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

Jeff Mezger, President, Chief Executive Officer and Director

Thanks Jeff. In closing, I would like to review some highlights of our full-year results. Revenue has increased to $2.4 billion or 14% year over year. Most of this revenue growth can be attributed to our higher average selling price as the geographic and product mix of our investments over the last few years continues to gain cash, drawing our top line, and improving our profitability allowed us to achieve our goal of reversing a DTA valuation allowance. As a result of both, our operational earnings, and this reversal, our net income for the year was $918 million or $9.25 per diluted share. Our reported book equity at year-end was $1.6 billion, up substantially over the prior year, and is now at a value of approximately $16 per fully diluted share. We enter the year with a strong backlog in place and with the year ending community count that is up 19% over last year.

This leaves us in a much better position to capitalize on this year’s spring selling season. Looking ahead, we expect to sustain our community count growth, which combined with an increase in ASP year over year, will continue to drive real top line growth. At the same time we will be diligently working to enhance profitability with a particular focus on improving gross margins. With our increasing revenue and improving profitability, we believe we are positioned to support our growth targets by placing a greater emphasis and also improving our return on investing capital. Thank you all for joining us this morning. Rob, let’s open up the call to questions.

Operator

Thank you. We will now be conducting a questions-and-answers session. If you like to ask a question, please press star, 1, on your telephone keypad. The confirmation tone will indicate your line is in the questions queue. We ask in the interest of all, [inaudible 22:08] one question and one follow up. If you like to remove your question from the queue, you may press star, 2. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please, I will hold for questions. Thank you. Our first question is from the line of Michael Reinhardt with JP Morgan. Please proceed with your question.

Michael Reinhardt, JP Morgan

Thanks. Good Morning everyone. The first question I had was on, I guess, the gross margins, obviously an area of concern, and you’ve talked about it a bit already but just wanted to clarify. When you talk about your expectation for 1^st Quarter gross margins to be down materially, sequentially, it would appear that given the outlook for break-even, net income would also be down materially on a year over year basis. Is that correct? And also for the outlook for the full year – are you expecting gross margins to, on a full year basis, improve, be flat, or even be down, year over year?

Jeff Kaminski, Executive Vice President and Chief Financial Officer

Ok. Yes Mike. I will. I think I will reply to the first.  Yeah, on a year over year basis, we do expect the 1^st Quarter margins to be down. There is really two, I would say, maybe two or three main impacts affecting the margins in the 1^st Quarter. First one is what we typically see every year in the 1^st Quarter versus the leverage impact, with the loss of leverage impact on the fixed costs that we have included in our construction costs. We think that could be up to 2 to 4 percentage points of margin impact [inaudible 22:08]. We have the conditions in the items discussed during the script, on the market – pricing, higher incentives that we are seeing the market place, price, the ability to increase price not equal to some of the cost increases that we are seeing that we can [inaudible 24:04] affected.

We also have a couple of, very high value, very high margin communities in our west coast region that are closed out now on the 4^th Quarter and we want to enjoy the benefits from those coming in the 1^st Quarter. I think it is important to note that we do believe that the 1^st Quarter will be a low point for the year, and that we will have sequential improvement going further into that. As far as the full-year estimate on the gross margin, right now, I would say it really depends on market conditions through the spring and our ability to raise price and offset some of the cost increases that we have been experiencing. But I would say that 20% target is not likely in 2015.