going to be around mix, but just curious around, you know, what else are you seeing and what kind of gives you confidence to say that, you know, that margin in the back half will be relatively flat given these, you know, price reductions that are occurring. Thank you. Thank you.
Speaker 5: Sure, Matt, I can respond to that. So as always, we have the advantage of looking at our backlog as we forecast margins. And we're anticipating that backlog right now that delivers out over the next three quarters. We know specifically in that backlog the pricing, the costs, et cetera. So I have a pretty good hand on the margin included in there.
Speaker 5: I would caution a little bit on the net order average selling price. There is a bit of noise in there, not only from the point of view of community mix and different plans obviously that are in the back or in those numbers, but there's backlog adjustments and noise associated with those backlog adjustments that get flushed through the interest of the government's
Speaker 5: average selling price on that order is every quarter. So those are the couple of items why that may not quite box with some of your numbers. But you know essentially at the end of the day as we look at it we have obviously some pricing pressure in the market that we're forecasting some is already embedded in our backlog.
Speaker 5: And then some of the cost savings that Rob pointed out, but many of those have hit fourth quarter early next year. And we have a pretty good beat on the margins, excluding any unforeseen events over the next few months. Got it. Okay. Super helpful. Thanks for that, Jeff.
Speaker 4: The second one, just kind of higher level, you know, recognizing that the stress in the banking environment and regional banks is evolving quickly here. I'm just curious of what you're seeing kind of on the margin, you know, in these past few weeks. You know, any kind of thoughts or what you're hearing around lending standards, you know, as well as just kind of impacts within your own mortgage business.
Speaker 6: How are you thinking about how this kind of rapidly evolving environment on regional banking may impact your business? Thank you. Matt, we're watchful like everyone on this call to see how this plays out. We're not hearing anything right now on title lending standards. We're not hearing buyers say.
Speaker 6: The banking crisis is really influencing my confidence. It's pretty quiet, but it's a headline that you have to be watchful of, in that if the regional banks got really stressed, it has to impact the economies where those banks are located. So we're watchful of it, but to date, there's no change in underwriting. Liquidity is out there.
Speaker 6: Certainly the big banks we do business with are all open and doing their thing. So far it's been good. If anything, it helped drop mortgage rates down and it helped the consumer. We have to wait and see how it plays out.
Speaker 2: And the next question comes from the line of Mike Dahl with RBC Capital Markets. Please proceed with your question.
Speaker 6: Hi, thanks for taking my questions. I guess, Jeff, just to follow up on that last comment, what are the things that you're most watchful for? What are the things that you view as the most leading indicators, whether it's feedback from your customers or things that you're seeing?
Speaker 6: in the market from various lenders in terms of identifying.
Speaker 6: you know, if or when or where you would start to see some of these stresses play out and start to impact your business.
Speaker 5: Yeah, I think if you're asking from the point of view of the consumer, obviously the headline is the mortgage rate and as Jeff said, some of the recent actions have served to moderate that a little bit. I think that's number one concern on the consumer's mind. Lending standards, as Jeff also mentioned, really haven't changed as far as we can see up to this point. So and there's the gist to mind, thank you.
Speaker 5: Those would be the two watch outs. You know, spring so far for us has been pretty healthy, and we like what we've seen on the sales side and consumer behavior, and we hope that continues and, you know, that this whole banking situation settles, and we kind of move on. We are watchful of it and obviously concerned, as everyone has done.
Speaker 5: where this could lead, but so far so good as far as our business goes. Got it. Okay, and my second question just and it's I was somewhat related, but just thinking about 2Q and the expectation on orders I think last quarter, you know, it was understandable. You had kind of five weeks under your belt for the quarter.
Speaker 6: And so you had a good taste of where things were and looking at the constant what you were trying to do on the sales side where you thought you could drive pace. You're pretty early in the quarter and there is a lot of uncertainty out there that's pretty quickly emerged. So in terms of the level of confidence.
Speaker 6: getting to the four to five pace for the full quarter. Just wanted to probe a little bit more on what's driving it. Is it, you know, is it, you think you've kind of found your stride on kind of price incentive strategy where if the market dips, you can, you can plug that, or is it just a function of what you've seen these past couple of weeks just.
Speaker 6: Maybe elaborate a little bit more on what's giving you the level of conviction to give that range for the second quarter. Sure. When I say we don't like giving a guide in March, it's because it's only right now two and a half weeks. It's more the...
Speaker 6: The comparables can be odd when you're comparing two and a half weeks to two and a half weeks and may not represent what's really going on in your in your business, but The selling environment there's not like a switch that puts on March 1 You're now in a new selling environment as we shared in our prepared comments. February was very good for us In fact, even with this elevated can rate that's...
Speaker 6: that's moderating. We were at 4 1?2 a month or a community in the month of February , and March has continued at similar levels. But Rob, do you want to give them some insight into our thinking on the sales projections?
Speaker 4: Yeah, I mean, I just I guess echo what you would say. I mean, we're confident in it because we're seeing it today. Like Jeff said, you know, but we were hitting the four and a half a month in February to increase sequentially each month of Q1.
Speaker 4: While it's early in March, we're seeing even more positive results on the sales side than what we saw in February . Barring any kind of unforeseen surprise on that, we don't really see a reason that we won't continue on the path that we've been on, which that's what gave us the confidence to guide the way we did.
Speaker 2: And our next question comes from the line of John Lavala with UBS. Please proceed with your question. Hi guys, thank you for taking my questions as well here. And maybe the first one just on the delivery ASP outlook of 480 to 490. It's pretty far above what's in the backlog.
Speaker 2: ASP right now. And so I'm just curious what's driving this? I mean, is it just mix of what's going to close or is there an expectation that the second quarter order ASP is going to be elevated and that's going to flow through the back cap? Just any help there would be appreciated. Right. Yeah, John , you know, as you know, we have a pretty wide range of ASPs between our West Coast business and the rest of the business. So at times, we have to be able to get through the rest of the business.
Speaker 5: those numbers get a little skewed just due to that mix between regions.
Speaker 5: We do schedule a lot of our deliveries, one by one, believe it or not, by community, by division, as we forecast out second to fourth quarter. So a lot of it is just very specific to what homes are actually scheduled to close and what quarters do we expect it.
Speaker 5: The differential between our go-forward guidance and really the backlog in my opinion isn't really that significant. And we often deal with that. The backlog is up to eight or nine months now, a backlog, and we're trying to forecast the first three months.
Speaker 5: of those deliveries. So you often get a little bit of a disconnect. Sometimes the next quarter is a little bit higher than the backlog. Sometimes it's a little bit lower. The backlog also doesn't include all of the potential revenue and that any of the units in backlog that haven't completely gone through the studio process are still under clubbed a little bit. So those are things that kind of bring it back more into line.
Speaker 2: I think you'd find that we're normally pretty accurate on the ESP go-forward forecasts and we're pretty confident with this one So don't see a lot of variability there Okay, that's helpful and then maybe just going back to the gross margins and sort of the sequential flat sequential gross margins in the back half relative to the second quarter. What are you guys forecasting in terms of direct costs?
Speaker 5: maybe you know in lumber and then how does it has the sort of the ASP flow into this as well? Right, so on the cost side most of the costs are more or less paid. You know we have a the vast majority of our starts for the whole year as Jeff mentioned you know we started by the end of this month so that we don't see a lot of variability on the cost side.
Speaker 5: Anything that happens with lumber up or down would be more an issue a bit in the fourth quarter, but even more so of an issue in the first quarter or an opportunity, I should say, in the first quarter of next year. So there's not a lot of variability on the cost side. The prices are more or less locked because they're a large backlog. And our expectations around what we do on quick moving units kind of reflect what's already in the backlog and kind of going off pricing and costs off some of those units. So, um.
Speaker 5: Again, we have a lot more visibility this quarter than certainly we had during our conference call earlier this year, which is one of the reasons why we wanted to go out for the full year and provide some more details. That's kind of how it's sorting out right now, fairly consistent margins and all the other guidance points that we've provided. We're pretty confident. And the next question comes from the line of Alan Bratner with Zelman Associates. Please proceed with your question.
Speaker 5: Thanks for all the color and guidance. Appreciate it. First question, I'd love to drill in a little bit in terms of what you're seeing in the land market. I know you walked away from some additional option deals this quarter, and if I look at your lot count, it's down about 35% year on year.
Speaker 5: Obviously, a lot of that's coming through option walkaways. But what we're hearing is the land market is remaining pretty sticky and home prices having declined. Pick your number, 5, 10, 15 percent in some markets. We haven't necessarily seen that come out of the land market yet is what builders are talking about. So, we're seeing that.
Speaker 5: On one hand, you can wait and wait for that capitulation, or on the other hand, if you're kind of optimistic that the market has found a solid footing here, it would seem like you kind of have to make a decision to go out and start buying land again. So I'm curious, A, what are you seeing in terms of that capitulation? And B, you pulled back quite a bit this quarter. How close are you to reengaging in the land market again? Well, Alan, I wouldn't say that we've...
Speaker 6: disengaged at all. We're just being more selective and cautious. And you're right in what you hear, the land prices have been sticky out there. And most of the landowners in the markets we're in are pretty well healed. And they're also waiting to see how the market plays out before they do anything. So we have not seen.
Speaker 6: a lot of downward movement in land prices.
Speaker 6: And as I shared in my comments, we're owned and controlled through.
Speaker 6: 24 and into 25. So we don't feel the pressure today that we have to do something, but we are encouraging the teams to go tie things up. And tie it up with some money and work on entitlements and we'll make a call on the closing when it comes time to
Speaker 6: to commit to the deal or not. But we're encouraging all our teams to go on a land search and go out there and fill in the queue. We're just not writing big checks unless we're confident that that has us.
Speaker 6: is going to give us the returns. So I think you'll see this healthy tension. There's land available out there. We're not worried that we won't be able to support a growth trajectory beyond 25.
Speaker 5: But we're going to stay watchful for a while. That's helpful. I appreciate that. Second question, you know, it seems like the incentive across the industry that's been having the most traction are mortgage rate buy downs. Definitely something that the new home market has an advantage on over the resale market with kind of the in house.
Speaker 5: mortgage subs. Are you guys using rate buy downs a lot? I mean, obviously with the build to order model, I would imagine it's more costly for you to do a buy down, you know, out three, four, five, six months into the future compared to a spec builder that could have certainty of delivery date in the near term. But.
Speaker 5: How often are you using those rate buy downs? And if so, what are you buying the rate down to and what does the cost look like? Rob, you want to take that? Yeah, sure. So I would say we are using the mortgage programs we've got to both lock longer term loans or short term ones and in some cases buy the rates down. But I would say we're seeing that become less as the market's improving and we've adjusted.
Speaker 4: pricing to get right into communities where we don't have a lot of backlog that gets impacted. So we are using it. It's selective. It's not every community. It's not every customer. And we use it where we need to drive the sales. And another benefit that we're seeing is the cost of those programs is becoming less as well with rates coming down some. Our typical
Speaker 2: and we offer a couple different programs but our typical is buying the rate down to five and seven eighths and with rates coming down the cost to do that has fallen along with the cost of the long-term block. We can go out 270 days on a BTO sale to lock that so the cost of both of those is coming down as well as the frequency of needing to use them with the market improvement and overall demand getting.
Speaker 5: understand your point that the ASP is locked as a bill to order builder and the houses are customized. But when you think about some of those incentives flowing through, what's the outlook for incentives in the second half of this year versus the first half? What are some of the offsets that you would expect to get to the next year?
Speaker 5: the flattish sequential gross margins. Yeah, I can take that. So on the incentive side, are the assumptions incentives are really baked into what's already been offered, and in some cases, what the division needs or feels they need on a community by community basis, maybe to incent some of the buyers to actually close on the home. So there is some,
Speaker 5: conservatism baked into the cost side on the incentives whereby we've included a bit more than actually is contracted at this point in those out quarters so I feel like there's enough cushion in there to cover what we'll need to do to get the closings.
Speaker 5: On the cost side of things, like we've mentioned a couple times, once a home starts, the costs of the home are pretty well baked in, so there's not a lot of offset there coming from any surprises. Most of it's just basically the cushion that we have involved there. The other side of this is the percentage that we have locked.
Speaker 5: on current mortgages. It's pretty high percent right now through our mortgage company, so we have a higher confidence in the closings that will occur. So with that, less variability on gross margin out in the back half of the year. The final point I guess I'd make is as we progress through last year.
Speaker 5: We did see some costs coming down and as we started those homes, those homes on a lower cost basis will be hitting in the second, third quarters, fourth quarters, a little bit up in the air, because some of the starts we haven't quite finalized for the fourth quarter, but for the most part, we're seeing some of the cost savings already flowing through, but the bulk of what Rob talked about earlier will actually pull through the early part of next year. That's really helpful. And just to clarify, going forward,
Speaker 5: Are you assuming incentives are higher in your deliveries in like the second, third, and fourth quarter than what was in the first quarter? Just trying to understand the timing of when you offer those and when they'll actually start to float through. I don't think they're necessarily higher. You know, one of the more difficult things we've...
Speaker 5: incentives to hold some of those buyers. I think the more stable we see rates, and again with the high percentage of buyers that are currently locked on mortgage rate, we don't think we'll have to do quite as much. But despite that, we still have included a little bit of talk on the cost side, just to compensate for whatever we do have to do.
Speaker 5: provided earlier for both the second quarter and the full year.
Speaker 5: And the next question comes from the line of Truman Patterson with Wolf Research. Please proceed with your question.
Speaker 6: I was wondering, as your construction times normalize, what level of incremental capital do you think you can pull out of – or cash you can pull out of working capital and the timing of that flowing through the financials? Yeah, we think there's a tremendous opportunity on that side, Paul. Thanks for pointing that out.
Speaker 5: not only us but for the whole industry for quite a few quarters now but eventually we're going to get back to the type of performance that our companies.
Speaker 5: used to in terms of both backlog conversion, level of WIP inventory out there, and the dollars we have tied up in it, we think it's a tremendous cash flow opportunity for us on a go-forward basis. Okay, and I think you mentioned you were developing smaller phases in your newer communities. I would assume you're also doing that for phase extensions and legacy projects.
Speaker 6: How does that impact the cost structure and would that present any kind of margin headwind as we move into 24 since you're not quote unquote getting that volume discount Incremental not it's not significant a lot of you get right back in unless carried you'll have to pay for another move in
Speaker 5: for the heavy equipment 30, 40, 50 gram, whatever. But the development subs are getting hungry too. So they've been accommodating us as we go to smaller phase because they want to keep doing. And the next question comes from the line of Michael Rehart with JP Morgan. Please proceed with your question. Hey, great. Thanks for fitting me in. I appreciate it.
Speaker 5: different factors can influence that. And in the expectation for 2Q to be reverting back to the 20 to 21, which I think was your original guidance for the first quarter, just trying to understand also what are some of the drivers there from...
Speaker 5: in terms of the current pricing environment and the cost backdrop. Sure, yeah, just starting with the quarter and the beat on the quarter. We talked about actually last quarter that we had, you know, a number of things that we thought was going to drive a sequential decrease. We included things such as the concessions and the mortgage rate buy downs, the construction costs.
Speaker 5: that ticked up a little bit when those homes were started, mixed shifts and a little bit lower operating leverage. On the operating leverage side, we actually held pretty steady there.
Speaker 5: Sales on a year-over-year basis or sorry our revenues on a year-over-year basis were pretty close So we didn't lose anything there, so we picked up a bit there Didn't see as much on incentives as we had baked in You know we have to basically estimate what the incentives would be on quick-movement homes
Speaker 5: And we just didn't see the need to do as much as what we had baked in there. Maybe the estimate was a little too conservative, I don't know, but it was helpful. So most of the variability was really on mixed, lower incentives, and then doing a little bit better on the spec home deliveries than we had anticipated.
Speaker 5: Okay. Thanks for that. I guess second question, I think Steve, Kim talked about maybe looking at some of your guidance metrics as conservative, I think, around closings. And the question I had was…
Speaker 5: I think it was part of his comments that talked about, you know, this four to five tapes maybe continuing through the rest of the year. You know, it does seem, you know, from your comments and others that seasonality and some more positive trends have come back throughout, you know, so far this year.
Speaker 5: But alongside that, perhaps you'd also expect seasonality to kick in in both ways. And historically, you look at three Q orders, they're down anywhere from 20 to 30% sequentially on a sales page basis.
Speaker 5: versus 2Q and then 4Q historically they fall off another roughly 20%. So if seasonality is coming back in the business and it's kind of a more normal quarter to quarter cadence.
Speaker 5: It does seem like you're obviously guiding to some return to normalcy. Is it fair to assume, and I'm not asking for quarterly guidance in 3Q4Q, but from a seasonality perspective, is that kind of the right way to think about it if we're kind of returning to plus or minus?
Speaker 6: a normal type of cadence throughout the year? It's certainly my expectation, Mike, that we're normalizing on the cadence. Our move from Q2 to three and three to four is not as great as you just articulated. Our Q3 is definitely down about 10% from Q2, and then Q4 is down five to 10%. Could be in part because of that.
Speaker 6: the markets we're in are a little warmer climate and you get a lot of snowbirds that come down in the winter and things like that, but in a normal year we'll run five, five and a half in the second quarter and then it they'll come down a little in the third quarter and come down a little in the the fourth quarter and then over the year you'll average between four and five.
Speaker 5: So based on what we're seeing right now in the consumer behavior, and we qualify it because there's a lot of unknowns out there, but based on what we're seeing, we think the markets are starting to normalize. And the next question comes from the line of Buck Horn with Raymond James. Please proceed with your question. Hey, thanks for the time. I appreciate it. Just step me back for me.
Speaker 5: community locations or the floor plans that your customers are choosing. Is there been any shift noticeable in your business in terms of shifting work from home preferences or I guess conversely is there still a strong driver in terms of the need for home office space in the business? I don't know we've seen any any shift yet.
Speaker 6: houses that were within 30 to 45 minutes of their employer. So their view was we can own a home here, drive a little further to work, but we're only having to go in the office a couple days. It's not like they would move to Kansas City while working in San Jose. They'd move to Stockton while working in San Jose. So I don't know, we've seen a big geographic shift in
Speaker 6: We're certainly not seeing a shift right now in the size of the home or what they're spending in our studios It's been pretty pretty static for the last 18 months All right, that's that's real helpful I appreciate that And then my last one just in terms of the cancellations and maybe the mechanics as you guys have absorbed So many cancellations over the past couple quarters
Speaker 5: Are you guys keeping most of the customers deposits on those cancellations or are you refunding some of that? Or you know, what's the amount of kind of the average amount of non refundable? Non-refundable slash hard money that the customer has when they sign a new contract with you guys.
Speaker 6: On average around the system buckets about 2% and if they cancel and they're, they had a loan approved and final to start or retain on the deposit.
Speaker 5: And the next question comes from the line of Alex Barron with Housing Research Center. Please proceed with your question.
Speaker 7: Thanks, guys. I wanted to ask a little bit about the two markets, I guess, where the
Speaker 7: orders still haven't come back fully. I guess that was the central and the Florida market or southeast markets. Was that still somewhat intentional on your part, you know, and not fully, you know, still focusing on delivering the higher margin backlog before incentivizing sales or, you know.
Speaker 7: Are those things largely behind us, and then you expect orders to get back to normal next quarter? Rob, you want to take that? Yeah, so, you know, I would say that part of what you mentioned is a driver. You know, we talked on our last quarter about our strategy.
Speaker 7: As far as the Southeast, they perform really well on the growth sale side, especially as we got toward the end of the quarter. So as some of the older sales that we have in backlog that may have purchased when rates were lower, those work through the system here over the next couple of months, I expect that the Southeast is going to bounce back pretty quickly.
Speaker 7: the southeast, you know, they perform really well on the on a growth sale side, especially as we got towards the end of the quarter. So as some of the older sales that we have in backlog that may have purchased when rates were lower as those work through the system here over the next couple of months, I expect that the southeast is going to bounce back pretty quickly. Got it.
Speaker 5: My second question has to do more with the balance sheet. So I believe you guys have some debt coming due next quarter, about $350 million due in May. Just curious if the plan there is to pay those off with cash or to potentially raise debt and...
Speaker 5: you know, take advantage and maybe do more of the share buyback given the big discount or just, you know, thoughts around those two topics. Right, Alex, we refined that debt actually last year. So our next maturity is actually our term loan. It's not until 2026. So we have known near term debt maturities at this point. Thank you. At this time we have reached the end of the question and answer session.
Speaker 5: And ladies and gentlemen, that does conclude today's teleconference. Thank you for your participation. You may now disconnect your lines.
Speaker 1: you