KB Home (KBH)’s 2014 Fourth Quarter Earnings Conference Call Transcript

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Operator

Thank you. The next question is coming from the line of Ivy Zelman with Zelman Associates. Please proceed with your question.

Ivy Zelman, Zelman Associates.

Thank you. Good afternoon guys. I think it would be helpful that, if you can, may be, have a deep rooted talk about some of the market differentiations, with Inland slowing. There has been some discussion that, you know, the Phoenix market is improving, and they remained really red hot, may be, with respect to the trend. Do you expect home prices on an apple to apple basis to still show increases? Are you concerned about Coastal California, Southern California, we are hearing that Asian buyers are starting to pull back as a target to pull money out of China. Are you hearing anything that would confirm that? I mean, how do we think about the trajectory is in the markets like Southern California, Northern California that did so strong and the coastal areas? Just the overall, kind of, sense of the markets, Pacific, that would be helpful for everyone.

Jeff Mezger, President, Chief Executive Officer and Director

One of the things that we have seen that we have seen that picked up is relative to Orange County. There has been a pull back on the new home side with the Chinese buyers. These people are heavily controlled by realtors that they are comfortable doing business with. Where the realtors are taking them today is the re-sale side. The new home pricing in 2014 increased pretty significantly in those areas and re-sale became a more attractive opportunity in the eyes of the realtor and the consumer. I don’t know if that’s the typical push pull in a market until the re-sale pricing goes up, which it has, now in the last 60 days, in Orange County, it has been moving up – so, it could be just the comparative push pull and at some time they would come back to the new home side. It’s hard to say whether it’s a short term move or the competitive pressure from other builders, but in the Inland Empire or central valley, up north in California, we saw a big increase in incentives and price pressures.

I don’t know if these people were closing out their year or closing out communities but we are watchful and we will see how the new year unfolds here. Relative to Phoenix, we are seeing improved demand in Phoenix. We are not that large there but we are seeing improved demand there. I think you will see activity levels go up before you will see a lot of price in Phoenix because people work through their assets. Vegas, I would say, is okay. Demand is good. We don’t see prices moving but there is demand there. So, it is a mixed bag. Interestingly, in Texas our pricing is favorable right now. We are not seeing any price pressures in our Texas business. If you go around the country, it is a mixed bag, and the good areas are still good and the bad areas are a little tougher.

Ivy Zelman, Zelman Associates.

Helpful Jeff. A follow up on depreciating the dynamics of what’s happening in certain Texas areas is [inaudible 46:19]. Your sales per community were down in the central region just [inaudible 46:28], and you indicated that you expected your gross to be just really driven by the new stores and new communities you are opening. So, when you are thinking about the level of same store being where it is right now, how much gross would you need to see in same store in order to resume margin expansion, or, you said that you are not strategically trying to increase same store if it means negatively impacting the margin. So, that relationship, strategically, how should we think about it?

Jeff Kaminski, Executive Vice President and Chief Financial Officer

Right, yeah. I think, as we look at it, as always we look at it on a community bases across the business and we currently have certain communities, that are running very well and running above pace or above forecasts of pace for those communities and we are taking pricing actions within those communities and we have communities on the other side of that spectrum as well. So, I think it is important to understand how we are running the business and it’s really done at the division level and even more detailed, at the community level, beyond that. The pace of our 1st Quarter, we are pretty happy with, as Jeff mentioned, it’s tracking very close, in fact a little bit above, our community count growth expectation for the quarter. So, you know, there is this science for the spring and we would continue to monitor spring selling conditions and hopefully start capturing back some of those margin improvements as we go.

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