Q4 2024 KB Home Earnings Call
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John: Good afternoon. My name is John, and I will be your conference operator today.
John: I would like to welcome everyone to the KB Home 2024 4th 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 February 13, 2024.
John: And now I would like 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 fourth quarter and full year fiscal 2024.
Speaker Change: On the call are Jeff Mezger, Chairman and Chief Executive Officer, Rob McGibney, President and Chief Operating Officer, Jeff Kaminski, Executive Vice President and Chief Financial Officer,
Jill Peters: Bill Hollinger, Senior Vice President and Chief Accounting Officer, and Thad Johnson, Senior Vice President and Treasurer.
Jill Peters: Due to various factors, including those detailed in today's press release and in our filings with the Securities and Exchange Commission, actual results could be materially different from those stated or implied in the forward-looking statements.
Jill Peters: In addition, a reconciliation of the non-GAAP measure of adjusted housing gross profit margin.
Jill Peters: 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 and or on the investor relations page of our website at kbhome.com. And with that, here is Jeff Mezger.
Thank you, Joe. Good afternoon, everyone, and Happy New Year.
Speaker Change: We are speaking with you today from our corporate office in Westwood. I'd like to start by sharing a few comments on the Southern California fires.
Speaker Change: Words cannot describe the damage and loss in the areas where the fires have occurred and are ongoing. Our thoughts and prayers go out to all that have been affected.
Speaker Change: I would also like to recognize and thank the first responders and fire teams for their heroic efforts.
Speaker Change: Although it is not business as usual for some of our employees, all of our divisions, communities, and sales offices are fully operational.
Speaker Change: We recognize that it will be a long road to recover from these disasters, but we also know that California and its people are strong and resilient with the tenacity to rebuild and move forward.
Speaker Change: We had a strong finish to our year with fourth quarter performance that was within our guided range across most of our key financial metrics.
Speaker Change: At $2 billion, our total revenues were significantly higher year over year, driven primarily by a 17% increase in deliveries that resulted from substantially lower build times.
Speaker Change: And our earnings per diluted share at $2.52 grew 36% from last year's fourth quarter.
Speaker Change: Our margins were healthy, expanding to just under 21% in gross and increasing to 11.5% in operating income.
Speaker Change: In addition, we returned nearly $120 million of capital to our shareholders during the quarter, the vast majority of which came from share repurchases.
Speaker Change: Our fourth quarter results contributed to a solid financial performance for 2024.
Speaker Change: We delivered nearly 14,200 homes, driving total revenues higher to roughly $7 billion, and increased diluted earnings of $8.45 per share.
Speaker Change: Our book value expanded 12% from the prior year, and we produced a higher return on equity. These results are notable in light of the volatility from shifting mortgage rates that shaped the housing market last year.
Speaker Change: Operationally, we executed well in 2024 as we opened 106 new communities and sold out of 90.
Speaker Change: Reduced our build time by an average of 28% year-over-year, and achieved the highest level of customer satisfaction in our company's history.
Speaker Change: The housing market is benefiting from solid employment and wage increases.
Speaker Change: Demographics have been, and we expect will continue to be, a significant factor in driving housing demand with the largest generational cohorts, millennial and Gen Z buyers, demonstrating a strong desire for homeownership and contributing to the growth in household formations.
Speaker Change: As to supply, although existing home inventory has risen, it is still below historically normalized levels in most markets, especially at our price points.
Speaker Change: While longer-term housing market conditions remain favorable, affordability constraints stemming from rising mortgage rates are influencing near-term demand.
Speaker Change: We generated 2,688 net orders in the fourth quarter, up 41% year-over-year against a soft comparison in the year-ago quarter.
Speaker Change: Our net orders were driven by a significantly higher monthly absorption pace per community of 3.5 homes compared to 2.7 in last year's fourth quarter.
Speaker Change: Our cancellation rate remains stable sequentially at a historically low level, indicative of a solid pool of buyers ready and able to close on their homes.
Speaker Change: Having said all this, we did miss our internal sales goals as rising mortgage rates tempered our selling pace as the quarter progressed.
Speaker Change: Favorable year-over-year traffic within our communities, as well as leads from our website, indicate to us that consumers have a strong interest in home ownership, but are hesitant due to discomfort with the volatility in rates.
Speaker Change: Affordability drives decision-making and we help buyers solve for this with our built-to-order model which offers choice and flexibility.
Speaker Change: buyers can meaningfully influence their final sales price by selecting their floor plan, lot, square footage, elevation, and personalized finishes in our design studios.
Speaker Change: In addition to offering buyer's choice, our built-to-order model provides visibility in our forecasting and consistency in converting backlog to closings with more than 60% of our fourth quarter deliveries coming from built-to-order sales.
Speaker Change: Fire hesitancy has continued to some degree in our current quarter to date, and as a result, for the first six weeks of our 2025 first quarter, our net orders are $1,026 as compared to $1,170 in the comparable period of the prior year.
Speaker Change: As we are now entering the stronger selling months of the quarter, and with a meaningful number of community openings projected, we do expect to close the gap on net orders relative to last year's quarter.
Speaker Change: We estimate that our net order comparison for the full 2025 first quarter will be roughly flat versus a strong comparable in our 2024 first quarter.
Speaker Change: And with that, I'll pause for a moment and ask Rob to provide an operational update. Rob?
Rob McGibney: Thank you, Jeff. I will begin by providing additional color on our net order results. Our fourth quarter traffic increased 12% year over year, reflecting demand for homeownership, improved market conditions, and a higher community count relative to the year ago quarter.
Rob McGibney: In addition, as Jeff mentioned, leads from our website were also up as compared to the fourth quarter of last year.
However,
Rob McGibney: The continued volatility of mortgage interest rates, along with general uncertainty headed into the election and other global and macroeconomic concerns, slowed our sales pace as the quarter progressed to below our internal target.
Rob McGibney: Although the Federal Reserve announced two interest rate cuts totaling 75 basis points during our fourth quarter, the rate on a 30-year fixed mortgage actually increased from September to October and again in November.
Rob McGibney: As a result, some buyers hesitated on their purchase decisions, particularly in the last two months of our quarter.
Rob McGibney: In a shifting rate environment, the one-time rate float down option offered by our joint venture, KBHS Home Loans, is a valuable tool for our built-to-order buyers. This feature allows buyers to reset their mortgage rates lower if they decline while their home is under construction.
Rob McGibney: With the consistency and closings that are built to order model provides, we were well positioned for the fourth quarter with our backlog and had also begun to shape our 2025 first quarter.
Rob McGibney: As a result, we held base prices on built-to-order homes in our communities relatively stable rather than chase additional sales with price decreases during a seasonally slow period.
Rob McGibney: That said, we continue to support our buyers during the fourth quarter with roughly 60% of our net orders having some form of mortgage concession, whether a rate lock or a buy down.
Rob McGibney: This was a consistent level relative to the past four quarters despite the rise in rates.
Rob McGibney: Mortgage concessions help buyers gain comfort with the timing of their purchases, serving to offset the option of waiting for a more favorable rate.
Rob McGibney: Although our goal is to wind down the use of these incentives as a selling tool, we will use them as needed to support our sales.
Rob McGibney: We begin 2025 with a backlog of more than 4,400 homes valued at over $2.2 billion.
Rob McGibney: While our backlog is lower year over year, driven by a 28% improvement in our average build time for fiscal 2024, we can convert our backlog more quickly into revenue.
Rob McGibney: In addition, faster build times provide an enhanced value proposition to our customers purchasing a personalized home and allow us to sell later in the year and still achieve a year-end closing.
Rob McGibney: As a result, our 2025 deliveries will be comprised of the homes we have in backlog, built-to-order homes sold through the early part of our third quarter, and sales of inventory homes.
Rob McGibney: We started approximately 2,800 homes in the fourth quarter, contributing to a 14% year-over-year increase in starts in 2024 and roughly 6,500 total homes in production at the end of the year.
Rob McGibney: Going forward, we plan to continue aligning our starts with sales, with the majority of those starts already sold.
Rob McGibney: While we averaged an improvement of 28% in build times for 2024, they were essentially flat quarter over quarter at about five months, which was a positive considering that the hurricanes in the southeast temporarily impacted our fourth quarter build times, although we did not incur any significant damage in our communities.
Rob McGibney: We expect to be able to drive build times lower in our 2025 first quarter as we progress toward our goal of four months from start to home completion, which is the lower end of our historical range, assuming no change to the availability of trade labor.
Rob McGibney: To that last point, we recognize that investors are trying to understand the impact that tariffs and immigration policy could have on the home building industry.
Rob McGibney: It is very early, as the new administration is not even in place yet.
Rob McGibney: So while we will have to wait and see how policies unfold, I will share a few of our current thoughts.
Rob McGibney: As to tariffs, the majority of the products we use are produced domestically. Although tariffs could result in a higher demand for products made in the U.S., thereby driving up the cost of those products, we would look for ways to offset those costs and work with our suppliers on volume-based pricing.
Rob McGibney: We have managed through disruptions in our supply chain before, and we are confident we will navigate any future interruptions as necessary.
Rob McGibney: With respect to trade labor, even in times past when trade labor was very tight, we relied on our long-standing subcontractor relationships to ensure that we had the crews necessary to get our homes built.
Rob McGibney: Working from a backlog of sold homes, our even flow production provides visibility to our trade partners, which is advantageous in their planning process.
Rob McGibney: We continued to reduce direct costs on our homes started during the fourth quarter, which were down both sequentially and year-over-year, helping to offset the impact of mortgage concessions and increases in land costs.
Rob McGibney: The categories where we saw the most favorable changes over the course of the year were lumber and concrete, despite volatility in lumber pricing in the closing months of our fiscal year.
Rob McGibney: There are always opportunities to find cost reductions on our products, and we continue to focus on this, which should help with affordability for our customers, driving incremental sales.
Thank you.
Rob McGibney: Before I wrap up, I will review the credit metrics of our buyers who finance their mortgages through our joint venture, KBHS Home Loans.
Rob McGibney: We maintained our 2024 3rd quarter capture rate with 88% of buyers who financed their homes using KBHS.
Rob McGibney: Higher capture rates help us manage our backlog more effectively and provide more visibility in closings, which benefits our company as well as our buyers.
Rob McGibney: In addition, we see higher customer satisfaction levels from buyers who use our JV versus other lenders.
Rob McGibney: The average cash down payment was stable both sequentially and year-over-year at 16%, equating to about $80,000.
Rob McGibney: On average, the household income of customers who use KBHS was over $131,000 and they had a FICO score of 742.
Rob McGibney: Even with one half of our customers purchasing their first home, we are still attracting buyers who can qualify for their mortgage while making a significant down payment.
Rob McGibney: Our longer-term goals of increasing our scale, profitability, and returns have not changed.
with our expanded investments in land acquisition.
Rob McGibney: and development in 2024, we are positioned for growth. We have a significant number of planned community openings in the first half of 2025 in time for the spring selling season.
Rob McGibney: Our success will be a function of our solid execution on the fundamentals, maintaining our high customer satisfaction levels, further improving build times,
Rob McGibney: value engineering our products to lower direct cost and improve buyers affordability, and optimizing each asset on a community-by-community basis to increase our margins and returns.
and we are confident in our ability to execute.
Jeff: and with that I will turn the call back over to Jeff. Jeff?
Thanks, Rob.
Jeff: During the quarter, we invested $744 million in land acquisition and development, an increase of 54% year-over-year.
Jeff: For the year, we invested over $2.8 billion to acquire and develop land. This represented a year-over-year increase of more than $1 billion as we continued to focus on growing our community count.
Jeff: Along the way, we remain diligent with respect to our underwriting criteria, product strategy, and price points.
Jeff: We increased our lot position by 37% year-over-year, ending 2024 with nearly 77,000 lots owned or controlled, almost one-half of which are optioned.
Jeff: We plan to increase our community count in both our established as well as newer markets.
Jeff: The latter group now includes a start-up division that we are in the process of opening in Atlanta, which continues our strategy of expanding our growth platform through de novo market entries similar to what we have accomplished in Seattle, Boise, and Charlotte.
Jeff: Atlanta is a top 10 housing market that we know well and we have hired a seasoned division president with years of experience in this market who already has a defined market strategy and is actively pursuing land acquisitions.
Across our footprint, we're focused on capital efficiency.
Jeff: Developing lots in smaller phases wherever possible and balancing development with our start space to manage our inventory of finished lots.
Jeff: With the cash that our business is generating, together with a healthy balance sheet, we are able to continue reinvesting in our expansion, which is our top priority, and also return a meaningful amount of capital to shareholders.
Jeff: We completed $350 million in share repurchases in 2024, representing 6% of our shares outstanding at the start of the year.
Jeff: Since we began repurchasing shares on a regular basis in late 2021, we have bought back 26% of our shares accretive to both our earnings per share and return on equity, returning 1.3 billion dollars in capital to stockholders including dividends.
Jeff: We plan to maintain our balanced approach in 2025, reinvesting our business, and repurchasing our shares.
Jeff: In closing, I want to recognize the entire KB Home team for their ongoing commitment to serving our home buyers and contributing to our strong results in 2024.
Jeff: Our company is well positioned for future growth as we intend to continue meaningfully reinvesting in land acquisition and development.
Jeff: Due to the market dynamics we experienced in the closing months of our fiscal 2024 that have continued into the start of fiscal 2025, we lowered our housing revenue guidance for this year.
to $7.25 billion at the midpoint of our range.
Jeff: Although there is always a degree of uncertainty as to how a new year will unfold, we have a long-tenured management team and seasoned operators in our divisions that are highly skilled in executing our business model and navigating fluctuating market conditions.
Jeff: Longer term housing market conditions remain favorable. We have the communities and products to meet demand.
Jeff: We remain committed to enhancing long-term shareholder value by profitably expanding our volume, driving higher returns, as well as continuing to return cash to shareholders through both share repurchases and our quarterly dividend.
Jeff: Before I turn the call over to Jeff, I want to take a moment to recognize him as this will be his last earnings conference call with the company.
Jeff: Jeff has been a valuable partner of mine and a critical part of our leadership team for the past 14 years.
Jeff: He has helped KB Home grow into a stronger company, producing higher margins and returns, and with a healthy balance sheet.
Jeff: He leads the company, having developed a highly capable and long-tenured team in accounting and finance that I am confident will help ensure a smooth transition. Thank you for your many contributions, Jeff. We wish you all the best in retirement.
Jeff: And with that, I'll now ask Jeff to provide the financial review. Jeff.
Jeff: Thank you Jeff for those kind words and especially for your leadership and our close working relationship during my time as CFO.
Speaker Change: It's truly been the high point of my professional life working with you here at KB Home.
Speaker Change: and I'm extremely grateful for the privilege to be able to complete my career with this outstanding company.
Speaker Change: I would also like to express a heartfelt thanks to the entire KB home team for their dedication and contribution to our success during my tenure.
Speaker Change: I sincerely appreciate the professional relationships and my countless interactions with this special group of people.
Speaker Change: I will now cover highlights of our financial performance for the 2024 fourth quarter and full year, as well as comment on our outlook for 2025.
Speaker Change: In the quarter, we produced solid results with a 20% year-over-year increase in housing revenues.
Speaker Change: and an operating income margin of 11.5%, driving a 36% increase in earnings per share.
Speaker Change: In addition, a robust cash flow supported $744 million in land investment along with continued share repurchases.
Speaker Change: In the 2024 fourth quarter, our housing revenues grew to $1.99 billion compared to $1.66 billion in the prior year period, reflecting a 17% increase in the number of homes delivered and a 3% rise in our overall average selling price.
Speaker Change: Our fourth quarter homes delivered of 3,978 represented a backlog conversion rate of 69%, a significant improvement from 49% in the year-earlier period.
Speaker Change: Our current quarter delivery performance was favorably impacted by continued improvements in build times and lower cancellation rates.
Speaker Change: Looking ahead to the 2025 first quarter, we expect to generate housing revenues in a range of $1.45 to $1.55 billion.
Speaker Change: For the 2025 full year, we are forecasting housing revenues in a range of $7.0 to $7.5 billion.
Speaker Change: supported by our backlog of sold homes, projected net orders, and reduced bill times.
Speaker Change: In the fourth quarter, our overall average selling price of homes delivered rose to approximately $501,000 with increases in three of our four regions.
Speaker Change: We expect our 2025 first quarter overall average selling price to remain flat sequentially at approximately $501,000.
Speaker Change: For the full year, we are projecting an overall average selling price in the range of $488,000 to $498,000.
Speaker Change: The expected decline in the full-year average selling price relative to the first quarter is primarily due to the higher mix of deliveries forecasted for the southeast region in the full-year period.
Speaker Change: Homebuilding operating income for the 2024 fourth quarter increased 27% to 229.1 million dollars, compared to 180.9 million for the year earlier quarter.
Speaker Change: Our home building operating income margin expanded to 11.5% compared to 10.9% in the 2023 fourth quarter.
Speaker Change: reflecting improvements in both gross profit margin and the SG&A expense ratio.
Thank you. Thank you.
Speaker Change: We anticipate our 2025 first quarter home building operating income margin will be approximately 9.5%.
and a four-year metric to be approximately 10.7 percent.
Speaker Change: Our 2024 fourth quarter housing gross profit margin increased 20 basis points from the year earlier quarter to 20.9%.
Speaker Change: excluding inventory related charges of 0.9 million dollars for the current quarter and 1.2 million for the year earlier quarter, our gross margin for the 2024 quarter was 20.9 percent compared to 20.8 percent in the prior year period.
Speaker Change: We are forecasting a housing gross profit margin for the 2025 first quarter in a range of 20.0 to 20.4% and for the full year in a range of 20.0 to 21.0%.
Speaker Change: This Gross Margin Outlook assumes the market conditions we experienced in 2024 with persistently elevated mortgage interest rates will continue.
Speaker Change: As a result, we expect no significant change in our use of homebuyer concessions to address affordability concerns.
Thanks so much.
Speaker Change: In addition, we intend to continue our focus on reducing direct costs to help offset the impact of these concessions, as well as higher land costs, as Rob stated earlier.
Speaker Change: Our selling general and administrative expense ratio for the 2024 fourth quarter improved 50 basis points from a year ago to 9.4%.
mainly due to improved operating leverage from higher housing revenues.
Speaker Change: We are forecasting our 2025 first quarter SG&A ratio to be in a range of 10.5% to 10.9% and that our 2025 full year SG&A expense ratio will be in a range of 9.6% to 10.0%.
Speaker Change: Our income tax expense of $57.1 million for the fourth quarter represented an effective tax rate of 23.1 percent.
Speaker Change: The rate was favorably impacted by additional tax benefits related to stock-based Compensation and are earning more tax credits from building energy efficient homes as compared to the year ago quarter
Speaker Change: We expect our effective tax rate for the 2025 first quarter to be approximately 23 percent.
Speaker Change: The full year tax rate is expected to be around 24%, up 1% as compared to 2024, primarily due to decreases in energy tax credits.
Given the elevated IRS tax credit qualification requirements,
Speaker Change: and our focus on maintaining the affordability of our products. We anticipate fewer of our homes will qualify for these tax credits in 2025.
Speaker Change: To be clear, we remain committed to building highly energy-efficient homes that meet the EPA's ENERGY STAR certified standards.
However, we believe the additional cost necessary
Speaker Change: for some of our homes to satisfy the higher IRS tax credit qualification standards.
Speaker Change: outweigh the possible benefits from meeting them for both our business and our buyers.
Overall, we reported net income of $190.6 million.
Speaker Change: compared to $150.3 million or $1.85 per diluted share for the prior year period.
Speaker Change: The 36% increase in our diluted earnings per share reflected the 27% increase in net income, as well as the impact of our common stock repurchases.
Speaker Change: that lowered our fourth quarter average diluted share count by 7% as compared to the prior year period.
Speaker Change: Reflecting on the full year, we are very pleased with our operational execution in 2024 that drove significant year-over-year improvements in financial performance.
Speaker Change: Our four-year housing revenues of $6.9 billion were up 8% as compared to the prior year, and were nearly $300 million higher than the midpoint of our guidance range provided last January.
Speaker Change: In addition, our $8.45 of earnings per diluted share, improved by over 20%,
Speaker Change: and our return on equity for the year increased to 16.6% compared to 15.7% a year ago, despite the persistently high mortgage rates for much of the year.
Speaker Change: Turning now to land, the 744 million dollars invested in land development and fees during the quarter contributed to the full year total of over 2.8 billion dollars which was up 58% compared to 2023 and represented the highest level since 2006.
Speaker Change: We ended the year with a pipeline of approximately 77,000 lots owned or under contract, supporting our plans to drive a significant increase in new community openings in 2025 and early 2026.
Speaker Change: Regarding community count, our fourth quarter average of 256 was up 8% year-over-year.
Speaker Change: We expect to end the 2025 first quarter with approximately 260 communities.
Speaker Change: which would result in an 8% year-over-year increase in the average community count.
Speaker Change: We also expect to maintain roughly 250 to 260 open selling communities throughout the second and third quarters of 2025, generating favorable year-over-year comparisons in the quarterly average community counts.
Speaker Change: While we plan to open more communities in 2025 than we did in 2024, we also foresee higher community sellouts.
Speaker Change: Based on the expected timing of these sellouts, we currently anticipate ending the year with approximately 250 communities before it grows again in early 2026, just ahead of that spring selling season.
Speaker Change: During the fourth quarter we repurchased approximately 1.3 million shares of our common stock at a total cost of 100 million dollars.
Speaker Change: contributing to a total of 4.7 million shares repurchased over the full year and 23.6 million shares or 26% of the starting share count repurchased since implementing our share buyback program in late 2021.
Speaker Change: with $700 million remaining under our current common stock repurchase authorization.
Speaker Change: the market price of our shares, and the housing market and general economic environments.
Speaker Change: At year-end, we had total liquidity of $1.68 billion, including $598 million of cash and $1.08 billion available under our unsecured revolving credit facility with no cash borrowings outstanding.
Speaker Change: Regarding our financial leverage and credit metrics, we are pleased with our continued progress and a recognition of our strong position as reflected in the ratings upgrades for both S&P and Moody's in 2024.
Speaker Change: Over the past year, our debt-to-capital ratio improved by 130 basis points to 29.4% at year-end, compared to 30.7% at the end of 2023.
Speaker Change: We have no debt maturities until our term loans 2026 expiration with our next senior note maturity in June 2027
Speaker Change: In conclusion, 2024 marked another year of strong operational and financial performance and we remain optimistic about the outlook for future growth.
Speaker Change: In addition, we believe our solid financial position, including our liquidity profile and long runway for debt maturities, will allow us to continue to be opportunistic with capital deployment in 2025 and beyond.
Speaker Change: We believe we are well positioned to achieve our objectives in 2025 as we execute on the core principles of our unique built-to-order business model supported by our improved build times and solid portfolio of communities.
Speaker Change: as well as our returns-focused growth strategy and balanced capital allocation approach centered on enhancing long-term stockholder value.
Speaker Change: We will now take your questions. John, please open the lines.
Thank you.
Speaker Change: Thank you, sir. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the queue. You may press star 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Speaker Change: And the first question comes from the line of Stephen Kim with Evercore ISI. Please proceed with your question.
Stephen Kim: Thanks very much guys. Appreciate all the color, as usual. Jeff, it's not going to be the same without you, but best of luck and thanks for all the help over the years.
Thank you.
Yeah, thanks Steve, it's been good working with you.
Speaker Change: Yeah, great. I, you know, you gave a lot, so I'm trying to digest all of it, but I think one of the things that really sticks out is the backlog turnover, you know, the implied backlog turnover ratios.
Speaker Change: which clearly are going up and I think you indicated that the cycle times actually really didn't improve significantly you know or at all quarter to quarter
Speaker Change: and so I'm curious as you look into like you know the first quarter and then the rest of next year it looks like you're you're calling for a backlog turnover ratio to be up pretty pretty meaningfully looks like an average you know somewhere
Speaker Change: you know, probably approaching 70% or more. And I'm kind of curious, how much of that is due to improving cycle time, in your view?
versus maybe carrying more spec inventory on your balance sheet.
Speaker Change: So, you know, the cycle time, first and foremost, was the largest impact and has been in the improving backlog conversion over time. We have tilted a little more towards
delivering some quick move-in ready homes.
Speaker Change: And that's also contributed to the backlog conversion rates and, you know, as we're reacting to the market and what buyers want.
Speaker Change: we've carried a bit more inventory. We hope longer term to come back right back to our traditional built-to-order percentages.
Speaker Change: But, you know, we'll always have them there for buyers. So, you know, the answer is really it's both. But, you know, the cycle time piece has been...
Speaker Change: have been really significant, especially after the last couple of years. Those cycle times on the construction side spiked quite high.
Speaker Change: post-COVID, and we've had a lot of focus and a lot of really good work done out in the field on getting that back to our more traditional levels, and that's been the primary driver on that.
Speaker Change: Great. Yeah, that's really helpful. And then you also gave some – Jeff Mezger, you gave some comments about the order pace that you had seen in the first six weeks and doing a little bit of math. It seems that you're looking for –
Speaker Change: You're probably looking for orders to be flat for the year but a flat for the quarter Which means that the remainder of the the quarter is going to be you know probably up about seven percent call Which is about how much your community count was up year-over-year at the end of the year So basically you're calling for kind of flattish year-over-year type absorptions
Speaker Change: for the rest of your first quarter. So I just wanted to confirm that that's actually, you know, that that's generally correct. And then secondly, with respect to absorptions and what we can expect going forward, in 2025, are the communities that you have open likely to generate stronger absorptions for any particular reason worth calling out?
Speaker Change: whether it be, you know, their geographic location, whether it be their size, or something of that nature that would lend them to having maybe somewhat stronger absorptions even if the demand environment is consistent year over year.
and others. Thank you.
Speaker Change: Steve, you did quick math on the absorption calculations. That was pretty good and your assumptions and analysis are correct. We're expecting the year to be similar to 2024.
Thank you.
Speaker Change: and it's been choppy. One month will be good and the next one's off and then you come back and so we think it'll be pretty typical with what we saw in
We have a lot of communities opening.
Speaker Change: We build our projections based on our pro formas and what we expect the communities to sell and then deliver. But with the shift to more openings this year, it wouldn't surprise me if the openings hit that you'll see a higher pace out of them.
Speaker Change: And when we had our call in September, things were solid and demand was strong, then it softened a bit. We've turned the corner.
Speaker Change: Thank you. And our next question comes from the line of John Lovallo with UBS. Please proceed with your question.
John Lovallo: Hi guys, thank you for taking my questions as well and Jeff best of luck to you
John Lovallo: in your retirement. First question is, you know, the 20 to 21 percent range for the gross margin is, you know, on the wider side, but understandable given
John Lovallo: the volatility and rates and you know the importance of the spring season. I guess the question is you know what are the main factors besides rates that could drive kind of the high or low end of that range?
John Lovallo: Right, so on the, you know, rates probably are the driver of both the high-end and low-end in many respects of, you know, where the general economic conditions are, affordability and
John Lovallo: you know, the largest impact we expect for next-gen affordability is where rates move. So that's part of the reason for the range, as you had mentioned.
John Lovallo: It's a little difficult right now, obviously, early in the year before the spring selling season to forecast out in the third or fourth quarters. We really base our margin estimates, particularly the next quarter out, based on our backlog margins. And that's exactly what we have in the first quarter. We also look at the leverage that we have on our fixed costs that are included in cost of goods sold.
John Lovallo: and, you know, in higher revenue quarters, we do a little bit better on margin because of that leverage.
John Lovallo: and that, you know, when you look at it sequentially, just focus now on the first quarter.
John Lovallo: When you look at the first quarter sequentially versus the fourth quarter, we're down about 70 basis points at the midpoint.
John Lovallo: and that is mainly due to the lower volume and the less leverage under fixed costs. So basically more than...
Speaker Change: More of what we just saw in the fourth quarter that we expect to see in the first a lot of those muscle songs Have been sold
Speaker Change: and it'll just be delivered out over the next couple months to end the quarter.
Speaker Change: The full year, you know, like always, I mean, the longer you look forward, the less clear it is and the less you have booked in the backlog, particularly for that back half.
Speaker Change: We'll come up, you know, the company will come back again you know at the end of the first quarter and have a little bit more visibility to it and clearly have a better idea how the year is shaping up based on the spring selling season. So we hope to give some some more detailed guidance at that point.
Stephen Kim: Yeah, makes perfect sense. And then, Jeff, you talked about just inventory levels. Obviously, there's a lot of concern in the market about overall inventory. So I was just hoping maybe you could flesh out those comments a little bit. I mean, it does appear that on a national basis that inventory is in pretty good shape, but there are some markets where it has stood out as increasing. So maybe just if you can go a little bit around the horn, if you will, and just give us thoughts on what you're seeing.
Jeff: Yeah. Most of the markets, John, are in pretty similar inventory situations. Resale inventory levels three and a half to four months.
Jeff: In that range, there's a couple I can call out that are higher than that.
Jeff: One would be in Austin and the other for us would be in Jacksonville. And in both of those cases, if you look at the resale inventory and the pricing, it's at price levels much higher than we operate at.
Jeff: Certainly in Austin, we're priced below median resale with our products. So we're in a competitive position in those
Jeff: where inventory has moved up a bit. But you run through California, Arizona, Nevada.
Jeff: Other parts of Texas are a little higher. They're probably in the four and a half to five month range, but still, at our price points, not a lot of inventory there. So I think it's important as you guys are looking at the various markets, look at the price points of the inventory as well, not just the numbers and how quickly they're trading.
Thank you. Bye.
Speaker Change: Thank you. And the next question comes from the line of Matthew Boulay with Barclays. Please proceed.
Thank you. Thank you.
Speaker Change: Good afternoon everyone. Thank you for taking the questions. I'm glad to hear everyone's well in Los Angeles there and also best wishes to Jeff K in the future.
Speaker Change: I wanted to go back to the Q1 order guide and, you know, kind of...
Speaker Change: on that view that are on that data that absorptions look like they're kind of down double digits quarter to date. You know, it sounded like the communities were going to be, you know, relatively flat from where you are now to the end of the quarter. I mean, just what is it specifically that kind of allows you to
Speaker Change: look at that high single-digit increase for the balance of the quarter? Is it going to be kind of a, you know, incentives, concessions, just price reductions, just what is it that you think will kind of stimulate that sales-based activity? Thank you.
Matt, I
Speaker Change: walk through the detail year over year because it's a very small number for an odd selling period.
Speaker Change: Whether it's how the weekends break around the holidays or just the fact it's the month of December It's not a big driver of our orders for the
Speaker Change: the years, and or quarter or year. That's why we said we know we'll close that gap over the balance of the year because of the, whether it's just the general market improvement or the number of communities that we're opening and introducing here in January and in February.
Speaker Change: The market doesn't have to dramatically change from where it is today. It's just a function of what we're doing with community openings.
Thank you.
Speaker Change: Okay, got it. Yeah, I just wanted to double click on the incentives and concessions and if there was any type of assumption there, I guess on the on the second question.
Speaker Change: You know just thinking about the kind of starts versus sales over the balance of the year I know you mentioned the sales came in a little lighter than expectations in q4 But you know you did start a little bit more homes
and you sold in Q4 and just.
Speaker Change: You know, I guess it kind of goes back to the margin question, but is there a margin level at which you would?
Speaker Change: look to hold the line a little bit more and dial back on starts? Or just kind of how you thinking about maintaining that, that balance between starts and margins, depending on how this market evolves this year? Thank you.
yeah
Speaker Change: And Matt, it's really a function of what we keep calling optimizing every asset. There's an ideal run rate at an ideal margin.
Speaker Change: That gets you the highest returns for that community and we target the highest return So if we're if sales are off We'll do things to to improve the sales pace and try to optimize the asset We won't just we don't have the need to just go blindly start a bunch of homes and and hope we sell them someday At whatever the margin is we're not in that kind of an environment. It's
Speaker Change: We're going to sell them, start them, close them, and the sales pace will pull the levers.
Speaker Change: Thank you. And the next question comes from the line of Michael Rehart with J.P. Morgan. Please proceed with your question.
Michael Rehart: Thanks. Good afternoon, everyone, and hope everyone's safe with all the unfortunate tragedies in L.A. And also, Jeff, it's been great working with you and best of luck going forward.
I just wanted to
Michael Rehart: dial in a little bit on the gross margin guidance and make sure we're understanding it properly. In terms of the modest sequential reduction, one Q to four Q, if that's more just simply a function of operating leverage.
Michael Rehart: I believe you said you're assuming a similar type of incentive environment, 1Q versus 4Q. So just wanted to make sure.
Michael Rehart: that I was getting that correctly and conversely going forward from one cue to the rest of the year getting closer to the midpoint if that's also more again a function of operating leverage versus anything else.
Michael Rehart: Right, so I'm not sure when you're talking about the operating leverage, Mike, are you talking year over year, are you talking sequentially, where are you coming from there?
Michael Rehart: Well, sequentially, right, because you're talking about 1Q gross margins being, taking a little bit of a step down versus 4Q and then
Michael Rehart: lower leverage on the fixed costs. So we have, we're seeing similar profiles on pricing, costs, incentives, etc.
that we experienced in the fourth quarter.
The bulk of those homes are in backlog.
Michael Rehart: We know the costs, we know the pricing, we don't expect to have a bunch of closing table giveaways or anything like that. And from the point of view of any quick move-in ready homes, there's always some variability around that in the quarter, but we think that'll be maintained about what we just saw in the fourth. So that's sort of the sequential piece on it. When you look forward to the full year,
Michael Rehart: Yeah, the, you know, as you know, the, the leverage on the fixed costs always has an impact, sometimes favorable, sometimes unfavorable, depending on the top line, within the quarter, when I'm looking at the full year, I'm looking at it really more on a basis of
Michael Rehart: You know, number one, you had the improvement coming off the first quarter, but the first quarter is usually a pretty low volume quarter for us.
Michael Rehart: So that is also mainly impacted, you know, those back three quarters.
in total.
Michael Rehart: A lot of that is actually also the leverage side of it. But I think as importantly, we are seeing a slight decline versus 2024 in the full year margin. It's about 60 dips right now at the midpoint, mainly due to mix and mainly due to what we are just forecasting where these new communities will open and deliver out at.
but you know a lot of that is
Michael Rehart: based on our best estimates right now on everything we know and
Michael Rehart: You know, we stay fairly current on the underwriting on these communities, and our divisions do a really good job forecasting current conditions out. But if conditions improve,
Michael Rehart: you know we'd like to say we could do better than these numbers and the opposite of conditions go the other way but
Michael Rehart: It's our best guess at this point, and it is a slightly wider range, and we normally like to give a full percentage point, but, you know, there's maybe a little bit more uncertainty as we enter the...
the full year right now.
Speaker Change: Right, no good. Understood. Appreciate that. I guess secondly, I just also wanted to dial in a little bit on
Speaker Change: incentives or mortgage concessions. I believe I heard right from Rob talking about
You know
Speaker Change: the percent of communities where you offer incentives being roughly similar to the last two or three quarters. I just wanted to dial in, if that statement kind of holds true, if you were to kind of compare the level of incentives that you were offering at the beginning of the fourth quarter towards the end of the, versus the end of the fourth quarter.
Part of the reason, perhaps, because your orders did miss
Speaker Change: or maybe what your internal projection is, if there was any type of, you know.
Speaker Change: It sounded like also a view of, to the extent you held incentives, you're willing to hold margin a little bit, not do some of those base price reductions, and you took, you know, the hit on the volume, if that's the right way to think about how you approach the quarter.
Speaker Change: versus maybe the industry itself being a little bit more conciliatory on incentives, you know, on the broader market basis.
Speaker Change: Mike, I can make one or two comments and then pass it to Rob because...
He's got the detail and lives the trend.
every day, but it's.
Speaker Change: It's a good example of the difference in how we operate versus a lot of our peers.
Speaker Change: that are 100% spec builders because they'll just keep upping the incentive till they clear the house or until they hit their number. And a big chunk of our deliveries were sold four, five, six months ago, and they're waiting on us to complete their homes. So there's no incentives needed. It's just get the home built.
Speaker Change: as quickly as you can, and we're sharing on this call that our bill times are continuing to compress, which is really a good thing for our business.
Speaker Change: but Rob why don't you walk through again the mortgage concessions and what you saw in the quarter with some of the rate locks you were having to do.
Speaker Change: Yeah, so I think most of what you said there was right in the way that you presented them. We didn't, or ask the question, we didn't see a big change in the number of buyers that we were incentivizing or the level of incentives overall for the quarter. I would say that that did increase some as we moved.
Speaker Change: throughout the quarter. You go back to September, we were in an environment where rates were coming down. I think there was some excitement about that, needed to do less just because rates were lower.
Speaker Change: That's gone the other way. We did choose to, you know, not chase sales in Q4 with big discounts or price cuts, considering how choppy the markets were, the
Speaker Change: the level of discounting that we saw many of our competitors putting in play in a slower demand time of the year.
Speaker Change: We haven't really adjusted in a meaningful way off of that. But it's still about finding the right deal for the buyers that are...
Speaker Change: If we find that we're going to have to do a little bit more because rates are up, we will. And as Jeff mentioned earlier, December is
Speaker Change: It's a tough time to do that. We're just now getting into the better time of year to sell, entering the spring selling season. We always see the...
Speaker Change: Thank you. Our next question comes from the line of Alan Ratner with Zellman & Associates. Please proceed with your question.
Alan Ratner: Hey guys, good afternoon. And just want to echo everybody else's comments, thinking about all you guys with the fires out there and good luck to Jeff K on the upcoming retirement.
Alan Ratner: My first question, you know, on the community count guide. Admittedly, that was a little bit lighter than than we were expecting. And it sounds like, you know, the dip in the fourth quarter you view as temporary, but I'm just curious, you know, when I look at your lot count, it's ramped up, you know, pretty meaningfully over the last year to two. I know that there's obviously lags there, but
Alan Ratner: you know, are there any delays driving that kind of flattish community count through the year either on development or maybe some communities getting pushed out either in California because of these fires or in the southeast because of the hurricanes or was this really kind of consistent with with your your expectations all along?
Alan Ratner: Alan Moser is just on the sellout side. We expect the sellouts to be significantly higher than 2024.
Alan Ratner: Doing a lot of work just to keep up on that side of it
Alan Ratner: As we mentioned during the prepared remarks, we have a lot more grand openings coming out as well.
Alan Ratner: but the pressure is really on selling out of more communities. So it's a little bit of a tough year from that point of view. If you're accurate in what you said about the fourth quarter, we wanted to give a little more color on the year. Normally we just kind of go one quarter out and at end of year to indicate what's really happening. And as we're moving through the spring selling season, we'll have, you know, the first and second quarter, some pretty good comps on a year-over-year basis on the average community count.
Alan Ratner: and that little dip in the fourth quarter is, at this point in time, what we expect to see is just a one-quarter dip.
Alan Ratner: the 2026 spring selling season. So we're pleased with that. As far as delays or things like that due to any reasons, you know, there's always things happening with communities and grand openings. There's a lot of factors outside of the control of anyone in the home building industry.
Alan Ratner: municipalities, weather, natural disasters, etc., all contribute to that. But on average, you know, we do pretty good getting our communities opening. And like I typically will say,
Alan Ratner: when we miss by a few openings in a single quarter.
Alan Ratner: It's those communities still get opened and it's not like they're opened, you know a year later or eight months later It's usually just missing quarter-end and they're opening within weeks or you know, you know within a couple months of the next quarter so it's not it's not a tragic impact or a super negative impact on the business when you look at it from that point of view, but
Alan Ratner: Really, the primary driver, the primary difference next year is just a much larger sellout population or anticipated sellout population than what we saw in 2024.
Speaker Change: Got it. Okay, I appreciate that, Jeff. Second question, I know it's very early days as far as the potential impact from all of these fires, but California is about a third of your business, and I'm curious just how you're thinking about how this might play out for your business. I know there's no direct overlap, thankfully, with your active communities, but do you anticipate any either
Speaker Change: acceleration and cost inflation as the labor pool gets diverted to repair and then you know fixing damaged homes or rebuilding damaged homes.
Speaker Change: Any changes you anticipate to the permitting process or insurance, maybe just talking broadly about your insurance vis-a-vis some of these more mature markets as well. I think kind of a catch-all question there, but any thoughts going forward?
Yeah, Alan, I think...
Speaker Change: In general, it's too early to speculate in that the fires are still ongoing and we're
Speaker Change: We're monitoring and we're helping our employees and we're keeping an eye on everything This will be an extremely complex situation to deal with and it's going to take some time So what we don't expect that six months from now, there will be 8,000 housing starts in LA County as all these homes go right back up. I think it'll be in a onesie twosie kind of a cadence and a lot of things have to get worked out in the meantime and No different than the geography is vast
and Southern Cal.
Speaker Change: The population is big and the capacity is there to handle a lot, so I don't expect a lot of labor or material pinch. If we get something, it'll be very short order and then you deal with it and you move on. I do think
Speaker Change: We have to be nimble with utilities, for instance. There's going to be a lot of challenge here on utility crews.
Speaker Change: to rebuild infrastructure and get power brought back to thousands and thousands of homes.
So we'll be watchful of that and
Speaker Change: We have assumptions in our community openings, and maybe a community loses another couple months, as you touched on, because we can't get power. And that may be a potential, but I don't see a big hit to labor and material necessarily.
Speaker Change: And the next question comes from the line of Mike Dahl with RBC Capital Markets. Please proceed with your question.
Thank you.
Thanks for putting my questions in.
Speaker Change: Just back on margins and incentive dynamic, I guess the simple question is if
Speaker Change: Yeah, if incentives crept up through the quarter, demand flowed and missed your expectations later in the quarter, and then it sounds like the first six weeks started off.
Speaker Change: So, why is the assumption of flat incentives for the quarter and the year the right one to make at this point, especially if rates continue to creep up?
Speaker Change: We just think on balance, you know, we're right there. I mean, during the September call, everything was optimistic, right? You know, when we were doing the call, rates had come down quite a bit and there's been just a lot of volatility up and down.
Speaker Change: around the rate environment. And, you know, there's still this issue on the spreads between the mortgage rate and the treasuries and everything else. So, look, you know, we don't have a crystal ball on the macro, and we don't know where that's heading. I do know.
Speaker Change: There was a fair amount of uncertainty as we started each of the last couple of years and we ended up having two really, really outstanding years as a company. And we've kind of proven that we have been able to overcome
Speaker Change: challenges as we move through the year so we'll just be watchful on it we're just calling it like we see it today Mike I mean we don't have any
Speaker Change: probably any more detail on the macro than you guys would, but that's how we're seeing it today. The backlog is number one for us. You know, we look at where those backlog margins are at, what we're currently selling at, and what our expectations are on the cost side.
Speaker Change: Sort of correlate all those things, you know, we came up with our guidance numbers But you know, that's why it's a range and I think that's why it's updated every quarter and you know We'll see as we go through the year
Speaker Change: Got it. Okay. And then just a quick one, just to make sure I heard it right in response to Steve's early question, the pace assumption, did you say for the year, the right assumption or what you're kind of currently planning for is about flat on a per community basis?
Thank you very much.
Speaker Change: Yeah, I mean, look, the one thing we're always really careful about is trying to forecast order rates.
Speaker Change: Right now, you know, the most important thing for us is order rates through the end of the spring selling season that basically sets up the full year revenues
Speaker Change: and we have better visibility into those numbers. Again, working out of a, off our backlog, you know, we'd like to build the order model partially for that reason that, you know, we do have visibility in the future, but we'll see where spring goes.
Speaker Change: You know, depending on the spring selling season, I think we'll get a better feel for the year, both in terms of overall absorption paces as well as housing revenues.
Speaker Change: And ladies and gentlemen, that does conclude today's teleconference. Thank you for your participation. You may now disconnect your lines.