KB Home KBH Q2 2025 Earnings Call Transcript

Image source: The Motley Fool

ETCALL PARTICIPANTSChairman, President, and Chief Executive Officer — Jeffrey T

MezgerChief Operating Officer — Robert R

McGibneyExecutive Vice President and Chief Financial Officer — Robert W

DillardNeed a quote from one of our analysts. [ tected] RISKSManagement lowered full-year revenue and margin guidance due to subdued buyer demand, persistent affordability challenges, and consumer uncertainty over high mortgage rates and macroeconomic trends

Net orders per community fell to 4. 5 year over year, with order declines in April and May disrupting typical seasonal trends

Contracts to purchase apximately 9,700 lots were canceled as they "no longer meet our underwriting criteria," signaling further caution on future land investment

TAKEAWAYSTotal Revenues: KB (KBH -2. 91%) reported $1. 53 billion in total revenues, a 10% decrease year over year

SUMMARYManagement explicitly reduced full-year guidance for housing revenues, gross margins (excluding inventory-related charges), and operating income, citing persistent affordability challenges, subdued spring demand, and consumer uncertainty over high mortgage rates and macroeconomic trends

Over half of all communities saw base price adjustments, with regionally variable impacts, and net orders declined in April and May, disrupting historic seasonal trends

Build times recovered to pre-pandemic norms, enabling faster backlog conversion and viding more dery certainty for the remainder of the year

Mezger said, "Reducing base prices late in our first quarter at the start of the strongest selling period of the year optimizes our assets. "McGibney quantified the adverse operational impact of delayed community openings, noting the company "bably missed a couple hundred sales" due to those delays

Dillard explained, "The 40 basis point difference between Q3 and Q4 [gross margin guidance] is almost entirely due to operating leverage, with a small contribution from price and mix. " Nearly 9,700 optioned lots were canceled, with Mezger emphasizing vigilance: "The lots that we walked on in the last quarter were basically I would call them earlier stage controlled lots that we just determined what the market movement in those sub wasn't something that we felt comfortable would hit our returns. "Management re-emphasized a shift away from incentives to a transparent pricing strategy, even as competitors grew more aggressive with incentives, which is not expected to change near-term strategy

INDUSTRY GLOSSARYAbsorption Pace: The number of net sales (orders) per month per community; a critical measure of sales velocity for builders

Built-to-Order: s constructed after a buyer selects specifications (e. , lot, design, elevation), usually viding higher customer satisfaction and margins than speculative, pre-built s

Speculative (Spec) s: s started without a presale, available for immediate or faster closing, often used to drive volume in lower demand periods

Backlog Turnover Ratio: The percentage of s in backlog that convert to closed deries over a specified period; a key metric for predicting future cash flow and recognizing revenue

Optioned Lots: Land parcels for which a company has a contractual right, but not obligation, to purchase and develop, viding flexibility while minimizing risk

SG&A: Selling, General, and Administrative expenses; overhead costs not directly tied to duction

Gross Margin (Excluding Inventory Charges): fit margin after direct costs but before inventory-related write-downs or charges, used to measure operational efficiency for current sales

Full Conference Call TranscriptJeff Mezger: Thank you, Jill, and good afternoon, everyone

We dered solid financial results in the second quarter that met or exceeded our guidance ranges across our metrics as we continue to navigate the current environment

With a healthy balance sheet, our financial position and flexibility are strong

Operationally, we continue to strengthen our by further reducing our build times and lowering our direct costs

As to market conditions, while longer-term the outlook for the housing market remains favorable, driven by demographics and an undersupply of s, consumers are continuing to demonstrate a lack of confidence the short term, which has impacted their purchase decisions

Affordability challenges have persisted, compounded by the variability in mortgage interest rates, which remain elevated, as well as macroeconomic and geopolitical uncertainties

These factors resulted in a more subdued demand during the spring selling season

We exceeded our dery expectations, driven primarily by faster build times, which imved sequentially by seven days and are now back to pre-pandemic levels

However, our net orders declined in April and May, which did not the typical spring trajectory

As a result, even though our average community count was in line with our jection, and our cancellation rate was fairly steady, our monthly absorption pace per community was 4. 5 net orders compared to 5. 5 in last year's second quarter

While our net order pace was below our internal goal, we believe it ranks high among the large duction builders

Our focus is on optimizing our assets to generate the highest returns, balancing pace and price on a community-by-community basis

In stronger market conditions, we believe this will yield an annual average absorption pace of five net orders per month per community, as we would increase price in order to maximize margins rather than run our communities any faster

When the market slows, we would expect a pace of roughly four net orders per month per community

This is not a fixed apach; it allows for flexibility to adjust to changing market conditions as we determine the appriate pace to achieve the best possible returns

For example, reducing base prices late in our first quarter at the start of the strongest selling period of the year optimizes our assets

Doing so in the fourth quarter, when demand is typically more inelastic and speculative builders are competing to finish their fiscal years, is not the optimal way to manage our assets

The incremental volume in that context tends to be minimal and comes at a great cost to our margins

Finding the right balance comes from adjusting prices to maintain or increase our absorption pace so that each community has the appriate selling cadence while maximizing margins, returns, and cash flow

Market conditions change over time

As we continue to sell through our inventory, our goal is to steer our back to this historical range of built-to-order s over time

It is our core competency and a key differentiator from a competitive standpoint, setting us apart from the other large duction builders

More importantly, from a consumer standpoint, it offers buyers choice with features we know they value based on our survey data

Our buyers can significantly influence their final sales price as they personalize their choice of lot, elevation, and design studio selection, aligning their monthly payment with their budget

Our studios also contribute to our high customer satisfaction scores as buyers draw value from that aspect of our cess, and they enhance our gross margins

As our built-to-order mix grows, we believe it will drive a higher gross margin for our company over time

With market conditions having softened, and taking our net order results from the first half of this year into consideration, resetting our revenue expectation is appriate

We anticipate the lower top line will contribute to lower margins, although we continue to pursue additional imvements in build times and direct costs, and we are rightsizing our overhead structure to align with our lower volume this year

Let me pause here for a moment and ask Rob to vide more details on our sales as well as an operational

Rob McGibney: Thank you, Jeff

Operationally, our divisions are executing well on the fundamentals

Maintaining our high customer satisfaction levels, further imving build times, lowering our direct costs, and balancing pace and price to optimize each asset

We exceeded our anticipated deries in the second quarter, one example of our solid execution, which had a positive impact on our financial results for the quarter

With respect to sales, on our last earnings conference call, we had outlined the steps that we had begun to take in February to reposition our communities

We simplified our sales apach to vide what our buyers want, which is securing a that meets their needs at the best possible price

Our strategy focuses on dering the most compelling value, imving affordability with transparency

Rather than relying on incentives, we focused on adjusting base pricing, and consumers responded

Three weeks into March, we had achieved solid weekly net orders with an absorption pace that was apaching seasonally normalized levels

Moving into April, consumers grew increasingly apprehensive the economy and rising geopolitical tensions, driving consumer confidence to a thirteen-year low

As a result, the housing market cooled

In response, we actively adjusted base prices in our underperforming communities to remain aligned with local market dynamics, including rising resale inventory and softening prices in some

Despite these actions, demand weakened

We believe this was due not only to the lack of consumer confidence but also to mortgage interest rates, which edged up in early April and remained high and variable for the balance of the quarter

In addition to these broader macroeconomic factors, we encountered municipal delays and final utility sign-offs and certificates of occupancy for model s that impacted the timing of a number of our planned community openings

While these issues were relatively minor in nature, largely driven by local municipal staffing shortages and administrative bottlenecks, they shifted some of our grand openings to later in the second quarter or into our third quarter, which in turn impacted our net orders in the second quarter

For the full quarter, our average absorption pace was 4. 5 net orders per month per community

A good result in this environment, although below our targeted range for the spring

We are further strengthening our community opening cess by enhancing coordination with stakeholders to imve visibility and responsiveness, helping us better anticipate and navigate potential delays going forward