Q2 2026 KB Home Earnings Call

June 23, 2026

Speaker #1: Good afternoon. My name is John, and I'll be your conference operator today. I would like to welcome everyone to the KB Home Q2 2026 earnings conference call.

Operator: Good afternoon. My name is John, and I will be your conference operator today. I would like to welcome everyone to the KB Home 2026 Q2 earnings conference call. All participant lines are in a listen-only mode. Following the company's opening remarks, we will open the lines for questions. This conference call is being recorded, and a replay will be accessible on the KB Home website until 23 July 2026. I will now turn the call over to Jill Peters, Senior Vice President, Investor Relations. Thank you, Jill. You may begin.

Speaker #1: All participant lines are in listen-only mode. Following the company's opening remarks, we will open the lines for questions. This conference call is being recorded, and a replay will be accessible on the KB Home website until July 23, 2026.

Speaker #1: I will now turn the call over to Jill Peters, Senior Vice President, Investor Relations. Thank you, Jill. You may begin.

Speaker #2: Thank you, John. Good afternoon, everyone, and thank you for joining us today to review our results for the second quarter of fiscal 2026. On the call are Jeff Mezger, Executive Chairman; Rob McGibney, President and Chief Executive Officer; Bill Hollinger, Senior Vice President and Chief Accounting Officer; and Thad Johnson, Senior Vice President and Treasurer.

Jill Peters: Thank you, John. Good afternoon, everyone, and thank you for joining us today to review our results for the Q2 of fiscal 2026. On the call are Jeff Mezger, Executive Chairman, Rob McGibney, President and Chief Executive Officer, Bill Hollinger, Senior Vice President and Chief Accounting Officer, and Thad Johnson, Senior Vice President and Treasurer. 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 of future results, and the company does not undertake any obligation to update them. 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.

Speaker #2: 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 of future results, and the company does not undertake any obligation to update them.

Speaker #2: 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.

Speaker #2: In addition, an explanation and/or reconciliation of the non-GAAP measure of adjusted housing gross profit margin, as well as 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.

Jill Peters: In addition, an explanation and/or reconciliation of the non-GAAP measure of adjusted housing gross profit margin, as well as 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. Finally, please note all figures are based on our quarter ended 31 May, and all comparisons are on a year-over-year basis unless otherwise stated. With that, here is Jeff Mezger.

Jill Peters: In addition, an explanation and/or reconciliation of the non-GAAP measure of adjusted housing gross profit margin, as well as 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. Finally, please note all figures are based on our quarter ended 31 May 2026, and all comparisons are on a year-over-year basis unless otherwise stated. With that, here is Jeff Mezger.

Speaker #2: And finally, please note all figures are based on our quarter ended May 31, and all comparisons are on a year-over-year basis unless otherwise stated. And with that, here is Jeff Mezger.

Speaker #3: Thank you, Jill. And good afternoon, everyone. We are pleased to report second-quarter results that met or exceeded the midpoint of our key guidance ranges and reflected sequential improvement in our adjusted housing gross profit margin.

Jeff Mezger: Thank you, Jill, and good afternoon, everyone. We are pleased to report Q2 results that met or exceeded the midpoint of our key guidance ranges and reflected sequential improvement in our adjusted housing gross profit margin. Operationally, our execution remained strong as we achieved double-digit year-over-year community count growth and further reduced our build times. We exceeded our expected mix of built-to-order sales during the quarter, and with the return to this core business model, we expect to have more predictability in deliveries at better gross margins than we would achieve by relying on selling inventory homes. At a high level, our Q2 results included total revenues of $1.1 billion and diluted earnings per share of $0.43. With our significant financial flexibility, we remain balanced in our capital allocation, investing for growth while also returning capital to our shareholders.

Speaker #3: Operationally, our execution remained strong, as we achieved double-digit year-over-year community account growth and further reduced our build times. We exceeded our expected mix of build-to-order sales during the quarter, and with the return to this core business model, we expect to have more predictability in deliveries at better gross margins than we would achieve by relying on selling inventory homes.

Speaker #3: At a high level, our second quarter results include total revenues of $1.1 billion and diluted earnings per share of $0.43. With our significant financial flexibility, we remain balanced in our capital allocation, investing for growth while also returning capital to our shareholders.

Speaker #3: We repurchased 1.4 million shares of our common stock at an average price below our current book value per share. We believe this is an excellent use of our cash—accretive to both our earnings and book value per share—and it will contribute to improving our return on equity over time.

Jeff Mezger: We repurchased 1.4 million shares of our common stock at an average price below our current book value per share. We believe this is an excellent use of our cash, accretive to both our earnings and book value per share, contributing to improving our return on equity over time. Inclusive of dividends, we returned over $90 million in capital to our shareholders in Q2. In addition, we continued to expand our book value per share to nearly $62. At this time, let me turn the call over to Rob.

Speaker #3: Inclusive of dividends, we returned over $90 million in capital to our shareholders in the second quarter. In addition, we continue to expand our book value per share to nearly $62.

Speaker #3: At this time, let me turn the call over to Rob.

Speaker #4: Thank you, Jeff. Our teams continue to execute well, balancing pace and price in response to market conditions, driving further efficiencies in build times, and managing our direct costs with discipline.

Rob McGibney: Thank you, Jeff. Our teams continued to execute well, balancing pace and price in response to market conditions, driving further efficiencies in build times and managing our direct costs with discipline. I will spend most of my time today talking about our strategic return to what KB Home does best in utilizing a built-to-order model. One year ago, on our Q2 fiscal 2025 earnings conference call, we shared our intention to return to predominantly BTO business. We acknowledged that doing so would create a temporary trough in deliveries, which we believe is now behind us. Our BTO approach and the benefits of it extend beyond any single quarter's results. It is a structural repositioning of our company that we believe will enable stronger, more sustainable performance over time and across market cycles.

Speaker #4: But I will spend most of my time today talking about our strategic return to what KB Home does best, utilizing a build-to-order model.

Speaker #4: One year ago, on our second quarter fiscal 2025 earnings conference call, we shared our intention to return to predominantly BTO business. We acknowledged that doing so would create a temporary trough in deliveries, which we believe is now behind us.

Speaker #4: Our BTO approach and the benefits of it extend beyond any single quarter's results. It is a structural repositioning of our company that we believe will enable stronger, more sustainable performance over time and across market cycles.

Speaker #4: The fundamental premise of our build-to-order model is putting the customer at the center from day one. Our buyers choose their lot, floor plan, and personalized finishes.

Rob McGibney: The fundamental premise of our built-to-order model is putting the customer at the center from day one. Our buyers choose their lot, floor plan, and personalized finishes. The result is a home that has real specific value to the people who will live in it. Homes built to customer specifications do not require heavy incentives to sell. The buyers are already invested in and feel a connection to the homes they created. This is in contrast to a speculative business model where incentives are used to create value. In that model, the builder increases the incentives to the point at which the buyers believe they have been adequately compensated for features and finishes they did not choose. Our low cancellation rate reinforces this point. Buyers who commit to a built-to-order home are genuinely invested in it, which means our backlog converts into closings.

Speaker #4: The result is a home that has real, specific value to the people who will live in it. Homes built to customer specifications do not require heavy incentives to sell.

Speaker #4: The buyers are already invested in, and feel a connection to, the homes they created. This is in contrast to a speculative business model, where incentives are used to create value.

Speaker #4: In that model, the builder increases the incentives to the point at which the buyers believe they have been adequately compensated for features and finishes they did not choose.

Speaker #4: Our low cancellation rate reinforces this point. Buyers who commit to a build-to-order home are genuinely invested in it, which means our backlog converts into closings.

Speaker #4: Critically, for how we run the business, bill-to-order creates a sold backlog before a single foundation is poured. Of the 3,317 net orders we generated in the second quarter, 73% were bill-to-order homes.

Rob McGibney: Critically, for how we run the business, built-to-order creates a sold backlog before a single foundation is poured. Of the 3,317 net orders we generated in Q2, 73% were built-to-order homes. This is not just a mixed metric. It is the result of a deliberate focus creating a backlog of sold, not yet started homes, which we believe has three principal benefits. First, it gives us visibility and predictability. We enter our construction cycle with certainty about the key variables: the buyer, the price, our cost to build, and the expected close date. When a buyer commits and we lock in the purchase price, our direct costs are established before a shovel hits the ground. We are not exposed to material or labor cost increases for that home after construction begins. Crucially, we know the margin we will achieve at delivery before we start.

Speaker #4: This is not just a mixed metric. It is the result of a deliberate focus, creating a backlog of sold, not yet started homes, which we believe has three principal benefits. First, it gives us visibility and predictability: we enter our construction cycle with certainty about the key variables—the buyer, the price, our cost to build, and the expected close date.

Speaker #4: When a buyer commits and we lock in the purchase price, our direct costs are established before a shovel hits the ground. We are not exposed to material or labor cost increases for that home after construction begins.

Speaker #4: Crucially, we know the margin we will achieve at delivery before we start. We view this as a fundamentally lower risk profile than a speculative model, where a builder starts a home with an assumption of the future sales price and then finds later at the time of sale that market conditions may require price reductions or heavy incentives, which compress the margin that looked attractive when construction began.

Rob McGibney: We view this as a fundamentally lower risk profile than a speculative model where a builder starts a home with an assumption of the future sales price and then finds later, at the time of sale, that market conditions may require price reductions or heavy incentives, which compress the margin that looked attractive when construction began. The visibility and predictability that BTO provides translates directly into more efficient operations and more dependable margins at delivery. Second, it gives us leverage with our trade partners. We currently have over 1,500 sold homes that have not yet started construction. This pipeline of pending starts is an asset we can leverage in negotiations, particularly when starts are lower in most of our markets, as they are now. Our trade partners want volume and predictable workflow, and we can offer both.

Speaker #4: The visibility and predictability that BTO provides translates directly into more efficient operations and more dependable margins at delivery. Second, it gives us leverage with our trade partners.

Speaker #4: We currently have over 1,500 sold homes that have not yet started construction. This pipeline of pending starts is an asset we can leverage in negotiations, particularly when starts are lower in most of our markets, as they are now.

Speaker #4: Our trade partners want volume and predictable workflow, and we can offer both. In exchange, we secure better cost, keep skilled crews on our job sites, and maintain the even flow of production cadence of weekly starts per community that drives efficiency across our entire build cycle.

Rob McGibney: In exchange, we secure better costs, keep skilled crews on our job sites, and maintain the even flow production cadence of weekly starts per community that drives efficiency across our entire build cycle. Third, it supports margin quality over time. We can produce better margins on BTO homes because we are building homes for buyers who have made choices for themselves with the personalization and value that matter to them. A predominantly BTO business operating at scale with disciplined execution is the foundation that enables us to expand our margins over time. We focused our selling efforts in our Q2 on BTO homes, and our divisions delivered solid performance that will benefit our results in the H2 of our fiscal 2026. BTO homes represented nearly three-quarters of our net orders, as I mentioned earlier. This outcome is a clear positive in what was a challenging spring selling season.

Speaker #4: Third, it supports margin quality over time. We can produce better margins on BTO homes because we are building homes for buyers who have made choices for themselves, with the personalization and value that matter to them.

Speaker #4: A predominantly BTO business operating at scale with disciplined execution is the foundation that enables us to expand our margins over time. We focused our selling efforts in our second quarter on BTO homes, and our divisions delivered solid performance that will benefit our results in the second half of our fiscal 2026.

Speaker #4: BTO homes represented nearly three-quarters of our net orders, as I mentioned earlier. This outcome is a clear positive in what was a challenging spring selling season.

Speaker #4: Although buyers continue to demonstrate the desire for homeownership and the ability to qualify, consumer confidence remains low, driven by a variety of factors—from elevated mortgage interest rates and affordability pressures to rising inflation and geopolitical uncertainties.

Rob McGibney: Although buyers continue to demonstrate the desire for homeownership and the ability to qualify, consumer confidence remains low, driven by a variety of factors, from elevated mortgage interest rates and affordability pressures to rising inflation and geopolitical uncertainties. We continue to attract a healthy level of traffic to our communities, signaling both consumers' interest in purchasing a home and the appeal of our locations and products. Our cancellation rate was stable, reflecting high-quality, committed buyers who can close. However, market conditions precipitated a less than optimal conversion of traffic to sales as many consumers lacked the confidence to purchase, resulting in a community absorption rate of four net orders per month. Looking at our net orders in more detail, we shared on our last earnings call that sales in March had started out a little slower sequentially.

Speaker #4: We continue to attract a healthy level of traffic to our communities, signaling both consumers’ interest in purchasing a home and the appeal of our locations and products. Our cancellation rate was stable, reflecting high-quality, committed buyers who can close.

Speaker #4: However, market conditions precipitated a less-than-optimal conversion of traffic to sales, as many consumers lacked the confidence to purchase, resulting in a community absorption rate of four net orders per month.

Speaker #4: Looking at our net orders in more detail, we shared on our last earnings call that sales in March had started out a little slower sequentially.

Speaker #4: This contributed to average weekly sales for the month of March that were softer than February, which we attributed to a further weakening in consumer confidence associated with the start of the conflict in the Middle East.

Rob McGibney: This contributed to average weekly sales for the month of March that were softer than February, which we attributed to a further weakening in consumer confidence associated with the start of the conflict in the Middle East, combined with rising mortgage interest rates. Moving into April, average weekly sales rebounded, helped by lower interest rates, as well as steps we took to improve affordability, adjusting pricing in certain communities, which allowed us to capture more of the market. While market conditions became more challenging in May with mortgage rates moving higher and inflation accelerating, our sales remained resilient. We view this as an encouraging result given the overall environment.

Speaker #4: Combined with rising mortgage interest rates, moving into April, average weekly sales rebounded—helped by lower interest rates, as well as steps we took to improve affordability, including adjusting pricing in certain communities, which allowed us to capture more of the market.

Speaker #4: While market conditions became more challenging in May, with mortgage rates moving higher and inflation accelerating, our sales remained resilient. We view this as an encouraging result, given the overall environment.

Speaker #4: We ended the second quarter with 280 active communities, up 11% year over year, and we achieved the high end of our target for new communities, including the grand opening of Meridian with five different product lines in Henderson, Nevada, one of the two large land parcels in the southwest that we acquired last year.

Rob McGibney: We ended the Q2 with 280 active communities, up 11% year-over-year. We achieved the high end of our target for new communities, including the grand opening of Meridian with 5 different product lines in Henderson, Nevada, one of the 2 large land parcels in the Southwest that we acquired last year. The second of these parcels, Sandstone in North Las Vegas, with 4 distinct product lines, is scheduled to open later this year. With more than 70 new communities in the H1 of this year, we had also attained our peak community count during our Q2 as planned. As we stated on our last earnings call, depending on the pace of sellouts, we expect community count to step down in the H2 of this year. We estimate our Q3 ending community count will be between 270 and 280.

Speaker #4: The second of these parcels, Sandstone in North Las Vegas, with four distinct product lines, is scheduled to open later this year. With more than 70 new communities in the first half of this year, we also attained our peak community count during our second quarter, as planned.

Speaker #4: As we stated on our last earnings call, depending on the pace of sellouts, we expect community count to step down in the second half of this year, and we estimate our third quarter ending community count will be between 270 and 280.

Speaker #4: Our backlog at quarter end was 4,526 homes, which grew 26% sequentially. With the level of BTO net orders that we achieved in the second quarter, we are moving closer to growing our backlog year over year and narrowed the gap significantly as compared to our first quarter.

Rob McGibney: Our backlog at quarter end was 4,526 homes, which grew 26% sequentially. With the level of BTO net orders that we achieved in the Q2, we are moving closer to growing our backlog year-over-year and narrow the gap significantly as compared to our Q1. Looking ahead, we expect to continue growing our backlog sequentially in the Q3 and believe this will also be the quarter in which we return to year-over-year backlog growth. This will support our projected sequential increase in deliveries during the H2 of fiscal 2026 and positions us favorably entering fiscal 2027. Our production is as well-balanced across the various stages of construction as we have seen in a long time. Having this cadence is another important aspect of our even flow production and ability to negotiate costs with our trade partners.

Speaker #4: Looking ahead, we expect to continue growing our backlog sequentially in the third quarter, and believe this will also be the quarter in which we return to year-over-year backlog growth.

Speaker #4: This will support our projected sequential increase in deliveries during the second half of fiscal 2026 and positions us favorably entering fiscal 2027. Our production is as well balanced across the various stages of construction as we have seen in a long time.

Speaker #4: Having this cadence is another important aspect of our even-flow production and ability to negotiate costs with our trade partners. We have a total of 3,989 homes in process, 77% of which are sold.

Rob McGibney: We have a total of 3,989 homes in process, 77% of which are sold. We reduced our finished unsold inventory to 11% of our total production as compared to 25% in the Q1, having sold through much of our aged inventory. Our teams continue to get better and better in efficiently constructing our homes and further reduced our build times in the Q2 by 8 days sequentially to 100 days from home start to completion on BTO homes. The ongoing progress made on this key metric is remarkable, driving build times that are now at their lowest, best levels in more than a decade. This is an important factor in the customer value proposition of a BTO home, sharply reducing the differential in the time that it takes to build a personalized home versus purchasing a resale home, historically our largest competitor.

Speaker #4: We reduced our finished, unsold inventory to 11% of our total production, compared to 25% in the first quarter, having sold through much of our aged inventory.

Speaker #4: Our teams continue to get better and better at efficiently constructing our homes, and further reduced our build times in the second quarter by eight days sequentially, to 100 days from home start to completion on BTO homes.

Speaker #4: The ongoing progress made on this key metric is remarkable, driving build times that are now at their lowest levels in more than a decade.

Speaker #4: This is an important factor in the customer value proposition of a BTO home, sharply reducing the differential in the time that it takes to build a personalized home versus purchasing a resale home, historically our largest competitor.

Speaker #4: Shorter build times also allow our customers to lock their mortgage rates more easily and cost-efficiently. With faster build times, we can sell later in the year for year-end delivery.

Rob McGibney: Shorter build times also allow our customers to lock their mortgage rates more easily and cost efficiently. With faster build times, we can sell later in the year for year-end delivery. In 2025, it took us about 5 months to build a home, which meant early spring was the latest we could sell BTO homes for same-year delivery. Today, with build times closer to 3 months, we could continue selling BTO homes into the summer for same-year delivery. By capturing more volume and revenue in the current year, we can better leverage our costs, thereby improving our margins and increasing our cash flow. As to direct costs, they have improved significantly in the past 3 years. The magnitude of improvement varies by division as regional mix and product types impact results. In certain divisions, we have reduced our directs by as much as 15%.

Speaker #4: In 2025, it took us about five months to build a home, which meant early spring was the latest we could sell BTO homes for same-year delivery.

Speaker #4: Today, with build times closer to three months, we could continue selling BTO homes into the summer for same-year delivery. By capturing more volume and revenue in the current year, we can better leverage our costs, thereby improving our margins and increasing our cash flow.

Speaker #4: As to direct costs, they have improved significantly in the past three years. The magnitude of improvement varies by division, as regional mix and product types impact results. In certain divisions, we have reduced our directs by as much as 15%.

Speaker #4: More recently, we have seen some pressure on material costs, in particular lumber, which we are working to offset with savings in trade labor costs.

Rob McGibney: More recently, we have seen some pressure on material costs, in particular lumber, which we are working to offset with savings and trade labor costs. Our lumber strategy is diversified with a variety of wood species and lock periods that helped us mitigate the volatility in lumber for homes that we started in Q2. Our teams are drawing on our deep supplier relationships to limit cost increases while also actively rebidding and negotiating our local and national contracts to help manage directs very tightly. In addition, value engineering our products and simplifying our studio offerings are offsetting some of the increases in material costs. Moving on, I will review the credit profile of our buyers who finance their mortgages through our joint venture, KBHS Home Loans.

Speaker #4: Our lumber strategy is diversified, with a variety of wood species and lock periods that helped us mitigate the volatility in lumber for homes that we started in the second quarter.

Speaker #4: Our teams are drawing on our deep supplier relationships to limit cost increases, while also actively rebidding and negotiating our local and national contracts to help manage directs very tightly.

Speaker #4: In addition, value engineering our products and simplifying our studio offerings are offsetting some of the increases in material costs. Moving on, I will review the credit profile of our buyers who financed their mortgages through our joint venture, KBHS Home Loans.

Speaker #4: These metrics have remained consistent and favorable over the past year, starting with our capture rate, with 83% of buyers who financed their home in the second quarter using KBHS.

Rob McGibney: These metrics have remained consistent and favorable over the past year, starting with our capture rate, with 83% of buyers who financed their home in Q2 using KBHS. Higher capture rates help us manage our backlog more effectively and provide more certainty in closing dates, which benefits our company as well as our buyers. In addition, we see higher customer satisfaction levels from buyers who use our JV versus other lenders. The average cash down payment of 15% was fairly steady as compared to prior quarters and equated to about $70,000. On average, the household income of customers who used KBHS was about $136,000, and they had a FICO score of 741. Even with one-half of our customers purchasing their first home, we are still attracting buyers with strong credit profiles who can qualify for their mortgage while making a significant down payment or paying cash.

Speaker #4: Higher capture rates help us manage our backlog more effectively and provide more certainty in closing dates, which benefits our company as well as our buyers.

Speaker #4: In addition, we see higher customer satisfaction levels from buyers who use our JV versus other lenders. The average cash down payment of 15% was fairly steady compared to prior quarters, and equated to about $70,000.

Speaker #4: On average, the household income of customers who use KBHS was about $136,000, and they had a FICO score of 741. Even with one half of our customers purchasing their first home, we are still attracting buyers with strong credit profiles who can qualify for their mortgage while making a significant down payment or paying in cash.

Speaker #4: About 8% of our deliveries in the second quarter were to all-cash buyers.

Rob McGibney: About 8% of our deliveries in Q2 were to all-cash buyers. Before I wrap up, let me spend a moment on how we see the remainder of the year unfolding. As we anticipated, and is evident in our guidance, we are expecting sequential growth in deliveries, revenue, and gross margin in our Q3 and again in our Q4. Specific to our Q3 deliveries, more than 80% of these homes are already in our backlog. Although Bill will provide the details of our guidance in a moment, let me share some context around our Bay Area business, which we expect to be a meaningful gross margin contributor in the H2 of this year and beyond. We took a patient, selective approach to investment in this market given the longer entitlement and development timelines.

Speaker #1: Before I wrap up, let me spend a moment on how we see the remainder of the year unfolding. As we anticipated, and as is evident in our guidance, we are expecting sequential growth in deliveries, revenue, and gross margin in our third quarter, and again in our fourth quarter.

Speaker #1: Specific to our third-quarter deliveries, more than 80% of these homes are already in our backlog. Although Bill will provide the details of our guidance in a moment, let me share some context around our Bay Area business, which we expect to be a meaningful gross margin contributor in the back half of this year and beyond.

Speaker #1: We took a patient, selective approach to investment in this market, given the longer entitlement and development timelines. That positioning is now paying off with a select group of new communities with high ASPs at healthy margins.

Rob McGibney: That positioning is now paying off with a select group of new communities with high ASPs at healthy margins. These communities are now selling, and as deliveries ramp up through H2 2026 and into fiscal 2027, we expect them to be a meaningful driver of the margin expansion we are discussing today. In conclusion, while we are managing through a difficult market environment, we are also reestablishing our operating identity as a company that builds homes based on decisions that buyers make, creating real value for them. This model enables backlog visibility, cost leverage, and margin predictability that we believe are meaningful differentiators and supports stronger performance over time, both operationally and financially.

Speaker #1: These communities are now selling and, as deliveries ramp up through the second half of 2026 and into fiscal 2027, we expect them to be a meaningful driver of the margin expansion we are discussing today.

Speaker #1: In conclusion, while we are managing through a difficult market environment, we are also reestablishing our operating identity as a company that builds homes based on decisions that buyers make, creating real value for them.

Speaker #1: This model enables backlog visibility, cost leverage, and margin predictability that we believe are meaningful differentiators. It supports stronger performance over time, both operationally and financially.

Speaker #1: We acknowledge that we have more work to do on further improving our gross margin, which we are building toward with intention, and with second quarter results that demonstrate the start of what we expect to be ongoing progress.

Rob McGibney: We acknowledge that we have more work to do on further improving our gross margin, which we are building toward with intention and with Q2 results that demonstrate the start of what we expect to be ongoing progress. With that, I will turn the call back over to Jeff.

Speaker #1: And with that, I will turn the call back over to Jeff.

Speaker #2: Thanks, Rob. We have a favorable lot position, owning or controlling over 59,000 lots at the end of our second quarter, 38% of which were controlled.

Jeff Mezger: Thanks, Rob. We have a favorable lot position, owning or controlling over 59,000 lots at the end of our Q2, 38% of which were controlled, and with only one community with approximately 100 lots that was land banked. Our longstanding approach has been to self-finance our land acquisitions, as we believe that only in certain situations does land banking make economic sense for our company, given the gross margin erosion and limited risk transfer from the transaction. This approach has the added benefit of a balance sheet that is more transparent. Our growth strategy remains primarily centered on expanding our share within our existing markets with a geographic footprint that we believe is positioned for long-term economic and demographic growth.

Speaker #2: And with only one community, with approximately 100 lots, that was land banked. Our longstanding approach has been to self-finance our land acquisitions, as we believe that only in certain situations does land banking make economic sense for our company, given the gross margin erosion and limited risk transfer from the transaction.

Speaker #2: This approach has the added benefit of a balance sheet that is more transparent. Our growth strategy remains primarily centered on expanding our share within our existing markets, with the geographic footprint that we believe is positioned for long-term economic and demographic growth.

Speaker #2: That said, with the success we've had in selectively entering new markets over the past five years—in Seattle, Boise, and Charlotte—with deliveries that are expected to represent about 10% of our fiscal 2026 volume, this year marks our return to Atlanta.

Jeff Mezger: That said, with the success we've had in selectively entering new markets over the past 5 years in Seattle, Boise, and Charlotte, with deliveries that are expected to represent about 10% of our fiscal 2026 volume, this year marks our return to Atlanta. This is a top 10 housing market characterized by strong demand as well as population and job growth. Our local team is led by a division president with 25 years of experience in this market, with deep relationships with landowners and sellers that he developed through his years of working for both national and local home builders. We are excited to expand our growth in our Southeast region in this thriving market, and we are off to a solid start. We have recently acquired our first land parcel in Atlanta with a projected community opening date in early 2027.

Speaker #2: This is a top-10 housing market characterized by strong demand, as well as population and job growth. Our local team is led by a division president with 25 years of experience in this market, with deep relationships with landowners and sellers that he developed through his years of working for both national and local homebuilders.

Speaker #2: We are excited to expand our growth in our Southeast region in this thriving market, and we are off to a solid start. We have in Atlanta, with a projected community opening date in early 2027.

Speaker #2: Our approach toward allocating our cash flow remains consistent and balanced. We are achieving our priorities of positioning our business for future growth, managing our leverage within our targeted range, and rewarding our shareholders through share repurchases and our quarterly cash dividend.

Jeff Mezger: Our approach toward allocating our cash flow remains consistent and balanced. We are achieving our priorities of positioning our business for future growth, managing our leverage within our targeted range, and rewarding our shareholders through share repurchases and our quarterly cash dividend. We are maintaining our land investments at a level that will support our current growth projections and invested just under $500 million in land acquisition and development in the Q2, with roughly 75% of our investment going toward the development and fees for land we already own. In closing, I want to thank our entire KB Home team for their commitment to serving our homebuyers and the discipline with which they've been executing our built-to-order model, which we believe will result in a stronger company going forward.

Speaker #2: We are maintaining our land investments at a level that will support our current growth projections, and invested just under $500 million in land acquisition and development in the second quarter, with roughly 75% of our investment going toward the development and fees for land we already own.

Speaker #2: In closing, I want to thank our entire KB HOME team for their commitment to serving our homebuyers and the discipline with which they've been executing our built-to-order model, which we believe will result in a stronger company going forward.

Speaker #2: Our year is progressing with expected further sequential improvement in quarterly deliveries, revenues, and gross margin in the back half of fiscal 2026. In addition, our anticipated backlog growth will lay the groundwork for fiscal 2027.

Jeff Mezger: Our year is progressing with expected further sequential improvement in quarterly deliveries, revenues, and gross margin in the back half of fiscal 2026. In addition, our anticipated backlog growth will lay the groundwork for fiscal 2027. We are rewarding our shareholders with a steady return of capital, and we plan to continue our share repurchase program with between $50 million and $100 million of repurchases planned for our Q3. We remain optimistic about the long-term housing market, with favorable demographics underpinning higher demand over time and the ongoing structural undersupply of homes supporting our opportunity for meaningful future growth. We are committed to delivering long-term shareholder value, and we look forward to updating you as the year continues to unfold. Now, I'll turn the call over to Bill Hollinger for the financial review.

Speaker #2: We are rewarding our shareholders with a steady return of capital, and we plan to continue our share repurchase program, with between $50 million and $100 million of repurchases planned for our third quarter.

Speaker #2: We remain optimistic about the long-term housing market, with favorable demographics underpinning higher demand over time and the ongoing structural undersupply of homes supporting our opportunity for meaningful future growth.

Speaker #2: We are committed to delivering long-term shareholder value, and we look forward to updating you as the year continues to unfold. And now, I'll turn the call over to Bill Hollinger for the financial review.

Speaker #3: Thank you, Jeff. In the second quarter of 2026, we generated housing revenues of $1.11 billion, net income of $27.3 million, and diluted earnings per share of $0.43.

Bill Hollinger: Thank you, Jeff. In the 2026 Q2, we generated housing revenues of $1.11 billion, net income of $27.3 million, and diluted earnings per share of $0.43. We continued our balanced approach to capital allocation with land-related investments and returning capital to shareholders through share repurchases and dividends. We also kept our debt-to-capital ratio at a healthy level. As you recall, last quarter, we provided limited guidance for the 2026 full year. With greater clarity following our Q2 results, including the softer-than-expected spring selling season, we have refined our 2026 outlook and are providing detailed guidance for both the Q3 and full year. Our housing revenues for the Q2 were just above the midpoint of our guidance range, declining 27% compared to $1.52 billion in the prior period.

Speaker #3: We continued our balanced approach to capital allocation, with land-related investments and returning capital to shareholders through share repurchases and dividends. We also kept our debt-to-capital ratio at a healthy level.

Speaker #3: As you recall, last quarter we provided limited guidance for the full year 2026. With greater clarity following our second quarter results, including the softer-than-expected spring selling season, we have refined our 2026 outlook and are providing detailed guidance for both the second and third quarters as well as the full year.

Speaker #3: Our housing revenues for the second quarter were just above the midpoint of our guidance range, declining 27% compared to $1.52 billion in the prior period.

Speaker #3: This result reflects a 23% decrease in the number of homes delivered and a 5% decline in their overall average selling price, primarily driven by general market conditions.

Bill Hollinger: This result reflects a 23% decrease in the number of homes delivered and a 5% decline in their overall average selling price, primarily driven by general market conditions. The 2,395 homes we delivered in the quarter represented a backlog conversion rate of 66% compared to 70% a year ago. The modestly lower conversion rate was expected this quarter as we continued our strategic shift to a higher mix of built-to-order homes delivered. In the Q2, we exceeded our expected mix of BTO net orders. Our renewed focus on built-to-order continues to drive sequential backlog growth with our total number of homes in backlog up 45% since the beginning of the year. This trend reflects both our buyers contracting earlier in the construction cycle and provides greater visibility into future deliveries.

Speaker #3: The 2,395 homes we delivered in the quarter represented a backlog conversion rate of 66%, compared to 70% a year ago. The modestly lower conversion rate was expected this quarter, as we continued our strategic shift to a higher mix of built-to-order homes delivered.

Speaker #3: In the second quarter, we exceeded our expected mix of BTO net orders. Our renewed focus on bill-to-order continues to drive sequential backlog growth, with our total number of homes in backlog up 45% since the beginning of the year.

Speaker #3: This trend reflects both our buyers contracting earlier in the construction cycle and provides greater visibility into future deliveries. And as Rob noted, based on this momentum, we expect our year-over-year ending backlog comparison to turn positive in the third quarter.

Bill Hollinger: As Rob noted, based on this momentum, we expect our year-over-year ending backlog comparison to turn positive in the Q3. Our overall average selling price of homes delivered for the quarter was $461,900, up 2% sequentially due to product and geographic mix. Let me address the anticipated trajectory of our average selling price for the rest of the year. We believe our average selling price will continue rising sequentially, with the increase becoming more pronounced in the Q4 as the larger share of deliveries comes from our higher price West Coast region, including Northern California, as Rob highlighted. With the current scale of our business, even modest shifts in regional mix can meaningfully impact our average selling price, and we expect these dynamics to work in our favor as the year progresses.

Speaker #3: Our overall average selling price of homes delivered for the quarter was $461,900, up 2% sequentially due to product and geographic mix. Let me address the anticipated trajectory of our average selling price for the rest of the year.

Speaker #3: We believe our average selling price will continue rising sequentially, with the increase becoming more pronounced in the fourth quarter, as a larger share of deliveries comes from our higher-priced West Coast region, including Northern California, as Rob highlighted.

Speaker #3: With the current scale of our business, even modest shifts in regional mix can meaningfully impact our average selling price, and we expect these dynamics to work in our favor as the year progresses.

Speaker #3: Based on our current outlook, we expect third-quarter homes delivered to range from 2,600 to 2,800, and our housing revenues to range from $1.2 billion to $1.35 billion.

Bill Hollinger: Based on our current outlook, we expect Q3 homes delivered to range from 2,600 to 2,800, and our housing revenues to range from $1.2 to $1.35 billion. For the 2026 full year, we are updating this guidance we provided last quarter. For our homes delivered, we are maintaining the same midpoint while narrowing the expected range to 10,500 to 11,000 homes. We have also narrowed our range of expected housing revenues to $4.9 to $5.3 billion. Homebuilding operating income for Q2 was $28.2 million compared to $131.5 million for the prior year quarter. Operating income in both the current and year earlier quarters included total inventory charges of $5.6 million. In the current quarter, these charges included a $3.1 million inventory impairment related to a single community, which was not due to any market factors.

Speaker #3: For the full year 2026, we are updating the guidance we provided last quarter. For homes delivered, we are maintaining the same midpoint while narrowing the expected range to 10,500 to 11,000 homes.

Speaker #3: We have also narrowed our range of expected housing revenues to $4.9 to $5.3 billion. Homebuilding operating income for the second quarter was $28.2 million, compared to $131.5 million.

Speaker #3: For the prior year quarter, operating income in both the current and year-earlier quarters included total inventory charges of $5.6 million. In the current quarter, these charges included a $3.1 million inventory impairment related to a single community, which was not due to any market factors.

Speaker #3: Our homebuilding operating income margin for the quarter was 2.5%, compared to 8.6% for last year's second quarter, mainly due to our lower housing gross profit margin and selling, general, and administrative expenses as a percentage of revenues.

Bill Hollinger: Our homebuilding operating income margin for the quarter was 2.5% compared to 8.6% for last year's Q2, mainly due to our lower housing gross profit margin and selling, general, and administrative expenses as a percentage of revenues. Our Q2 housing gross profit margin was 15.2% compared to 15.3% in Q1 and 19.3% for the year earlier quarter. The year-over-year decrease primarily reflected pricing pressures, higher relative land costs, and reduced operating leverage. Excluding inventory-related charges, our housing gross profit margin was 15.7%, which came in just above our guidance range and reflected a modest sequential improvement from the 15.5% for Q1. For comparison, the housing gross margin excluding inventory-related charges in the year earlier quarter was 19.7%.

Speaker #3: Our second quarter housing gross profit margin was 15.2%, compared to 15.3% in the first quarter and 19.3% in the year-earlier quarter. The year-over-year decrease primarily reflected pricing pressures, higher relative land costs, and reduced operating leverage.

Speaker #3: Excluding inventory-related charges, our housing gross profit margin was 15.7%, which came in just above our guidance range and reflected a modest sequential improvement from the 15.5% for the first quarter.

Speaker #3: For comparison, the housing gross margin excluding inventory-related charges in the year-earlier quarter was 19.7%. We are forecasting our housing gross profit margin for the 2026 third quarter in the range of 16% to 16.6%.

Bill Hollinger: We are forecasting our housing gross profit margin for the 2026 Q3 in the range of 16% to 16.6%, and for the full year in the range of 16.1% to 16.5%, assuming no inventory-related charges. Our full year outlook reflects our expectation of a more pronounced sequential margin improvement as the year progresses, supported by increased operating leverage, a growing proportion of built-to-order homes delivered, and favorable mix shift toward higher price, higher margin West Coast communities, particularly in Northern California. As these factors take hold, we anticipate the year-over-year housing gross margin gap to continue to narrow over the balance of the year. Let me take a moment to expand on the sequential margin progression we anticipate for the remainder of the year. The midpoint of our Q3 guidance at 16.3% represents a 60 basis point of sequential improvement.

Speaker #3: And for the full year, in the range of 16.1% to 16.5%, assuming no inventory-related charges. Our full-year outlook reflects our expectation of a more pronounced sequential margin improvement as the year progresses.

Speaker #3: Supported by increased operating leverage, a growing proportion of build-to-order homes delivered, and a favorable mix shift toward higher-price, higher-margin West Coast communities, particularly in Northern California.

Speaker #3: As these factors take hold, we anticipate the year-over-year housing gross margin gap to continue to narrow over the balance of the year. Let me take a moment to expand on the sequential margin progression we anticipate for the remainder of the year.

Speaker #3: The midpoint of our third quarter guidance, at 16.3%, represents a 60 basis point sequential improvement. We expect our third quarter margin to benefit mainly from an increase in operating leverage of roughly 30 basis points, along with a lift from a higher mix of BTO deliveries.

Bill Hollinger: We expect our Q3 margin to benefit mainly from an increase in operating leverage of roughly 30 basis points, along with a lift from a higher mix of BTO deliveries. Our full year margin guidance implies a further step-up in Q4 at the midpoint about 100 basis points of sequential expansion. We anticipate this improvement to be driven primarily by roughly 60 basis points of positive operating leverage, along with more meaningful contribution from our expanding BTO mix and additional upside from a favorable mix shift towards higher price, higher margin West communities. The projected sequential improvement also reflects some modest offsets, which are incorporated into our guidance. Our selling, general, and administrative expense ratio for the 2026 Q2 was 12.7% at the midpoint of our guidance.

Speaker #3: Our full-year margin guidance implies a further step up in the fourth quarter, at the midpoint, about 100 basis points of sequential expansion. We anticipate this improvement to be driven primarily by roughly 60 basis points of positive operating leverage, along with a more meaningful contribution from our expanding BTO mix and additional upside from a favorable mix shift toward higher price, higher margin West communities.

Speaker #3: The projected sequential improvement also reflects some modest offsets, which are incorporated into our guidance. Our selling, general, and administrative expense ratio for the second quarter of 2026 was 12.7% at the midpoint of our guidance.

Speaker #3: SG&A for the quarter included $1.5 million of expenses related to the planned relocation of our corporate headquarters to Tempe, Arizona, in 2027, which we announced in April.

Bill Hollinger: SG&A for the quarter included $1.5 million of expenses related to the planned relocation of our corporate headquarters to Tempe, Arizona in 2027, which we announced in April. We anticipate recognizing additional relocation-related expenses each quarter until the move is fully completed. We will outline the estimated total cost in our Q2 Form 10-Q, which we plan to file on or about 9 July. These anticipated expenses are included in our guidance. While our total overhead for the quarter decreased from a year ago, our SG&A ratio increased mainly due to lower operating leverage. We are forecasting our 2026 Q3 SG&A ratio to be in the range of 11.3% to 11.9%, and our 2026 full-year ratio to be in the range of 11.4% to 11.8%.

Speaker #3: We anticipate recognizing additional relocation-related expenses each quarter until the move is fully completed. We will outline the estimated total costs in our second-quarter Form 10-Q, which we plan to file on or about July 9.

Speaker #3: These anticipated expenses are included in our guidance. While our total overhead for the quarter decreased from a year ago, our SG&A ratio increased, mainly due to lower operating leverage.

Speaker #3: We are forecasting our 2026 third quarter SG&A ratio to be in the range of 11.3% to 11.9%, and our 2026 full-year ratio to be in the range of 11.4% to 11.8%.

Speaker #3: We expect our SG&A ratio to continue to improve sequentially in the second half of the year, mainly due to increased volume and resulting higher revenues.

Bill Hollinger: We expect our SG&A ratio to continue to improve sequentially in the H2 of the year, mainly due to increased volume and resulting higher revenues. Our income tax expense of $9.9 million for the quarter represented an effective tax rate of 26.6%, compared to the 24.2% for the year earlier quarter. The higher-than-expected rate versus our previous guidance was primarily due to lower benefits from stock-based compensation, reflecting fewer stock options exercises than anticipated. All our outstanding stock options are set to expire in October. We expect our effective tax rate to range from 19% to 21% for the 2026 Q3, which assumes the exercise of all outstanding stock options. For the full year, we anticipate our effective tax rate will be approximately 22% to 24%, which is slightly lower than last quarter's guidance.

Speaker #3: Our income tax expense of $9.9 million for the quarter represented an effective tax rate of 26.6%, compared to 24.2% for the year-earlier quarter.

Speaker #3: The higher-than-expected rate versus our previous guidance was primarily due to lower benefits from stock-based compensation, reflecting fewer stock option exercises than anticipated. All our outstanding stock options are set to expire in October.

Speaker #3: We expect our effective tax rate to range from 19% to 21% for the third quarter of 2026, which assumes the exercise of all outstanding stock options.

Speaker #3: For the full year, we anticipate our effective tax rate will be approximately 22% to 24%, which is slightly lower than last quarter's guidance. As we noted on our previous earnings call, our tax rate in the second half will reflect the reduced impact of energy tax credits due to their elimination for homes delivered after June 30, 2026.

Bill Hollinger: As we noted our previous earnings call, our tax rate in the H2 will reflect the reduced impact of energy tax credits due to their elimination for homes delivered after 30 June 2026. As I previously mentioned, we generated net income of $27.3 million and diluted earnings per share of $0.43. This compares to net income of $107.9 million and diluted earnings per share of $1.50 for the same quarter of last year. Our diluted average share count for the current quarter was down 12% year-over-year, reflecting the impact of our share repurchase activity. Turning to the balance sheet. We continued our balanced approach to capital allocation, investing in future growth and returning excess capital to shareholders. In the Q2, our investment in land acquisition and development was nearly $500 million, bringing our year-to-date total to $1.06 billion.

Speaker #3: As I previously mentioned, we generated net income of $27.3 million and diluted earnings per share of $0.43. This compares to net income of $107.9 million and diluted earnings per share of $1.50 for the same quarter of last year.

Speaker #3: Our diluted average share count for the current quarter was down 12% year over year, reflecting the impact of our share repurchase activity. Turning to the balance sheet, we continued our balanced approach to capital allocation, investing in future growth and returning excess capital to shareholders.

Speaker #3: In the second quarter, our investment in land acquisition and development was nearly $500 million, bringing our year-to-date total to $1.06 billion. This is down 26% from last year's first half, when we purchased the two large land parcels in our Southwest region, as Rob referred to earlier.

Bill Hollinger: This is down 26% from last year's H1 when we purchased the two large land parcels in our southwest region, as Rob referred to earlier. We ended the quarter with an inventory balance of approximately $5.7 billion, up slightly from where we ended 2025. During the quarter, we repurchased 1.4 million shares of our common stock at a total cost of $75 million, bringing our total to a year-to-date repurchases to 2.2 million shares at a total cost of $125 million. With $775 million remaining under our current board authorization and a solid balance sheet, we have the flexibility to continue to repurchase shares. In the Q2, we also paid roughly $15 million in dividends, representing an annualized yield of approximately 2%.

Speaker #3: We ended the quarter with an inventory balance of approximately $5.7 billion, up slightly from where we ended 2025. During the quarter, we repurchased 1.4 million shares of our common stock at a total cost of $75 million, bringing our year-to-date repurchases to 2.2 million shares at a total cost of $125 million.

Speaker #3: With $775 million remaining under our current board authorization and a solid balance sheet, we have the flexibility to continue to repurchase shares. In the second quarter, we also paid roughly $15 million in dividends, representing an annualized yield of approximately 2%.

Speaker #3: We ended the quarter with total liquidity of $1.12 billion, including $200 million of cash and $923 million available under our unsecured revolving credit facility, with $275 million of cash borrowings outstanding.

Bill Hollinger: We ended the quarter with total liquidity of $1.12 billion, including $200 million of cash and $923 million available under our unsecured revolving credit facility, with $275 million of cash borrowings outstanding. Our debt-to-capital ratio was 34.1% at the end of the quarter, compared to 30.3% at the end of 2025, reflecting the credit facility borrowings. We have no debt maturities until June of 2027. With our land position, liquidity, and well-laddered debt maturities, we feel prepared to manage through the current environment. These strengths support a balanced and disciplined approach to capital allocation in 2026 and beyond, our continued focus on long-term value creation for our shareholders.

Speaker #3: Our debt-to-capital ratio was 34.1% at the end of the quarter, compared to 30.3% at the end of 2025, reflecting the credit facility borrowings. We have no debt maturities until June of 2027.

Speaker #3: With our land position, liquidity, and well-laddered debt maturities, we feel prepared to manage through the current environment. These strengths support a balanced and disciplined approach to capital allocation in 2026 and beyond, and our continued focus on long-term value creation for our shareholders.

Speaker #3: For the remainder of 2026, the volume, pace, and timing of land investments, share repurchases, and financing activities will depend on several factors, including our operating cash flow, liquidity outlook, land investment opportunities and needs, our share price, and broader housing market and economic conditions.

Bill Hollinger: For the remainder of 2026, the volume, pace, and timing of land investments, share repurchases, and financing activities will depend on several factors, including our operating cash flow, liquidity outlook, land investment opportunities and needs, and our share price and broader housing market and economic conditions. To wrap up, while the spring selling was softer than expected, given consumer affordability challenges and uptick in mortgage interest rates and broader macroeconomic and geopolitical uncertainty, we made meaningful progress in returning to a predominantly built-to-order business and positioning our operations for future profitable growth. With the first half of the year now behind us and our backlog up sequentially over that period, we have a greater clarity on the drivers shaping the remainder of 2026 and believe we are poised to deliver on our outlook.

Speaker #3: To wrap up, while the spring selling season was softer than expected given consumer affordability challenges, an uptick in mortgage interest rates, and broader macroeconomic and geopolitical uncertainty, we made meaningful progress in returning to a predominantly built-to-order business and positioning our operations for future profitable growth.

Speaker #3: With the first half of the year now behind us, and our backlog up sequentially over that period, we have greater clarity on the drivers shaping the remainder of 2026 and believe we are poised to deliver on our outlook.

Rob McGibney: We will now take your questions. John, please open the lines.

Speaker #3: We will now take your questions. John, please open the lines.

Bill Hollinger: We will now take your questions. John, please open the lines.

Speaker #2: Thank you. We will now conduct a question-and-answer session. If you would like to ask a question, please press star 1 on your telephone keypad.

Operator: Thank you. We will now conduct a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. The confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove a question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We ask that you please limit yourself to one question and one follow-up. Thank you. One moment please, while we poll for questions. Thank you. The first question comes from the line of John Lovallo with UBS. Please proceed with your question.

Speaker #2: The confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove a question from the queue.

Speaker #2: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We ask that you please limit yourself to one question and one follow-up.

Speaker #2: Thank you. One moment, please, while we pull questions. Thank you. And the first question comes from the line of John Lavala with UBS.

Speaker #2: Please proceed with your question.

Speaker #3: Good evening, guys, and thank you for taking my questions. The gross margin walk that you provided from Q2 to Q3, and from Q3 to Q4, was really helpful, so I appreciate that.

John Lovallo: Good evening, guys, and thank you for taking my questions. The gross margin walk that you guys provided from Q2 to Q3 and Q3 to Q4 was really helpful. Appreciate that. I guess the question I have is, I believe you mentioned 30 basis points of sequential operating leverage Q2 to Q3, then 60 basis points from Q3 to Q4. I'm curious, how would this compare in your mind to kind of a normal year? In other words, is there anything unusual in this expected leverage?

Speaker #3: But I guess the question I have is, I believe you mentioned 30 basis points of sequential operating leverage from Q3 to Q4, and then 60 basis points from Q3 to Q4.

Speaker #3: I'm curious, how would this compare in your mind to a normal year? In other words, is there anything unusual in this expected leverage?

Speaker #4: Yeah, John, I think it's a pretty normal trend. We always deliver more in the second half than we do in the first half. It's probably that there was less leverage in Q2 because we had the trough in deliveries than we would have in a normal Q2.

Rob McGibney: Yeah, John, I think it's a pretty normal trend. We always deliver more in H2 than we do H1. There was less leverage in Q2 because we had the trough in deliveries than we would've in a normal Q2. We have an overhead structure in place that can continue to handle the scale as we get into 2027 as well. In part it's what we're seeing in Q3 and Q4. We think we can continue to benefit looking ahead.

Speaker #4: And we have an overhead structure in place that can continue to handle the scale as we get into '27 as well. So, in part, it's what we're seeing in Q3 and Q4, but we think we can continue to benefit looking ahead.

Speaker #3: Okay, that's helpful. And then you did a nice job of answering my next question as well, but maybe I could just ask it a little bit differently.

John Lovallo: Okay. That's helpful. You did a nice job of answering my next question as well. Maybe I could just ask it a little bit differently, that's the Q4 delivery ASP. You did talk about some of the drivers of that. It seems like it's going to approach somewhere around $500,000, which would be up sort of $30,000 sequentially. You talked about BTO and some of the Bay Area deliveries. I guess the question would be, is there any way to kind of parse out the benefit from just BTO versus the Bay Area deliveries? Is there anything else that we should sort of consider in that step up in ASP?

Speaker #3: And the fourth quarter delivery ASP—you did talk about some of the drivers of that. It seems like it's going to approach somewhere around $500,000, which would be up about $30,000 sequentially.

Speaker #3: And you talked about BTO and some of the Bay Area deliveries. I guess the question would be, is there any way to kind of parse out the benefit from just BTO versus the Bay Area deliveries?

Speaker #3: And is there anything else that we should, sort of, consider in that step-up in ASP?

Speaker #4: I think you've really got them all three there, John—between the leverage from the scale, the BTO shift, and then what we're expecting as a mix change that's favorable for both ASP and margin.

Rob McGibney: I think you've really got them all three there, John, between the leverage from the scale, the BTO shift, then what we're expecting is a mix change that's favorable for both ASP, margin, and revenue in Q4. Yeah, we haven't really parsed through outside of the leverage piece, the specific drivers from the other part of that incremental step up.

Speaker #4: And revenue in Q4, yeah. We haven't really parsed through, outside of the leverage piece, the specific drivers from the other part of that incremental step-up.

Speaker #2: Thank you. And the next question comes from the line of Matthew Boulay with Barclays. Please proceed with your question.

Operator: Thank you. The next question comes from the line of Matthew Bouley with Barclays. Please proceed with your question.

Speaker #5: Hey, good afternoon, everyone. Thanks for taking the questions. So, kind of similar line of questioning on the BTO mix and the California mix. I think I heard you say for the fourth quarter gross margin, the midpoint is around 17.3%, and correct me if I'm wrong.

Matthew Bouley: Hey, good afternoon, everyone. Thanks for taking the questions. Kind of similar line of questioning on the BTO mix and the California mix. I think I heard you say for the Q4 gross margin, the midpoint is around 17.3, and correct me if I'm wrong. In that Q4, is the BTO mix kind of at the targeted run rate, and so we can kind of run with that jump off point for 2027? On the California mix, similar question. I think I heard you say you're going to expect benefits there into 2027, so kind of a finer point on your Q4 expectations and what it means for 2027 there on both those fronts. Thank you.

Speaker #5: So, in that fourth quarter, is the BTO mix kind of at the targeted run rate? And so we can kind of run with that jump-off point for 2027?

Speaker #5: And then on the California mix, similar question. I think I heard you say you're going to expect benefits there into 2027. So, kind of a finer point on your Q4 expectations and what it means for 2027 there on both those fronts.

Speaker #5: Thank you.

Speaker #4: Yeah. As far as the BTO mix, I wouldn't say we'll be fully there. We expect the BTO on deliveries is probably going to be plus or minus in the 70% range when we get to Q4.

Rob McGibney: As far as the BTO mix, I wouldn't say we'll be fully there. We expected the BTO on deliveries is probably going to be plus or minus in the 70% range when we get to Q4. I think there's some potential upside beyond that, and we'll still have some spec coverage that we're doing likely as we get into Q4. What was the other part of the question? Oh, yeah, the West Coast piece. We talked about this a little bit on our last call. Certainly we see that playing through in the numbers. When we think specifically about our Northern California and really the Bay Area business, both south and north, our teams there have done a good job of growing the lot pipeline.

Speaker #4: I think there's some potential upside beyond that, and we'll still have some spec coverage that we're doing, likely as we get into Q4. What was the other part of the question?

Speaker #4: Oh, yeah, the West Coast piece. So, we talked about this a little bit on our last call. Certainly, we see that playing through in the numbers, but when we think specifically about our Northern California and, really, the Bay Area business—both South and North—our teams there have done a good job of growing the lot pipeline.

Speaker #4: And we're coming off of a few years where that lot pipeline was a little thinner. Deliveries were a little thinner. But we're seeing a good book of business that's coming through—high ASP, strong margins.

Rob McGibney: We're coming off of a few years where that lot pipeline was a little thinner, deliveries were a little thinner, but we're seeing a good book of business that's coming through, high ASPs, strong margins, and we don't see that as a Q4 event really. Let's see it more as a structural change that's going to be with us for a long time now that we've got our discipline and our rhythm back in that area of the country.

Speaker #4: And we don't see that as a Q4 event, really. We see it more as a structural change that's going to be with us for a long time.

Speaker #4: Now that we've got our discipline and our rhythm back in that area—the country.

Speaker #5: Awesome, great, great. Thanks for that color. And then, secondly, I wanted to, I guess, touch a little bit on the comments around the spring selling season.

Matthew Bouley: Awesome. Great. Thanks for that color. Secondly, I wanted to touch a little bit on the comments around the spring selling season. I think you said there were some price adjustments in April, you said in May there might've been additional challenging market conditions. I'm curious, number one, maybe if you could draw that into June, anything you've seen more recently. Also I'm wondering if these factors are included in the margin guidance for 2026, or any of these kind of pricing adjustments, could they still kind of bleed into what you see in 2027? Thanks, guys, and good luck.

Speaker #5: I think you said there were some price adjustments in April, and then you said in May there might have been additional challenging market conditions.

Speaker #5: So, I'm curious, I guess—number one—maybe if you could draw that into June, anything you've seen more recently. But then, also, I'm wondering if these factors are included in the margin guidance for 2026, or if any of these kinds of pricing adjustments could still sort of bleed into what you see in 2027?

Speaker #5: Thanks, guys, and good luck.

Speaker #4: Yeah. So we've just to take the last part first. We've absolutely put in everything into our guidance as we see it. We're just we've got a lot better visibility than we've had in prior years because of the backlog that we have resulting from our shift to BTO.

Rob McGibney: Yeah. To take the last part first, we've absolutely put in everything into our guidance as we see it. We've got a lot better visibility than we've had in prior years because of the backlog that we have resulting from our shift to BTO. It's fully baked into our guidance and our projections for the back half of 2026. As far as June goes, I would say, we're not really seeing any surprising changes from how things trended in the Q2. We're seeing the typical seasonality trends coming out of the spring selling season, our order pace has been steady, and it's tracking right in line with our expectations. Nothing in the cadence through June has given us any cause for concern.

Speaker #4: So it's fully baked into our guidance and our projections for the back half of 2026. As far as June goes, I would say we're not really seeing any surprising changes from how things trended in the second quarter.

Speaker #4: We're seeing the typical seasonality trends coming out of the spring selling season, but our order pace has been steady and is tracking right in line with our expectations.

Speaker #4: And nothing in the cadence through June has given us any cause for concern. It’s playing out about the way that we would expect it to so far, and it supports our plan and our guidance for the back half of the year.

Rob McGibney: It's playing out about the way that we would expect it to so far, it supports our plan and our guidance for the back half of the year. On top of that, our BTO mix continues to build as a percentage of orders, which we're pleased with.

Speaker #4: On top of that, our BTO mix continues to build as a percentage of orders, which we're pleased with.

Speaker #2: Thank you. And the next question comes from the line of Stephen Kim with Evercore ISI. Please proceed with your question.

Operator: Thank you. The next question comes from the line of Stephen Kim with Evercore ISI. Please proceed with your question.

Speaker #5: Yeah, thanks very much, guys. Appreciate all the color. Bill, nice to hear you on the call again. I guess my first question, I'm going to start with the California or the Bay Area deliveries.

Stephen Kim: Yeah. Thanks very much, guys. Appreciate all the color. Bill, nice to hear you on the call again. I guess my first question, I'm going to start with the California or the Bay Area deliveries. In the communities in particular, I think you indicated that this is something that's going to provide a positive impact, not just this year, but I think you said this year and beyond, and I wanted to touch on that phrase. We obviously have a select group of communities in the Bay with higher ASPs, higher margins, all that kind of thing. I wanted to make sure that I'm understanding that you're saying that there's a pipeline of similar communities in your land holdings behind that. I wanted to make sure that's actually true and we're not going to see things drop back once these communities sell out, for example.

Speaker #5: In the communities, and particularly—I think you indicated that this is something that's going to provide a positive impact not just this year, but, I think you said, this year and beyond.

Speaker #5: And I wanted to touch on that phrase. So, we obviously have a select group of communities in the Bay with higher ASPs, higher margins, all that kind of thing.

Speaker #5: But I wanted to make sure that I'm understanding what you're saying—that this is actually, that there's a pipeline of similar communities in your land holdings behind that.

Speaker #5: I wanted to make sure that that's actually true. I'm not going to see things drop back once these communities sell out, for example. So, can you talk about the pipeline of communities at that kind of price point?

Stephen Kim: Can you talk about the pipeline of the communities at sort of this, that kind of price point? Can you talk about maybe what drove the change effectively? Why maybe the dropout, why you had a period where you didn't have those communities, and just provide some color there. Thanks.

Speaker #5: And can you talk about maybe what drove the change? Effectively, why maybe the dropout, why you had a period where you didn't have those communities?

Speaker #5: And just provide some color there. Thanks.

Speaker #4: Sure. Steve, so as far as the communities themselves, we've generally got larger lot counts in the community portfolio, or the book of business, and just more of them coming.

Rob McGibney: Sure, Steve. As far as the communities themselves, we've got generally larger lot counts in the community portfolio or the book of business and just more of them coming. Some of them are on structured takedowns. As we look at the way that this area has developed for us, to the second part of your question, it's really getting back to what we want to work in this Bay Area business. We have had some changes with the management teams up there over the last several years. We're happy with the team we've got now. They've been delivering good deal flow. We've been pleased with the communities that they've opened, and we've continued to invest in those areas.

Speaker #4: Some of them are on structured takedowns. But as we look at the way that this area has developed for us—to the second part of your question—it's really getting back to what we once were in this Bay Area business.

Speaker #4: So, we have had some changes with the management teams up there over the last several years. We're happy with the team we've got now.

Speaker #4: They've been delivering good deal flow. We've been pleased with the communities that they've opened, and we've continued to invest in those areas. There was a time when the core South Bay was one of our most profitable divisions for a long time, and it had really shrunk down to a pretty small business.

Rob McGibney: There was a time when the core South Bay was one of our most profitable divisions for a long time, and it had really shrunk down to a pretty small business, and we've been growing that back, and we're just now getting to the point where we're seeing the results of that flow through the delivery. It was a bit of a trough, if you will, in deliveries coming out of that specific region that we've now got back on track and we're pleased with.

Speaker #4: And we've been growing that back, and we're just now getting to the point where we're seeing the results of that flow through the delivery.

Speaker #4: So, it was a bit of a trough, if you will, in deliveries coming out of that specific region that we've now got back on track, and we're pleased with.

Speaker #5: Yeah, that sounds really great—kind of more of a normalization then. That's great.

Stephen Kim: Yeah, that sounds really great. Kind of more of a normalization then. That's great.

Speaker #4: Yeah. Exactly.

Rob McGibney: Yeah, exactly.

Speaker #5: Next question. Yeah, next question relates to land. And so, when we look at your landholdings, it seems like you walked away from, I don't know, maybe 1,750 lots or something like that.

Stephen Kim: Yeah. Next question relates to land. When we look at your land holdings, it seems like you walked away from, I don't know, maybe 1,750 lots or something like that. Mostly in your option count, it seems like. You walked away from some options. I was wondering if you could talk about your thinking around that decline. What sort of drove it? Is that getting you to a level that you feel comfortable with? Maybe if you could talk about what you think the long-term optimal level of land owned and option is, not mix, but year supply of each. That would be great. Thanks.

Speaker #5: Mostly in your option count, it seems like. So, you walked away from some options. I was wondering if you could talk about your thinking around that decline?

Speaker #5: What sort of drove it? Were there some things that got you to a level that you feel comfortable with? Maybe if you could talk about what you think the long-term optimal level of land owned and optioned is.

Speaker #5: Not a mix, but a year's supply of each. That would be great. Thanks.

Speaker #4: So, we try to target a three- to five-year supply of lots. There are ins and outs, inputs and takes with that. And if it's the right deal, we may go longer than that.

Rob McGibney: We try to target a three to five-year supply of lots. There are ins and outs and puts and takes with that. If it's the right deal, we may go longer than that, and we certainly buy deals that are closer to just a year's worth of deliveries. As far as the lots that we've chosen to walk away from, it's really just been about staying disciplined to our approach and making sure that as we're focused on driving growth, that's profitable growth. As you know, the market's been choppy. Things have moved around a lot. We're not afraid to walk away from deals that we have under option or under contract if they no longer make financial sense. Our first salvo is to go approach the landowner or the seller and renegotiate a better price or better terms.

Speaker #4: And we certainly buy deals that are closer to just a year's worth of deliveries. But as far as the lots that we've chosen to walk away from, it's really just been about staying disciplined to our approach and making sure that as we're focused on driving growth, that that's profitable growth.

Speaker #4: And as you know, the market's been choppy. Things have moved around a lot. We're not afraid to walk away from deals that we have under option or under contract if they no longer make financial sense.

Speaker #4: And our first salvo is to go approach the landowner or the seller and renegotiate a better price or better terms. But we don't always get that, and that's really the driver of why we've walked away from some of the lots that you're referring to.

Rob McGibney: We don't always get that, and that's really the driver of why we've walked away from some of the lots that you're referring to. Most of them, really all of them, have been deals that we've tied up with a deposit and we're in feasibility or through due diligence and haven't gotten a lot of money invested in them at that point. We're just not going to keep proceeding down a path on a deal that we don't see as meeting our return hurdles.

Speaker #4: Most of them, really, all of them have been deals that we've tied up with a deposit and were in feasibility or through due diligence and haven't gotten a lot of money invested in them at that point.

Speaker #4: And we're just not going to keep proceeding down a path on a deal that we don't see as meeting our return hurdles.

Speaker #2: Thank you. And the next question comes from the line of Mike Dahl with RBC Capital Markets. Please proceed with your question.

Operator: Thank you. The next question comes from the line of Mike Dahl with RBC Capital Markets. Please proceed with your question.

Speaker #5: All right, thanks for taking my questions. Sorry for the repetitive ones on California, but can you just remind us, maybe, what percentage of deliveries and revenues that division used to represent for you?

Mike Dahl: Thanks for taking my questions. Sorry for the repetitive ones on California, can you just remind us maybe what percentage of deliveries and revenues did that division used to represent for you, what did it drop down to these past couple of years? Then when you're talking about having the pipeline, can you just help us quantify a little bit better what percentage of mix this represents, since it does seem to be sort of a meaningful thing for you?

Speaker #5: What did it drop down to these past couple of years? And then, when you're talking about kind of having the pipeline, does that assume—can you just help us quantify a little bit better what percentage of mix this represents, since it does seem to be sort of a meaningful thing for you?

Speaker #4: Yeah, Mike, we don't really have that data at hand. The reason that we specifically called out the Bay Area in the second quarter, or what Rob walked through, is that we had a challenging situation up there.

Jeff Mezger: Yeah. Mike, we don't really have that data at hand. The reason that we specifically called out the Bay Area in the second quarter, what Rob walked through, we had a challenge situation up there. Our team wasn't delivering. Our results really eroded, we didn't share on our calls that the results were eroding, because it would've just come off as an excuse. We powered through it, and we've rebuilt the business. The pipeline's back where it's healthy and going in the right direction. For years and years, the South Bay division was 10% to 15% of our profits, just that one division. A lot of that went away, and now it's coming back, and it's a combination of a high ASP, high margin area that is also performing very well right now. It's one of the best housing markets in the country.

Speaker #4: Our team wasn't delivering. Our results really eroded, and we didn't share on our calls that the results were eroding, because it would have just come off as an excuse.

Speaker #4: And we powered through it, and we've rebuilt the business. The pipeline's back where it's healthy and going in the right direction. And for years and years, the South Bay division was 10% to 15% of our profit.

Speaker #4: Just that one division. A lot of that went away, and now it's coming back. It's a combination of a high ASP, high-margin area that is also performing very well right now.

Speaker #4: It's one of the best housing markets in the country, so we're calling it out now because, at our current scale, the change in ASP can be pretty significant.

Jeff Mezger: We're calling it out now because at our current scale, the change in ASP can be pretty significant, as you're seeing in our guide for Q4. The pipeline's there, and we continue to expect bigger and better things in future years.

Speaker #4: As you're seeing in our guide for the fourth quarter, the pipeline's there, and we continue to expect bigger and better things in future years.

Speaker #5: Yeah, okay. I hear you, Jeff. I think making a finer point at some stage might be helpful, just to underscore the fact and help us all have conviction that that's going to be something that is kind of a good go-forward run rate, or a continued kind of improvement, whatever.

Mike Dahl: Yeah. Okay. I hear you, Jeff. I think a finer point at some point might be helpful just to underscore the effect and help us all with the conviction that that's going to be something that is a good go-forward run rate or continued improvement lever. I guess just shifting gears back to the demand side, I appreciate the comments on June being seasonal. Just that cadence through May, if you were at four a month for the quarter, can you be more specific about where May sat? Then when you talk about June seasonal, was that seasonal as in what you'd see in Q3 versus Q2 typically, or was it seasonal off of what was a weaker than normal May? Just help us dial that in a little bit better, if you could.

Speaker #5: I guess just shifting gears back to the demand side, I appreciate the comments on June being seasonal. Can you just talk about that cadence through May?

Speaker #5: If you were at four a month for the quarter, can you be more specific about kind of where May sat? And then when you talk about June seasonal, was that seasonal as in what you'd see in three Q versus two Q typically, or was it seasonal off of what was a weaker than normal May?

Speaker #5: Just help us dial that in a little bit better, if you could.

Speaker #4: Well, really, March, which we usually expect to be one of our best-selling months of the spring selling season, was what we really saw as soft.

Rob McGibney: Well, really March, which we usually expect to be one of our best-selling months of the spring selling season, was what was really soft. As I walked through in the prepared remarks, there was a lot going on at that time, I think a lot weighing on the consumer psyche, specifically late February, the very end of February, the conflict in the Middle East kicking off. We were happy with the way that sales rebounded in April. I would say that April and May were stronger than March were, if you were to distill it all down. As we've gotten into June, really it's continued about with where we ended up with March. The orders have been strong. They've been in line with our expectations. It's about this time of year, we usually start to see more of a seasonal summer slowdown.

Speaker #4: And as I walked through and prepared remarks, there was a lot going on at that time. I think a lot was weighing on the consumer psyche.

Speaker #4: Specifically, in late February—at the very end of February—the conflict in the Middle East kicked off. So we were happy with the way that sales rebounded in April.

Speaker #4: And I would say that April and May were stronger than March was, if you were to distill it all down. As we've gotten into June, really, it's continued about with where we ended up with March.

Speaker #4: Orders have been strong. They've been in line with our expectations. It's about this time of year that we usually start to see more of a seasonal summer slowdown.

Speaker #4: And without getting into specific sales results and dates and weeks, I'd say what we're seeing right now is aligned with that typical seasonal pattern.

Rob McGibney: Without getting into specific sales results and dates and weeks, I'd say what we're seeing right now is in line with that typical seasonal pattern.

Speaker #2: Thank you. And the next question comes from the line of Alan Ratner with Zelman & Associates. Please proceed with your question.

Operator: Thank you. The next question comes from the line of Alan Ratner with Zelman & Associates. Please proceed with your question.

Speaker #6: Hey, guys. Good afternoon, early evening. I appreciate all the detail so far, and nice job with the improvement towards pivoting back to BTO. My first question: I want to add on to some of the questions on the lot count and, I guess, the land market more broadly.

Alan Ratner: Hey, guys. Good afternoon, early evening. I appreciate all the details so far, nice job with the improvement towards pivoting back to BTO. My first question wants to add on to some of the questions on the lot count and I guess the land market more broadly. Your lot count is down quite a bit over the last four to five quarters, down over 20% from where it peaked early last year. I'm just curious to know, A, as we think about community count beyond this year, how should we think about the impact of the decline we've seen in lot count over the last five quarters? Is that going to result in some compression or a kind of an air pocket in community count, maybe out into 2027 or 2028? The follow-on to that, I guess, is more broadly in the land market in general.

Speaker #6: Your lot count is down quite a bit over the last four to five quarters, down over 20% from where it peaked early last year.

Speaker #6: And I'm just curious to know, as we think about community count beyond this year, how should we think about the impact of the decline we've seen in lot count over the last five quarters?

Speaker #6: Is that going to result in some compression or kind of an air pocket in community count, maybe out into '27 or '28? And the follow-on to that, I guess, is more broadly in the land market in general.

Speaker #6: Have you seen any relief or correction in land prices that gets you guys excited that there might be some opportunities to rebuild that pipeline over the next few quarters?

Alan Ratner: Have you seen any relief or correction in land prices that get you guys excited that there might be some opportunities to rebuild that pipeline over the next few quarters? Thank you.

Speaker #6: Thank you.

Speaker #4: Yeah. Alan, I'll take the first half and then kick it to Rob for the current environment. If you think about it, the lots on the controls started going down as the market started going down.

Jeff Mezger: Yeah. Alan, I'll take the first half then kick it to Rob for the current environment. If you think about it, the lots owned and controlled started going down as the market started going down. As things got very volatile, if you will, with pricing and consumer sentiment and whatnot, we were having trouble getting things to underwrite. If you go back to 2021, 2022, market was going the other way. It was easier to underwrite, we tied up a lot of deals. As we sit here today, we're actively looking at deals each week. We intend to grow the company, we're positioned. Our balance sheet supports it, we do have growth targets out there for 2027 and 2028 that the divisions are pursuing.

Speaker #4: And as things got very volatile, if you will, with pricing and consumer sentiment and whatnot, we were having trouble getting things to underwrite. And if you go back to 2021, '22, the market was going the other way.

Speaker #4: It was easier to underwrite, and we tied up a lot of deals. So, as we sit here today, we're actively looking at deals each week.

Speaker #4: We intend to grow the company, and we're positioned to do so. Our balance sheet supports it, and we do have growth targets out there for 2027 and 2028 that the divisions are pursuing.

Jeff Mezger: What is interesting, I'll hand it to Rob, we're seeing some opportunities for finished lot deals as the markets are resetting, where we can get into things. We have plug-and-play product and get to deliveries sooner than later, as opposed to what we've been through in the Bay Area with long-term entitlement plays. The market is rational to me, and there's finished lot opportunities, and we're chasing those right now.

Speaker #4: What is interesting—and then I'll hand it to Rob—is that we're seeing some opportunities for finished lot deals. As the markets are resetting, we're able to get into things where we have plug-and-play product.

Speaker #4: And get to deliveries sooner rather than later, as opposed to what we've been through in the Bay Area with long-term entitlement plays. So the market is rational to me, and there are finished lot opportunities, and we're chasing those right now.

Speaker #3: Yeah. As far as the overall land market goes, I would say that we're beginning to see more than what we've seen over the past couple of years, as far as the sellers starting to come to terms with the reality of the current market.

Rob McGibney: Yeah. As far as the overall land market goes, I would say that we're beginning to see more than what we've seen over the past couple of years as far as the sellers starting to come to terms with the reality of the current market. I wouldn't say that it's fully adjusted to the point where you can go out in most of our markets and just start adding lots at scale that would meet our underwriting hurdles today. Certainly, looking at things like better terms, in some cases, prices coming down, maybe less competition out there for some of the lots. Overall, I would say that the sellers are starting to get a little more constructive with tethering their lot price and the finished lot price that we would get to where current prices are today and where the current values are today.

Speaker #3: I wouldn't say that it's fully adjusted to the point where you can go out in most of our markets and just start adding lots at scale that would meet our underwriting hurdles today.

Speaker #3: But certainly, looking at things like better terms in some cases, prices coming down, maybe less competition out there for some of the lots. But overall, I would say that the sellers are starting to get a little more constructive with tethering their lot price and the finished lot price that we would get to—where current prices are today and where the current values are today.

Speaker #3: So I think there's more work to do, and it's, again, like with a lot of these things, it's a market-by-market story. Some have softened up more than others, especially where you've seen house prices come down and there's data to point to.

Rob McGibney: I think there's more work to do, and it's, again, like with a lot of these things, it's a market-by-market story. Some have softened up more than others, especially where you've seen house prices come down and there's data to point to. Overall, I'd say there's more rational thinking as far as the land sellers go on the value of their asset.

Speaker #3: But overall, I'd say there's more rational thinking, as far as the land sellers go, on the value of their asset.

Speaker #6: Great. I appreciate the call, guys. Thanks a lot.

Alan Ratner: Great. I appreciate the color, guys. Thanks a lot.

Speaker #2: And the next question comes from the line of Rafe Jadrasich with Bank of America. Please proceed with your question.

Operator: The next question comes from the line of Rafe Jadrosich with Bank of America. Please proceed with your question.

Speaker #5: Hi, good afternoon. Thanks for taking my question. Can you provide the percent of deliveries that were built to order in the second quarter, and maybe the cadence for the back half of the year?

Rafe Jadrosich: Hi. Good afternoon. Thanks for taking my question. Can you guys just provide the % of deliveries that were built-to-order in Q2 and maybe the cadence for H2 of the year?

Speaker #4: Are you talking orders or deliveries?

Rob McGibney: Are you talking orders or deliveries?

Rafe Jadrosich: How much were deliveries in Q2 were BTO?

Speaker #5: For how much were deliveries in the second quarter for BTO?

Speaker #4: Yeah, it was 60% in the second quarter, and we see that progressing. We're not going to call the ball on it. I don't need the exact number.

Rob McGibney: Yeah. It was 60% in Q2. We see that progressing. We're not going to call the ball on the exact number. As I said, we think that'll continue to ramp up, and by the time we get to Q4, I would expect that we would be ± around 70% of our deliveries coming from built-to-order.

Speaker #4: But, as I said, we think that will continue to ramp up, and by the time we get to Q4, I would expect that we would be plus or minus around 70% of our deliveries coming from built to order.

Rafe Jadrosich: Great. That's helpful. As you look at sort of the outlook for gross margin, you mentioned you're starting to see some lumber inflation. What's the assumption in terms of stick and brick costs and land inflation as you move through the H2 of this year?

Speaker #5: Okay, great. That's helpful. And then, as you look at the outlook for gross margin—you just mentioned you're starting to see some lumber inflation.

Speaker #5: What's the assumption in terms of stick-and-brick costs and land inflation as you move through the back half of this year?

Rob McGibney: Anytime we're putting financials together, our guide together, we're basing everything off today. It's today's sales prices, today's cost. We don't have a crystal ball with where things are headed. Certainly, there's been a lot of talk about pressure around fuel-related price increases, and we've been pushing those off and negotiating those off. Now you've got fuel prices coming down. We're not looking out and projecting where commodity prices or things like that may go. We're basing it on as we see it today, where our prices are, where the revenue side is, and where our cost side is coming in. Yeah. The other thing is we are seeing, I mentioned it in my prepared remarks, but across most of our markets, probably close to all of our markets, we're seeing a pretty significant decline in starts year-over-year.

Speaker #4: So, when we look at any time we're putting financials together, our guide together, we're basing everything off today. So it's today's sales prices, today's costs. And we don't have a crystal ball for where things are headed.

Speaker #4: Certainly, there's been a lot of talk about pressure around fuel-related price increases, and we've been pushing those off and negotiating those off. Now, you've got fuel prices coming down.

Speaker #4: So we're not looking out and projecting where commodity prices or things like that may go. We're basing it on, as we see it today—where our prices are, where the revenue side is, and where our cost side is coming in.

Speaker #4: Yeah. The other thing—we are seeing, I mentioned it in my prepared remarks—but across most of our markets, probably close to all of our markets, we're seeing a pretty significant decline in starts year over year.

Speaker #4: And I mentioned the 1,500 homes that we have that are sold but not started right now. I think that's a great asset and a powerful tool that we can leverage for better costs.

Rob McGibney: I mentioned the 1,500 homes that we have that are sold not started right now. I think that's a great asset and a powerful tool that we can leverage for better cost. Even as things get a little bumpier, prices move around, we've got that asset that we can lever for those starts. Generally, when starts are coming down, our trade partners get hungrier for work, and that'll either keep a lid on cost or potentially drive them down from today's levels.

Speaker #4: So even as things get, if they get a little bumpier, prices move around, we've got that asset that we can leverage for those starts.

Speaker #4: And generally, when starts are coming down, our trade partners get hungrier for work. That'll either keep a lid on costs or potentially drive them down from today's levels.

Speaker #2: Thank you. And the next question comes from the line of Paul Prisbilsky with Wolfe Research. Please proceed with your question.

Operator: Thank you. The next question comes from the line of Paul Przybylski with Wolfe Research. Please proceed with your question.

Speaker #5: Thanks, good afternoon. I guess, to start off, congratulations again on the build-to-order shift. Related to that, historically, I think build-to-order has had a 300 to 500 basis point gross margin premium to spec.

Paul Przybylski: Thanks. Good afternoon. I guess to start off, congratulations again on the build-to-order shift. Related to that, historically, I think, build-to-order has had a 300 to 500 basis point gross margin premium to spec. Are you seeing that spread continue to hold or you had to kind of shrink that somewhat to get that increased mix?

Speaker #5: Are you seeing that spread continue to hold, or have you had to shrink that somewhat to get that increased mix?

Speaker #4: No, we actually haven't seen that change in probably the better part of two years. It's been within that range, and really, the midpoint is about right.

Rob McGibney: No. We actually haven't seen that change in probably the better part of two years. It's been within that range, really the midpoint is about right. We could probably even tighten that some. It's right around four points of spread is what we typically see between BTO and spec sales, even within the same community, same product.

Speaker #4: I mean, we could probably even tighten that some. It's right around 4 points of spread, which is what we typically see between BTO and spec sales, even within the same community, same product.

Speaker #5: Okay. And then, I guess you mentioned your re-entry into Atlanta. How long do you think it will take you to get that market to scale, and why now? And do you have any other markets on your radar?

Paul Przybylski: Okay. I guess, you mentioned your re-entry into Atlanta. How long do you think it'll take you to get that market to scale, and why now, and do you have any other markets on your radar?

Speaker #4: Yeah. Well, we had our startup in Seattle several years ago, and that's been a model for us that we would like to follow.

Rob McGibney: Well, we had our startup in Seattle several years ago, that's been really a model for us that we would like to follow. Only a few years have passed since we entered that market, we've now grown it to a top 3 position. We'd like to replicate that in Atlanta, just like we're working on in Boise. Atlanta's very new. We just acquired our first land deal there. I don't really have a prediction for when or how big we can get there, but we think there's a great opportunity. It's a top 10 housing market, we've got a really good template with what we've done with Seattle, what we've done with Boise and other places that we can follow there. We're excited about the opportunity and the growth opportunity we can drive coming out of Atlanta.

Speaker #4: And only a few years have passed since we entered that market, and we've now grown it to a top three position. So we'd like to replicate that in Atlanta, just like we're working on in Boise.

Speaker #4: And Atlanta is very new. We just acquired our first land deal there. I don't really have a prediction for when or how big we can get there, but we think there's a great opportunity.

Speaker #4: It's a top 10 housing market, and we've got a really good template with what we've done with Seattle, what we've done with Boise, and other places that we can follow there.

Speaker #4: And we're excited about the opportunity and the growth opportunity we can drive coming out of Atlanta.

Speaker #2: Thank you. And the next question comes from the line of Jade Rahmani with KBW. Please proceed with your question.

Operator: Thank you. The next question comes from the line of Jade Rahmani with KBW. Please proceed with your question.

Speaker #6: Thank you very much. Just on the San Francisco question, which happens to be, I think, the strongest real estate market in the country—what's the sustainability of your community count and land supply in the market?

Jade Rahmani: Thank you very much. Just on the San Francisco question, which happens to be, I think, the strongest real estate market in the country. What's the sustainability of your community count and land supply in the market and the current demand outlook that you're seeing?

Speaker #6: And the current demand outlook that you're seeing?

Speaker #4: Yeah. Well, like I said, we're happy with the footprint and the portfolio that we've developed. And it really all comes down to acquiring new deals as we sell through and deliver on the assets that we've got.

Rob McGibney: Well, like I said, we're happy with the footprint and the portfolio that we've developed, it really all comes down to acquiring new deals as we sell through and deliver on the assets that we've got. Our teams are out there. We feel like we've got a really strong land team in that market. They know how to work entitlements. They know how to work the processes. They're well connected. Our approach is to grow it, certainly from where we are today. As we mentioned, it had shrunk down. We didn't like seeing that happen. We're happy with getting it back to what I would call stable and now growing, our focus is on continuing to grow it as long as we can continue to find profitable land deals.

Speaker #4: So our teams are out there. We feel like we've got a really strong land team in that market. They know how to work entitlements.

Speaker #4: They know how to work the processes. They're well connected. So, our approach is to grow it, certainly, from where we are today. As we mentioned, it had shrunk down.

Speaker #4: We didn't like seeing that happen. We're happy with getting it back to what I would call stable, and now growing. Our focus is on continuing to grow it, as long as we can continue to find profitable land deals.

Speaker #6: And could you quantify by what magnitude you're expecting to ramp up land investment in the Bay Area?

Jade Rahmani: Could you quantify by what magnitude you're expecting to ramp up land investment in the Bay Area?

Rob McGibney: No. I'm going to stay away from that one. We're looking to grow all of our cities that we operate in, all of our divisions, all of our regions. We don't really do capital allocation in a way that we would say we're going to allocate X to this division or this area. We look at every deal. We're open for business every Monday on land committee, if a deal meets our hurdles and we like the proposition, then we're going to do it. We don't really look at it in terms of allocating a certain amount of capital or defining a certain level of land acquisition that we're after in a specific market.

Speaker #4: No, I mean, I'm going to stay away from that one. I mean, we're looking to grow all of our cities that we operate in, all of our divisions, all of our regions.

Speaker #4: So we don't really do capital allocation in a way that we would say, "We're going to allocate X to this division or this area." We look at every deal.

Speaker #4: We're open for business every Monday on land committee, and if a deal meets our hurdles and we like the proposition, then we're going to do it.

Speaker #4: But we don't really look at it in terms of allocating a certain amount of capital or defining a certain level of land acquisition that we're after in a specific market.

Operator: Thank you. The next question comes from the line of Jay McCanless with Citizens Bank. Please proceed with your question.

Speaker #2: Thank you. And the next question comes from the line of Jay McCandless with Citizens Bank. Please proceed with your question.

Speaker #5: Hey, good afternoon. My first question—just with the very high level of M&A we've seen this year—is that opening up any potential tailwinds for KB, or is it creating some headwinds as this M&A wave seems to keep going?

Jay McCanless: Hey, good afternoon. My first question, just with the very high level of M&A we've seen this year, is that opening up any potential tailwinds for KB, or is it creating some headwinds as this M&A wave seems to keep going?

Speaker #4: Yeah, Jay, for us, it's business as usual. We don't want to comment on what others have done, but we see our real opportunities to grow and are staying focused on KB Home.

Rob McGibney: Jay, for us, it's business as usual. We don't want to comment on what others have done. We see our real opportunities to grow and stay focused on KB Home. A logo changes, I don't know anything else changes.

Jeff Mezger: Jay, for us, it's business as usual. We don't want to comment on what others have done. We see our real opportunities to grow and stay focused on KB Home. A logo changes, I don't know anything else changes.

Speaker #4: A logo changes. I don't know if anything else changes.

Speaker #5: Right. Well, I kind of feel like Alan stole my question around the community count, but I didn't know if all this turnover and ownership was giving you guys an opportunity to maybe grow the community count, add some lots a little bit faster.

Jay McCanless: Right. Well, Alan stole my question around the community count, but I didn't know if all this turnover and ownership was giving you guys an opportunity to maybe grow the community count, add some lots a little bit faster.

Speaker #4: Well, we're always looking at the private builders, and most of the time it's difficult to get it to pencil because they want a premium.

Rob McGibney: Well, we're always looking at the private builders, and most of the time it's difficult to get it to pencil because they want a premium to sell their communities, and you throw the premium on, and then you don't get the margin. Our saying here is keep turning all the rocks over and see what we can find. We are out looking at M&A, but we haven't been able to find one that works in the last couple of years.

Jeff Mezger: Well, we're always looking at the private builders, and most of the time it's difficult to get it to pencil because they want a premium to sell their communities, and you throw the premium on, and then you don't get the margin. Our saying here is keep turning all the rocks over and see what we can find. We are out looking at M&A, but we haven't been able to find one that works in the last couple of years.

Speaker #4: To sell their communities, and you throw the premium on, and then you don't get the margin. So what we're saying here is, keep turning all the rocks over and see what we can find.

Speaker #4: So, we are out looking at M&A, but we haven't been able to find one that works in the last couple of years.

Speaker #5: Understood. Okay. Thanks for taking my questions.

Jay McCanless: Understood. Okay. Thanks. That's my question.

Speaker #2: Thank you. And, ladies and gentlemen, that is the end of the question-and-answer session. That also concludes today's teleconference. We thank you for your participation.

Operator: Thank you. Ladies and gentlemen, that is the end of the question and answer session. That also concludes today's teleconference. We thank you for your participation. You may disconnect your lines at this time.

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