KB Home Earnings Call Insights: Gross Margin Outlook and Backlog Conversion Rates

KB Home (NYSE:KBH) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.

Gross Margin Outlook

Michael Rehaut – JPMorgan: First question, I just wanted to focus on the gross margin, we had nice improvements there and I know you pointed to several areas that could drive further improvement and of course also guided to sequential improvement throughout the year. So, in terms of the gross margins, can you give us any sense of where you think you might be able to end the year given what you already have in backlog and some of the trends? And when you talk about option or lot premiums, I believe you said 1% below and studio revenue is another point or two of margins, just want to make sure I understand those are longer term opportunities that in aggregate would be another 200 to 300 bps to the gross margin?

Jeffrey T. Mezger – President, CEO and Director: Mike, I’ll tell you those numbers and they are over the long-term and that would be closer to what we’ve achieved and what I confirm to as a normalized market. I wanted to walk through those items and frankly they may not be available to all the other builders. Our business model provides some real opportunity to pull levers that are visible to us and in working with a built to order consumer, you know where you can push a little bit here or a little bit there on price and you can also lever a little bit differently on the cost. You didn’t hear me talk about banging on contractors on the cost side, because they will just go run to another community somewhere. So, I think there are differentiators and I think they’ll start to illustrate real benefit moving forward. I think the same holds true on lot premium side, and everything I talked about because most of those are tied to experiences in our past overt the last 15 years of running the business model. At this time, we’re not going to give you a specific guidance on the gross profit for the rest of the year other than that we expect sequential improvement. We’ll see how the spring market unfolds and how things work out for the rest of the year.

Michael Rehaut – JPMorgan: No I appreciate that Jeff. I guess the second question is around your land spend and your community count growth that would result from the acceleration your putting in place right now. With the guidance which is appreciated for 4Q average being up roughly 15% year-over-year it would seem that there’s still a lot more runway looking into fiscal ’14 in terms of additional community count growth and if you know – obviously you haven’t given guidance for fiscal ’14, but it would seem to me that given the material increase in land spend, it would be safe to assume at least double-digit or at least a 10% incremental growth on average for fiscal ’14. Is that fair to say Jeff and I guess I’m talking not to Jeff Mezger but Jeff Kaminski as you’re looking at some of those acquisition outlays.