KB Home (KBH) Q3 2024 Earnings Call Transcript Highlights: Strong Revenue and EPS Growth Amid ...
Revenue: $1.75 billion for Q3 2024.
Gross Margin: 20.6% for Q3 2024.
Net Income: $157.3 million for Q3 2024.
Diluted Earnings Per Share (EPS): $2.04 for Q3 2024.
Operating Income Margin: 10.8% for Q3 2024.
Book Value Per Share: Increased 13% year-over-year.
Net Orders: 3,085 for Q3 2024.
Average Selling Price: $481,000 for Q3 2024.
Community Count: 254 communities open for sales at the end of Q3 2024.
Land Investment: $845 million in Q3 2024.
Liquidity: $1.46 billion at the end of Q3 2024.
Share Repurchases: $150 million in Q3 2024.
Return on Equity: Expected to be around 16.5% for FY 2024.
Release Date: September 24, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
KB Home (NYSE:KBH) achieved double-digit year-over-year growth in revenues and diluted earnings per share in the third quarter.
The company generated total revenues of over $1.75 billion and diluted earnings per share of $2.04.
Cancellation rates remained low, and build times have compressed, leading to higher-than-anticipated home deliveries.
The company invested $845 million in land acquisition and development, a 50% year-over-year increase, positioning for future growth.
The Federal Reserve's recent interest rate cut is expected to benefit consumer confidence and affordability, potentially boosting demand.
Negative Points
Gross margin was slightly lower at 20.6%, down from the past two quarters.
Operating income margin was within the guided range but lower than the prior year at 10.8%.
Buyers showed hesitancy due to elevated interest rates and economic concerns, leading to softened demand in late June through July.
The company had to adjust pricing in some communities to maintain sales pace, impacting overall revenue.
Higher land and development costs, along with competitive pressures, continue to challenge profitability.
Q & A Highlights
Q: Can you unpack the $7.5 billion revenue outlook for 2025? Is it more volume-driven or price-driven, and how does community growth play into that? A: Jeff Kaminski, CFO: We decided to provide high-level guidance this quarter. Our community count, backlog, starts, and absorption assumptions support the $7.5 billion estimate. Given economic uncertainties, we kept our guidance high-level and will provide more details in January.
Q: How will you approach a lower-rate environment between Q4 and next year? Will you adjust home prices or mortgage concessions? A: Robert Mcgibney, COO: Lower rates are good for us and the consumer. We focus on selling the home value rather than the biggest mortgage incentive. We adjusted prices in some communities to drive pace. As rates come down, we expect to lower incentives without reducing revenue, which should expand gross margins.
Q: Is there headroom on your absorptions from the current level, and when is the inflection in community count likely to happen? A: Jeff Kaminski, CFO: There's always room for improvement in absorptions. We expect a strong spring selling season given the right conditions. We will provide more details in January.
Q: What drove the 20.7% gross margin in Q3 relative to the 21-21.4% outlook for Q4? A: Jeff Kaminski, CFO: The Q3 margin was impacted by a higher West Coast mix, pricing adjustments, and reduced homebuyer incentives. Sequentially, we expect West Coast margins to improve, contributing to the Q4 margin guidance.
Q: How do you see the dynamic of existing home inventory coming back into the market? A: Jeffrey Mezger, CEO: More resale inventory will help the overall housing market. Inventory is still limited at our price points, so we are well-positioned to compete favorably as resale opens up.
Q: Are there any potential quick changes you're making with brokers due to recent settlements? A: Robert Mcgibney, COO: The process is evolving. We now require buyers to show their compensation agreement with their realtor. We typically pay up to 2%, but not more. We focus on reaching buyers directly through digital marketing.
Q: Do you think there's an opportunity to bring build cycle times lower than your historical average? A: Robert Mcgibney, COO: Yes, we have programs in place to continue accelerating build times. Some divisions are already building in about 110 days. We aim to get closer to four months, which will improve our return ratios.
Q: How should we think about your free cash generation going forward? A: Jeff Kaminski, CFO: We focus on asset efficiency and inventory turn. Reducing build times has been a big cash generator. We will continue to allocate capital carefully and focus on shareholder-friendly allocations.
Q: What is your outlook on direct costs and land inflation? A: Robert Mcgibney, COO: We see opportunities to continue driving down direct costs through value engineering and simplifying options. Land costs have stabilized but remain high. We incorporate these costs into our underwriting to ensure deals make sense.
Q: What is your spec versus built-to-order (BTO) mix, and how do margins differ between the two? A: Robert Mcgibney, COO: Our current mix is roughly 60% spec and 40% BTO. We aim to return to an 80/20 mix, as BTO homes typically have higher margins due to personalization.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
This article first appeared on GuruFocus.