KB Home (KBH) Q1 2012 Earnings Call March 23, 2012 11:30 am ET Executives Jeffrey T. Mezger - Chief Executive Officer, President and Director Jeff J. Kaminski - Chief Financial Officer and Executive Vice President Analysts William Wong - JP Morgan Chase & Co, Research Division David Goldberg - UBS Investment Bank, Research Division Robert C. Wetenhall - RBC Capital Markets, LLC, Research Division Joshua Pollard - Goldman Sachs Group Inc., Research Division Stephen Kim - Barclays Capital, Research Division Ivy Lynne Zelman - Zelman & Associates, Research Division William Alexis Presentation Operator
The discussion today may also include references to non-GAAP financial measures as defined in Regulation G. The reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures and the Regulation G required information is provided in the company's earnings release issued earlier today, which is posted on the Investor Relations page of the company's website under Recent Releases, and through the Financial Information News Releases link on the right-hand side of the page.And now it is my pleasure to turn the conference over to Mr. Jeff Mezger. Please go ahead, Mr. Mezger. Jeffrey T. Mezger Thanks, Kelsy, and good morning, everyone. Thank you all for joining us today for a review of our first quarter results. With me this morning are Jeff Kaminski, our Executive Vice President and Chief Financial Officer; and Bill Hollinger, our Senior Vice President and Chief Accounting Officer. I'd like to start off by saying that we are encouraged by the favorable improvement we are seeing in the national economy, particularly on the jobs front and with consumer confidence. We also believe the overall housing market is improving and is stronger today than a year ago. As inventories continue to ease and prices in many markets have now stabilized, we feel that a modest recovery in housing has indeed begun in many markets across the country. Our traffic levels are up, affordability remains very compelling and prospective homebuyers coming to our sales offices are appearing more confident than we have experienced in some time. Specific to KB Home for the quarter, many of our financial and operating metrics improved over the prior year, with the exception primarily of net orders. So this morning, I want to begin by addressing our order results for the quarter, which were impacted by a combination of circumstances. We do not believe that our net order results are reflective of current market conditions, and I also do not want them to cloud the underlying improvements in our business that I will discuss in detail during this call.
While our gross orders and traffic were up year-over-year, net orders in the first quarter were 1,197 compared to 1,302 in the prior year, a decrease of 8% or 105 homes. There were 3 key factors behind this negative result that I will review: first, a spike in the cancellation rate due to the unpredictability and lack of performance by mortgage companies other than our preferred lender, MetLife; second, our deliberate focus on improving gross margins; and third, the impact of our strategic shift in geographic footprint, all of which affected our sales results and year-over-year comparable for the quarter.On our last earnings call, we shared with you that we missed deliveries that we had expected in the fourth quarter as a result of the nonperformance of outside lenders, which is a reference to mortgage lenders other than MetLife. As December progressed and we diligently worked to close these homes, we learned that even though the majority of these buyers had preliminary or full loan approval letters, the lenders subsequently changed their commitment and would not fund the loan, and therefore the customer could not perform. In many instances, we could not resolve the situation with our buyer and eventually canceled the sale. In addition, MetLife unexpectedly announced in the first week of January that they were immediately shutting down their retail mortgage operations, further impacting our customers' ability to perform. As a result of all of these, we experienced excessive cancellations versus our expectations in the range of 140 during the quarter. We have taken measures to remedy the situation. In March, we were pleased to announce that Nationstar Mortgage will be KB Home's new preferred mortgage provider, which I will talk about in more detail in a moment. A second factor influencing our lower net orders was the strategic shift in our focus to prioritize margin improvement over sales pace. Coming into the new fiscal year, we had accomplished our goal of having a higher backlog level to better support our business model and overhead levels. With the backlog in place, we have moved on to prioritizing higher margins. Read the rest of this transcript for free on seekingalpha.com