KB Home Earnings Call Insights: Guidance Details and Product Prepositioning

KB Home (NYSE:KBH) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

Guidance Details

Michael Rehaut – JPMorgan: On that topic, my first question, when you discussed your expectation for further improvement in the back half of the year, recognizing that you haven’t given specific guidance, but you did have a pretty material improvement obviously sequentially in year-over-year in this current quarter. Given the pricing trends that you’ve been able to realize and the fact that we are still off from mid-cycle 19%, 20% or better that you saw in late 90s time period. When could we expect to get back to that 20% or better type of level? Would it be in the next couple of quarters or would that be more of a fiscal ’14 event?

Jeffrey T. Mezger – President, CEO and Director: As you already said Mike, we haven’t given guidance on where we think our margins are headed. Having said that, we did share that we expect continued sequential growth in our gross margins. We have a lot of things in play, many of which I shared in my comments and we shared at the Investor Day relative to opportunities in the studio and the premiums and our built-to-order model. We also have a nice mix of product rotation as we open up new communities and close out of older ones. So, I can’t give you the date when we will hit the 20%, you’ve referenced, but we’re continuing to actually sequentially improve, and at this time we’re already north of 18%. So, we’ve moved pretty significantly in the last year, I’m not saying, you’ll see that kind of significant going forward, but we think we’ll continue to improve and at some point we’ll get there.

Michael Rehaut – JPMorgan: I appreciate that, and certainly to be able to hold on to a 300 plus sequential improvement is impressive in itself, and certainly the outlook for expansion is encouraging. The second question just on the ASP guidance of 285 to 290 for the year that kind of implies more of a flattish outlook for the back half, I know you said that ASP should improve throughout the rest of the year, but I would think the numbers the way we’re looking at them would only bear just a very modest sequential improvement for here. So, I was wondering if you could elaborate on that a little bit if our math is correct and if there is some mix shift items going on, because certainly as you mentioned before, you do have positive pricing momentum and everything else equal that would imply perhaps a more material improvement in the back half?

Jeff Kaminski – EVP and CFO: Sure, Michael. Yeah, I can respond to that. During the quarter, we had a nice mix shift. It helped us about 7 percentage points, actually in the mix shift to West. So, we are using a little bit of caution, are forecasting of where those delivery numbers will be and where the revenue will come from in the third and fourth quarter and that is moderating. I’d say the pace of improvement, but nonetheless, we still see sequential improvement both in the third and in the fourth quarter of this year. We’ve had some pretty high comps in the last two quarters. The first quarter is up 24%, of course as more recent quarter is up 25%, full year last year was up about 10%. So, we are enjoying the increases, the strategy is working, continues to work. We are seeing everything ranging from increasing average square footage in our communities to the community placements to regional shift helping us, but we stand by the guidance for the full-year of 285 to 290 for ASP.

Product Prepositioning

Joey – Wells Fargo Securities: I had a question about your product prepositioning. This is actually (Joey) on for Adam. How far do you think you are in your product repositioning strategy and if you’re halfway there or three-fourth of the way there, how much longer, how many more quarter until you kind of get to your goal?

Jeffrey T. Mezger – President, CEO and Director: Joey, it’s an interesting question because we really haven’t looked at it that way. Certainly, the new communities were opening are aligned with our strategy and are very successfully for the most part, and until we get to our maximum market potential in our 33 markets I would say that we have a lot of upside still, but it’s a nice combination as we closed one of our older communities and open a new one. We think, through the things we’ve already identified in this call we’ll continue to have a positive impact from all these initiatives for some time going forward.

Joey – Wells Fargo Securities: A question on current trends in June. If you could help us with what you’re hearing from the field, real-time feedback from your communities on what’s been going on with recent trends in traffic and orders that would be really helpful.

Jeff Kaminski – EVP and CFO: We typically don’t give a lot of detail on intra-quarter, but I can tell the current trends seem to be holding up. I think with all the noise that you’re reading in the media and the press and everything else on interest rates and what it’s doing in my opinion, at least in the short-term I think it’s going to create more urgency and buyers that want to get to the table will get to the closing table quicker. We’re seeing it in a lot of anecdotal I guess stories from the field at this point and we’re really not seeing any negative impact so far from the headlines.

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