KB Home CEO Jeffrey Mezger had lots of good things to talk about during the company's fourth quarter and year-end earnings call Tuesday. The company posted $100.7 million in profits, thanks to a hefty $191.7 million tax refund. It also grew gross margins for the fifth consecutive quarter; increased cash on the balance sheet; and logged year-over-year order growth during the quarter. The biggest disappointment was the $77.2 million in inventory and joint-venture impairments and option write-offs.
But despite the relatively strong finish to its fiscal year, Mezger appeared rather measured in his remarks regarding the company's performance in 2010. He said he expected the company to achieve operational profitability in the latter half of 2010, but he said it would be unlikely that the improvement would offset the company's expected losses in the first half of the year. But just how big--or small--that change would be hinges almost entirely on the company's fiscal 1Q 2010, according to the KB Home executive.
Mezger said current projections are that KB's unit volume will remain relatively flat in 2010 compared with 2009, with closings coming in between 8,000 and 9,000 homes. However, the extended federal home buyer tax credit, which expires April 30, is the big X factor in the company's performance projections. If the program gives a good boost to home buyer demand, the company stands to capture critical order growth that will help carry its performance through the back half of the year. On the other hand, if the tax credit falls short of expectations, KB Home could be looking at another tough year.
Mezger said the company was positioning itself to capture as many new orders as possible during the first quarter.
First, the company was going to continue production of its highly successful Open Series product line. More than 50% of deliveries in 2009 were Open Series product, and Mezger said he expected that percentage to go up in 2010, helping sales and absorptions.
Second, the company bulked up on lower-cost finished lots during the fourth quarter, spending roughly $375 million in land acquisition and development, while shedding roughly $50 million in less strategic land positions.
That spending isn't likely to slow down any time soon; the company's land spend budget for 2010 was double what it was in 2009. The new lots give KB Home the opportunity to quickly increase its community count, if necessary.
Improved cycle time also will play a big role in the company's ability to roll out new communities on the fly. Mezger said many divisions' cycle times were down to 4.5 months from contract to close, which includes securing home buyer loan approval, permitting, and options selections. And there's still room to improve. "Overall, I think we can shave another three to four weeks off [cycle time], at best," Mezger said. "But at a certain point, you get where you are running the engine too hot."
Third, management is looking at ways to ensure the company has ample quick-close inventory on hand to meet demand. Although Mezger stopped short of saying that the company would ramp up its spec production--"we remain firmly committed to our built-to-order strategy"--he said company management was evaluating several alternative strategies to have more homes ready for move-in sooner. One such strategy would be to basically to pull a page from M.D.C. Holdings' playbook and start more homes, but halt construction at drywall, a technique that allows for both a rapid close and customer customization with options and upgrades.
"We will have a strategy in place to avoid the disadvantage we were in last fall," Mezger said. With an average of less than one spec home per community, management felt the company left closings on the table, so to speak, as the initial first-time buyer tax credit approached its planned November expiration.
When pressed by analysts to spell out what a best-case scenario would look like in 2010, Mezger said that assuming market stabilization, the company had the capacity to grow community count fast enough to translate into a 20% to 30% increase in units year-over-year.
However, he noted that resale markets were still pressuring prices in key markets in the Carolinas, Florida, and Nevada, making that growth more difficult to achieve. "It's still a little wobbly," Mezger said. "[But] we'll be able to grow in a hurry when each of these markets stabilize."
Sarah Yaussi is executive editor of BIG BUILDER magazine.
Learn more about markets featured in this article: Los Angeles, CA.