KB Home(US:KBH)2019-09-26 02:07Financial Data and Key Metrics Changes - The company generated total revenues of $1.2 billion and diluted earnings per share of $0.73 in Q3 2019, with a gross margin of 18.9% excluding inventory-related charges [7][19][23] - The return on equity is expected to accelerate from 6.3% in 2016 to over 12% in 2019, with diluted earnings per share projected to increase by more than 150% relative to 2016 [6][18] - The company reduced its debt to capital ratio by 550 basis points over the past year, achieving the high end of its tightened target range [7][28] Business Line Data and Key Metrics Changes - The company opened 26 new communities during the quarter, boosting the average community count by 18% year-over-year [8][25] - Monthly net orders advanced to 4.3 per community, resulting in a 24% growth in net orders and a 25% increase in net order value to $1.3 billion [9][20] - Deliveries to first-time buyers accounted for 55% of total deliveries, reflecting the company's focus on this segment [10][11] Market Data and Key Metrics Changes - Market conditions remain favorable, supported by low mortgage interest rates, steady economic growth, and high consumer confidence [8] - The West Coast region saw a 32% growth in net orders, with the Southwest region delivering the highest net order increase of 40% [13][14] - Demand in Phoenix exceeded 60% net order growth, driven by strong economic conditions and lower cost of living [15] Company Strategy and Development Direction - The company aims to profitably grow its business through consistent implementation of its core business strategy while strengthening its balance sheet [5][12] - The focus remains on expanding community count and targeting median household income segments, particularly first-time buyers [10][12] - The company is committed to advancing market share and reducing build times through local scale benefits [12] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in a strong finish to 2019, anticipating meaningful year-over-year increases in key financial metrics [17][18] - The backlog value of $2.3 billion and community count growth position the company to deliver over $5 billion in revenues next year [18][27] - Management noted that the principles of the Returns-Focused Growth Plan will continue beyond 2019, focusing on profitable growth and higher returns [17][28] Other Important Information - The company invested $442 million in land, land development, and fees during Q3, with $174 million representing new land acquisitions [26] - The effective tax rate for the quarter was approximately 26%, with a projected rate of 28% for Q4 [25] Q&A Session Summary Question: Update on pricing and strength of price hikes by product segments - Management noted that pricing strength varies by community and that they are balancing price and pace while achieving target absorption [31][32] Question: Insights on California's order growth and pipeline for 2020 - Management confirmed strong community count growth in California, particularly in the Bay Area, and expressed confidence in maintaining a solid pipeline for 2020 [34][66] Question: Comments on cycle times and labor market pressures - Management acknowledged potential labor tightness due to stronger demand but emphasized their strategy to leverage scale to manage build times [38] Question: Expectations for margins in 2020 - Management anticipates incremental improvements in both gross margin and SG&A, leading to stronger operating margins [45][46] Question: Performance of the mortgage banking joint venture - Management reported a capture rate of 72% for the mortgage banking joint venture, indicating strong performance and expectations for growth [16][48] Question: Observations on industry incentives and competitor activity - Management observed that incentives were lessening as inventory pressures eased, leading to a more rational pricing environment [84]