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Earnings Calls: 
KB Home Earnings Call, Second Quarter 2008
Author: Maclintosh Kuhlengisa
123jump.com
Last Update: 12:44 PM EDT June 30 2008

123Jump:


The homebuilder reported revenues of $639.1 million, down 54% from $1.41 billion in 2007 as housing market conditions remained difficult for the homebuilding industry, with inventories of unsold homes expanding as foreclosures rise to record highs, and consumer confidence continuing to deteriorate amid signs of weakness in the general economy. As a result, the firm reported a net loss of $255.9 million or $3.30 a share, from a net loss of $148.7 million or $1.93 a share in the prior year.


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This summary is based on the second quarter fiscal 2008 earnings call conducted by KB Homes Inc. (KBH) on June 27, 2008.

Management:

- President & CEO: Jeffrey Mezger
- Executive VP & CFO: Domenico Cecere
- Sr. VP & CAO: William Hollinger
- Sr. VP & Treasurer: Kelly Masuda

Key Investors Issues

- Revenues totaled $639.1 million, down from $1.41 billion in 2007.
- The Company reported a net loss of $255.9 million or $3.30 a share, from a net loss of $148.7 million or $1.93 a share in the prior year.
- The cash balance totaled $1.31 billion compared to $390.6 million in 2007.

Half Year Highlights:

- Revenues dropped 50% from $2.8 billion in 2007 to $1.4 billion.
- The firm loss position deteriorated to $524 million or $6.77 a share.

Second Quarter Highlights

Revenues totaled $639.1 million, down 54.7% from $1.41 billion in 2007, largely due to lower housing revenues.

- Housing revenues of $636.7 million declined from $1.30 billion in the year-earlier quarter, reflecting a 41% decrease in homes delivered and a 17% decline in the average selling price.
- The firm delivered 2,810 homes at an average selling price of $226,600 in the second quarter of 2008 compared to 4,776 homes delivered in the year-earlier quarter at an average selling price of $271,600.
- Net orders of 4,200 new homes were down 42% on a year-over-year basis due primarily to a 37% decrease in the community accounts and a softening demand in a number of served markets.
- The firm had 215 active selling communities compared to 342 in 2007, with the community count lower in each of the four regions with decreases ranging from 24% to 45%.

The order cancellation rate improved to 27% of gross orders from 53% in the first quarter of 2008, 58% in the fourth quarter of 2007 and 34% in the year-earlier quarter.

- Cancellation rates have been volatile over the past couple of years but have recently returned to more normal levels.
- The firm incurred a net loss of $149 million or $1.93 per diluted share including a pre-tax non-cash charge of $308 million for impairment and abandonment charges partially offset by an after-tax income of $25 million or 33 cents a share from French discontinued operations.
- The firm delivered 2,810 homes, down 41% from the earlier quarter mainly due to the reduced community counts.

Each of the regions delivered fewer homes compared to the earlier quarter with decreases ranging from 30% to 50%.

- Consistent with the rate of broader market price declines the average selling price for decreased 17% to $226,600 from $271,600 in 2007, a result of the efforts taken over the last several quarters to address affordability.
- Floor plans were simplified, the average square footage was lowered by 10% and pricing was adjusted to remain competitive in the market.
- The housing gross margin fell to a negative 17.5% from a negative 3.9% in the second quarter of 2007.
- Selling, general and administrative expenses decreased $75 million or 38% from a year ago.

The Countrywide KB Home Loans mortgage joint venture continues to perform well, with a retention rate of 80% compared to 70% a year ago.

- The average FICO score of the joint venture mortgage customers was 696, slightly lower then 706 a year ago.
- Government and conforming loans were used in 97% of the second quarter deliveries and over two-thirds of the backlog of sold homes were qualified with an FHA loan.
- The firm had $2.6 billion in inventories compared to $5.2 billion in the prior year and the firm owned or controlled 56,600 lots, down 70% from the peak of 186,300 lots in 2006 and 41% from the 96,700 lots in 2007.
- With $1.3 billion of cash and about $1.1 billion net of letters of credit available under the bank revolving credit agreement, the firm has substantial liquidity to navigate the current environment and to capitalize on opportunities as they arise.
- KB Homes reported a net loss of $255.9 million or $3.30 a share, from a loss of $148.7 million or $1.93 a share in the prior year.

The firm has reduced inventory levels by 50% from a year ago to $2.6 billion and the firm entered the period with 56,600 lots owned or controlled down 70% from a peak of 186,000 in 2006.

- The leverage ratio net of cash was 40.2% at quarter-end, which is at the low end of the targeted range of 40% to 50%.
- Net debt was $856 million, down from $2.4 billion at the 2007 quarter-end, a reduction of 65%.
- The firm had $2.4 billion of liquidity with an undrawn revolver and $1.3 billion of cash, enabling it to be opportunistic with land acquisitions from distressed builders, developers and banks as they arise.
- In July, the firm will redeem all 300 million of the outstanding 7¾% senior subordinated notes, and this should generate almost $16 million of annual savings and a 4.5 month breakeven on the 1.9% redemption premium.

State of The Housing Market:

- Inventories of both new and existing homes hovered at a 10 to 11 month supply throughout the period with buyers remaining on the sidelines concerned with the weakening economy and tightening mortgage lending standards.
- Foreclosure activity continues to rise, compounding the inventory overhang and maintaining pressure on prices.
- This is borne out by the SMP Case-Schiller composite 20 index which reported that prices in April had dropped 15.3% as well as the conference board’s recent release which indicated that the consumer confidence index fell to 50.4% in June.
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