Q3 2024 KB Home Earnings Call
John: Good afternoon. My name is John and I'll be your conference operator today. I'd like to welcome everyone to the KB Home 2024 third quarter earnings conference call. Currently, all participants are in a listen only mode. Following the company's opening remarks, we will open the lines for questions.
John: Today's conference call is being recorded and will be available for replay at the company's website KBHome.com through October 24th, 2024. And now I will have to turn the call over to Jill Peters, Senior Vice President Investor Relations. Thank you, Jill. You may begin.
Jill Peters: Thank you, John. Good afternoon, everyone, and thank you for joining us today to review our results for the third quarter of fiscal 2024.
Speaker Change: On the call, our Jeff Mezger, Chairman and Chief Executive Officer, Rob McGibney, President and Chief Operating Officer, Jeff Kaminski, Executive Vice President and Chief Financial Officer and Bill Hollinger, Senior Vice President and Chief Accounting Officer.
Speaker Change: During this call, items will be discussed that are considered forward-looking statements within the meaning of the private securities litigation reform act of 1995. These statements are not guarantees a future result and the company does not undertake any obligation to update them.
Speaker Change: Due to various factors including those detailed in today's press release and in our filing with the Securities and Exchange Commission, actual results could be materially different from those stated or implied in the forward-looking statements.
Speaker Change: In addition, a reconciliation of the non-gap measure of adjusted housing gross profit margin.
Speaker Change: which excludes inventory related charges.
Speaker Change: and any other non-gap measure referenced during today's discussion.
Speaker Change: to what's most directly comparable gap measure can be found in today's press release and or on the investor relations page of our website at kbhome.com. And with that, here is Jeff Mezger.
Jeff Mezger: Thank you, Jill. Good afternoon, everyone.
Jeff Mezger: We achieved double digit year-over-year growth in revenues and diluted earnings per share in the third quarter.
Speaker Change: With these results and our expectations for the remainder of this year, we believe we are well-visation to produce about 6.9 billion in revenues in 2024 at a gross margin exceeding 21%.
Speaker Change: As we work to finish the year's strong, we remain focused on growing our community count, maintaining our high levels of customer satisfaction.
Speaker Change: and executing our personalized built-to-order model, offering customers choice, and flexibility based on what they value and can't afford.
Speaker Change: As for the details of our results, we generated total revenues of over $1.75 billion, and the
Speaker Change: We delivered more homes during the quarter than we had anticipated, as cancellation rates remained low, and our build times have compressed.
Speaker Change: Our gross margin was slightly lower than we have seen in the past two quarters at 20.6% which we will provide some detail on in a moment.
Speaker Change: Although our operating income margin was within our guided range at 10.8%.
Speaker Change: Our performance drove our book value per share of 13% year over year.
Speaker Change: Long-term housing market conditions remain positive, supported by an under-supply of new and resale homes, solid employment, wage growth, and favorable demographics in household formations.
Speaker Change: Although Recell inventory is rising in certain of our markets, it remains well below historically normalized levels. It's very limited at our price points, and days on the market are still low.
Speaker Change: We generated 385 net orders in the third quarter, flat with a year ago period.
Speaker Change: Our monthly absorption pace per community of 4.1 homes was in line with our third quarter average over the past decade, although slightly below the 4.3 pace in last year's third quarter.
Speaker Change: Our cancellation rate remains stable sequentially at a historically low level, indicate an affallent pool of buyers ready to close on their homes when completed.
Speaker Change: The desire for home ownership is strong and we saw evidence of this during the third quarter with higher year-over-year traffic within our communities and increased leans from our digital marketing efforts.
Speaker Change: That said, fires were hesitant, as interest rates remained elevated, and concerns about a slowing economy increased, and demand began to soften and late June through July.
Speaker Change: In this environment, we took steps to adjust pricing as necessary to hold our pace.
Speaker Change: Rates moderated in August, and demands strengthened, where our weekly net orders improving sequentially in each of the last three weeks of August.
Speaker Change: We are encouraged by this positive trend, and we continue to see solid sales, quarter-to-date in September.
Speaker Change: With the Federal Reserve lowering interest rates by 50 basis points last week, we believe this will further benefit consumer confidence and affordability.
Speaker Change: given the soft comparison in the year ago fourth quarter. Even normal seasonality will produce a strong year over year comparison at our 2020 fourth quarter net orders.
Speaker Change: Set in us up with momentum as we enter the New Year. And with that, applause for a moment and that's Rob to provide an operational update. Rob.
Rob: Thank you, Jeff. I will begin by providing additional color on our net order results. Although traffic increased 8% year over year, some buyers hesitated on their purchase decision, due to concerns about transacting too early given the uncertainty around interest rates.
Speaker Change: and news headlines feeling an expectation of interest rate cuts by the Federal Reserve. Ultimately, lower mortgage rates do help to stimulate demand, and we saw evidence of this and August with net workers increasing sequentially week by week as the month progressed.
Speaker Change: While buyers are rate sensitive, we believe the primary motivation of most customers is to secure a home that meets their needs at the best price, not the biggest incentive or rate by down.
Speaker Change: Understanding this, and considering the price increases, we had taken in most of our communities in the first half of this fiscal year. We strategically, and selectively adjusted pricing at the community level, as needed, to stimulate demand and optimize the pace price balance of each asset.
Speaker Change: which favorably impacted our net orders in August.
Speaker Change: Our pricing strategy focuses on offering the best possible price where he's continually increasing incentives.
Speaker Change: Although we achieved the same gross margin by offering a reduction in price or an equivalent dollar value of incentives, buyers care about the price of the home and our team's impassized the value of the personalized home and the community more than an incentive or mortgage rate.
Speaker Change: That said, we did continue to utilize mortgage concessions in the third quarter, with net orders that had some form of mortgage concession, whether a rate lock or a buy-down, in the low 60% range, consistent with the past three quarters.
Speaker Change: We began to reduce the dollar amount of mortgage concessions on our net orders and August in conjunction with the lower prices that I just spoke of. We expect to be able to lower our use of this incentive in the fourth quarter considering improved affordability levels provided by the recent relief and mortgage rates.
Speaker Change: As to mortgage concessions on homes delivered in the third quarter, they average just under 2% of housing revenues.
Speaker Change: We started nearly 3,000 homes in the quarter, ending the quarter with over 7,700 homes in production, including models. Our expectation is to end the year having started roughly 20% more homes in 2024 than we did in 2023.
Speaker Change: Given our production, backlog and lower build times, we have returned more historical levels of converting our backlog to deliveries. Going forward, we plan to continue aligning our starts with sales, which will help keep our production in balance with the majority of those starts already sold.
Speaker Change: Our build times on homes delivered during the quarter was about 150 days, a two-week improvement sequentially and a factor in delivering more homes in the third quarter than we projected.
Speaker Change: Going forward, we are focused on continued progress to drive build times down to four months, which is the lower end of our historical range.
Speaker Change: We reduced cost on our home, started during the third quarter, which were down sequentially in a low single digit range, helping to offset the impact of pricing changes and centers in land costs.
Speaker Change: The categories where you've seen the biggest changes recently are at lumber and stucco. We are aggressively pursuing additional opportunities to further reduce our direct cost, enhancing affordability and expanding our reach to a wider range of potential customers.
Speaker Change: Before I wrap up, I will review the credit metrics of our buyers who financed their mortgages through our joint venture KBHS home loans.
Speaker Change: We had a solid year over your increase in our capture rate, with 88% of the mortgages funded during the quarter, having even financed through our joint venture.
Speaker Change: As compared to 84% in the prior year quarter.
Speaker Change: Higher Capture rates help us manage our backlog more effectively and provide more visibility and closings which benefits our company as well as our buyers.
Speaker Change: In addition, we see higher customer satisfaction levels from buyers who use KBHS versus other lenders.
Speaker Change: The average cash down payment was stable, both sequentially and year over year at 16%, equating to about $77,000.
Speaker Change: On average, the household income of customers who use KVHS was nearly $133,000 and they had a
Speaker Change: Even with about one-half of our customers purchasing their first home, we are attracting buyers who can qualify for their mortgage while making a significant down payment.
Speaker Change: As we head into year-end, we do so with a continued daily emphasis on maintaining our high customer satisfaction levels, further improving build times and valuing engineering products to lower direct cost.
Speaker Change: Our objectives remain consistent in increasing our scale, profitability, and returns.
Speaker Change: We expect to execute on these goals by reinvesting in our growth, opening our communities on time, offering a compelling value proposition to our customers and optimizing each asset on a community-by-community basis to increase our margins and returns.
Speaker Change: and with that I will turn the call back over to Jeff.
Jeff Mezger: Thanks, Rob.
Jeff Mezger: During the quarter, we invested $845 million in land acquisition and development, an increase of over 50% year over year with more than $425 million going toward acquiring new land.
Speaker Change: You're today, we have invested $2.1 billion in acquiring developing land more than we spent in all of fiscal 23.
Speaker Change: As we continue to accelerate our land investment in 2024, we remain diligent with respect to our underwriting criteria, product strategy, and price points.
Speaker Change: We increased our lap position 21% year over year, ending the quarter with over 69,000 laps, under controlled, positioning the company for future growth.
Speaker Change: Overall, we remain focused on capital efficiency, developing lots and smaller phases wherever possible, balancing development with our starts-based, to manage our inventory of finished lives.
Speaker Change: The composition of our land portfolio is strong, aligned with our product and pricing strategy and provides opportunities for us to gain share in our served markets.
Speaker Change: In addition to growing our established divisions, we are also beginning to see solid growth in our newest markets, Boise and Charlotte, as well as Seattle, which had its first deliveries only five years ago, and is already on the cusp of a top three market share of position.
Speaker Change: These three divisions are a great representation of our geographic expansion strategy. As we can absorb the overed costs of a new market entry in our existing business, and as these new markets mature, they become meaningful contributors to our results.
Speaker Change: We maintain a balanced approach in allocating our cash, enabling us to meaningfully reinvest in our growth, which remains our top priority, while also returning capital to stockholders.
Speaker Change: with the $150 million in share repurchases that we completed in our third quarter. The highest quarterly amount this year. We have already achieved the increased level of buybacks for the year that we shared on our last earnings call.
Speaker Change: We do plan to continue repurchase in our shares in the remainder of this fiscal year, and intend for it to be an ongoing part of our capital allocation plan beyond 2024.
Speaker Change: This way began repurchasing shares on a regular basis. In 2021, we have repurchased more than 24% of the shares than outstanding, a creative to both our diluted earnings per share and return on equity.
Speaker Change: Over that time frame, we have returned nearly $1.2 billion in cash to our stockholders, including dividend.
Speaker Change: In closing, I want to recognize the entire KV home team for their commitment to serving our home buyers and contributing to our performance in the third quarter.
Speaker Change: Our company is well positioned for future growth, as we mean fully invest in the expansion of our business and diversify our geographic footprint.
Speaker Change: We have an experience management team and a business model that provides customers choice and flexibility in purchasing a home that meets their needs and budgets.
Speaker Change: With about two months remaining in this fiscal year, we are on track to achieve about 6.9 billion in revenues, with the highest level of deliveries in many years.
Speaker Change: which will drive well over eight dollars in diluted earnings per share, representing significant year over your growth.
Speaker Change: This increase in scale and profitability, together with the favorable impact of share repurchases, we'll contribute to a return on equity of around 16 and a half percent.
Speaker Change: As we look ahead at fiscal 2025, our initial guidance for revenue next year is about $7.5 billion.
Speaker Change: We are committed to enhancing stockholder value by properly expanding our volume, driving higher returns, as well as continuing to return cast of stockholders through both share repurchases and our quarterly dividend.
Speaker Change: With that, I'll turn the call over to Jeff for the financial review. Jeff.
Speaker Change: Thank you, Jeff, and good afternoon, everyone. I will now review highlights of our financial performance for the 2020 Ford Third Quarter and provide our current outlook for the fourth quarter and full year.
Speaker Change: We're pleased with their execution during the third quarter as their housing revenues increased 11% compared to the prior year and reached a high end of our guidance range.
Speaker Change: Combined with our healthy operating margin of nearly 11% we generated robust cash flow that enabled us in the quarter to invest approximately $845 million in land and development.
Speaker Change: and return roughly $168 million to our stockholders through share repurchases and accordingly dividend.
Speaker Change: Our housing revenues grew to $1.75 billion for the quarter compared to $1.57 billion for the prior year period.
Speaker Change: The growth in our overall housing revenue was driven by increases of 8% in a number of homes delivered.
Speaker Change: and 3% in the overall average selling price.
Speaker Change: Our third quarter deliveries of 3,631 represented a backlog conversion rate of 58% of significant improvement from 46% in the year earlier period.
Speaker Change: Our current quarterly quarter delivery performance was favorably impacted by continued improvements in construction cycle time and lower cancellation rates.
Speaker Change: We anticipate these factors will also benefit our fourth quarter deliveries and have considered them in our guidance.
Speaker Change: Based on our current backlog and expected construction cycle times.
Speaker Change: We project our 2024 fourth quarter housing revenues will be in a range of $1.94 to $2.04 billion.
Speaker Change: In the third quarter, our overall average selling price of homes delivered was approximately $481,000. Up from approximately 466,000 in the prior year period.
Speaker Change: This increased primarily reflected a mix shift in home still delivered towards our higher priced West Coast region.
Speaker Change: Looking ahead to the fourth quarter, we are projecting a year-over-year increase of $23,000 in the overall I ever selling price.
Speaker Change: to approximately $510,000.
Speaker Change: Mainly driven as in the third quarter by an expected higher proportion of deliveries from a West Coast region.
Speaker Change: Our home building operating income for the third quarter increased to $189 million, that's compared to $179 million for the year earlier period, operating in margin of 10.8% compared to 11.3% in the prior year.
Speaker Change: For the fourth quarter, we expect improvements in both our housing, gross margin and FGNA expense ratio.
Speaker Change: to drive expansion in our home building operating income margin to the range of 11.4 to 11.8%. Assuming no inventory related charges, representing both the sequential and year-of-year improvement.
Speaker Change: Our housing growth profit margin for the quarter was 20.6% as compared to 21.5% for the prior year period.
Speaker Change: The margin result relative to the prior year was primarily due to product and geographic mixed shift of homes delivered along with other factors, including the impact of pricing adjustments to support demand.
Speaker Change: Partly offset by reduced total home buyer incentives.
Speaker Change: The Mix Impact mainly resulted from a higher percentage of revenues in the West Coast region with gross margins below the company average.
Speaker Change: excluding inventory related charges of $1.2 million in the quarter and 0.6 million a year ago, our margin of 20.7% for the quarter was down 80 basis points year over year.
Speaker Change: We expect to see a sequential improvement in our fourth quarter gross margin.
Speaker Change: Assuming no inventory related charges, we believe our fourth quarter housing growth profit margin will be in the range of 21 to 21.4%.
Speaker Change: Our selling general administrative expense ratio of 9.8% for the quarter, improved by 40 basis points, as compared to 10.2% in the prior year. Primarily due to increased operating leverage from higher housing revenues.
Speaker Change: Supported by another expected sequential increase in quarterly housing revenues.
Speaker Change: We believe our SGNA expense ratio will further improve in the fourth quarter, to approximately 9.6%.
Speaker Change: Our income tax expense for the third quarter of $50.1 million, represented in effective tax rate of 24.2% compared to 22.9% for the prior year period.
Speaker Change: We expect our effective tax rate for the 2024 fourth quarter to be approximately 24%.
Speaker Change: Overall, we reported net income from the third quarter of $157.3 million, or $2.4 per diluted share compared to $149.9 million, or $1.80 per diluted share for the prior year period.
Speaker Change: The 13% increase in our deluter earnings per share reflected higher earnings as well as a stock We've completed over the past several quarters.
Speaker Change: Turning out a community count, our third quarter average of 251 increased 5% from the year earlier quarter.
Speaker Change: We ended the quarter with 254 communities open for sales, up 10 percent as compared to 230 communities at the end of the 2023-3rd quarter.
Speaker Change: We still believe our 2024 year in community count will be in a range of 250 to 255, resulting in a 7-8% increase in the fourth quarter average community count.
Speaker Change: As Jeff mentioned, we invested $845 million in land and development during the third quarter. The significant increase from the same quarter of the prior year.
Jeff Mezger: 50% of the current quarter investment represented new land acquisitions, contributing to the growth in our land pipeline to over 69,000 lots of quarter end, of which 58% were owned and 42% were under contract.
Jeff Mezger: at Quarter End. We had total liquidity of $1.46 billion.
Jeff Mezger: including $375 million of cash and $1.08 billion available under our unsickered, revolving credit facility with no cash borrowings outstanding.
Jeff Mezger: During the third quarter, in addition to significantly increasing our land investments.
Jeff Mezger: We repurchased roughly 1.9 million shares of a common stock at a total cost of $150 million, while maintaining our historic low leverage ratio of 29.8%.
Jeff Mezger: With $800 million remaining under our current common stock repurchase authorization.
Jeff Mezger: We intend to continue to reproduce shares with the pace, volume and timing, space and considerations over our operating cash flow, liquidity outlook, land investment opportunities and needs, the market price of our shares, and the housing market and general economic environments.
Jeff Mezger: You're today, we've purchased 3.46 million shares at an average cost of $72.24 per share, helping to drive an improvement and are expected for your return on equity to approximately 16.5%.
Jeff Mezger: In summary, we are pleased with our solid third quarter financial performance and operation executions. And believe we are well-positioned to both achieve our goals for the 2024 fourth quarter and drive higher housing revenues in 2025.
Jeff Mezger: using the midpoints of our fourth quarter guidance.
Jeff Mezger: We expect for your housing revenues of approximately $6.9 billion with an affording income margin of over 11%. Exceeding both our 2023 results and our initial expectations for 2024 is shared during our January earnings call.
Jeff Mezger: is Jeff mentioned we also expect growth in our 2025 housing revenues reaching approximately $7.5 billion.
Jeff Mezger: We believe our ongoing focus on accelerating profitable growth and expanding our returns by leveraging our larger scale, strong community portfolio, and uniquely compelling built-to-order business model will produce measurable expansion in our book value per share in enhanced long-term stockholder value.
Jeff Mezger: We will now take your questions, John, please open the lines.
John: Thank you sir, we will now conduct a question and answer session.
John: If you would like to ask a question, please press the star key, followed by one on your cell phone key that the confirmation tone indicates that your line is in the queue. You may press star 2 to remove a question from the queue. For participants using speaker equipment, it may be necessary to pick up your hands and press in the star key.
Speaker Change: We ask that you please believe in yourself to one question and one follow-up. Thank you.
Speaker Change: One moment please will we call for any questions.
Speaker Change: Thank you for watching.
Speaker Change: i
Speaker Change: and the first question comes from the line of Matthew DeLay with Barclays. Please proceed with your question.
Matthew DeLay: Good afternoon everyone. Thank you for taking the questions.
Matthew DeLay: Maybe I'll start on that 7.5 billion revenue outlook for 2025. I see if we can unpack that a little bit. It sounds like you're...
Speaker Change: talking to an ASP of around 5-10 here in Q4 due to mix.
Speaker Change: but I'm not sure if we should really draw that into next year. So I guess we talk about seven and a half billion is going to be more kind of volume driven, price driven and I guess how does the community growth sort of play into that volume side? Thank you.
Speaker Change: Yeah, on a high level map, we decided to provide some high level guidance this quarter. We believe our community count or backlog or starts or absorption assumptions is also a quarter estimate of the $7.5 billion.
Speaker Change: You know, given where we're at today economically and particularly with some of the uncertainty around what the Fed actions will be for the rest of the year, the election results of macroeconomic.
Speaker Change: and Geoccalinical, etc., etc., etc., we decided to keep it very high level.
Speaker Change: and really keep our guidance really only that top line number. So at this point in time, we're not going to provide a lot of detail or dive into some of the components of it, you know, as typical, you see pretty much all of the above use you when you're driving volume, you know, from the point of view of absorption growth, community, county, and price.
Wright Fertis: Wright Fertis, soon the same for next year, but we're going to wait until we come back to guys in January and discuss all our key metrics and guidance and expectations at that point in time like we don't need you.
Speaker Change: Okay, fair enough, thanks for that Jeff. Secondly, you mentioned your strategy of sort of...
Speaker Change: focusing on adjusting home prices rather than...
Speaker Change: is really toggling incentives to a significant degree if I heard you correctly. Obviously now you've got lower mortgage rates relative to a few months ago. My question is really around how you will approach a lower rate environment.
Speaker Change: between sounds like you're willing to pull back a little on the mortgage concessions here in Q4.
Speaker Change: But, you know, what should we expect around home prices, right? How did that trend as you got into August so you did start to see demand improve?
Speaker Change: and you know, is there a scenario where you could, you know, sort of turn around here and start adjusting home prices in the other direction, given where rates have gone or is that a little bit too early? Any color on how you're going to approach that lower rate environment? Thank you.
Speaker Change: Rob, do you want to take that?
Rob: Sure, so obviously lower rates are good for us, they're good for the consumer, for our buyer. A fortability has been a big challenge, rates have been a big piece of that, so we're certainly happy to see them come down.
Speaker Change: As we mentioned in our prepared remarks, we are focused on selling the home and the value of that home versus just who can offer the biggest buy-down of the biggest mortgage incentive.
Speaker Change: and we put that in place throughout the quarter.
Speaker Change: You know, June started off.
Speaker Change: Fairly strong from a sales perspective, and then it got weaker as we move through the latter part of June, a little weaker still in July, and then better in August. And as we've done that, as the market was weakening, we found the need to lower prices in some of our communities to drive pace and optimize that asset.
Speaker Change: At the same time, we had others where we were lifting price again, so it really just gets to managing each asset individually and what that buyer needs or what that community needs to hit the volume levels that we're pursuing and to optimize each of those assets.
Speaker Change: Certainly as rates come down and they continue to come down, we expect to be able to lower our incentives and do that without having to further lower revenue, which...
Speaker Change: should up expand our overall gross margins on orders.
Speaker Change: Thank you. Our next question comes from the line of Stephen Kim with Evercore ISI. Please proceed with your question.
Stephen Kim: Yeah, thanks very much, guys. I'm going to follow up on Matthew's question. Just because that's 7.5 billion is a really encouraging figure. You know, it implies closing probably a 15,000 or more. And so, you know, you've talked about, I think you addressed absorptions. I just want to make sure...
Stephen Kim: that I'm understanding the interplay of absorption and community count from this point forward. Is it right that you think that there's a headroom on your absorptions from the level that you're currently at?
Speaker Change: and in terms of community count, it's going to be, I think, kind of flat, I should know here in the next couple of months, but when is this inflection in community count likely to happen, is it, you know, is it imminent or is it something that you expect to sort of, you know, reach by the end of next year?
Speaker Change: Yeah, like we said today, we're not really going to comment too much more on detail on the outlook for next year, wanted a range, you know, the top line target for the company and let you guys know we're heading.
Speaker Change: I think a lot will play out here over the next few months with the macroeconomics situation, particularly as we get through the election cycle.
Speaker Change: and what not, and we look forward to hopefully a very strong spring selling season. As far as absorption and room amount of absorption, there's always room for us to improve in that area. We've had to, we've talked quite a bit, quite extensively, over the last several quarters.
Speaker Change: We're not in a center-based company, we've had to incentivize a bit on a mortgage rate more than we'd like to.
Speaker Change: and as demand conditions improve and as the rate, hopefully the mortgage rates start coming down. We see less need to do that and we do think that we'll be a demand driver going into next year. You know, from a personal point of view, I don't have a crystal body more than any of you do, but...
Speaker Change: You know, with a lower rate environment and given that the consumer has been a little more condition on these higher rates for the past.
Speaker Change: you know, a couple years or so, you know, we're expecting to see a pretty strong spring song season given the right conditions.
Speaker Change: but there's a lot of ground to cover before we get to that point so we're kind of holding back on a lot of the details until we have more visibility into the macro.
Speaker Change: but we did want to kind of range out next year for it. So please forgive us for lack of details at this point. Like I said, we'll provide a lot more on January and we'll come back to you.
Speaker Change: Well, I mean, it's certainly a higher level of revenues and I think most people were looking for, so that is
Speaker Change: encouraging to hear that you're targeting that level and you see the internal opportunity for it. From a longer term perspective, I wanted to talk about your margin.
Speaker Change: Um...
Speaker Change: If I think about your operating margin, I know over the past several years, you know, you've had issues like...
Speaker Change: You know, the mop-balled communities, you had your interest expense running through cost of good sold and you know, at this point I think most of those issues are kind of behind you and things have been proved.
Speaker Change: So I'm trying to figure out whether or not the long-term operating margin opportunity for the company is materially higher than where you're at today called 11% or not. So can you give us a sound for what you think is kind of an appropriate long-term operating margin range for the company?
Speaker Change: Sure, so I'll talk maybe nine quantitative a little bit on this one, but you know, as we have a lot of focus on growing our scale.
Speaker Change: through the obviously through market share gains, through gone community count, and hopefully we'll see some market expansion as well with affordability, maybe coming a little more favorable.
Speaker Change: for the consumer. We think with that additional scale, there's certainly upside an operating margin.
Speaker Change: You've seen us break that double digit that 10% mark on the SGA ratio for several quarters and we think that's attainable, especially with a higher top line. And with the margins where they've been trending over the past 12 months.
Speaker Change: given that we've been offering a lot of incentives.
Speaker Change: at the same time, you know, just purely just a pullback and incentives at the same price points.
Speaker Change: that we have today could have been incrementally to the gross margin. So, you know, short of guiding where we're going next year on that operating margin. I think there is potential for the company to improve in that area. It's certainly goal, a company to improve in that area. And we'll see again based on the macro and vermin of...
Speaker Change: and we can get there.
Speaker Change: Thank you, and the next question comes from the line of John LeVallow with UBS. Please proceed with your question.
John LeVallow: Thanks for taking my questions as well. I know you gave some of the factors on the gross margin. I'm just curious in the quarter of the 20.7 relative to the 21.4 outlook. Just maybe if you could just kind of buck it those a little bit else understand.
John LeVallow: and what's the delta was there and then along the same lines, what's the driver of that sequential increase as we move into the fourth quarter of the list.
Speaker Change: Yes, you have both very good questions. So, on the quarter itself, relative to guidance, as I mentioned in the prepare of Grammarx, a lot of it was just driven by the West Coast Mix in the quarter, virtually all of the upside that we had on the top line, relative to the midpoint of our guidance.
Speaker Change: came from our West Coast business.
Speaker Change: and currently that business is carrying margins lower than the company average, so that was a little bit of a drag on the percent.
Speaker Change: Margin that we had for the quarter and dollar terms obviously, it was nice to have it. The other two factors that I mentioned was pricing was a negative, so we did see some price moves but on the positive side, total incentives.
Speaker Change: Total Homebire Concessions in the quarter actually a little bit favorable.
Speaker Change: So those three factors were really the drivers, but the largest of the three, as far as the guidance.
Smith: Smith, was the West Coast mix.
Smith: when you look at it sequentially.
Smith: We will have some additional west coast deliveries and revenues in the fourth quarter, but the Delta won't be as high as it was, especially on a year of year basis as it was in the third quarter.
Smith: So there'll be a little bit of drag there, but on the upside we're also looking at the West Coast margins improving.
Smith: between 3rd quarter and 4th quarter, so there'll be a little less.
Smith: Going into it, and as always, I mean, we guide.
Speaker Change: Margin's based on a very detailed forecast, so we start actually with our backlog, which is actually house by house, it gets rolled up to community, it gets rolled up to division, and it's consolidated.
Speaker Change: So, you know, the vast majority of our deliveries in a quarter are already on the books with known pricing and known costs.
Speaker Change: The Swing Factor Off and for us is just which homes get closed, so what is a mixed factor of a plank in the quarter?
Speaker Change: and also we typically run about 20% of quarterly deliveries that are sold and closed in the same corners. So those are obviously just estimates that we have to do at the beginning of the quarter. But that's the question of improvement.
Speaker Change: looks pretty solid to us at this point and we'll see how the quarter progresses and see where we get our deliveries but we're pretty confident in the guidance numbers that we provide it.
Speaker Change: Okay, that's really helpful. And you know, I can tell you some of the more cautious feedback that we're getting from folks, is that, well, you know, rates are coming down. This is not a new story, but that existing momentum is going to come back into the market or already seeing the builders put up lower than expected gross margins as they're battling that. That doesn't seem to be the case. You guys are talking about existing momentum in tors to be pretty much in check, you're going up in some markets. And the expectation that you will be able to, you know, pair back on incentives, you know, as rates come down. Just, you know, I want to make sure I'm understanding your thoughts on that correctly and you know, and how you do sort of see that dynamic of existing home inventory coming back in certain markets.
Speaker Change: Well, John, I think he's shaped it the right way. I think if there's more resell inventory will help the overall housing market. There's a lot of people that are locked out of moving up.
Speaker Change: because there's not enough product or...
John LeVallow: They don't want to sell their current home, but they need to move up. I think the whole thing opens up, but what we call the housing food chain will all unlock it.
John LeVallow: if inventory would come up a little bit, and as I shared in the prepared remarks, the days on the market is still very favorable, so while inventory is taken up.
John LeVallow: is clearing.
John LeVallow: Pretty quickly in most of the markets. We have to look at it.
Speaker Change: Submarket by Submarket in every city and when you do, there's been a lot of headlines on the pricing coming down on inventory off, but it's in at the higher price point Submarket somewhere we operate.
Speaker Change: That's down at the more affordable levels that we operate at the inventory is pretty limited still. So, but we think we're in a good position to compete very favorably as Resale opens up some.
Speaker Change: Thank you, and the next question comes in a line of Michael Rehart with JP Morgan. Please proceed with your question.
Michael Rehart: Hi guys, Andrew, I'm from Mike. Thank you for taking my questions.
Speaker Change: I just want to follow up, maybe with the recent AR settlement, more of us if there are any potential quite changes they are making with brokers, if any, and kind of any impacts from those and maybe your views more generally on brokers.
Speaker Change: But it's still very early in the process and like everyone else, we're watching the movements and trying to come up with whatever our strategy would be. But Robert, why don't you share what we're seeing right now.
Robert: Yeah, it's, you know, like Jeff mentioned, it's a process, it's kind of influx, I think it's a process that will continue to evolve over time But we are seeing that evolution speed up a little bit now that buyers are required to sign in agreement with their realtor that defines the terms of the compensation
Speaker Change: We've had some interesting situations in the field over the last couple of months where buyers, some buyers had signed agreements and didn't really know what they had signed up for and we've also had customers.
Speaker Change: Come into our sales office and tell us that they chose not to work with the realtor because they didn't want to be on the hook for covering that commission. So now we're working directly with them and they're working with our team.
Speaker Change: and we value the realtors and the relationships that we have with them and if they bring us business, we wouldn't otherwise be getting and they're procuring cause for the sale, if you will, we truly value that and want to...
Speaker Change: Continued cooperating with them and compensating them fairly for it, but at the same time it's a pretty significant cost addition to the home.
Speaker Change: A fortabilities can be tough and we're focused on removing any extra costs that we can.
Speaker Change: One change that we have in play is now that we require the buyer to show us that compensation agreement with the realtor. We typically pay up to 2%, but not more. Sometimes it's a flat fee. If that agreement says that the buyer's paying 1%, and that's what we're going to pay.
Speaker Change: Still in flux, we'll adjust our approach and our strategy as we learn more about it and see how things are playing out. Our main focus is going to continue to be trying to reach that buyer, working to reach that buyer directly through our...
Speaker Change: Digital Marketing programs, our website and other outreach and advertising and just offer a straightforward, simple process for purchasing, purchasing home.
Speaker Change: I would say it's interesting that one statistic that our Q3 orders.
Speaker Change: We saw that real-term participation was down on about 5% of points sequentially, so not sure if that's a direct correlation to the NIR settlement or if that's just kind of movement around in the numbers in the new process, but something that we're going to continue watching closely.
Speaker Change: Thank you for that, that was a great thorough and helpful, you know, maybe moving along to kind of your build cycle times having somewhat normalized recently. Do you think maybe there's an opportunity to bring those cycle times lower than your historical average over time?
Speaker Change: Yes, absolutely. You know, we still got a little ways to go to get to the lower end of our historical average about another 30 days, but we've got a lot of divisions, many divisions today that are building lower than that. You know, some of them are in the, uh,
Speaker Change: the 110 day build time range so other divisions were
Speaker Change: You know, not quite as much available labor, it's a little slower, but I think, you know, we've got programs in place to continue accelerating those built-in times. It just does so much for us, whether that's, you know, pulling in deliveries from a future quarter, all of our return.
Speaker Change: Rations, so definitely something we're focused on, I think it's an opportunity for us if we can just get kind of our outlier divisions that are building longer down to even our company average, I think we'll get much closer to that for a month.
Speaker Change: I was nobody on our team likes to hear this, but at one point when I was in Vegas we were building houses in about 90 days from sale to clothes that may be a little too high of a goal but we're going to get what we can.
Speaker Change: Thank you. Our next question comes from the line of Alan Ratner with Bellman and Associate. Please proceed with your question.
Alan Ratner: Hey guys, good afternoon. Thanks for all the details so far.
Alan Ratner: You know, first, I guess Jeff Kay, you know, on the 25-out looking, I'm going to be very careful not to ask you to parse it to finally, you know, your message is clear. But one of the things that you mentioned that gives you the confidence and growth mixture, you pointed to your backlog and, you know, kind of the homes under production. I just want to make sure I'm thinking about this right because, you know, on a year or a year basis, your backlog's been pretty consistently down, you know, roughly 15%.
Speaker Change: I believe the home's underproduction number you gave is roughly flat year over year, so I'm just trying to figure out like from a spec mix standpoint, you know, you came into this year building more specs and that allowed you to grow closing even though your backlog was lower.
Speaker Change: Should we expect an incremental increase in spec building ahead of next spring given your optimism there? Or are you just taking a forward view of what demand is going to be in the spring and given you improving cycle times are confident that you can get those homes built and delivered and if that closing target.
Speaker Change: Yeah, you said the right way, I should have actually combined that cycle time with the backlog in that comment.
Speaker Change: because that's a pretty important factor for us and we improve each cycle time. It's been a big generator and a nice increment on our revenues. But yeah, it's our forward look of where we expect things to go. Based on our market arts, start plans and we expect to see going into the spring.
Speaker Change: Got it. Okay, that's helpful. And then second question, you know, kind of on the balance sheet, after the efficiency side, you guys have done a really great job with the capital allocation in bindback stock. And
Speaker Change: You know, as I look at your cash balance today in the cash flow year to day, you're roughly breaking even on a free cash basis, you know, your option share of land has increased, but the own supplies is still kind of sitting three to four years, which is similar to where it's been of late.
Speaker Change: How should we think about your free cast generation going forward? Other builders have set a target of roughly 100% conversion earnings to cash flow. I'm assuming fourth quarter will be a solid cast generation quarter for you guys, but it would seem like in order to get to that 100% number or something close.
Speaker Change: You would need to see that your supply of own land moved closer to maybe one or two years where some other builders are.
Speaker Change: We focus mostly on the acid efficiency element for the point of the inventory turn.
Speaker Change: and what we're doing with the communities that we have out there, we're relatively high-paced company from an absorption point of view, typically one of the tops in the industry.
Speaker Change: I'm turning our inventory once the communities are up and running, so that's really the primary focus for us as far as asset efficiency goes and that can generate a lot of cash, you know, the reduction of build times has been a big cash generator for the business.
Speaker Change: and we don't think we're as Robin mentioned earlier, we think there's still a room on that.
Robin: to generate some incremental cash and go forward with a basis.
Speaker Change: That's where we'll focus in, of course, if we can achieve some operating margin expansion. That's just a bonus on top of it. So land monetization force is very important. Big cash driver, and we'll continue to allocate capital very carefully based on.
Speaker Change: are forward outlook on cash flow and balance sheet. The one nice thing for us is we can really focus on.
Speaker Change: I would term it as more shareholder friendly, allocations to capital, particularly with our balance sheet in the condition that's in today, which I don't think it's ever been better from the leverage point of view, so you know that's a big favor for us as well.
Speaker Change: Thank you. Our next question comes in the line of Reef Jadros Hitch with Bank of America. Please proceed with your question.
Speaker Change: Hi, good afternoon. Thanks for taking my question.
Speaker Change: First, I just wanted to mention that Direct Cost had come down a little bit. You've seen some opportunity. Can you talk about the outlook going forward on the Direct Cost side? And then also, what are you seeing on land inflation today?
Speaker Change: Rob, that's right up your alley. Okay, so yeah, we've driven direct costs down.
Rob: You know, sequentially I still think on direct, you know, some of it's going to be based on market conditions and how busy you are.
Speaker Change: or Suppliers and our trade partners are, but I think we've got opportunities to continue driving it down. It may not necessarily come from simple things like rebitting, but we've got initiatives going on throughout the company.
Speaker Change: and an effort to get to better affordability for our buyers of driving cost out of those homes, whether it's the elevation, the look of the outside of the home, whether that's simplifying the options that we offer that we've been.
Speaker Change: Working on it's an ongoing process and we're seeing relief and cost from that.
Speaker Change: and just value engineering the projects. You know, we've got San Antonio, for example, as we're trying to get to a more affordable price point. We're introducing new models with their little less elevated and more simplified in terms of...
Speaker Change: You know, there are box on box type construction, getting rid of offsets and overhangs and things like that. So, the real opportunity that we're continuing to drive there that I expect to see more cost decreases on the direct cost side. So, I mean, coming in, of course, we'll take everything the market will give us as well, in terms of...
Speaker Change: Rebed it in just negotiating lower cost.
Speaker Change: I'm sorry, what was the question on the land?
Speaker Change: Just what you're seeing in terms of land costs today, what will level of inflation and how is it changed?
Speaker Change: Well, there's an ongoing land grab in most of our markets, so it's certainly push pressure on both the raw land side and the development cost. I'd say that that's definitely slowed down and stabilized from what we saw.
Speaker Change: and back in 22 and 23. So on the land, that's on the land. I would say they'd generally stabilize, but now stabilize at a higher level.
Speaker Change: Yeah, between land and land development, we do see higher overall lock costs, not necessarily as a percentage of our revenue, but we're incorporating that in doll of our underwriting.
Speaker Change: and we're only doing deals that make sense to us, so as the land costs go up or something else has got to move down maybe that's direct like we talked about.
Speaker Change: still just focused on making sure each deal that we do hits or underwriting hurdles and we feel we feel good about our portfolio and the process going forward.
Speaker Change: and then the second question is just, where is your spec versus BTO mix right now and how do we think about the margin differential between the two segments?
Speaker Change: i
Speaker Change: So in terms of sales, it's roughly 60-40 on what we've had, we expect that probably to come down more than the historical range has been more like 80-20. And we do see a drop-off in, and we get higher margins when we're selling a BTO home. And somebody's personalizing that home for themselves, which is one of the reasons we...
Speaker Change: and I'd like to keep that ratio closer to the 80-20. That's our primary focus, our primary business model is selling personalized homes, and that's what we're going to continue doing.
clever Alanton: Thank you, our next question comes from the line of clever Alanton with Wolf Research. Please receive a second question.
clever Alanton: Good afternoon. Thank you for taking my question.
clever Alanton: I want to follow up on Alan's question regarding your land bank, your option law percentage has really drunk the last couple of quarters. Is that a function of just timing, or is there been a different approach there and do you expect that to stay near these higher levels or over the next.
Speaker Change: and several quarters gravitate back towards your 25% option level they've been at recently.
Trevor Wright: Trevor Wright.
Speaker Change: Rob touched on the fact that most of the markets were in land is very competitive.
Speaker Change: You'd love to buy every deal on a rolling option, and some markets you can do it, and some you can't. We have been successful with a lot of our bulk purchase going to a phase take down, where you may buy half of it today and half of it, 18 months out.
Speaker Change: and as you look at our percentage movement, as we're investing more in our growth, I would say it's all the above. We're seeing more option deals, we're seeing more faiths take down, we're also buying some deals, both within it and I think.
Speaker Change: Over time, you'll see the option percentage go up a little more from where it is today, but our primary mission right now is to create a bigger road platform and capture the business that we can and grow our share.
Speaker Change: Yeah, makes a lot of sense of content. And then a second question on geography, clearly Florida and Texas have gotten a lot of attention the last few months from an order standpoint, it looks like.
Speaker Change: The central was maybe a little bit softer for you guys to quench your lead but it's out east.
Speaker Change: was improved relative to overall company average, knowing that down is modestly, quarter of the quarter. You talk about how Florida and Texas demand trended throughout the quarter, and how that compares to your business overall. Thanks.
Speaker Change: Robb.
Robb: Yeah, it was...
Robb: We talked about the resale and inventory, just give you an example, it really is market by market. It's a division like Jacksonville, where the resale inventory is about five and a half months of supply now, which is...
Robb: approaching the longer-term historical average and it's up more than two months year over year. So there is more pressure on there from resales and I think that was a factor or land that was similar, some of the Florida markets that we've got.
Robb: as we looked at the move that we needed to make, to lift our sales base, those were some of the areas that we did lower prices in. And we've seen that those have been fairly effective and sales about back in August. Texas, I would say, is similar, you know, really.
Robb: The different, if you go from Austin to San Antonio as far as buyer profile and price point, but both of those markets too, we've seen resell inventory start to climb back up. It's become a bigger competitor and we've taken a similar approach there.
Robb: Taking steps to find the market, some of that included lowering prices in certain communities. And again, so I've come back and we're pleased with where things headed in August with sales and proving each week of the month and continue on its set in December.
Robb: Um...
Robb: As we look at early September, we're also seeing a really strong activity on our leads and traffic. So it gives us...
Robb: Good optimism here as we look through the fourth quarter.
Speaker Change: Thank you. Our next question comes from the line of J. Romani with KBW. Please trust me with your question.
J. Romani: Thank you very much, absorption-paced step to 4.1. Can you just comment on what your target is?
J. Romani: you know what you're expecting, say for next year.
J. Romani: and I could have answered Stephen's question earlier.
Speaker Change: but along his lines, so thanks for the question. If you look back at 22 when the markets were really strong in the early part of the year, we were at 6, 6 and a half a month in this springtime.
Speaker Change: and that's an illustration that we're going to optimize the asset, take the price, balance price.
Speaker Change: and paste on what we have found over time.
Speaker Change: is, you have to hold it about four a month minimum. So you do what you take the steps you have to to get to four. And if it's a large lock position in a sub-market that's easily replenishable, you'll let it run at six, or even seven or eight, like we've done.
Speaker Change: and some of our community. So as we look at this year, we've been navigating some real volatility in market demand and we're going to run right around four a month at the end of the day.
Speaker Change: Based on where we're at and where we're headed, but that's certainly not ceiling that's a floor.
Speaker Change: So I think at the MarketSword to improve, you see us lift above the floor.
Speaker Change: I'm sorry, the stated range that we've given as well average 46.
Speaker Change: and every community has got its own story, though.
Speaker Change: Thank you very much, and honing in on California, how would you characterize it as the demand trends you saw in the quarter? That's your largest market.
Speaker Change: Copy you on any other way.
Speaker Change: Yeah, California has been strong for us, you know, Southern California has done really well in the empire has been one of our...
Speaker Change: Strongest Divisions in Terms of Sales, and they kept on chugging in Q3. Overall, please, with our demanding California.
Speaker Change: continues to do very well. I don't have a lot to add to that. It's been a good story for us.
Speaker Change: i
Speaker Change #100: Thank you, and our final question comes from the line of Susan McLeary with Goldman Sachs. Please appreciate your question.
Susan McLeary: Thank you, and thank you for taking the question.
Susan McLeary: My first question is around buyer sentiment, the election, how does he have gotten a lot more attention from both of these candidates? Do you think that that's having an effect on people's decision-making process and their willingness to wrap step into the market today?
Speaker Change #102: Well, it's pleasing to the ear both sides talking about doing things to help house it, but that's encouraging for us. Our industry continues to underbuild.
Speaker Change #102: We have a real affordability issues that we're navigating as an industry and anything that they can do would be a help so that that would be a good thing and whatever they do, it'll still take some time to catch up if we ever catch up, frankly.
Speaker Change #102: because there are some structural things that we're dealing with. The consumer has a lot of triggers when they make a home buying decision. Most of them are life changing, whether it's getting married, having a baby, relocating.
Speaker Change #102: Promotion, Demotion, you know, all those things, retire, they're all those things dry, the need to...
Speaker Change #102: Changed your home ownership and all those have been going on all year.
Speaker Change #103: So I think there was a pause.
Speaker Change #103: because interest rates stuck. Everybody thought they were at a peak.
Speaker Change #103: sooner or later that would move and they now have and it's...
Speaker Change #104: has interest rates slid. We saw almost an instant reaction out of the consumer where in the month of August, Leeds went up traffic went up business to the community. Everything was very favorable. I think that's just the human nature of things, not necessarily.
Speaker Change #105: Somebody's platform for what they're going to do for housing.
Speaker Change #105: So I think if either side does something I think it will be helpful but I don't think that's a principle driver right now with the decisions being made.
Speaker Change #106: Yeah, okay, that's helpful, color. And then just one last question on the design studios. As we move through the quarter and you saw the movements on the demand side and thinking about the outlook for the fourth quarter and even into next year. Any changes in the options and things that people are picking there and the amount that they're spending in the design studios?
Sharon: has been pretty static, but we keep Sharon at the buyers or spend in what they're spending in the percentage on the price really has removed in a couple of years.
Speaker Change #108: Thank you. I'm ladies and gentlemen that does conclude the question in their session and this also concludes today's telecomference. Thank you for your participation. You may now disconnect your lines.
Speaker Change #109: I'll be back with you, I'll be back with you,