KB Home may have lost more money than analysts expected in its first quarter of 2010, but by this time next year, the company is expected to be profitable again, CEO Jeffrey Mezger told analysts Tuesday.
Mezger said all the pieces are in place for improvement: Improved margins, compressed cycle times, even-flow production, a land-light position, and transformed product offerings in the form of its Open Series houses.
"We are not declaring that the housing industry is robust," said Mezger. However, "we remain bullish on our company's ability to compete."
KB Home lost $54.7 million, or $0.71 per share, in its first fiscal quarter ending Feb. 28, compared with a net loss of $58.1 million, or $0.75 per share, in the same quarter of 2009. Analysts' consensus was $0.42 per share.
On the other hand, new orders were up 5% to 1,913 in the quarter, from 1,827 in 2009's first quarter. And backlog at 2,713 homes had its first year-over-year increase in more than four years. It had 2,651 homes in backlog at the same time last year.
The company's quarter didn't start so well with December orders. Mezger credited that to the sunset of the home buyer tax credit last fall.
However, sales took off with the start of 2010, growing steadily for the rest of the quarter, "and we were able to make up for this shortfall," Mezger said, adding that the extended/expanded home buyer tax credit does seem to be spurring some purchases.
The company's popular Open Series line of plans rolled out during the past year are also helping sales, executives said. Last year, Open Series homes accounted for 50% of all sales, though they hadn't been integrated in all the company's communities yet. Executives didn't have solid numbers for how many of the company's more recent sales were Open Series, but they did say 80% of the first quarter deliveries were to first-time buyers and a good percentage of those were for Open Series houses.
In order to make sure the company has enough quick-delivery homes to meet demand within the extended/expanded tax credit time frame, KB is ramping up the number of spec homes it has started.
"The general guideline is one month's [worth of] sales in entry-level communities that have demonstrated predictable and consistent absorption rates," Mezger said.
That doesn't mean KB has abandoned its fierce belief that building homes to order is a best practice, he added. It's just that Mezger said he thinks the company lost sales last fall because it didn't have homes ready to meet demand spurred by the tax credit.
KB's big mission for 2010 is to bring on new communities with land prices reset to match the depressed market. The market is beginning to stabilize, and "we think the time is right once again to reinvest in our future growth," Mezger said. "We have the ability and resources to ramp up our community count through the year."
The company has earmarked $600 million for land and land development through the year. That said, it still expects to end the year with more than $1 billion in cash.
One operating margin analysts zeroed in on during the call was the company's sales, general, and administrative costs, which were up to $72.2 million in its first quarter, up nearly 18% from last year's same quarter.
Management told analysts the increase was outside of the company's control. About $6 million was related to the company's price increase. The company was required to mark to market the increased value of stock appreciation rights and phantom shares. Last year, the company was able to lower its SG&A costs after the stock fell in value.
The other increased line item outside the company's control was for higher legal expenses related to paying the defense costs of former CEO Bruce Karatz, who is on trial for allegations that he stole from investors by backdating stock options he received and then lying about it to the home builder's lawyers.
Karatz's name wasn't mentioned during the conference call. He was referred to as the company's "former chairman and CEO."
Apparently, under the laws of Delaware where KB is incorporated, the company is required to pay legal defense costs, company officials said.