KB Homes Q2 2026 Earnings Call

THE SELF STORAGE REPORT — EPISODE TRANSCRIPT Episode: KB Homes Q2 2026 Earnings Call Company / Call: KB Home — Second Quarter Fiscal 2026 Earnings Conference Call. Executives: Jill Peters, Senior Vice President, Investor Relations; Jeff Mezger, Executive Chairman; Rob McGibney, President and Chief Executive Officer; Bill Hollinger, Senior Vice President and Chief Accounting Officer; Thad Johnson, Senior Vice President and Treasurer. Analysts: John Lovallo, UBS; Matthew Boulay, Barclays; Stephen Kim, Evercore ISI; Mike Dahl, RBC Capital Markets; Alan Ratner, Zelman and Associates; Rafe Jadresic, Bank of America; Paul Przybylski, Wolfe Research; Jay Remani, KBW. Recorded: June 24, 2026 Video: https://www.youtube.com/watch?v=QXaclM39J6s Key topics: KB Home second quarter fiscal 2026 results with housing revenues of $1.11 billion; net income of $27.3 million and diluted EPS of 43 cents; 2,395 homes delivered, down 23%; average selling price of $461,900; the strategic return to a predominantly built-to-order model at 60% of Q2 deliveries and roughly 70% targeted by Q4; backlog up 45% since the start of the year; over 59,000 lots owned or controlled, 38% of them controlled; the Bay Area and South Bay division rebuild; the corporate headquarters relocation to Tempe, Arizona in 2027 and $1.5 million of related Q2 expense; third quarter SG&A ratio guidance of 11.3% to 11.9%; a softer-than-expected spring selling season and March slowdown; re-entry into Atlanta plus growth in Boise and Seattle; over $90 million of capital returned to shareholders; book value per share of nearly $62; and lumber and stick-and-brick cost assumptions Note: Speaker attribution reconstructed from raw captions. Light cleanup of transcription errors only; wording preserved. Timestamps and YouTube chapter markers removed. Turns marked [attribution inferred] could not be attributed with certainty. ————————————————————————————— Operator: until July 23rd, 2026. I will now turn the call over to Jill Peters, senior vice president, investor relations. Thank you, Jill. You may begin. Jill Peters: Thank you, John. Good afternoon, everyone, and thank you for joining us today to review our results for the second quarter of fiscal 2026. On the call are Jeff Mezger, executive chairman, Rob McGibney, president and chief executive officer, Leo Hollinger, senior vice president and chief accounting officer, and Thad Johnson, senior vice president and treasurer. During this call, items will be discussed that are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future results, and the company does not undertake any obligation to update them. Due to various factors, including those detailed in today's press release, and in our filings with the Securities and Exchange Commission, actual results could be materially different from those stated or implied in the forward-looking statements. In addition, an explanation and or reconciliation of the non-GAAP measure of adjusted housing gross profit margin, as well as any other non-GAAP measure referenced during today's discussion to its most directly comparable GAAP measure, can be found in today's press release and or on the investor relations page of our website at kbhomes.com. And finally, please note all figures are based on our quarter ended May 31, and all comparisons are on a year-over-year basis unless otherwise stated. And with that, here is Jeff Mezger. Jeff Mezger: Thank you, Jill, and good afternoon, everyone. We are pleased to report second quarter results that met or exceeded the midpoint of our key guidance ranges and reflected sequential improvement in our adjusted housing gross profit margin. Operationally, our execution remains strong as we achieved double-digit year-over-year community count growth and further reduced our build times. We exceeded our expected mix of built-to-order sales during the quarter and with the return to this core business model, we expect to have more predictability in delivers at better gross margins than we would achieve by relying on selling inventory homes. At a high level, our second quarter results included total revenues of $1.1 billion and diluted earnings per share of 43 cents. With our significant financial flexibility, we remain balanced in our capital allocation, investing for growth while also returning capital to our shareholders. We repurchased 1.4 million shares of our common stock at an average price below our current book value per share. We believe this is an excellent use of our cash, accretive to both our earnings and book value per share, contributing to improving our return on equity over time. Inclusive of dividends, we returned over 90 million dollars in capital to our shareholders in the second quarter. In addition, we continue to expand our book value per share to nearly $62. At this time, let me turn the call over to Rob. Rob McGibney: Thank you, Jeff. Our teams continued to execute well, balancing pace and price in response to market conditions, driving further efficiencies in build times, and managing our direct costs with discipline. But, I will spend most of my time today talking about our strategic return to what KB Home does best in utilizing a built-to-order model. One year ago on our second quarter fiscal 2025 earnings conference call, we shared our intention to return to predominantly BTO business. We acknowledge that doing so would create a temporary trough in deliveries, which we believe is now behind us. Our BTO approach and the benefits of it extend beyond any single quarter's results. It is a structural repositioning of our company that we believe will enable stronger, more sustainable performance over time and across market cycles. The fundamental premise of our built-to-order model is putting the customer at the center from day one. Our buyers choose their lot, floor plan, and personalized finishes. The result is a home that is that has real, specific value to the people who will live in it. Homes built to customer specifications do not require heavy incentives to sell. The buyers are already invested in and feel a connection to the homes they created. This is in contrast to a speculative business model where incentives are used to create value. In that model, the builder increases the incentives to the the point at which the buyers believe they have been adequately compensated for features and finishes they did not choose. Our low cancellation rate reinforces this point. Buyers who commit to a built-to-order home are genuinely invested in it, which means our backlog converts into closings. Critically, for how we run the business, built-to-order creates a sold backlog before a single foundation is poured. Of the 3,317 net orders we generated in the second quarter, 73% were built-to-order homes. This is not just a mix metric. It is the result of a deliberate focus, creating a backlog of sold, not yet started homes, which we believe has three principal benefits. First, it gives us visibility and predictability. We enter our construction cycle with certainty about the key variables: the buyer, the price, our cost to build, and the expected close date. When a buyer commits and we lock in the purchase price, our direct costs are established before a shovel hits the ground. We are not exposed to material or labor cost increases for that home after construction begins. Crucially, we know the margin we will achieve at delivery before we start. We view this as a fundamentally lower risk profile than a speculative model where a builder starts a home with an assumption of the future sales price and then finds later, at the time of sale, that market conditions may require price reductions or heavy incentives, which compress the margin that looked attractive when construction began. The visibility and predictability that BTO provides translates directly into more efficient operations and more dependable margins at delivery. Second, it gives us leverage with our trade partners. We currently have over 1,500 sold homes that have not yet started construction. This pipeline of pending starts is an asset we can leverage in negotiations, particularly when starts are lower in most of our markets as they are now. Our trade partners want volume and predictable workflow, and we can offer both. In exchange, we secure better costs, keep skilled crews on our job sites, and maintain the even flow production cadence of weekly starts per community that drives efficiency across our entire build cycle. Third, it supports margin quality over time. We can produce better margins on BTO homes because we're building homes for buyers who have made choices for themselves with the personal personalization and value that matter to them. A predominantly BTO business operating at scale with disciplined execution is the foundation that enables enables us to expand our margins over time. We focused our selling efforts in our second quarter on BTO homes, and our divisions delivered solid performance that will benefit our results in the second half of our fiscal 2026. BTO homes represented nearly three quarters of our net orders as I mentioned earlier. This outcome is a clear positive in what was a challenging spring selling season. Although buyers continue to demonstrate the desire for homeownership and the ability to qualify, consumer confidence remains low driven by a variety of factors from elevated mortgage interest rates and affordability pressures to rising inflation and geopolitical uncertainties. We continue to attract a head a a healthy level of traffic to our communities signaling both consumers interest in purchasing a home and the appeal of our locations and products and our cancellation rate was stable reflecting high-quality committed buyers who can close. However, market conditions precipitated a less than optimal conversion of traffic to sales as many consumers lack the confidence to purchase resulting in a community absorption rate of four net orders per month. Looking at our net orders in more detail, we shared on our last earnings call that sales in March had started out a little slower sequentially. This contributed to average weekly sales for the month of March that were softer than February, which we attributed to a further weakening in consumer confidence associated with the start of the conflict in the Middle East combined with rising mortgage interest rates. Moving into April, average weekly sales rebounded helped by lower interest rates as well as steps we took to improve affordability adjusting pricing in certain communities, which allowed us to capture more of the market. While market conditions became more challenging in May with mortgage rates moving higher and inflation accelerating, our sales remained resilient. We view this as an encouraging result given the overall environment. We ended the second quarter with 280 active communities up 11% year-over-year and we achieved the high end of our target for new communities, including the grand opening of Meridian with five different product lines in Henderson, Nevada. One of the two large land parcels in the Southwest that we acquired last year. The second of these parcels, Sandstone in North Las Vegas with four distinct product lines, is scheduled to open later this year. With more than 70 new communities in the first half of this year, we had also attained our peak community count during our second quarter as planned. As we stated on our last earnings call, depending on the pace of sell-outs, we expect community count to step down in the second half of this year, and we estimate our third quarter ending community count will be between 270 and 280. Our backlog at quarter end was 4,526 homes, which grew 26% sequentially. With the level of BTO net orders that we achieved in the second quarter, we are moving closer to growing our backlog year-over-year and narrow the gap significantly as compared to our first quarter. Looking ahead, we expect to continue growing our backlog sequentially in the third quarter and believe this will also be the quarter in which we return to year-over-year backlog growth. This will support our projected sequential increase in deliveries during the second half of fiscal 2026 and positions us favorably entering fiscal 2027. Our production is as well balanced across the various stages of construction as we have seen in a long time. Having this cadence is another important aspect of our even flow production and ability to go negotiate costs with our trade partners. We have a total of 3,989 homes in process, 77% of which are sold. We reduced our finished unsold inventory to 11% of our total production as compared to 25% in the first quarter, having sold through much of our aged inventory. Our teams continue to get better and better in efficiently constructing our homes and further reduced our build times in the second quarter by eight days sequentially to 100 days from home start to completion on BTO homes. The ongoing progress made on this key metric is remarkable, driving build times that are now at their lowest best levels in more than a decade. This is an important factor in the customer value proposition of a BTO home, sharply reducing the differential in the time that it takes to build a personalized home versus purchasing a resale, historically our largest competitor. Shorter build times also allow our customers to lock their mortgage rates more easily and cost-efficiently. With faster build times, we can sell later in the year for year-end delivery. In 2025, it took us about five months to build a home, which meant early spring was the latest we could sell BTO homes for same-year delivery. Today, with build times closer to three months, we could continue selling BTO homes into the summer for same-year delivery. By capturing more volume and revenue in the current year, we can better leverage our costs, thereby improving our margins and increasing our cash flow. As to direct cost, they have improved significantly in the past three years. The magnitude of improvement varies by division as regional mix and product types impact results, and in certain divisions, we have reduced our directs by as much as 15%. More recently, we have seen some pressure on material cost, in particular lumber, which we are working to offset with savings in trade labor cost. Our lumber strategy is diversified with a variety of wood species and lock periods that helped us mitigate the volatility in lumber for homes that we started in the second quarter. Our teams are drawing on our deep supplier relationships to limit cost increases while also actively re-bidding and negotiating our local and national contracts to help manage direct very tightly. In addition, value engineering our products and simplifying our studio offerings are offsetting some of the increases in material cost. Moving on, I will review the credit profile of our buyers who financed their mortgages through our joint venture, KBHS Home Loans. These metrics have remained consistent and favorable over the past year. Starting with our capture rate with 83% of buyers who financed their home in the second quarter using KBHS. Higher capture rates help us manage our backlog more effectively and provide more certainty in closing dates, which benefits our company as well as our buyers. In addition, we see higher customer satisfaction levels from buyers who use our JV versus other lenders. The average cash down payment of 15% was fairly steady as compared to prior quarters and equated to about $70,000. On average, the household income of customers who use KBHS was about $136,000 and they had a FICO score of 741. Even with one half of our customers purchasing their first home, we are still attracting buyers with strong credit profiles who can qualify for their mortgage while making a significant down payment or paying cash. About 8% of our deliveries in the second quarter were to all cash buyers. Before I wrap up, let me spend a moment on how we see the remainder of the year unfolding. As we anticipated and is evident in our guidance, we're expecting sequential growth in deliveries, revenue, and gross margin in our third quarter and again in our fourth quarter. Specific to our third quarter deliveries, more than 80% of these homes are already in our backlog. Although Bill will provide the details of our guidance in a moment, let me share some context around our Bay Area business, which we expect to be a meaningful gross margin contributor in the back half of this year and beyond. We took a patient, selective approach to investment in this market given the longer entitlement and development timelines. That positioning is now paying off with a select group of new communities with high ASPs at healthy margins. These communities are now selling and as deliveries ramp up through the second half of 2026 and into fiscal 2027, we expect them to be a meaningful driver of the margin expansion we are discussing today. In conclusion, while we are managing through a difficult market environment, we are also re-establishing our operating identity as a company that builds homes based on decisions that buyers make, creating real value for them. This model enables backlog visibility, cost leverage, and margin predictability that we believe are meaningful differentiators and support stronger performance over time, both operationally and financially. We acknowledge that we have more work to do on further improving our gross margin, which we are building toward with intention, and with second quarter results that demonstrate the start of what we expect to be ongoing progress. And with that, I will turn the call back over to Jeff. Jeff Mezger: Thanks, Rob. We have a favorable lot position owning or controlling over 59,000 lots at the end of our second quarter, 38% of which were controlled, and with only one community with approximately 100 lots that was land banked. Our long-standing approach has been to self-finance our land acquisitions as we believe that only in certain situations does land banking make economic sense for our company given the gross margin erosion and limited risk transfer from the transaction. This approach has the added benefit of a balance sheet that is more transparent. Our growth strategy remains primarily centered on expanding our share within our existing markets with a geographic footprint that we believe is positioned for long-term economic and demographic growth. That said, with the success we've had in selectively entering new markets over the past 5 years in Seattle, Boise, and Charlotte with deliveries that are expected to represent about 10% of our fiscal 2026 volume. This year marks our return to Atlanta. This is a top 10 housing market characterized by strong demand as well as population and job growth. Our local team is led by a division president with 25 years of experience in this market with deep relationships with landowners and sellers that he developed through his years of working for both national and local homebuilders. We are excited to expand our growth in our Southeast region in this thriving market and we are off to a solid start. We've recently acquired our first land parcel in Atlanta with a projected community opening date in early 2027. Our approach toward allocating our cash flow remains consistent and balanced. We are achieving our priorities of positioning our business for future growth managing our leverage within our targeted range and rewarding our shareholders through share repurchases and our quarterly cash dividend. We are maintaining our land investments at a level that will support our current growth projections and invested just under 500 million in land acquisition and development in the second quarter with roughly 75% of our investment going toward the development and fees for land we already own. In closing, I want to thank our entire KB Home team for their commitment to serving our homebuyers and the discipline with which they've been executing our built-to-order model, which we believe will result in a stronger company going forward. Our year is progressing with expected further sequential improvement in quarterly deliveries, revenues, and gross margin in the back half of fiscal 2026. In addition, our anticipated backlog growth will lay the groundwork for fiscal 2027. We are rewarding our shareholders with a steady return of capital, and we plan to continue our share repurchase program with between 50 million and 100 million of repurchases planned for our third quarter. We remain optimistic about the long-term housing market with favorable demographics underpinning higher demand over time and the ongoing structural undersupply of homes supporting our opportunity for meaningful future growth. We are committed to delivering long-term shareholder value, and we look forward to updating you as the year continues to unfold. And now, I'll turn the call over to Bill Houngers for the financial review. Bill Hollinger: Thank you, Jeff. In the 2026 second quarter, we generated housing revenues of 1.11 billion dollars, net income of 27.3 million dollars, and diluted earnings per share of 43 cents. We continued our balanced approach to capital allocation with land-related investments and returning capital to the shareholders through share repurchases and dividends. We also kept our debt-to-capital ratio at a healthy level. As you recall, last quarter we provided limited guidance for the 2026 full year. With greater clarity following our second quarter results, including the softer-than-expected spring selling season, we have refined our 2026 outlook and are providing detailed guidance for both the second the third quarter and full year. Our housing revenues for the second quarter were just above the midpoint of our guidance range, declining 27% compared to $1.52 billion in the prior period. This result reflects a 23% decrease in the number of homes delivered and a 5% decline in their overall average selling price, primarily driven by general market conditions. The 2,395 homes we delivered in the quarter represented a backlog conversion rate of 66% compared to 70% a year ago. The modestly lower conversion rate was expected this quarter as we continued our strategic shift to a higher mix of built-to-order homes delivered. In the second quarter, we exceeded our expected mix of BTO net orders. Our renewed focus on built-to-order continues to drive sequential backlog growth with our total number of homes in backlog up 45% since the beginning of the year. This trend reflects both our buyers contracting earlier in the construction cycle and provides greater visibility into future deliveries. And as Rob noted, based on this momentum, we expect our year-over-year ending backlog comparison to turn positive in the third quarter. Our overall average selling price of homes delivered for the quarter was $461,900, up 2% sequentially due to product and geographic mix. Let me address the anticipated trajectory of our average selling price for the rest of the year. We believe our average selling price will continue rising sequentially with the increase becoming more pronounced in the fourth quarter as a larger share of deliveries comes from our higher price West Coast region including Northern California as Rob highlighted. With the current scale of our business, even modest shifts in regional mix can meaningfully impact our average selling price and we expect these dynamics to work in our favor as the year progresses. Based on our current outlook, we expect third quarter homes delivered to range from 2,600 to 2,800 and our housing revenues to range from 1.2 to 1.35 billion dollars. For the 2026 full year, we are updating this guidance we provided last quarter. For homes delivered, we are maintaining the same midpoint while narrowing the expected range to 10,500 to 11,000 homes. We have also narrowed our range of expected housing revenues to 4.9 to 5.3 billion dollars. Home building operating income for the second quarter was 28.2 million dollars compared to 131.5 million for the prior year quarter. Operating income in both the current and year earlier quarters included total inventory charges of 5.6 million dollars. In the current quarter, these charges included a 3.1 million dollar inventory impairment related to a single community which was not due to any market factors. Our home building operating income margin for the quarter was 2.5% compared to 8.6 for the last year's second quarter, mainly due to our lower housing gross profit margin and selling general and administrative administrative expenses as a percentage of revenues. Our second quarter housing gross profit margin was 15.2% compared to 15.3% in the first quarter and 19.3% for the year-earlier quarter. The year-over-year decrease primarily reflected pricing pressures, higher relative land costs, and reduced operating leverage. Excluding inventory-related charges, our housing gross profit margin was 15.7%. Which came in just above our guidance range and reflected a modest sequential improvement from the 15.5% for the first quarter. For comparison, the housing gross margin excluding inventory-related charges in the year-earlier quarter was 19.7%. We are forecasting our housing gross profit margin for the 2026 third quarter in the range of 16 to 16.6% and for the full year in the range of 16.1 to 16.5% assuming no inventory-related charges. Our full year outlook reflects our expectation of a more pronounced sequential margin improvement as the year progresses supported by increased operating leverage, a growing proportion of built-to-order homes delivered, and favorable mix shift toward higher price, higher margin West Coast communities, particularly in the Northern California. As these factors take hold, we anticipate the year-over-year housing gross margin gap to continue to narrow over the balance of the year. Let me take a moment to expand on the sequential margin progression we anticipate for the remainder of the year. The midpoint of our third quarter guidance at 16.3% represents a 60 basis point of sequential improvement. We expect our third quarter margin to benefit mainly from an increase in operating leverage of roughly 30 basis points, along with a lift from a higher mix of BTO deliveries. Our full year margin guidance implies a further step up in fourth quarter. At the midpoint, about 100 basis points of sequential expansion. We anticipate this improvement to be driven primarily by roughly 60 basis points of positive operating leverage, along with more meaningful contribution from our expanding BTO mix and additional upside from a favorable mix shift towards higher price, higher margin West communities. The projected sequential improvement also reflects some modest offsets, which are incorporated into our guidance. Our selling, general, and administrative expense ratio for the 2026 second quarter was seven was 20 was 12.7% at the midpoint of our guidance. SG&A for the quarter included 1.5 million of expenses related to the planned relocation of our corporate headquarters to Tempe, Arizona in 2027, which we announced in April. We anticipate recognizing additional relocation-related expenses each quarter until the move is fully completed. We will outline the estimated total cost in our second quarter form 10-Q, which we plan to file on or about July 9th. These anticipated expenses are included in our guidance. While our total overhead for the quarter decreased from a year ago, our SG&A ratio increased mainly due to lower operating leverage. We are forecasting our 2026 third quarter SG&A ratio to be in the range of 11.3% to 11.9% and our 2026 full year ratio to be in the range of 11.4 to 11.8%. We expect our SG&A ratio to continue to improve sequentially in the second half of the year mainly due to increased volume and resulting higher revenues. Our income tax expense of 9.9 million dollars for the quarter represented an effective tax rate of 26.6% compared to the 24.2% for the year earlier quarter. The higher than expected rate versus our previous guidance was primarily due to lower benefits from stock-based compensation reflecting fewer stock options exercised than anticipated. All our outstanding stock options are set to expire in October. We expect our effective tax rate to range from 19% to 21% for the 2026 third quarter, which assumes the exercise of all outstanding stock options. For the full year, we anticipate our effective tax rate will be approximately 22 to 24%, which is slightly lower than last quarter's guidance. As we noted our previous earnings call, our tax rate in the second half will reflect the reduced impact of energy tax credits due to their elimination uh for homes delivered after June 30th, 2026. As I previously mentioned, we generated net income of $27.3 million and diluted earnings per share of $0.43 cents. This compares to net income of $107.9 million share of $1.50 for the same quarter of last year. Our diluted average share count for the current quarter was down 12% year-over-year reflecting the impact of our share repurchase activity. Turning to the balance sheet, we continued our balanced approach to capital allocation investing in future growth and returning excess capital to shareholders. In the second quarter, our investment in land acquisition and development was nearly $500 million bringing our year-to-date total to $1.06 billion. This is down 26% from last year's first half when we purchased the two large land parcels in our Southwest region as Rob referred to earlier. We ended the quarter with an inventory balance of approximately $5.7 billion up slightly from where we ended 2025. During the quarter, we repurchased 1.4 million shares of our common stock at a total cost of $75 million bringing our total to a year-to-date repurchases to 2.2 million shares at a total cost of 125 million. With 775 million remaining under our current board authorization and a solid balance sheet, we have the flexibility to continue to repurchase shares. In the second quarter, we also paid roughly 15 million dollars in uh 50 million dollars in dividends representing an annualized yield of approximately 2%. We ended the quarter with total liquidity of 1.12 billion dollars including 200 million of cash and 923 million available under our unsecured revolving credit facility with 275 million of cash borrowings outstanding. Our debt to capital ratio was 34.1% at the end of the quarter compared to 30.3% at the end of 2025 reflecting the credit facility borrowings. We have no debt maturities until June of 2027. With our land position, liquidity, and well-laddered debt maturities, we feel prepared to manage through the current environment. These strengths support a balanced and disciplined approach to capital allocation in 2026 and beyond and our continued focus on long-term value creation for our shareholders. For the remainder of 2026, the volume, pace, and timing of land investments, share repurchases, and financing activities will depend on several factors including our operating cash flow, liquidity outlook, land investment opportunities and needs, and our share price and broader housing housing market and economic conditions. To wrap up, while the spring selling was softer than expected given consumer affordability challenges and uptick in mortgage interest rates and broader macroeconomic and geopolitical uncertainty, we made meaningful progress in returning to a predominantly built-to-order business and positioning our operations for future profitable growth. With the first half of the year now behind us and our backlog up sequentially over that period, we have a greater clarity on the drivers shaping the remainder of 2026 and believe we are poised to deliver on our outlook. We will now take your questions. John, please open the lines. Operator: Thank you. We will now conduct a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. The confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove a question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We ask that you please limit yourself to one question and one follow-up. Thank you. One moment, please, while we poll for questions. Thank you, and the first question comes from the line of John Lovallo with UBS. Please proceed with your question. John Lovallo: Uh good evening, guys, and uh thank you for taking my questions. Um the gross margin walk that you guys provided from 2Q to 3Q and 3Q to 4Q was was really helpful, so appreciate that. But I guess the question I have is I believe you mentioned 30 basis points of sequential operating leverage 2Q to 3Q and then 60 basis points from 3Q to 4Q. I'm curious, you know, how would this compare in your mind to kind of a normal year? So, in other words, is there is there anything unusual in this expected leverage. Bill Hollinger [attribution inferred]: Yeah, John, I think it's a a pretty normal trend. We always deliver more in the second half than we do the first half. Um it is probably um uh there was less leverage in Q2 because we had the trough in deliveries than we would have in a normal Q2. And we uh we have a an overhead structure in place that can continue to handle the scale as we get into '27 as well. So, um it in part it's it's what we're seeing in Q3 and Q4, but we think we can continue to benefit looking ahead. John Lovallo: Okay, that that that's helpful. And then, you know, you did you did a nice job of answering my next question as well, but maybe I could just ask it a little bit differently. And that's the fourth quarter delivery ASP, you know, you you talked about some of the drivers of that. It seems like it's going to approach to somewhere around 500,000, which would be up sort of 30,000 sequentially. Um and you talked about BTO and and some of the Bay Area deliveries. I guess the question would be is there any way to kind of parse out the benefit from just BTO versus the Bay Area deliveries? And is there anything else that we should sort of consider in that uh in that step up in in ASP? Rob McGibney [attribution inferred]: Uh I think you've really got them all three there, John. Between the the leverage from the scale, the BTO shift, and then what we're expecting is a a mix change that's favorable for both ASP and margin and uh and revenue in Q4. Um Two's good on mute. Yeah, we we haven't really we haven't really parsed through outside of the the leverage piece, you know, the specific drivers from from that the other part of that incremental step up. Operator: Thank you. And the next question comes from the line of Matthew Boulay with Barclays. Please proceed with your question. Matthew Boulay: Hey, uh good afternoon, everyone. Thanks for taking the questions. Um so uh kind of similar line of questioning on the on the BTO mix and the California mix. Um I think I heard you say for the fourth quarter gross margin, the midpoint is around 17.3 and and correct me if I'm wrong. But in that fourth quarter, is the BTO mix kind of at the at the you know, targeted run rate and so we can kind of run with that jump off point for 2027? And then on the California mix, similar question. I think I heard you say you're you're going to expect benefits there into 2027. So kind of a finer point on your 4Q expectations and what it means for for 2027 there on both those fronts. Thank you. Rob McGibney: Yeah, as far as the BTO mix, I wouldn't say we'll be fully there. Um you know, we we expected the BTO on deliveries is probably going to be you know, plus or minus in the 70% range when we get to Q4. I think there's some potential upside beyond that and we'll still have some uh spec coverage that we're doing likely as we get into uh into Q4. Um what was the other part of the question? Oh, the the yeah, the West Coast B. So we we talked about this a little bit on our on our last call. Um you know, certainly we see that playing through in the numbers, but when you think specifically about our uh our Northern California, really the the Bay Area business, both south and north, um our teams there have done a good job of growing the lot pipeline. And uh you know, we're coming off of a few years where that lot pipeline was a little thinner, deliveries were a little thinner, but you know, we're seeing a good book of business that's coming through, high ASPs, strong margins, and we don't see that as a Q4 event, really. That's see it more as a structural change that's going to be with us for a long time now that we've got our our discipline and our rhythm back in in that area of the country. Matthew Boulay: Awesome. Great. Great. Thanks for that color. And then secondly, I wanted to I guess touch a little bit on the comments around the spring selling season. I think you said there were some price adjustments in April and then you said in May there might have been additional challenging market conditions. I'm curious as number one maybe you could draw that into June. Anything you've seen more recently. But then also I'm wondering if these factors are included in the margin guidance for 2026 or or any of these kind of pricing adjustments, you know, could they still kind of bleed into what you see in 2027. Thanks guys and good luck. Rob McGibney: Yeah, so we've just to take the last part first. We've absolutely put in everything into our guidance as we see it. We're just we've got a lot better visibility than we've had in prior years because of the backlog that we have resulting from our our shift to BTO. So it's fully baked into our guidance and our projections for the back half of 2026. As far as June goes, I would say you know, we're not really seeing any surprising changes from how things trended in the second quarter. We're seeing the typical seasonality trends coming out of the spring selling season, but our order pace has been steady and it's tracking right in line with our expectations and nothing in the cadence through June has given us any cause for concern. It's played out about the way that we would expect it to so far and it supports our plan and our guidance for the back half of the year. Yeah, you know, on top of that our BTO mix continues to build as a percentage of orders which we're pleased with. Operator: Thank you. And the next question comes from the line of Stephen Kim with Evercore ISI. Please proceed with your question. Stephen Kim: Yeah, thanks very much, guys. Appreciate all the color. Um Bill, nice to hear you on the call again. Um I guess my my first question I'm going to start with the the California or the the the Bay Area deliveries. You know, in the communities in particular, I think you indicated that this is something that's going to, you know, provide a positive impact uh not just this year, but I think you said this year and beyond. And I wanted to touch on that phrase. Um so, you know, we obviously have a select group of communities in the Bay that, you know, with higher ASPs, higher margins, all that kind of thing. Um but I wanted to make sure that I'm understanding what you're that you're saying that this is actually um uh that there's a pipeline of similar communities in your land holdings behind that. Um I wanted to make sure that that's actually true. I'm not going to, you know, see things drop back once these communities sell out, for example. So, can you talk about the pipeline of the communities at at sort of this that kind of uh price point. Um and can you talk about uh maybe what uh what what drove the change effectively? Uh why maybe the drop out, why you had a period where where that where you didn't have those communities. And just provide some color there. Thanks. Rob McGibney: Sure, Steve. So, um you know, as far as the communities themselves, we've got generally, you know, larger lot counts in the community portfolio or the book of business and and just more of them coming. Some of them are on structured take downs, but as we look at the the way that this area has developed for us, um to the second part of your question, it's really getting back to what we once were in the in this uh Bay Bay Area business. So, we have uh you know, had some changes with the management teams up there over the last several years. We're happy with the team we've got now. They've been delivering good deal flow. Um we've been pleased with the communities that they've opened and we've continued to to invest in those areas. So, there was a time when the core South Bay was one of our most profitable divisions for a long time and it had really shrunk down to a pretty small business and we've been growing that back and we're just now getting to the point where we're seeing the results of that flow through the delivery. So, it was a a bit of a trough, if you will, in deliveries coming out of that specific region that we've now got back on track and we're we're pleased with. Stephen Kim: Yeah, that sounds really great. Kind of more of a normalization then. Um that's that's great. Rob McGibney [attribution inferred]: Yeah, exactly. Stephen Kim: Next question Yeah, next question relates to land. Um and so when we look at your land holdings, it's a seems like you walked away from, I don't know, maybe 17 1,750 lots or something like that uh in mostly in your option count, it seems like. So, you walked away from some options. I was wondering if you could talk about your thinking around that decline, you know, what sort of drove it, were there some, you know, is that is that getting you to uh a level that you feel comfortable with? Um maybe if you could talk about what you think the long-term optimal level of land owned and option is, not mix, but year's supply of each. That'd be great. Thanks. Rob McGibney: So, we we try to target a 3 to 5-year supply of lots and you know, there are there ins and outs and and puts and takes with that and you know, if it's the right deal, we may go longer than that. We certainly buy deals that um you know, are are closer to just a year's worth of uh of deliveries, but you know, as far as the lots that we've chosen to walk away from, it's really just been about staying disciplined to our approach and making sure that as we're focused on driving growth, that that's profitable growth and as you know, the market's been choppy, things have moved around a lot and uh you know, we're not afraid to walk away from deals that we have under option or under contract if they no longer make financial sense. And our first salvo is to go approach the landowner or the seller and renegotiate a better price or better terms, but we don't always get that, and that's really the the uh the driver of why we've walked away from some of the the lots that you're referring to. Most of them really all of them have been uh deals that we tied up with a deposit and were, you know, in in feasibility or you know, through due diligence and haven't gotten a lot of money invested in them at that point, and uh you know, we're just not going to keep proceeding down a path on a deal that we don't see as meeting our return hurdles. Operator: Thank you. And the next question comes from the line of Mike Dahl with RBC Capital Markets. Please proceed with your question. Mike Dahl: Thanks for taking my questions. Um sorry for the repetitive ones on California, but can you just remind us maybe um what percentage of deliveries and revenues did that um did that division used to represent for you? What did it drop down to these past couple of years? And then what when when you're talking about kind of having the pipeline, does that assume Can you just help us quantify a little bit better like what percentage of of mix this represents since it does seem to be kind of a meaningful thing for you. Jeff Mezger: Yeah. But Mike, we we don't really have that that data at hand. The The reason that we we specifically called out uh the Bay Area in the second quarter of the what Rob Wachter, we we had a challenge situation up there. Our team wasn't delivering. Our results really eroded, and we didn't share on our calls that the results were eroding because it it would have just come off as an excuse. And we we powered through it and we've rebuilt the business. The pipeline's back where it's healthy and going in the right direction and um for for years and years the South Bay division was 10 to 15% of our profits. Just that one division and uh a lot of that went away and now it's coming back and it it's a combination of a high ASP high margin um area that is also performing very well right now. It's one of the best housing markets in the country. So um we're we're calling it out now because at our current scale the change in ASP can be pretty significant. As you're seeing in our guide for the fourth quarter. But the pipeline's there and we continue to to expect uh bigger and better things in uh future years. Mike Dahl: Yeah, okay. I I hear you Jeff. I I think a finer point at some point might be helpful just to underscore like the back then help us all with the conviction that that's going to be like something that is kind of a good go forward run rate or or or continued kind of improvement whatever. Um I guess just shifting gears back to the demand side. I I I appreciate the the comments on June being seasonal. Can Can you just that cadence through through May? If you were at four a month for the quarter, can you be more specific about um kind of where May sat and then when you talk about June seasonal uh was that seasonal as in what you'd see in 3Q versus 2Q typically or was it seasonal off of what was a weaker than normal May? Just help us dial that in a little bit better, if you could. Rob McGibney: Well, I you know, really the March, which we usually expect to be one of our best-selling months of the of the spring selling season, was what we really saw. And as I walked through in the prepared remarks, you know, there was a lot going on at that time. I think a lot weighing on the consumer psyche. Um specifically, late February, the very end of February, the conflict in the Middle East kicking off. So, we were happy with the way that sales rebounded in April. And I would say that, you know, April and May were stronger than than March were, if you were to distill it all down. Um as we've gotten into June, really it's continued about with where we ended up with March. Say orders have been strong, they've been in line with our expectations. And it's about this time of year we used to usually start to see more of a a seasonal summer slowdown. And, you know, without getting into specific sales results and dates and weeks, I'd say what we're seeing right now is aligned with that typical seasonal pattern. Operator: Thank you. And the next question comes from the line of Alan Ratner with Zelman and Associates. Please proceed with your question. Alan Ratner: Hey guys. Good afternoon, early evening. I appreciate all the details so far and nice job with the the improvement towards pivoting back to PTO. Um My first question, you want want to add on to some of the questions on on the lot count and I guess the land market more broadly. Um you know, your lot count is down quite a bit over the last four to five quarters, down over 20% from where it peaked early last year. And I'm just curious, you know, A, as we think about community count beyond this year, um you know, how should we think about the impact of the the decline we've seen in lot count over the last five quarters, is that going to you know, result in some compression or kind of an air pocket in community count, maybe out into '27 or '28? And the follow-on to that, I guess, is more broadly in the land market in general. Have you seen any relief or correction in land prices that get you guys, you know, excited that there might be some opportunities to rebuild that pipeline over the next few quarters? Thank you. Jeff Mezger: Yeah, Alan, I'll I'll take the first half and then kick it to Rob for the the current environment. If you think about it, the the lots owned and controlled started going down as the market started going down. And um as as things got very um volatile, if you will, with pricing and consumer sentiment and whatnot, we we were having trouble getting things to underwrite. And uh if you go back to 2021-22, market was going the other way. It It was easier to underwrite it, and we tied up a lot of deals. So, as we sit here today, we're we're actively looking at deals each week. Uh we intend to grow the company. And um we're positioned. Our Our balance sheet supports it, and we do have growth targets out there for '27 and and '28 that the divisions are are pursuing. What What is interesting, and you know, and then I'll hand it to Rob, we're seeing some opportunities for finished lot deals as the markets are resetting, where uh we can get into things we have plug-and-play and get to deliveries sooner than later, as opposed to what we've been through in the Bay Area with long-term entitlement plays. So, the the market is uh uh irrational to me, and there's finished lot opportunities, and we're chasing those right now. Rob McGibney: Yeah. Uh as far as the overall land market goes, I would say that we're beginning to see more than what we've seen over the past couple of years as far as the sellers starting to come to terms with the reality of the current market. Um I wouldn't say that it's fully adjusted to the point where you can go out in you know in most of our markets and just start adding lots at uh at scale that would meet our underwriting hurdles today, but certainly looking at things like better terms, in some cases prices coming down, um maybe less competition out there for some of the lots, but overall I would say that the sellers are starting to get a little more constructive with uh you know tethering their lot price and the finished lot price that we would get to where current prices are today and where the current values are today. So, I think there's more work to do and it's again like with a lot of these things it's a it's a market-by-market story. Some have uh softened up more than others, especially where you've seen house prices come down and there's there's data to point to, but overall I'd say it's getting uh there there there's more uh you know rational thinking as far as the land sellers go on the value of their of their asset. Alan Ratner: Great. I appreciate the color, guys. Thanks a lot. Operator: And the next question comes from the line of Rafe Jadresic with Bank of America. Please proceed with your question. Rafe Jadresic: Hi. Good afternoon. Thanks for taking my question. Um can you guys just provide the percent of deliveries that were built to order in the in the second quarter and maybe like the cadence for the for the back half of of the year? Rob McGibney: Are you talking orders or uh deliveries? Rafe Jadresic: For for deliveries, how much were were um deliveries in the in the second quarter were BTO? Rob McGibney: Yeah, it was it was uh 60% in the second quarter. Um and we see that progressing, you know, we're not going to call the ball on any on any exact number, but as I said, we think that'll continue to ramp up and by the time we get to Q4, I would expect that we would be, you know, plus or minus around 70% of our deliveries coming from built to order. Rafe Jadresic: Okay, that's that's helpful. Um and then as you look at um sort of the the um uh the outlook for for gross margin, just you mentioned you're starting to see some lumber inflation. What's the assumption in terms of stick and brick costs and and land inflation as you move through the back half of of this year? Rob McGibney: So, we look at, you know, anytime we're putting financials together or guide together, we're basing everything off today. So, it's today's sales prices, today's costs. And you know, that we don't have a crystal ball with where things are headed. Um certainly there's been uh a lot of talk about uh pressure around fuel-related price increases. And we've been pushing those off and negotiating those off. Now, you've got a fuel prices coming down. So, we're not looking out and projecting where commodity prices or things like that may go. We're basing it on, you know, as we see it today, where our prices are, where the revenue side is, and where our cost side um is is is coming in. Yeah, yeah. The other thing, you know, we're we are seeing, I mentioned it in my prepared remarks, but across most of our markets, probably close to all of our markets, we're seeing a pretty significant decline in starts year over year. And I mentioned the the 1,500 homes that we have that are sold not started right now. I think that's a great asset and a powerful tool that we can leverage for better costs. So, even as things get, you know, if they get a little bumpier, prices move around, um we've got that asset that we can lever for those starts. And generally, when starts are coming down, our trade partners get hungrier for work, and uh that'll either keep a lid on cost or potentially drive them down from today's levels. Operator: Thank you. And the next question comes from the line of Paul Przybylski with Wolfe Research. Please proceed with your question. Paul Przybylski: Thanks. Good afternoon. Um I guess to start off, you know, congratulations on again on the the builder order shift. Um related to that, you know, historically I think, you know, builder order has had a 300 to 500 basis point gross margin premium to to spec. Are you seeing that spread continue to hold, or you had to, you know, kind of shrink that somewhat to to get that increased mix? Rob McGibney: No, we're We actually haven't seen that change in probably the better part of 2 years. It's It's been within that range, and really the midpoint is about right. I mean, we could probably even tighten that some. It's right around four points of spread is what we typically see between BTO and uh in spec sale, even within the same community, same product. Paul Przybylski: Okay. And then I guess, you know, you mentioned your your re-entry in into Atlanta. How long do you think it'll take you to get that, you know, market uh to scale, and and why now, and you know, do you have any other markets uh on your radar? Rob McGibney: Yeah. Well, you know, we we had our our startup in Seattle several several years ago, and that's been really a a model for us that we would like to follow, and only a few years have passed since we entered that market, and we've now grown it to a top three position. So, we'd like to replicate that in Atlanta, just like we're working on in Boise, and Atlanta is very new. We just acquired our first land deal there. Um you know, I don't really have a uh prediction for, you know, when or how big we can get there, but we think there's a great opportunity. It's a top 10 housing market, and we've got a really good template with what we've done with Seattle, what we've done with Boise, and and other places that we can follow there. And we're we're excited about the opportunity and the growth opportunity we can drive coming out of Atlanta. Operator: Thank you. And the next question comes from the line of Jay Remani with KBW. Please proceed with your question. Jay Remani: Thank you very much. Um just on the San Francisco uh question which happens to be I think the strongest real estate market in the country. Um what's the sustainability of your community count and land supply in the market and uh the current demand outlook that you're seeing? Rob McGibney: Yeah, well, we're like I said, we're we're we're happy with the footprint and the portfolio that we've developed. And it really all comes down to acquiring new deals as we sell through and uh deliver on the assets that we've got. So, um you know, our teams are out there. We feel like we've got a really strong land team in that market. They they know how to work entitlements. They know how to work the processes. They're well connected. So, our our approach is to grow it certainly from where we are today. Um as we mentioned it had uh shrunk down. We didn't like seeing that happen. We're happy with getting it back to uh what I would call stable and now growing. And our focus is on continuing to grow it as long as we can continue to find profitable land deals. Jay Remani [attribution inferred]: And could you quantify — END OF TRANSCRIPT —