KB Home FY 2Q15 Earnings Call Notes

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A tale of two halves

“we view this year as a tale of two halves. In the first half, among other things, we’ve expanded our community count and built a robust backlog that has strategically positioned our operations for revenue and earnings growth.

In the second half, we expect to realize the benefits of our expanded platform, as we convert our backlog into deliveries and revenues, improve our margins on a sequential basis and achieve greater economies of scale.”

Big headline increases in backlog numbers

“Our ending backlog in units grew 39% to 4,733 and our backlog value rose 57% to $1.6 billion. This was our highest second quarter ending backlog value since 2007. With this solid backlog position and our expectation for continued year-over-year community count growth over the balance of this year, we are now set up for accelerating revenue and profits and to enter next year with terrific momentum”

Housing market continues measured recovery

“the housing market also continues its measured recovery. Inventory levels remain well below normal, and while there is still price appreciation occurring in most markets, it is at a more moderate and sustainable pace. Even with the slight uptick in mortgage rates over the past week, affordability remains at compelling levels. The most encouraging statistical trend that bodes very well for future housing demand is the dramatic increase now occurring in household formation.”

Household formation has been accelerating

“Recent census reports put household formation at an annualized rate of almost 2 million, well above normalized historical levels and significantly higher than the 500,000 households we have averaged per year over the last eight years. This data point suggests that we may be at a turning point in this housing recovery, as household formation has been the missing link.”

No sign of slowdown from oil price decline

“While we remain cautious, we are still not seeing signs of a slowdown in demand in our communities as a result of the oil price decline.”

First time buyer coming back

“our first-time buyer percentage did move up a little bit in the quarter. We were up to 56% – couldn’t tell you if that’s a sustained trend or a coincidence of mix. But we saw an increase in three of the four regions during the quarter – a couple of points a region in first-time buyers. So it’s an encouraging sign and as I’ve shared, it’s what’s been missing to get a sustained housing recovery. We haven’t had the first-time buyer demand and this household formation that’s developing, that was very encouraging.”

The aging of the millennials

“over a 40-year period, the nation averaged 1.2 million household formations. From the period of 2008 to 2014, we averaged 500,000, well below normal. So people that don’t have a job, they’re staying with their parents longer – everything we’ve talked about over the past few years.

With the job growth that’s occurring and the aging of the millennials, they’re getting to a point in their life where they’re getting a job and moving on with their life. So if you go from annualizing the 500,000 to 2 million, it creates demand, whether it’s rental or for sale, there’s a lot more people that are out there needing a roof over their household.”

Strong volumes and pricing trends gave better than expected margins

“The predominant – I guess, when we were forecasting, the 50 basis points predominantly came from leverage; increased revenues on some of our fixed costs are included in margin. What we also saw during the quarter was some pretty strong pricing trends. ”

Seeing broad based strength across markets

“Specific to our business, there is no question that our demand has broadened out, where some regions that weren’t as larger contributor to our orders are stepping up quite a bit. So there is a broadening, but within the markets that we’re in, we’re seeing strength across the markets. There is not – all of them are doing better at their own pace of improvement, but there is none that I can think of where I’d say that’s a tough market today. It’s a pretty broad-based strengthening going on and I think a lot of it’s demographics. This household formation you can’t ignore the demand that gets created when those many people are moving from the roost.”