Good morning. Thanks for joining us as we're rounding out the morning of day two of our 16th Annual JP Morgan Home Building and Building Products Conference. My name is Michael Rehaut. I'm the senior analyst covering the home building and building product names for JP Morgan. We're excited to have with us KB Home, CEO Jeff Mezger, CFO Jeff Kaminski, and VP of Investor Relations, Jill Peters. Well, this presentation will be a fireside chat. I'll be asking a series of questions, but if you'd like to ask a question for those that are dialed in or watching, you can hit the Ask a Question icon on the digital dashboard on the website, and I'll be happy to relay those questions along. I'll turn it over to Jill for some brief remarks, and then we'll go into Q&A. Good morning, everyone, thank you, Mike, for hosting us today. For those investors who are newer to the KB Home story, we are one of the largest homebuilders in the U.S., with the primary focus on serving first-time and affordable first move-up buyers, who accounted for 73% of our deliveries in our 2023 first quarter. Our personalized build-to-order model emphasizes choice, including the selection of the floor plan, lot, square footage, and finishes. A complement to this choice offering is the availability of quick move-in homes in every community to serve the buyer who prioritizes a near-term move-in date over personalization. We believe the ability for buyers to choose what they value and can afford generates strong customer satisfaction. We are proud to be the number one customer-ranked national homebuilder in third-party customer surveys such as ConsumerAffairs. Our homes offer the highest energy efficiency among national home builders based on an average Home Energy Rating System, or HERS, index score of 48, an industry-leading publicly reported score. We recently published our 16th Annual Sustainability Report, the longest-running publication of its kind in the home building industry, detailing our achievements and goals across environmental, social, and governance factors. I would like to note that with our approaching May quarter-end date, we will not be providing an update on orders or related metrics today. In addition, our reference points will be the commentary we provided on our 2023 1st quarter Earnings Call held on March 22nd and/or contained in our Form 10-Q, which was filed with the SEC on April 7th. With that, we'd be happy to answer your questions. Great. Thanks so much, Jill. Welcome, Jeff and Jeff and Jill to the conference. Again, really appreciate seeing you here and participating. It's great to have you. Thanks, Mike. Good to see you too. You know, I'm gonna skip my first couple of questions on demand trends and pricing, given Jill's, you know, guidelines, which I understand and, you know, again, appreciate, you know, given the fact that you're more or less, you know, within a couple of weeks of closing out your quarter. I'd like to shift a little bit towards, you know, some of the company-specific questions that I have in store. You know, maybe to kick it off, you highlighted the 73% exposure to entry level. Obviously, you know, putting out an affordable product is central around satisfying that consumer. How do you think, you know, given all the concerns around affordability today, how do you think about your price point and your closing ASPs going forward, you know, against the backdrop of those concerns? You know, outside of, you know, obviously market trends or future home price appreciation in your markets, how should we think about your average selling price over the next couple of years as you continue to address affordability concerns? Mike, it's a good question, and we're working hard to keep our products affordable. The, you know, prices ran up pretty significantly over the last few years, and interest rates ran up, so it was a double combo on the affordability squeeze. When we open a community and invest in a new community, we always try to target the median income for that area or the median sales price for that area. With cost pressures we had and interest rates moving and prices going up, we moved away from the median incomes. The community still sold well because there was no inventory in those sub-markets. There was stronger demand, and we were able to accommodate all that. While going through that, we've remained very sensitive to affordability, and we're hard at work right now retooling product, simplifying, introducing smaller floor plans across the footprint, as models, not just, floor plans that are available and we'll continue to work to lower our costs. The labor side's been a little sticky because things picked up again this spring, so we haven't had the continued progress in labor cost reductions we thought we would as we entered the year. We're having to do it other ways. One of the things that the investors may not appreciate or understand. When times are good, it's not just that our prices go up and our products get bigger. The cities start asking for more. Then when things slow down and their permit activity drops and they need revenue, they're more accommodating on changing things in the product. A lot of what we're doing right now is going back into cities and getting approval for a little less expensive exterior or allowing us to go to a little smaller footprint on the lot. We're continuing to see costs come down. I don't know that we should expect our ASP to go up any further for a while because whatever we can do to stay affordable, we're gonna go do. There's a lot going on right now in that regard. Right. You know, I mean, that was kind of part of my question was, you know, direction of ASP. You said maybe it shouldn't go up for a while. Mm-hmm. With, you know, kind of shifting maybe to smaller floor plans or value engineering, is there potential in a, in a steady market for ASPs to maybe moderate a little bit, come in maybe a few percent in the next year or two? It's, it's certainly possible. We'll see how things unfold. Along the way, the ASP may go down, but we're not expecting our margin% to go down with it. You, you'll have a little less dollars of margin, but the% will hold, if not even go up, depending on the community and the product mix. One of the other things I didn't mention that we're working on is trying to increase densities on communities where, we may not even have closed on the land yet and have an approved map, and we're going back in and requesting smaller lots in order to, again, lower the price to the end product to the consumer. That's another thing that could keep our pricing down a little bit from where it's been, but we'll see. Right. understood. You know, in Jill's opening remarks, you know, she also hit on, you know, kind of your approach to market in terms of being build-to-order. When you think about build-to-order versus spec, and you kinda also highlighted the fact that you try and keep quick move-in homes available in each of your communities. I think broadly speaking, it's fair to say that, you know, you've kind of remained steadfast in your build-to-order approach, as opposed to a lot of other builders that have significantly increased their spec exposure or spec percentage. You know, even a smaller cap builder, kind of well-known in this space for being build-to-order is now, you know, maybe a little bit build-to-order, but they've really shifted, you know, pretty hard towards the spec model. Maybe you could just kinda review where spec is today as a percentage of your business versus normally. How do you think about, you know, to the extent that you're pivoting, how do you think about, you know, over the next year or two where you want to be in a more normal backdrop? Sure. Well, we're actually in a very good spot right now, Mike. One of the things I keep reminding people of in our business, our build-to-order sales typically have a margin that's 300 basis points higher. So we feel we make more money in our build-to-order approach. It's much more than that. It's also consistency in the deliveries and more visibility on where our revenue's headed because we've already sold the homes. We look back on the first quarter, we did have a spike in inventory tied to some of the cancellations that we'd experienced in the third and fourth quarter of last year. We were able to sell through it. We shared on our call that our range would be 70%-75% sold in our WIP, which is right where we are, you know, we're coming out of the first quarter. We're in a good balance. We feel inventory is part of choice to the consumer. There is that buyer that has to move in in a hurry. We continue to see demand for our build-to-order product. People, when they're making the largest investment in their lives, they wanna have some input into what goes in the home. We just think it's a better way to create that value and satisfaction for the customer, and we make more money along the way. We have not strayed, frankly, good and bad for 20 years now. We've been very consistent in our approach and, like the business. We think there's a lot of benefits and we'll continue to range 70%-75% sold before it's done. Right. No, thanks for that. You know, maybe just, you know, you hit on gross margins a little bit, in terms of the typical spread. Is that 300 bip difference now kind of in line with that, you know, range, you know, where you're selling today in terms of spec versus build-to-order? Have we seen that kind of revert to normal at this point? We are. In fact, we shared that on our Q1 call. The spreads are pretty normal. What happens when you're in a build-to-order approach, the buyer's gonna pay more for lot premiums because they're picking their lot and putting their home on it. When you get to an inventory home, a lot of times the first thing that goes away is the lot premium because you're already trying to incentivize to sell the home because it's finished and may not have the things the buyer wants, and they'll still buy it if you give them a deal. It's a different way to create value, but you can lose your ability to garner lot premiums. You lose some of the revenue out of the studio that we experienced in the inventory sales. We've always seen a 200, 300 basis point spread, and that's right where we are again today. Right. Okay, perfect. Maybe just focusing on gross margins for the full year. you know, in your prior earnings call, you talked about guidance around, you know, back half gross margins being roughly flat from the second quarter. At the same time, obviously, you know, construction costs have been moderating over the last two or three quarters. Net pricing across the industry is starting to improve a little bit. Could those trends drive upside, to your back half guidance? Or is it something where we wouldn't expect that to more hit until 2024, just given maybe the build-to-order lag or perhaps other offsetting tailwinds that we're not, we're not aware of? Jill won't let me reconfirm guidance, so I'm not gonna tell you that was a good or a bad, that number that we gave. You're right that the markets have firmed up some. When we gave the guidance, there was a wild card what the second half demand is gonna look like, so that was part of our consideration. Third, there is a lag. As lumber come down, a lot of our lumber benefit will actually be in the first and second quarter of next year due to the cycle time that we run through. We feel good about our business and, you know, what's going on right now. As the year unfolds, we'll see if there's more lift or not. Right. Okay. Fair enough. maybe just, you know, on a longer term basis, how to think about gross margins would also be helpful. Between 2013 and 2020, your gross margins averaged 18%. Is this kind of a level of profitability that we should expect, going forward or as the market normalizes? Or can KB or is there potential to generate something a little higher, perhaps due to scale or operational efficiencies? It's absolutely gonna be higher, Mike. As you know, we had to go through some retooling of our business coming out of whichever housing crash we call that one now, because it was a couple ago. Coming out of 2007, 2008, 2009, we had to fix the balance sheet. We had our returns-focused growth plan that we shared, and you were familiar with. Where our margins are today, we feel is pretty much where it's at or the floor. 18% is well below what our expectations are, and we target that we should be able to sustain a double-digit operating margin. Right. Okay. Much higher than that average. That average was distorted on the low side. Just on one data point alone, Mike. Okay, Jeff mentioned the leverage impact on fixed costs and cost of sales, but the difference in interest amortization is 300+ bps between that 13%-18% period and where we're at today. We would be, you know, we're definitely targeting a two-hand on our margins in the you know, foreseeable future. Have a lot of improvements within the business that have supported that. Yeah, right, we don't see ourselves going back to sub 20%. Okay. I appreciate that clarification, Jeff. We had a question from the audience. On the incentives front, what's resonating most with buyers today? What incentives and which incentives impact sales price versus cost of goods sold? Jeff can walk you through the accounting side. Every buyer has a little different set of needs. Most of the time, it's either a buyer that doesn't have the cash to close or doesn't have enough cash cushion to close. You help with closing costs. If it's a qualifying issue, you'd offer them a little bit of a rate buydown in order to get them to qualify. If they qualify and they have cash, they typically tilt to give me a price discount and get the best price that they can. Those all have a different nuance to our accounting. Jeff, you can fill them out on how they get treated. Right. You know, the largest incentive we've seen over the last 12 months, as you know, Mike, and Jeff mentioned, we're not an incentive-based company. Usually it's a point or less and kind of just gets lost and around and hasn't been a really much of an issue or impact on the business. Been a little bit different this time because of the spike in mortgage rates. As we've been offering incentives on those spikes, they are coming off the ASP. It's, it's getting booked as an offset to selling price and, in our opinion, what's the most appropriate GAAP treatment for that. Okay. Perfect. Thank you. Maybe shifting a little bit to your geographic footprint. How do you view it currently? In other words, is there? In terms of, you know, every builder kind of has a balance of, you know, investing or trying to go deeper in your existing markets or, you know, perhaps going into some new markets. How do you balance that, you know, and where do you see, you know, either the greatest opportunity or different opportunities across your existing and potentially new markets, as part of your footprint? Well, we have a few growth engines all working together right now that we're setting up what we feel is a very favorable trajectory. If you look at the core footprint in our peak, we deliver approximately 25,000 homes. We're nowhere near where we once were, and we know the markets will give it to us if we can get the community count up and keep growing our scale. In the markets we've been in a while across the footprint, every division has a growth plan with targets to get to the top three in that market. If we do that, there's significant upside. Along the way, we've entered a few markets through a de novo process that takes some time to get up to scale and to get up to profits. In the meantime, we've been able to absorb the overhead of the ramp up without really impacting our financial results. Seattle's a great example of that, where we entered that market four or five years ago. We're now a top five builder in Seattle. We're targeting top three. We've entered Boise, and we've also reentered Charlotte with, you know, both very good economic engine growth cities, and we expect big things out of those markets. Within the regions, one of the things I'm proudest of is how our southeast region has finally matured and developed and is quite a growth engine for us, both in revenue and in profit. It's a nice complement to the west and southwest and then our big business in Texas. A lot of growth opportunities where we're at. The, the new market entries are maturing and starting to contribute. We think we have a nice combination of things that'll continue to drive our growth. You know, kind of shifting to land and your land strategy for a moment. You know, most builders prioritize, you know, optioning lots, due to a combination, at least in their view, of driving higher returns and mitigating risk. Currently your land book is about 25% option, down from a peak of 45%, a couple years ago before the recent market downturn. Obviously, you know, that decline, like many of your peers as you walked away from options that or land that didn't make sense as much, but still at 45%, maybe, you know, less than some of your other public peers. How do you think about optioning land? Where would you want that percentage to get back to, let's say, over the next couple of years? And how do you think about optioning as a tool for, you know, to drive returns for the company? Sure. Well, as you touched on our option percentage went down 'cause we abandoned a lot of, a lot of the options we had when the market reset. You always hate to book abandonments, but it's far better than paying for lots that may not pencil and get your return anymore. We're pretty aggressive in that regard. We're only gonna do something if it makes sense to us. Ideally, we'd option every piece of land we could. As you know, the land sellers are pretty savvy, and when you're in a preferable sub-market, it's harder to get terms. The way you could make it an option is to go do some type of off-balance sheet financing, which we don't necessarily like to do because you give up too much margin. We focus on the inventory turn and making sure we get it open as quickly as we can. We phase development and go for our targeted absorption pace to optimize the asset and get our returns through execution. Along the way, that's worked well for us. Ideally, I would guess we'll get back to that historical ratio you touched on, 55/45, 60/40, in that range. We try to option everything we can. You also wanna be in the right sub-markets at the right price point. Our balance sheet allows us to move quickly and get those. Same time, now we turn the inventory fast and it's helping our returns. I'd say 55/45, 60/40 is a good spread. Great. Okay, perfect. Last one from me. Again, for those dialed in, we do have a little bit of time on the back end here if people have questions. Again, please feel free to, y ou can even shoot me a Bloomberg IM if you like, or that's easier, or, you know, hit the Ask a Question icon on the dashboard. Last one for me is on capital allocation, and specifically share repurchase. In 2021 and 2022, you spent about $350 million on share repurchase, and you took your share count down about 10% during that time. This compares to much lower levels in the prior years. How should we think about share repurchase going forward, particularly as your balance sheet is pretty solid at this point, you know, cash flow positive? How should we think about share repurchase, in the coming years? Well, great question, Mike. As you may recall, we announced at our earnings call we had just had a refresh and upsize by the board to authorize a $500 million repurchase program. If you go back and look at what we've done and how our balance sheet's evolved, we've continued this balanced approach of managing our debt fueling our growth and then bringing capital back to the shareholders. Over the last few years, debt well under control. We're below our the low end of our range on our targeted debt ratios. That's a good thing. We don't expect that we'll be taking more debt out as we go ahead. We're still generating a lot of cash. Priority one, you put it back into your business if you can get the returns. Priority two is, how do we share it with the shareholders? As we've looked at it with where our stock has been trading, we feel it's well below value. It's been trading below book value. Every share we buy back is accretive. In 2022, I don't recall Jill, I think the number, the average price on the buybacks was about $30. It was the best investment we could have made with those dollars for the shareholder, and we continue to feel that. As long as we're trading at the levels we're at, we'll continue to exercise. Just keep our discipline of the balanced approach, but we'll continue to take shares out with the cash and the authorization we have because it's the best investment we can make for the shareholder. Right. Right. No, appreciate that. We actually do have another question coming in from the audience. Can you please help quantify the drivers, of gross margins going from roughly 24% in 2022 to roughly 21% at the midpoint of your 2023 guidance? Jeff, you want to go over that? Sure. Yeah. I'd say, you know, the bulk of that, Mike, is just top line price and what's been happening with incentives in the marketplace as well as average selling price in general at the list level. It is encouraging now being able to back off some of these incentives and seeing the market, I would say, you know, gaining some acceptance of rates being in the low sixes, lower mid sixes, as opposed to years, you know, a few years back, 4% or 5%. People are starting to get more comfortable with that and I think a little less likely to demand incentives on every single sale. We're seeing that back off nicely but that was the main impact. It was really top line. You have all the moving pieces in there, though. I mean, it's all blended in. You know, you have community mix, geographic mix. You have cost changes depending on when you started the home and where the costs were at that time. It's, you know, there's a, there's a lot to it. You know, in our case, the majority of it was just on the, on the net price of the home, net of incentives. Right. Right. All right. Well, I think that does it. Appreciate your time today. Jeff and Jill, always a pleasure to have you. You know, again, we really appreciate the participation at our conference. We're going to go into a short or the lunch break. We'll resume at 1:15 P.M. Eastern time, with Taylor Morrison, followed by PGT Innovations and then Forestar Group. Thanks again. Great to see everyone. You know, we'll talk soon. Thanks, Mike. Thank you, Mike. Thanks, Mike.