Good morning. My name is Manny and I will be your conference operator today. I would like to welcome everyone to the KB Home 2014 third quarter earnings conference call. At this time, all participants will be in a listen-only mode. Today's conference is being recorded and a live webcast is available on KB Home's website at kbhome.com. Following the company's opening remarks we will open the lines for questions. (Operator Instructions). KB Home's discussion today may include forward-looking statements that reflect management's current views and expectations of market conditions, future events and the company's business performance. These statements are not guarantees of future results and the company does not undertake any obligation to update them. Due to a number of factors outside of its control, including those identified in its SEC filings, the company's actual results could be materially different from those expressed and/or implied by the forward-looking statements. A reconciliation of non-GAAP measures referenced during today's discussion to their most directly comparable GAAP measures can be found in the company's earnings release issued earlier today and/or on the Investor Relations page of the company's website. It is now my pleasure to introduce your host, Chief Executive Officer for KB Home, Mr. Jeff Mezger. Mr. Mezger, you may begin.

Thank you, Manny. Good morning, everyone and thank you everyone for joining us for a review of our third quarter results. With me today are Jeff Kaminski, Executive Vice President and Chief Financial Officer, Bill Hollinger, Senior Vice President and Chief Accounting Officer and Thad Johnson, Vice President and Treasurer. I will begin this morning with a high level overview of our results for the quarter. I will then provide an update on our three key strategic initiatives, increasing community count, growing revenues per community and enhancing profitability per unit. Next, I will provide some color on our perspective of current economic and housing market conditions. Jeff Kaminski will then provide specific details on our financials, after which I will make a few concluding remarks and in turn open it up for questions. Once again this quarter, our results reinforce that our investment and product positioning strategies are working and we are well positioned for continued revenue and profit growth. Our quarter-end backlog value of $1.1 billion best illustrates this point. This is our highest quarter-end backlog since 2008. We continue to gain momentum in growing our community count. During the quarter, we opened 29 new communities and with our current projection for openings in the fourth quarter, we will end the year having opened almost as many communities this year as we did in the prior two years, combined. This sets us up for solid unit and revenue growth opportunities entering 2015. Looking ahead, we will continue to invest in land and land development in support of our growth targets with the goal of increasing market share within our current operating footprint. Over the past few years, we have built a solid growth trajectory through establishing a specific set of objectives that we have shared on previous earnings calls,…

Thank you, Jeff, and good morning. We continue to generate positive results in several key financial and operating metrics during the third quarter. On a year-over-year basis, revenues increased 7% to $589 million, driven by ASP growth across all four of our homebuilding regions. Net income rose 4% to $28.4 million which equated to diluted earnings per share $0.28. We reported growth of 19% in our net order value and an increase of 37% in our backlog value on a 13% rise in the number of homes in backlog. In addition, as a result of our community repositioning strategy and generally favorable market conditions, we were able to improve our average selling price by 9% while maintaining our sales pace per community as compared to the prior year. As Jeff mentioned, we are executing well on our strategies but are disappointed that delays in construction schedules and a transition to our new mortgage joint venture deferred some of the deliveries we were anticipating in the third quarter. This tempered our top line growth, moderated our gross margin performance and ultimately led to net income that fell below our expectations. Our backlog conversion ratio for the 2014 third quarter declined to 53%, the lowest level in several years. While we are taking steps to address the factors that impacted our Q3 deliveries and intend to have most of these actions implemented by the end of the fourth quarter, it is important to note that the vast majority of these deliveries were deferred and not lost. As we realize improvements from the corrective actions, we expect to report a much higher Q4 backlog conversion ratios compared to the third quarter in the range of 65% to 70%, which would result in approximately 2,200 to 2,400 deliveries for the fourth quarter. The year-over-year…

Thanks, Jeff. I would like to take a brief moment to thank all employees at KB Home for their contribution in helping us achieve our goals. While I am out visiting divisions across the country, the highlight for me is experiencing the passion and dedication of our employees and the pride they exhibit with the quality of our product and their role in delivering the American dream. In conclusion, we are solidly profitable and we are building momentum. Our strategy is working in the current market environment and we continue to position ourselves for capturing upside. We are still on offense at KB Home and I look forward to sharing more of our success with you in the future. Thank you for your time this morning and now we will open the call up to questions. Manny?

(Operator Instructions). The first question is from Michael Rehaut of JPMorgan. Please go ahead.

Hi, thanks. Good morning, everyone. The first question I had was on the gross margin. I appreciate some of the detail, Jeff K, that you gave in terms of the 40 bips impact. I think that you estimated from the delayed deliveries and reduced leverage. I wanted to know if there was also any type of impact as well due to the mix, the fact that some of the West Coast deliveries in particular were impacted and if those deliveries typically have a positive mix impact on the gross margin as well?

Yes, Mike. That's correct. We did see some impact, obviously coming from the lower West Coast deliveries. Some of those were rather high, as you can imagine high dollar ASPs as well as high dollar margins and high percentage margins above the company average, but the larger impact was on the leverage, but the mix had an incremental impact as well.

Okay. So maybe the 40 bips on the leverage and then a little incremental, like you are saying, from the mix?

It's correct.

Thank you. The next question from Bob Wetenhall of RBC Capital Markets. Please go ahead.

Hi, guys, thanks for the color. Jeff, if you could just give us, you said there were some labor shortages, some municipal bottlenecks and then some issues with pulling electric as to delays. If you could give us an update on that? And also to, how should we think about the transition to Home Community Mortgage and the structure of this and how does that tie together with the Nationstar relationship? Thanks.

Okay. Thanks, Bob. Let me split the topics. As we have been sharing, you hear it across the industry, there is pockets of labor shortages that, depending on the city, are really tough or not so bad and that's fairly typical in our industry when things are recovering. What we are continuing to bump up against relative to the utility companies, if you think about our industry is moving past buying finished lots and building homes on those and completing those communities to more deals that are self developed and in those it's not just getting an electric meter plugged in, it's getting the community energized. And the utility companies reduced staff in the downturn, just like everyone else and they are really struggling with their infrastructure to keep up. And a good example that gets back to some lost California deliveries, I will use Playa Vista as an example, because a lot of you were out there at our Investor Conference earlier this year. We had 15 homes in the queue to deliver where the home is completed, the loan is approved, the buyers walked, because we can put temporary power to the homes to totally shake them down and present them to the customer, but we couldn't get the community energized and in turn meters plugged in. So what in the past would have been a two day to a week process, took five weeks. And as a result, we deferred up to 15 closings at a meaningful price and above company average margin. So you take that hit in that example. Once the community is energized, you are done dealing with that issue because now the whole community is energized and it's down to just getting electric meters plugged in. The utility issues were not just in…

Thank you. The next question is a follow-up from Michael Rehaut. Please go ahead.

Thanks, I appreciate that. I guess I was cut off from my second question. I just wanted to circle back also to SG&A. I appreciate the incremental color about the stock bonus that affected the year ago or the stock compensation timing. Going forward, how do you think about SG&A and what's your ultimate goal there? Because I think in 4Q, again given the timing of that, we have your 4Q 2013 SG&A at 11.6% and so I think there might be additional confusion there that should be avoided, but longer term how do you think about SG&A in terms of the right number, let's say, in a fuller revenue type of dynamic for the company, let's say two years out?

Right. I am glad you asked that question, Mike. There are a few comments I can make on it. I guess I will start with the current quarter, moving to the fourth quarter and then give you more long-term. On the current quarter, the impact on the SG&A percentage on ratio was really very much top line related. We lost a number deliveries. We would nearly 200 deliveries and $60 million or so of top line revenue that impacted the ratio. The fixed costs were maintained fairly steadily from the third quarter. We counted on getting more leverage from the top line. And the so-called miss in SG&A was really purely associated with the top line. So I was pleased with the expense control in the quarter. I was not pleased with the delivery performance. Relating to the fourth quarter, just as a reminder, we did have a legal reversal lash in the fourth quarter. It was $8.2 million, which helped us obviously last year and will make the year comparison a little tougher for us this year. But despite that, we do believe we will have significant leverage in the fourth quarter and see a much improved SG&A expense ratio than what we just reported in Q3. On a long-term basis, our target is to get into low double digits. And as I have said often, I would like to see us get as low as single-digit number if we could get our top line high enough and continue to control expenses across our current footprint. That's, I would say, is a little further out for us as a goal, but certainly that very low double digit number, I think, is really attainable for the company.

I appreciate that, and just for modeling purposes, you mentioned that the fixed costs were kind of held in 3Q. What's the right variable number to think about? Different companies, depending on certain moving parts have said, builders have said it could be anywhere from 4% to 7%. If that's kind of the right way to think about it? And maybe if you could give a little closer, particular numbers within that range?

Right. I think, for modeling purposes, if you use about a 5% variable based on top line, it gets you pretty close for most of quarters, even this quarter. If you look at the third quarter to the fourth quarter on a sequential basis, it got right there on the number and if you extrapolate that out on a higher revenue base, you could see where the SG&A, I think, should have been in this quarter as a ratio. So that 5% number is a pretty good one to use.

Thank you. The next question is from Ivy Zelman of Zelman and Associates. Please go ahead.

Hi. Good morning. Thanks, guys. I wanted to ask a question, Jeff, with respect to your commentary regarding the Central Region. I think you sounded very upbeat about it and quoting you from last quarter, you talked about the vibrant economy in those market economies that you had a 12% year-over-year growth and this year you were flat -- I mean, sorry, for this quarter, you were flat and it seems as if you still were very excited about that listening to your tone. So seeing the significant deceleration in order activity there and you commented that you don't want to incentivize because you recognize you are not going to push the absorptions to sacrifice margin, it sounded like. So just understanding, it seems a little bit different in what you wrote and what you said last quarter and the way you view the sequential and year-over-year versus how we perceive it. And then secondly your commentary around the mortgage market being tight and realizing it's tough out there, last quarter you spoke about green shoots and talked about the entry level coming back. So it feels like you may have seen something that has changed your view and recognizing maybe it was sort of looking at approvals, trying to get the mortgages closed within the JV that you got a closer look at it, but something changed. So maybe you can comment on all of that and obviously I have a lot more questions, but I will behave myself.

Okay. Sure. Thanks, Ivy. On the Central region, you did touch on my answer, in that we are pursuing margin on a per store basis. Year-over-year, our sales were about flat. And our margins in the region have come up significantly, but they are still not to our stated goal and every asset has its own strategy, but we are still trying to elevate margin and you can see it coming in this region. And then once we hit the margin, this is a region where we can go for a lot of volume because it's not land constrained as the markets are out in the Coastal California. But it in the short run, we are going to maintain our pace and continue to work to get our margin up north of 20%. As to mortgage underwriting, I was trying to give a balanced view on the pluses and minuses. As I said, we have seen a slight improvement in underwriting and I would still say that it is not as difficult as it was, but it still is a headwind as you look at FICO scores, they have come down somewhat, but they have not come down to the degree where you could say that the mortgage companies are underwriting to the broad, HUD approved underwriting criteria. You get under a 670 or 680 FICO, you still have to put a lot more money down and as a first-time buyer, you don't have that. So they will give you the loan with a lower FICO, but you have to put more money down than you would have previously and that customer doesn't necessarily have it. And I think you will continue to see it slowly ease, but it is not like a switch was flipped and we are back to normal times in underwriting. It is still tighter than normal.

Thank you. The next question is from Mike Dahl with Credit Suisse. Please go ahead.

Hi. This is Patrick Murray, on for Mike Dahl. Just first question was with respect to the gross margin goal and the current demand environment. Can you talk about anything with respect to the time variable as you see more recent land vintages start to come through deliveries? And if that would cause you to, maybe, shift strategy at all?

Pat, we certainly haven't shifted strategy. We have been pretty consistent on this track for many years. And we have made a lot of progress in advancing our gross profit margin. To think about it in the perspective that we are hanging right around 19%, our goal isn't that far off and you can't just raise your price to get there. And you are not going to find one thing that reduces cost to get there. We have to pull a lot of levers and we will continue to pull them until we achieve our targets. And it's not necessarily tied to the vintage of the land, it's the overall company book of business and what we have to do to get to our margin, once you add any other color on that.

Okay. Thanks, and then a second related question. Can you talk about the land competition? What you are seeing out there in some of your markets? And if that has changed at all, year to date, and maybe in comparison to last year? Thank you.

Okay. Thanks, Patrick. Obviously, that's something that varies at a very local level and I would say that in the land constrained areas, it continues to be pretty competitive, because there is not that many parcels to bid on. In some of the markets that have shown a little more softness like a Sacramento or a Phoenix, the land sellers are becoming more rational. We are hearing some things about deals being re-traded where they may have been bid up and the buyer backs out or tries to cut a new deal. So in those areas where it's little bit softer, you are seeing it more rationalized, but typically the land markets will move with the confidence or lack of among the purchasers. And markets that are good, it's competitive, markets that aren't so good, it's not that tough. We continue to underwrite, by the way, to the same financial criteria we have had in place for years. So we were not compromising in order to acquire things that has to hit our hurdles. So we are not going to make the investment decision.

Thank you. The next question is from John Coyle with Barclays. Please go ahead.

Actually it's Steve Kim from Barclays. Guys, thanks very much for all the color. I just was a little intrigued by something you mentioned earlier. You had said that, I think if I heard you say you were sort of looking to focus on getting your gross margin to 20% or better before you got a little bit more aggressive, let's say, on the order side of the equation. But at the same time, you also mentioned that there was a 40 basis point headwind on your gross margin from maybe a slower pace of deliveries, i.e., unit volumes. So it's kind of a little iterative and a little circular. I guess I was kind of curious as to whether you believe that you can achieve a higher gross margin in any kind of market environment? Or it would seem to me that the market pretty much can give you a certain gross margin and you pretty much need to make sure you are pricing your product according to what the market will give you. So I guess I am a little confused by exactly what you were trying to say by putting the gross margin comment first before you were going to get really aggressive on volume.

Right, Steve, and a few comments on that. I mean, pricing ultimately is the market function. New homebuilders are a small percent of the overall housing market. There has to be some alignment with resale pricing in order for us to sell homes and make money and that's what we strive for. You can be more on the aggressive side of that at times or more on the conservative side and go for margin. The comment I made on the margin hit in the current quarter was really reflective of the delivery shortfall not net order shortfall. Our conversion rate came in at about 53%. It was about 5% short of where it should have been in the quarter. As we talked several times during the call, we are taking actions to correct that and expect to have a much higher conversion rate in the fourth quarter. So I don't see it as inconsistent at all. They are really two different issues. The sales pace is supporting a volume for our business that will provide that near-term target, 20% margin. In the current quarter, we happened to have a few hiccups on the delivery side, which again we are very disappointed about and doing much focus on correcting on a go forward basis as soon as the fourth quarter. So in my mind, there is no inconsistency there.

Steve, let me add a couple more color or comments for you. I think our business model gives us a lot of margin upside today. And what Jeff touched on, you have to be priced competitively with whatever the market will give you and certainly with the resale median prices in that area, as I shared in my prepared comments, we have a lot of things we can mine in a built to order business that you can't do when you are a spec builder. When you are a spec builder, the longer the home sits, the lower the price gets. We build value up and we are continuing to find ways to get higher margin through the revenue side, and as we are rebuilding the scale in our markets, we are going to see more cost synergy on the direct side. And they are both in play right now and we continue to attack both of them. If you balance that with, we are tracking three to four month in our communities, that's a balance where you can get the return and you will opt for a higher margin. If you go to our Coastal California communities that are typically irreplaceable, you are not ever going to run them hot. You are never going to let those run even for a month because you can't replace it. And if it's 30, 40, 50 lots, you mine every dollar of margin you can and in some cases it can be significant. If you go to Houston, where land is readily available, and we have a big businesses and we can go replace most of our communities at relatively comparable lot cost, once we hit the promised land on our margin side, you will see us ramp up our sales per community. So every asset has its own strategy. It happens to bubble up in about four a month. And that's what our target is until we get north of the 20%.

Got it. That's actually very helpful. It makes me feel a lot better. Thanks a lot for that clarification. My second question relates to a comment, I think, on traffic. And I guess this is something that harkens back to one of your peers that had a recent conference call where traffic was good, substantially better than what the order rate was. I just wanted to make sure that this traffic figure, it appears to be, I guess a gross number, not a net number. Correct me if I am wrong on that. And if that's the case, it would seem that if you simply had your average buyer instead of visiting, I don't know, three times maybe visits four times or instead of four goes to five or something like that, you could achieve a significant differential between your traffic increase and your order rate to the tune of like 25% to 30% just on that alone, and I was curious as to whether or not you believe that a rising traffic or a higher traffic growth rate versus an order rate necessarily will lead to a future increase in orders if all you have is people, the same number of people just visiting you one more time, let's say, than they usually did in the past?

Actually, Steve, and this is anecdotal. The feedback I am getting from the field is that the quality of the traffic is improving. These are real buyers that are out there that are just taking their time right now and making sure they are comfortable with the home buying decision. And I think the good old days are gone right now where you could get, what I call a floor pop, we you could actually sell somebody on their first time in. We are seeing the customers come back four, five, six, seven times before they make the home buying decision. So I do believe that this increase in traffic suggests there is a strengthening interest in homeownership and we think it will help propel more sales in the future.

Thank you. The next question is from Jack Micenko of Susquehanna International Group. Please go ahead.

Hi. Thanks for taking the questions. I am wondering about your perspective on broker incentives over the past quarter. I have been hearing and seeing some increases. It's probably not well-suited for your model on the built to order, but just curious if you have seen any change there on the broker incentives.

Jack, that's a good question. We typically don't o anything other than whatever the market commission rate is for the broker. Our realtor co-op percentage is up, more of our sales have a realtor associated with them today then in the past and that's without having a broad-based campaign to pay more for the realtors. What I have always found over the years, is if you take care of their customer, do a good job, deliver on the promise, their customer is happy and the transaction works well, they will bring you more business. They are not necessarily motivated by an extra one point. While that's my belief, having said that, we are seeing some signs in some of the cities where other builders are increasing realtors spiffs or commission rates. That's not new. That's been going on for years, and we don't think it naturally drives a lot of sales and pretty happy right now with our realtor participation level.

Okay, great. And then Jeff K., I think you had sort of intimated that we would see maybe more land sales in the future, either you reposition or sort of get out of markets. Do you expect more impairments like the Atlanta land sale? Or is some of that stuff above water now? Is there a way to think about either the magnitude of sort of future land sales in a dollar amount or kind of where we are versus the market, that sort of thing?

Yes. I would say, it's difficult right now to give any precise numbers on it. I wanted to basically make a comment that it is a lever that we are looking at. We obviously have a very large landholding in Las Vegas in Inspirada where we have a land that's priced at or marked at our book, a very favorable cost where we certainly wouldn't expect to lose any money on sales there. Really, we are looking at a whole portfolio across all the divisions and just pulling different levers. In some cases, it's going to be activations of land. Other cases, we may potentially look at some isolated sales from here on out. So that's really it.

Jack, let me make a comment on the Atlanta sale. As far as I know, that's the only asset we had anywhere where we are not there in that market today. So this isn't a case where we have a lot of assets around the system where we are no longer operating. And when we made the decision to park this one, it's in a desirable area on the north side of Atlanta, and we actually evaluated the merits of going back in and building it out, in that we knew we could create more value through a build out. And I made the decision, let's continue to focus on our current footprint, take those dollars and reinvest them where our teams are in place and we will get a better return than the distraction of sending somebody up to Atlanta to build out a 70 or 80 lot community. So that's an example of where we could have built it out, elected not to so we can stay focused on the core footprint. But that's the only asset we had that's not in our active businesses as I am aware of.

Thank you. The next questions is from Eli Hackel with Goldman Sachs. Please go ahead.

Thanks. I had a question about the Chinese buyer in California. I mean you have seen a lot of commentary as it relates to that economy and things slowing down. Have you seen any of that make its way into the California residential real estate market?

Well, we continue to see heavy demand from Chinese nationals that are relocating to, in particular, SoCal. And what we are finding is, it's a quote real buyer. This is not an investor. You hear things in the media that people are trying to get their wealth out of China but the primary motivator seems to be getting into investing their money in a solid real estate investment and getting their children into a preferred school district in California and in turn, hopefully, someday a UC college education. So, we have seen a lot of it. I haven't heard anything that it's materially changed. I think we still have a pretty strong influence there. When you are gateway state like California is to such a large population in Asia, because right now we are talking Chinese, but over the years, Japanese, Korean, Philippine, there is always a country that seems to have a lot of interest in relocating to California and it is a great place to live. So I understand that. But we have not seen any indication that that shift has occurred yet.

Great, thanks very much.

Thank you. The next question is from Mike Roxland of Bank of America Merrill Lynch. Please go ahead.

Thanks very much. Just a quick question on the Central Region. Just wanted to get a sense as to why order prices declined by around 2% on a year-over-year basis and whether that has to do with the company's ability to incentivize to move product there?

I don't have all the details, Mike, but I know that the one division that was down a handful of sales was Colorado where our ASP is significantly higher than in Texas. So that alone could be the difference. We are not experiencing a lot of incentives in Texas in our business. It's strong and we continue to push for more margin, not less.

Got you, and then just a question on the Southeast region. I get your viewpoint as to the order declines. I think orders were down about 8% in the quarter. Is that just a function of your strategy to match pace versus price? Or did something else go on in that region?

Well, for starters, it's not that big a region. So I think the sales were down a total of 30 net orders in the quarter and over half of that was in Raleigh and DC. So if you get into Raleigh and DC, it's kind of the timing of closing out of the last few lots in this community and you lost a month to renew one was opened and I didn't give much color on Florida but we are actually seeing strength in pockets in Florida. I could name by city, an area of that city that's performing quite nicely. We have some strong communities in Tampa, Orlando and Jacksonville. And then at the same time, we have some that aren't working so well in some of the lesser areas we are trying to work our way through. So our community count ticked up in the quarter and I think you will see us start to push more activity out of the Southeast going forward.

Thank you, and our final question comes from Adam Rudiger of Wells Fargo Securities. Please go ahead.

Hi, thanks. Can you just give us some broad color on maybe the intra-quarter trends? What you saw month-to-month? We saw the new home sales came out today that seemed a little bit contradictory from some of the trends we have seen from the big builders. So anything you can shed on that would be helpful.

Sure. Adam, I don't react too much to the monthly new home sales because they always seem to be adjusted 30 days later, and I am not sure the quality of the number, it's a number that's posted. We felt, in our case, it was fairly consistent across the quarter. When we break it down monthly, you have to look at things like how many weekends in the month and how many days in a month and which holidays occur in which month. That can move it around a bit, but are our traffic levels were elevated throughout the quarter and we felt that our demand was pretty consistent throughout the quarter.

Okay. Thank you, and then how about just any comments you had on costs?

Why don't you tell him what's going on costs?

Sure, a couple of comments on costs. We are continuing to see some headwinds on the cost side, mainly in labor, pretty much across all market and various pockets. So there is pockets of labor pressures that we have been seeing on a year-over-year basis, probably up three or four percentage points in costs since the start of the year unlike product. And it's an area we try to continue to control. We have implemented a lot of basically pursing strategies across the business to help control that. At this point, obviously we are absorbing those cost increases and doing better than that, in fact, on the price side. So it hasn't really hurt the margin, but it is an area of concern for us and something that we continue to watch very closely. And until I think some little more capacity enters the labor market, it may continue to be pretty tight on that side of the business for some time.

Thank you. That concludes the question-and-answer portion of the conference. I would like to turn the floor back over to management for any closing remarks.

Thank you, Manny. I would like to again thank everyone for joining us today. We look forward to a strong financial finish to our year and in turn we look forward to sharing our full results with you in January. Have a great week and we will talk to all of you soon. Thank you.