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

Closing, while many of our served markets remain sluggish in their pace of recovery –with our larger scale and expectation for continued community count growth – we believe we have momentum. We will continue to drive our topline growth while taking every action possible to enhance our profitability, while also now working diligently to improve our return on investing capital. With that, I will hand the call over to Jeff Kaminski for a more detailed discussion of our financial results. Jeff.

Jeff Kaminski, Executive Vice President and Chief Financial Officer

Thank you Jeff, and good morning. We continued our profitable growth trajectory in the 4^th Quarter largely through the successful execution of our three strategic initiatives. Perhaps, most notably, during the quarter we reversed $825 million of our deferred tax asset valuation allowance. The said operational improvements and expected future performance that supported the reversal also set the stage for the introduction of our fourth strategic initiatives – improving asset efficiency and increasing our return on investing capital. Since Jeff has just covered the headline results for the quarter, I will focus on providing more details surrounding some of our key financial matrix for the period and our expectations heading into 2015. Certainly one highlight for the quarter was the increase in our overall average selling price to $351,500, representing a 17% rise from a year ago. Double digit increases in three of our four home building leasings combined with the expected favorable makeshift toward higher price sub market within our northern California division were the main drivers of this improvement.

For the 1^st Quarter of 2015, we currently expect to experience a sequential decline in our average selling price due to the changing mix of deliveries within our home building regions as well as a relative shift of deliveries away from our higher priced west coast region to our other home building regions. We also anticipate selling price growth to moderate in 2015, given the higher price levels we have reached after 18 consecutive quarters of year over year increases. We expect the 1^st Quarter ASP to be in the range of $325,000 which is close to what we reported in the 2^nd and 3^rd quarters of 2014. Our housing gross profit margin for the 4^th Quarter was 17.3% versus 17.9% for the same quarter of 2013. The current quarter included $34.2 million of inventory impairment charges of which $11 million were housing inventory related. The 2013, 4^th Quarter included $8.5 million of warranty related charges and $3.3 million of housing inventory impairment and land auction contract abandonment charges. Excluding these housing impairment and warranty charges, our 4^th Quarter adjusted housing gross profit margin decreased to 18.7% in 2014 from 19.8% in 2013.

While our goal of achieving a minimum 20% housing growth profit margin remains intact, we believe our timing to achieve this goal would be extended largely due to the current [inaudible 16:22] discussed earlier. During the 4^th quarter our selling, general & administrative expense ratio increased by 20 basis points from the year ago to 10.5%. This slightly higher ratio was mainly due to the reversal of an $8.2 million accrual in the 2013, 4^th Quarter, following a favorable court decision. Excluding this reversal, our ratio would have improved by 110 basis points year over year. Sequentially the 4^th Quarter ratio improved by 190 basis points as compared to Q-3 of 2014, reflecting the continued success of our cost containment efforts and a favorable leverage impact of increasing revenues. We ended the 4^th Quarter with 227 communities open for sale, up 19% from 191 communities a year earlier. During the 4^th Quarter we opened 40 new communities and closed out 13.

Our 4^th Quarter average community count of 214 was up 13% as compared to the same period of last year. During the quarter we invested $272 million in land, bringing the total of owned and controlled lot count at year end to 520,198. We expect further community count growth in 2015, with the full year average projected to increase in a range of 15% to 20% – this is 2014 – depending, of course, on sale absorption rates and the resulting timing of community close outs. Our net order performance during the quarter was consistent with our stated strategy of maintaining pace on a per community basis, roughly in line with the year earlier quarter and an increase in overall net orders in line with community count growth. 4^th Quarter, 2014, net orders increased 10% to 1,706 or 2.7 orders per average community per month, approximately the same rate that we experienced in Q-4 of 2013. Our net order value for the quarter increased 22% from the year ago to $587.4 million due to higher net orders and the average selling prices.

Turning now to our balance sheet and capital structure, we are able to achieve our goal of reversing a significant portion of our deferred tax asset valuation allowance during the 4^th Quarter and we ended the year with a net debt-to-capital ratio of 57.9%. At year-end we have over $550 million of liquidity and our strategic prioritization of asset efficiency will play additional focus on asset monetization opportunities as well as balancing land investment and managing growth within our capital structure goals. We are targeting a lower rate of land investment in 2015, in a range of $1.1 billion to 1.4 billion, which we believe will support our revenue growth objectives. Other than in connection with the planned refinancing of our [inaudible 19:10] due in June of this year, we now anticipate capital raises for the foreseeable future and have no plans to issue equity. In addition our target net debt-to-capital ratio in the 40% to 50% range remains consistent with past comments. We are pleased with the progress we have made in the 2014 fiscal year.

Our focused operational and investment strategies yielded broad improvements across most of our core financial matrix demonstrating the success of our strategic initiatives. However, we believe the [inaudible 19:41] will likely create a pause in this progress and we have moderated our expectations for the 1^st quarter of 2015. We currently expect our housing revenues would be between $440 million and $490 million in Q-1. With this anticipated significant decrease in the housing gross profit margin mentioned earlier and an inclusion of a projected land sale gain of approximately $7 million, we believe our 1^st Quarter bottom line will be approximately break-even. Now I would like to turn the call back over to Jeff for his final remarks.