Jeff Mezger - Chairman, President, Chief Executive Officer Matt Mandino - Executive Vice President, Chief Operating Officer Jeff Kaminski - Executive Vice President, Chief Financial Officer Bill Hollinger - Senior Vice President, Chief Accounting Officer Thad Johnson - Senior Vice President, Treasurer Jill Peters - Senior Vice President, Investor Relations

Good afternoon everyone. My name is Devon and I will be your conference operator for today’s call. I would like to welcome everyone to KB Home’s 2020 Fourth Quarter Earnings Conference Call. At this time all participants are in a listen-only mode. Following the company's opening remarks, we will open the line for questions. Today's conference call is being recorded and will be available for replay at the company's website kbhome.com through February 12. Now, I would like to turn the call over to Jill Peters, Senior Vice President, Investor Relations. Jill, you may begin.

Thank you, Devon. Good afternoon, everyone, and thank you for joining us today to review our results for the fourth quarter of fiscal 2020. On the call are Jeff Mezger, Chairman, President and Chief Executive Officer; Matt Mandino, Executive Vice President and Chief Operating Officer; Jeff Kaminski, Executive Vice President and Chief Financial Officer; Bill Hollinger, Senior Vice President and Chief Accounting Officer and Thad Johnson, Senior Vice President and Treasurer. Before we begin, let me note that 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 factors outside of the company's control, including those detailed in today's press release and in 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, a reconciliation of the non-GAAP measures referenced during today's discussion to their most directly comparable GAAP measures can be found in today's press release and/or on the Investor Relations page of our website at kbhome.com. And with that, I will turn the call over to Jeff Mezger.

Thank you, Jill. Good afternoon and Happy New Year! We hope your holidays were enjoyable and safe for you and your families. We finished 2020 strong, producing fourth quarter results that include remarkable net order growth and gross margin expansion. As we continue to rotate into a high-quality mix of communities, effectively manage our costs and reduce our amortized interest, we are generating significantly higher margins, and our balanced approach to optimizing price and pace in this robust demand environment is providing further support. We begin 2021 with momentum, with our backlog value up over 60% year-over-year, and the potential to generate as much as $6 billion in housing revenues this year as we focus on building our scale. We are poised for profitable returns-focused growth, given the composition of our backlog, a strong lineup of community openings and our leaner, more efficient cost structure, all contributing to an expected double-digit operating margin this year. As for the details of the quarter, we generated total revenues of $1.2 billion, and diluted earnings per share of $1.12. While our deliveries and revenues were down year-over-year, this was expected, reflecting the COVID-related disruption in our second quarter net orders and housing starts. Having said this, we earn more on a per unit basis with a housing gross margin of 21%, excluding the inventory-related charges, up 110 basis points year-over-year. The strength of our gross margin was the key factor driving improvement in your operating income per unit to over $44,000, a sequential increase of $7,000 per home. Our balance sheet is in excellent shape and we are clearly in a solid position to support the expansion of our scale. Investing in land acquisition and development remains our top priority for deploying the substantial, operating cash flow we are generating. In the fourth…

Thank you, Jeff, and good afternoon, everyone. I will now cover highlights of our financial performance for the 2020 fourth quarter, as well as provide our 2021 first quarter and full year outlook. During the fourth quarter, we continued to produce sequential improvement in our key profitability and credit metrics and generated outstanding growth in our net orders, which contributed to a significant year-over-year increase in backlog value to its highest level in 15 years. In the fourth quarter our housing revenues of $1.19 billion were down 23% from a year ago, reflecting a decrease in homes delivered that was partially offset by a 5% increase in the overall average selling price of those homes. The lower delivery volume was due to the negative impact, the onset of the COVID-19 pandemic and public health control measures had on our second quarter net orders and housing starts. Looking ahead to the 2021 first quarter, we expect to generate housing revenues in a range of $1.14 billion to $1.22 billion. For the 2021 full year, we are forecasting housing revenues in a range of $5.5 billion to $6 billion, up $450 million at the midpoint as compared to our prior guidance. Having ended our 2020 fiscal year with a backlog value of approximately $3 billion, we believe we are well-positioned to achieve this topline performance. In the fourth quarter, our overall average selling price of homes delivered increased to approximately $414,000. For the 2021 first quarter we are projecting an average selling price of approximately $390,000 due to a regional mix shift of homes delivered. We believe our overall average selling price for the 2021 full year will be in the range of $400,000 to $410,000. Homebuilding operating income for the fourth quarter totaled $115.7 million compared to $162.5 million for the…

[Operator Instructions] Our first question comes from the line of John Lovallo of Bank of America. Please proceed with your question.

Hey guys, thank you for taking my questions tonight. The first one is on the gross margin outlook of 21%, which is clearly impressive. Are you basically implying that pricing is going to be sufficient to offset what we're seeing in lumber and structural panels and then probably what we’ll be seeing down the road with labor inflation? And I'm just curious, I mean, I know you guys talked about affordability to some degree versus existing homes, but how do you kind of think about it versus the other alternative product being renting?

There’s a few questions there John. We tried to illustrate in our prepared comments that our margin and our improvement in gross margin is not necessarily just because we're able to take price. As I look at the puts and takes over a year, if the markets are good, home prices costs go up. They typically, they'll catch up with each other over a 90 or 120 day period. If markets are good, land prices go up. If markets are tough, home prices go down, costs go down, land prices may go down. So they kind of work in tandem and what we're accomplishing right now in our gross margin improvement is the combination that we outlined. We have a far better mix of the quality of the communities that we're operating in. Looking at our Southeast region, it's really picking up steam and margins are enhanced. If you looking, even in California it's picking up steam and margins are enhanced, because we're operating better and it's a better mix of communities. Then you go over to the capitalized interest, the amortized interest is continuing to come down and that tailwind because of what we've done over the past three to four years and our returns focused growth. And then third, you get leverage, because we're picking up our pace a little bit per community and a lot of the costs in running that community don't increase with the pace, so you get some margin expansion due to your leverage. So we have all those things going on, and what we feel, we still have upside and momentum there and if we get price on top of it, we'll take it and we've been able so far to take enough price to cover any cost increases along the way. Relative to the ‘for rent’ market, I don't really think about that too much John. Our buyers are home buyers. They want to be homeowners today. They want their own place and it's rare that somebody comes in and says, I'm comparing your home here to home for rent down the street, and I can't make up my mind. We just don't hear that that often, John.

Okay, that's helpful. And then you mentioned some organic moves into new markets, into some pretty interesting markets shift Seattle and Charlotte. Is organic kind of the way you guys plan on doing things or are there opportunities from an M&A standpoint that could expedite the move in certain markets?

Well, there's two levels of organic for us John. One would be just growing our business where we exist today. We have a great footprint and we're nowhere near max in our market share in any of the markets we're in. So we'll keep pursuing a bigger market presence in every city we're in. We quietly expanded into Seattle a couple of years ago and didn't say much about it, because we wanted it to mature and get traction and it's done that now and it's worked very well. Then if you go over to the Carolinas, where we were in Charlotte at one time. We left back in the fiscal crash and Raleigh shored up. Raleigh is performing well. Raleigh is on a nice growth trajectory, and it's logical to expand right back into Charlotte and we're taking the same approach we did in Seattle where you go in with a team, you get some deal flow, you pair up your overhead with your revenue growth, and we'll have our first deliveries in Charlotte in 2022. If you look at Seattle or what we're expecting out of Charlotte, it takes time for those to build into a real contributor to our results, so it'll take two years, three years, but you don't pay a dump tax, you don't have the integration challenge; there is no premiums, no accounting issues, no goodwill hitting your balance sheet. So it's a much cleaner entry, if you can do it and so as a result we have this one-two punch where we can grow organically in our served markets and continue to bolt on these other very strong housing markets that we're able to enter that we're not in right now. I think that's a better approach for us than M&A. We look at M&A. Premiums are typically pretty high and we've got the other things like I mentioned, so if we can hit our growth targets, we’d certainly have a growth trajectory right now for 2021. If we can hit our growth targets and keep fueling this thing organically, that's what we're going to do.

Our next question comes from the line of Steve Kim with Evercore ISI. Please proceed with your question.

Hi. Good evening. This is [Inaudible] on for Steve. Thanks for taking our questions. I wanted to start off discussing your community count goals in 2021 and 2022. Thanks for all the great detail there on the growth targets for each of those years, mid to high singles next year and then double-digits year after. I heard the comment regarding the moderation of quarter growth in 1Q on the tougher comps. But our question is, if you continue to see strong order growth throughout 2021, say 25% or better. Are you still in a position to hit both of those goals?

Juan [ph], I'm not sure I understand the question. Are you saying if sales rates slowed we hit the goals or sales rates accelerated we hit the goals?

So it may be a deceleration from the 40% or so, but if it stays strong like the 25 plus range, is that going to continue to sell off faster than you can replace and are you at risk of that still hitting those target?

No, I don't think so, all of those things were considered in our guidance. We are actually powering through that right now. It's right in front of us and that the second half sales strength that we saw is playing through and it will hit the low point in Q1 and we're continuing to load in more as we go out ahead of us. And I shared, we already owned and control everything for '22, let alone '21 that's right in front of us. So we absolutely are committed to those community count growth targets. Whether sales hold or go up or go down. We'll get to the community count.

Awesome! That's really encouraging. And on a related note, with respect to the land spend, you mentioned that $650 million in the prepared remarks more than I think you've done in any quarter, at least in recent history here, and I appreciate that positions you all for growth in the next couple of years. But first question, were there any projects may be that you pulled forward just to make sense to take on now? And then second, could you help us understand a little bit more about the composition of that spend? Are you bringing in different types of land, maybe more move up assets or taking advantage of the work-from-home trends by buying in further out regions? Thanks again.

Actually, I think in part the number was outsized in Q4 for the year because of deferrals out of Q2 and Q3. For the year we spent a little bit more than the prior year and we're positioned now where we expect to spend more in 2021 to fuel our growth. In terms of our strategy on the investment side, it hasn't changed relative to buyer profile and price points we want to play at. Again in the shared comments, I talked about our strategy, our position, the product. So it's attainable by the median income in that sub-market and we are committed to that. That's where the biggest segments of demand are in every sub-market and that's where we want to play. So the profile or the communities really hasn't changed. We're a little more willing to go into the B-minus sub-markets where there's a little more land, because the markets are good. But overall, we're tired in the median incomes and there's plenty of demand if you can bring the lots to market and that's what we're working on.

Alright, thanks very much, Jeff.

Thanks.

Our next question comes along of Matthew Bouley with Barclays. Please proceed with your question.

Good afternoon, everyone. Thanks for taking the questions. Question on the orders into Q1 here. It sounds like you didn't really see the normal seasonality in Q4, but you're talking about off of this 44% quarter-to-date growth, you're expecting some deceleration. My question is, I guess to what degree is that deceleration basically your own efforts to meter out sales pace via price or simply a comp dynamic? I guess the question is, are you actually expecting sales pace to maintain somewhat close to current levels and comps get tougher and perhaps there's a little more of a community gap or is there actually somewhat of your own efforts to meter out sales space in there? Thank you.

Primarily that is that our comps get tougher. Last year in January and February we had some very strong selling months, so it's just hard to hold a 40% comp as strong as our sales were in January and February. In fact, we wouldn't want to do that. There is a little bit of price and slowing down in communities that aren't replaceable or have a limited lot supply left, but it's primarily just the comp. And if you think of our backlog position, then the starts that we're rolling through right now, we can afford to take some price and slow things down, but it's primarily the stronger comp in January, February.

Okay. Got it. Thank you for that. And then, I guess secondly, you mentioned the backlog, I'm curious if you have a sense, I guess of what the gross margin and backlog looks like today. If you could remind us kind of with the KB Home model, what would cause the margin and backlog today to change upon the delivery, whether there can still be, I guess incremental studio upgrades on the one hand versus what your exposure would be the construction costs on the other hand? Just what would cause current margin and backlog to change? And if you have any sense of what that looks like today? Thank you.

Jeff. You want to take that one?

Sure. As we look at our guidance and as we forecast out the future, it's a very good point that you make about our backlog, because we have a very large backlog to start the year. So at over 7,800 units we have very, very good visibility to really the first and second quarter’s deliveries and related gross margin coming off of those deliveries. And what we have basically in the backlog, we have contracted sales prices. So we know the price on those units, we know the price that they'll deliver at. For anything that's started, we basically have locked in costs and we lock in our costs with the vast majority of our vendors of our subs upon start. So we're not really taking any inflation risks, whether it be labor or materials or anything else on our started homes, and that provides us like I said, a really nice visibility on our gross margins. As we look out, the other, I guess a little bit unknown variable is, not all the homes have been through studio and that is generally, a bit of a lift of margin as we go to studio. We make that estimate also as we go through the forecast and our guidance numbers. So really the largest unknown for us is just you know what the future sales would be, both from a sales price point of view and then as we deliver out those homes with the cost of build would be. But we generally forecast that at current cost, current selling prices and as Jeff mentioned earlier, we rely on that dynamic that's been pretty consistent between selling prices and cost. So, we feel we have really nice visibility. As far as margins go, that backlog supports our guidance and our forecast I think quite well. The higher revenue numbers next year which were up significantly versus 2020, provides the additional overhead leverage, because we do have a fixed cost component in our cost of sales. So that's a real positive and Jeff mentioned some of the other factors earlier. So we're pretty comfortable and secure with our margin guidance and really looking forward to seeing a full year where we're about 20% every quarter, and achieve the type of numbers that we talked about for the full year.

Our next question comes from the line of Alan Ratner with Zelman & Associates. Please proceed with your question.

Hey guys, Happy New Year, and congrats on the great results. Appreciate you taking my question. Jeff, several years ago when your margins were lower than where they are today, you provided a really helpful roadmap to kind of talk about why the margins were being pressured by some of the legacy land that you had, that you were moving through, and at the same time as some of the newer deals you were underwriting to much higher margins came to market, that would provide a tailwind and it obviously has come to fruition. So, I'm hoping that you can maybe give us a little bit of insight into the land you're underwriting today and how you're thinking about that underwriting relative to the guidance you're giving for 21? Because you're obviously tying up a ton of land today, your competitors are doing the same thing, it would seem like it's a pretty competitive land market. So, can you talk a little bit about when we look at your absorption rate where you're at today, four and a half per month or your margins, 20% to 21%? What type of assumptions are being embedded within the land you're tying up today for '22 and beyond?

Well, Happy New Year to you Alan as well. When we underwrite land, it's a combination of the margin and also the IRR and the assets. So you take a little lower margin if you get a much higher IRR and together they activate a combined threshold for us. Our underwriting in terms of just the margin today would be in the 19% to 21% range. So pretty similar to what we're seeing in the revenue that we're generating. Land's always a competitive environment. There's no city that we operate in where it's not competitive, and you just – you have to be focused and one of the things that we like about our land efforts that we think is an advantage is, there's clarity among the divisions on what the product strategy is, what the price point is, what the financial hurdles are and we can move pretty quickly from feasibility to a committed deal, because of the clarity that we have, and I think that is an advantage for us as a company. But in the rhythm of our business, we're not thinking in price, we're not assuming inflation to get there, it's got to underwrite today, today's sales pricing, today's sales pacing in that city and I'd say it's 19% to 21% on the growth side.

That's really helpful, I appreciate that. And then, yeah, my second question is just as we think about these communities coming online. Obviously, you provided a very detailed guidance for 2021, which is helpful. I know in the past, you know occasionally when you've had big growth and community count, there's been some overhead expenses that have to be pulled forward or you have to add some headcount to satisfy that type of growth. And I'm curious, should we think about that in maybe '22 just as there are going to be a need to add additional headcount to support the level of type of growth that you're anticipating?

Yeah. Actually we didn't want to get into the wade too much on what's hitting SG&A and the gross margin in the fourth quarter that we just finished. But if you think about it, there were 38 community openings, which is the most we've had in a quarter in quite some time. So we already absorbed that overhead and the cost there. Our business is getting more evenly distributed among our region, so if you grow your community count 20 or 25, that's one fitting to [inaudible]. So there's not a lot of overhead associated with it, but there is some cost to run the model park once you get the community open, but it should self-fund it at that point in time. So we think we're past the increase in overhead for the community kind of growth. We've already incurred it. So there'll be some incremental costs for '22 but nothing that'll really move the needle versus our core growth and SG&A. You got any other comments or thoughts on that Jeff?

So, I think you hit it on the head Jeff. You know 38 grand openings annualized, it's over 150 grand openings supported by the fourth quarter expense base and overhead base. So we think we're in really good shape, particularly as we work through 2021 on supporting our growth targets.

Our next question comes from the line of Buck Horne with Raymond James. Please proceed with your question.

Hey, thanks for the time, I appreciate it. Was curious if you're noticing any changes in the buyers' preferences in terms of you know trying to understand if you've got any intel on work-from-home habits. If you're seeing that buyers are, you know there is a big uplift in the Home Office upgrades that you guys have offered? Is that getting traction and/or, are you seeing buyers crossing state lines more often or some of your, whether it's Texas or Florida or Colorado, are you picking up that people are migrating to different markets from high costs in any greater numbers?

Sure. I'll make a couple of comments Buck, and then kick it to Matt Mandino to give you an insight on the buyer profile, but it's interesting. We shared it on our last quarterly call. While our buyer mix is tilting to incrementally more first-time buyers, up in the 60’s in the percentile now, our studio sales are actually picking up. They were up in the third quarter and they're up again in the fourth quarter, not big numbers but $1,000 a unit, $1,500, $2,000 a unit, which is contrary to what you would think with a first time buyer with may not as high - had as high an income, so the studio is continuing to work. Matt, do you want to give them any comments on where the buyers are coming from, going to and what they're taking?

Yeah Buck, I think as I hear your question there it sounds – are we seeing kind of this exhibit from California. And what's interesting, while a market like a Vegas or a Denver, you know we do see some of that moved from California. Even within the state of California, we're seeing quite a bit of in-state. Our sales performance, especially in like Inland Empire has been incredibly strong. And so while it does exist Buck, at some level it's not necessarily just moving across state lines. It's actually pretty interesting. We also took a look Buck, is it coming out of cities and just getting to the suburbs. We do see some of that, but much of what we've seen in the fourth quarter was within the suburbs itself, so not quite the dynamic Buck that you might think.

Understood, that's very helpful feedback. I appreciate that. I'm curious just in terms of the land market as well, a follow-up on this one, given that it seems like finished lot availability is becoming increasingly constrained and maybe this is a bigger picture question for the industry at large. I mean with everyone out there searching for land and the demand so strong, are you going to have to continue to put more cash to work in land that you need to self-develop internally? How does that change the timeline to which you can bring communities often? Does it change the margin profile for self-developed blocks?

It's an excellent question Buck and it's something we've been dealing with for quite some time. There's very few finished lots on the ground. That's why I included in my prepared comments that we own and control everything for ‘22. But you couldn't go down the street and buy some finished lots somewhere today and help your fourth quarter of '21 necessarily. And so you have to include in your timelines, in your projected community growth or revenue growth, the extended time it takes to get things entitled and then developed and then brought to market. So, if you think back to '20, we started the year with expectations of delivering a few thousand homes more than we did. We owned those lots at the time in order to do that. And then with the pandemic disruption, we didn't hit our delivery numbers, but we still have the lots. So what it's done for us has set up a stronger lot count and pipeline for '21 deliveries. And in turn, we had already targeted growth for '22 back in January of '20. So we already have the queue and own and control what we need to get our growth targets. We're actually working now on what we need to exit in '22 in order to have growth in '23 and it sounds like a long way off, but its entitlement takes 18 months in lot of the cities, if not longer in California. It'll be here before you know it. So our horizon has definitely extended and I think the whole industry has in terms of what you have to do in order to fuel your growth. As we've said a few times on this call, we've already got it for '21 and '22.

Our next question comes from the line of Michael Rehaut with J.P. Morgan. Please proceed with your question.

Hi! Good evening everyone. Thanks for taking my question and congrats on the results. Hope everyone is healthy out there. First question, I just wanted to zero in on the gross margin guidance for a moment and try and break down if it's possible. On a full year basis how you're thinking about interest amortization on a $1 basis or on a percentage basis. I believe as a percent of sales, interest amortization is down about 40 bps in fiscal '20 to maybe roughly about $130 million on a dollar basis. So how you're thinking about that in '21? And what the remaining core expansion, ex-interest – gross margin for ex-interest might be or be driven by?

Mr. Kaminski?

I thought that was coming my way. Yeah, thanks for letting me take that. So Mike, just starting with the interest, as you know it's been trending down pretty consistently year-over-year, and we think there is still some fairly significant opportunity over the next several years to continue that trend. On a stand-alone basis for 2021, right now our forecast is showing about 30 basis points of improvement. I believe that's probably a little bit on the light side. I think there's some opportunity to be above that, but that's what we baked in our guidance, about 30 bps on that piece, and at the midpoint of our guidance that will leave about 90 basis points toward other factors. As I mentioned earlier, the margin for the first couple of quarters is more or less baked into our backlog. So what we're seeing in there is not only the leverage impact on our fixed costs and cost of goods sold, which is pretty significant if you think about it you know with an increase year-over-year, nearly 40% on the top line. We'll see some nice leverage impact flowing through our margin line, but I think as importantly if not more importantly it's just a composition of our current communities, the improvements that we've been putting in place throughout the company and really the end result of some of the efforts we've been working really hard on for the last several years is they've been outcroppings of our returns focused growth plan. And Jeff was mentioning earlier some of the underwriting on the new land, and you know that's been another big benefit for us and that a lot of the land that we've been bringing to market with new community openings in 2020 and expect to bring in 2021 were underwritten in a different market environment. They were underwritten some of those parcels a year, year and a half ago, and we've been developing that land and then eventually grand opening it, and pricings actually different. We've seen some margin expansion just coming from market movements, and our ability to maintain as best as possible cost control, so those are the components that are really important. So that other 90 basis points is what we're seeing in the backlog combined with mix impacts from some of the new communities opening up and some of the pricing moves versus the cost moves that we've been seeing and we've reflected all that into the guidance.

Right. Thank you, Jeff, I appreciate that. Secondly, I just wanted to hit on the SG&A side of the equation as well. Your guidance for the full year of low 10%, I guess 10.1% at the midpoint, but still actually a little bit slightly higher than where you were in 2018 despite an outlook for $1.2 billion greater in terms of revenue at the midpoint. So just wondering – and obviously taking a nice amount of leverage year-over-year, which is obviously very important. But just in terms of how you think about yourselves over the next two or three years, and just wondering what is the further potential for leverage going forward, as it appears within you know kind of flirting with getting below 10%, but just wondering about where the ultimate number can get to assuming a consistent double digit top-line growth, and obviously embedded in that question is variable SG&A versus fixed as you continue to grow the top line?

Right. Yeah, I mean the SG&A side, it’s similar to what we talked about in a couple of earlier questions and you know anticipating community count growth and supporting growth in the business. We're very growth-minded right now. Our view is that we've fixed a lot of the fundamental issues that we were facing in the business. We made improvements across the capital structure, across the balance sheet. We've made vast improvements across our community portfolio and we're really in a position, very strong position right now of being able to expand the top line and grow the company at very strong return levels and really drive shareholder value as a result of that. So I think part of what you're seeing in the SG&A outlook, particularly for 2021 is enough resources in the business to continue that growth, and to continue to excessively or not excessively, but to continue to expand that topline as we move forward and you need some level of resource to do that. I do believe, you know if you're talking longer term and that's one of the reasons why our guidance starts at a single digit, albeit 9.9%. I do believe that single digit SG&A expense ratio is very achievable for this company. And as we see our scale expand further and basically get on this cadence of strong growth year-over-year, I think we'll be able to achieve that. But one year at a time as we always say, so we've forecasted out as best as we can see it today and that's where it's coming in at, right around that 10%, 9.9% to 10.3% as we guide it.

Jeff and comparing to '18, wasn't there an accounting change, a model cost?

Yeah, a very good point. Yeah, that's true. We did implement the new accounting standard and some of that shifted into SG&A from our cost. So, that's a really good point Jeff. We're probably actually below it if you pull it out.

In terms of 40%, wasn't it?

Yes.

Our next question comes from the line of Nishu Sood with UBS. Proceed with your question.

Thank you. I wanted to revisit the kind of the order pace, the demand pace versus your start. You had a very nice acceleration and demand 3Q to 4Q and it looks like it persisted consistently through the quarter and into your first fiscal quarter as well. How much of that was the market and how much of it was the nice pickup you saw in starts, which were about the same rate? So did your increased pace of starts allow you to sell a little bit further out or yeah, so I just was wondering if you could help us break that down?

Okay. Nishu, I'll kick it to Matt here in a minute to give you some color. But if you think of our business model, it's like you know prime the engine and then the engine gets going and that once you sell the home, then it takes some time to – for the buyer to finalizing the studio, and then we get a permit and they get their loan approved and then we go. So there's this lag 60 days or so between contract and a start. As you look back, the sales really started to pick up June, July, August and so on, and as the starts will pick up 60 days thereafter, and I threw a comment in the prepared remarks. In our normal year, the spring selling season makes our year. It's the strongest selling environment. Then you have the 60 days then you start the home, and our fourth quarters always are our highest delivery quarter by a bunch, due to the timing of demand for us in the spring selling season. This year for the first time in my career, we're actually going to deliver more in the first quarter than we did in the fourth quarter, because the spring selling season gets delayed, with the pandemic disruption, and now when the cloud started to clear a bit and there's such strong housing demand that helps sell on, it has us on this growth trajectory where Q1 and Q2 ramp up stronger than Q4, which I've never seen before in my career here at KB over a lot of years. And so it's pretty interesting, and it speaks to the how strong the demand is right now. But Matt, do you want to talk about the timing of our sales to our starts and how we pace it and…

Sure. Yeah, and that's it. Sales really does drive it for us and we view that sale as that first step in the process. And as Jeff touched on, what we've seen over the last couple of months has just been really strong. Absolutely, no signs of letting up. There was not a holiday lag that we usually see, and if anything, we historically think about the Super Bowl as being the kickoff for the selling season. I can tell you, the season has already started. And so, with that, that really does drive the process in which our customers go through our studio and make selections, and we move forward, get permit and start that home. We have also done some things relative to that upfront step of the process and studio selection. It was forced due to COVID, but putting tools in place that has allowed us to have virtual studio appointment is now actually getting traction and we're saving time. So as we move forward, you're going to continue to see hopefully starts continue to walk that up to match and stay in sync with the great sales activity that we've seen.

Got you, got you. That's very helpful. So, since it was – it seems like it was primarily demand driven, you know the strong order acceleration that you focus on has continued into this year. It really doesn't seem like the renewed lockdowns, especially in California, an important stay too. It doesn't seem like that's really affected demand. I was just wondering if you could, if you'd comment on that a little bit further. I imagine your organization is now well adjusted to operating in this new reality, so that it seems like consumers weren't persuaded by increased lockdowns or maybe we could just discuss that a little bit, please.

Sure. And we have not seen it slow, and what we have seen though is, when they do show, they're ready to go. So much of the interaction that would normally take place in our models is now happening over the phone or over a Zoom call. And early on, and I'm going to go back to where we were in March, we rolled out pretty extensive training program for all of our sales teams on how to use these virtual tools; I don't see that necessarily going away. While it makes it difficult just to monitor foot traffic because what we see today is a different environment than what we had a year-ago, the net of what we're getting through with buyers ready to go and move forward has been very positive. So that's my assessment of where we're at and anticipate that that's going to continue in this environment. And I also anticipate the use of some of these virtual tools thriving post vaccine distribution.

I think Nishu, it's also a fair comment that as these lockdowns have reoccurred and tightened up, it's actually tightened people's desire to buy a home because they want their own place, and they want their own backyard and they want their own refuge that they may not get if they're a renter somewhere. It's an interesting dynamic.

And with that ladies and gentlemen, this concludes today's teleconference. Thank you for your participation. You may now disconnect your lines and have a wonderful day.