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

Page 2 of 15

During the quarter our SG&A ratio continued to improve, coming in at 10.5% as we work to contain overhead costs while growing our revenue. The income for the quarter rose to $853 million or $8.36 per diluted share, reflecting both our operational result and the positive impact of our DTA reversal. With this result we now have $1.6 billion in book equity, nearly three times our equity at the prior year-end. While we continued to make progress in many areas of our business during the quarter, we also recognize there is still much work to be done to achieve our financial goals going forward.

Now I would like to address our 4th Quarter housing gross margin performance. At the time of our last earnings call, with our expectation that the housing market would continue its slow yet steady recovery, we indicated that we believed our housing gross profit margin for the 4th Quarter would improve sequentially from the 3rd Quarter. Unfortunately, we experienced a soft end in demand in some of our served markets as the quarter progressed, with increased pricing pressure; while at the same time, we continued to face cost pressure among other things. As a result, we generated a disappointing 4th Quarter adjusted housing gross margin of 18.7% which was down 30 basis points from the 3rd Quarter.

While regionally, results in the Inland markets of our west coast operations had the most significant effect, several factors contributed to the difference between our actual and projected growth margin results. First, we were impacted as a result of delivering fewer homes than we had previously expected. Consequently, we lost some operating leverage on our indirect construction costs. These costs have been increasing ahead of deliveries as we continued to staff our operations in support of our current and future community count growth. Second, against the backdrop of tighter market conditions, we had an increased use of sales incentives and price reductions on spec home deliveries in the quarter.  Third, we continued to experience cost pressure with our construction labor and material costs. We believe that all of these factors taken together had about an 80 basis point impact on our gross profit margin for the quarter.

Page 2 of 15