KB Home (KBH) 2003 Q4 法說會逐字稿

Thank you for standing by and welcome to the KB Home fourth quarter earnings conference call. As a reminder today's call is being recorded. KB Home's discussion today will include certain projections and forward-looking statements in order to help investor's better understand KB Home's business prospects. These are based on assessment of current business and operation conditions. Please be aware that the actual results may differ from those expressed or applied by the projections and forward-looking statements and differences may be material.

These discussions in the company's annual reports on form 10K, quarterly reports on form 10Q and current reports on form 8K filed with the SEC, identify various factors that could cause actual results to differ from those that KB Home will be projecting in the forward-looking statement that will be made today and we urge you to read those. I would like to remind everyone that this conference is being webcast on KB Home. At this time I would like to turn the conference over to the Chairman and Chief Executive Officer, Bruce Karatz. Mr Karatz, please go ahead.

Good morning, every one. Before we start all of us at KB Home want to wish you and your families a very, very happy holiday and new year and we appreciate your joining us today to discuss the results of our fourth quarter and fiscal year ended November 30. With me this morning are Jeff Mezger our Executive Vice President and Chief Operating Officer, Dom Cecere our Senior Vice President and Chief Financial Officer and Bill Hollinger our Senior Vice President and Controller. We are pleased to report strong fourth quarter results that wrapped up another excellent year for our our shareholders. Our financial performance in 2003 reflects the dynamics of a fragmented homebuilding market still in the early stages of consolidation.

Favorable demographics, and our continued focus on refining our KB next operating model to improve all aspects of our business. We are a build to order home builder with a mortgage banking subsidiary to support our homebuilding business. It's that simple. Our 2003 financial results, 2004 plan, and outlook for the next several years reflect our continual strategy to maximize the favorable competitive advantages afforded to large public builders. Our financial results today are a snapshot in time of what we started in 1996 in building a company with sustainable competitive advantages that can deliver excellent results quarter after quarter.

The fourth quarter and full year financial results for 2003 marks another year of delivering on our promises and reflects on all the employees of KB Home who produced another outstanding year. Net orders for the quarter increased by 14% companywide, and by more than 17% in the U.S, when compared to the fourth quarter of last year. This marked our third consecutive quarter of strong unit order growth. We enter 2004 with a healthy backlog of $3.1 billion up 31% from the same period a year ago. In the fourth quarter we posted solid top line growth with companywide unit deliveries up 12% on a year over year basis.

Total revenues for the quarter reached $1.87 billion and diluted earnings per share rose to $3.31. Our strong fourth quarter performance contributed to the company's solid financial results for the year. We delivered 27,331 homes in 2003, up 7% from a year ago while total revenues were up 16% from the previous year. The revenue growth translated into a 23% year over year increase in diluted earnings per share to $8.80. The company's after tax return on invested capital for 2003 was 16.6% which was well above our cost of capital and almost triple the average for the S&P 500.

I am pleased with this return, particularly in light of the significant investments, we made in inventories during the year as we position the company for growth and entered new markets. In 2003, we repurchased 2 million shares of our common stock. Over the last two years we have repurchased 6 million shares at an average price of just under $50 per share representing approximately 13% of the shares outstanding at the beginning of the period. We continue to believe share buy backs are a good use of our free cash flow to reward our shareholders. We ended the year with a healthy financial position with our debt to total capital improving by 380 basis points to 44%.

To quote a recent press release from Fitch Ratings, "KB Home's rating outlook has been changed from stable to positive. This change reflects KB Home's solid consistent profit performance in recent years and the expectation that the company's credit profile will continue to improve as it executes its business model and embarks on a new period of growth." On December 5th, we announced an increase in our annual cash dividend from 30 cents per common share to $1, underscoring our commitment to directly reward our shareholders while maintaining our stated objective of becoming an investment grade company.

The year 2003 was truly a year of transformation for KB Home that has built a foundation for profitable growth for years to come. During the year we expanded our geographic reach through both acquisitions and denova growth and now have significant positions in dynamic markets across the country. We also continue to diversify our product offerings to serve the first time home buyer segment as well as first time move up, second time move up and active adult buyers. We enter 2004 from a position of strength with a healthy financial position, robust backlog and an excellent platform for continued profitable growth.

Throughout 2003 we made strategic investments in markets across the nation, to advance our business and facilitate top line and bottom line growth, while adhering to our balanced approach to managing our financial position. In California and Las Vegas we devoted an additional $275 million in land and land development to expand our market presence. Our land pipeline in these land constrained markets is strong and the benefits of the significant land investments made during 2003 will pay real dividends in 2004 with a full benefit being realized in 2005.

In our central region, we faced more sluggish market conditions and pricing pressures which tested our KB next operating model, our management and our ability to redeploy assets to maximize our returns to shareholders. We substantially maintained our housing gross margins and took action to reduce our overhead. We still were able to generate acceptable operating profits, even though lower than 2002. We are confident our central region will improve nicely in 2004. On the acquisition front, we challenged our people to provide full integration support for our strategic expansion into new and exciting geographic markets.

In Florida, our operations broaden significantly in just over a year. Toward the end of 2002, we acquired American Heritage Homes which expanded our presence to Tampa and Orlando. Just recently we announced our denova expansion into Ft. Myers and the Treasure Coast. Treasure Coast is an area that spans the Florida coastline from the city of Melbourne to Port St. Lucy. In March of 2003 we acquired Colony Homes which further supplemented our growing presence in the southeast into Atlanta, Charlotte and Raleigh. And in the fourth quarter of 2003 we acquired Zale Homes, giving us a foothold in Chicago, one of the largest home building markets of the US. Zale provides an attractive entry into the midwest where our potential for growth is strong.

Today we enter 2004 having expanded operations into 11 new geographic markets extending our market presence to 31 of the top 75 MSAs. We fully expect to continue to strategically extend our footprint as new acquisition opportunities are explored that meet both our business and financial criteria for investment. Having said that, we plan to maintain a balanced approach in the use of our cash that has put us in our current strong financial state. One of our priorities is to become an investment grade company. With the recent upgrade from Fitch we believe we are moving in the right direction to achieve this goal.

As we evaluate future acquisition opportunities, we will also be working to keep our leverage in check. At the same time, we intend to hold to our KB next disciplines to insure our high standards are met and that we acquire companies that fit into our strategy and uphold our margins. In 2003 we tested our people, our business model and our leadership and they met the challenge head on.

We had another terrific year with revenues up 16%, net income up 18% and EPS up 23%. More importantly, we positioned ourselves for a terrific 2004. We invested in land and land development to widen our presence in the land constrained California-Las Vegas markets, we expanded our geographic reach by over 50% to 31 markets in the U.S. and we entered 2004 with a stronger balance sheet, a $3.1 billion backlog and an excellent footprint for continued growth. And now I would like to ask Dom to take us through some of the financial highlights.

Thank you, Bruce. If you would please turn to our exhibit labeled consolidated statements of income. The company's housing revenues for the fourth quarter of 2003 reached 1.84 billion up 15% from the same quarter of 2002. We delivered 8874 homes in the fourth quarter up 12% from 7932 in 2002. This was the first quarter in 2003 where our year over year delivery growth exhibited the momentum we are building and expect to carry forward into 2004. The average sales price for the fourth quarter was up 3% in 2003.

In the U.S, the average price for the quarter was flat, as increases of 6% in the West Coast and 9% in the southwest, were offset by the mix impact from higher deliveries in our southeast region where homes have significantly lower price points. In France, the average sales price was up 20%, driven primarily by a weaker U.S. dollar. On a side note, the company's commercial and land sales revenues for the quarter totaled 14.7 million, down from 54.3 million in 2002. The operating income on these revenues also decreased to 1.9 million from 6.8 million in the prior year. Commercial and land sales had a minimal impact on our financial results for the fourth quarter of 2003 and even less of an effect than in 2002.

All our selling, general and administrative expenses ratio in the fourth quarter was 11.7% of housing revenues up only 10 basis points over the fourth quarter of 2002. In the fourth quarter we showed marked improvement in our year over year SG&A ratio comparisons versus the previous three quarters of 2003. Our SG&A ratio is now coming back in line since we have fully integrated the southeast businesses and resized the cost in our central region to correspond to current demand. Our net interest expense for the fourth quarter of 2003 was 5.4 million versus 10 million in 2002. The primary reason for the decrease was the increased capitalization of interest in the fourth quarter of 2003 due to having more land under development as a result of the substantial investments made during the year to support our future growth.

Our construction pretax income for the fourth quarter of 2003 rose 19%, to 199 million from 176 million in 2002. This was driven by a 12% increase in revenues combined with an 80 basis point improvement in our housing gross profit margin. The company's housing gross profit margin hit an all time high of 23.4% of revenues for the quarter. For the year the housing gross margin was 22.5% up a healthy 120 basis points over the 21.3% reported in 2002. As a percent of construction revenues our related operating income in 2003 was 9.7% up from 9.2% in 2002.

Let me make a few comments on our mortgage banking operations which came in below expectations. Our mortgage banking operations posted fourth quarter pretax income of 8.2 million down from 17.9 million in the year earlier quarter. For the year, these operations recorded profits of 35.8 million compared to 57.5 million in 2002. The lower profits in our mortgage banking operations were reflective of several factors. First our retention rate for the year fell to 73% in 2003 from 89% in 2002, partially due to our mortgage operations setting up to handle home buyers in our new southeast region.

Second, the mortgage banking marketplace demanded more diverse loan products such as interest only payment loans, which required the use of lower margin wholesale brokers. Third, both the narrowing interest rate spread from the previous share and a volatile interest rate environment impacted profitability. Finally our implementation of SOP 01-6 adversely impacted results as noted in our first quarter call. We have taken steps now to reduce our overall cost per loan. Implementation of SOP 01-6 is now behind us, our mortgage banking operations are now fully in place in the southeast and we have expanded our portfolio of inhouse products which should reduce our brokered loans.

We fully expect these actions will improve our mortgage banking operations financial performance in 2004. Our mortgage banking business is in place to support our homebuilding business and is only 6% of our total company pretax profits. Therefore the recently published concern around the forecasted 80% decline in the refinance market from 2.2 trillion to 434 billion is not anticipated to have a material impact in our business going forward. Companywide our total pretax income for the fourth quarter of 2003 increased 12% to 207 million from 185 million in 2002, and we ended the year with 553 million in pretax income up 18% from 469 million last year, with an effective tax rate of 33%, the company's net income increased 12% to 139 million in the fourth quarter up from 124 million in the same quarter of 2002.

For the year, our net income rose 18% to 371 million from the year earlier period. The company's fourth quarter EPS of 3.31 increased 13% from the year earlier quarter EPS of 2.92 and was 23 cents ahead of the $3.08 consensus estimate for the quarter. Our $8.80 in EPS for 2003 was up 23% over the 7.15 we recorded in 2002, which was up 30% over the 5.50 EPS posted in 2001. We exceeded the consensus estimate of 8.60 for 2003 by 20 cents. Now, please turn to our exhibit labeled consolidated balance sheet. The company closed the quarter with $117 million in cash, related to construction operations. We continued to improve our leverage ratio with our debt to total capital improving 380 basis points to 44% at year end 2003 from 47.8% at year end 2002.

Our net debt to total capital, taking cash into consideration, was 41.7%. We believe that our leverage along with our financial matrix demonstrates that we are operating within guidelines that support an investment grade rating. Our inventory at November 30, 2003, was 2.88 billion including both land and homes under construction, up 710 million from 2002. We invested over 250 million in our expansion into the southeast and Chicago. In California and Las Vegas, both land constrained markets, we increased our land investments by 275 million as stated earlier. The balance was invested in our central region and our other southwest operations for organic growth.

Companywide we had approximately 129,000 lots owned and controlled at November 30, 2003, compared to 110,000 a year earlier, approximately 52% of these lots were under option contract. We are pleased with the strategic land position we have, across the U.S. and in France and believe we have a strong pipeline to support our growth goal. Included in inventory are unsold homes and homes under construction. With our continued focus on build to order, we had less than 500 completed unsold homes at November 30, 2003 which approximated 1.3 unsold homes per active selling community or 5% of the total units under construction. We also continued to maximize our return on invested capital by turning 80% of our inventory dollars in five to six quarters and focusing on our build cycle times.

The company turns its inventory 1.7 times while maintaining a full year pipeline of land either owned or controlled. If you would now turn to the attached supplemental information supplied with our earnings release you will see that our net orders for the fourth quarter of 2003 were up 14% companywide and over 17% in the U.S, which is expected to translate into KB Home having a solid first half in 2004. Our cancellation rates for the fourth quarter remained in the mid 30% range basically unchanged from the previous three quarters but slightly improved from what we experience in 2002.

Throughout 2003 demand was steady as traffic comparisons remained positive on a year over year basis in all of our regions. Finally, we ended the year with a robust backlog of 14,675 units, up 22% on a year over year basis. The dollar value of our backlog at November 30, 2003, was approximately 3.07 billion, up 721 million or 31% from 2.35 billion in 2002. All year over year backlog value comparisons at the end of 2003 was the best it has been in five years and was up in all our geographic regions setting us up for solid performance in 2004. In summary, we are in the strongest financial position in our history and operate a geographically diverse business with a wide array of product offerings.

During 2003, we made the necessary investment in both organic growth and expansion into several attractive new markets to have a successful 2004. Our debt is well laddered and we now have a $1 billion revolver in place which will allow us financing flexibility at very attractive rates. Furthermore our credit ratios are well within investment grade levels. Now I will turn it back to Bruce for the wrap up of our fourth quarter.

Thanks, Dom. Our outlook for the next several years reflects our continued strategy to maximize the favorable competitive advantages afforded to large public builders in a fragmented homebuilding market still in the early stages of consolidation. We are operating in an environment that continues to remain favorable for the homebuilding industry. This environment is characterized by constrained housing supply and strong demand as well as positive demographic trends and low interest rates. With the U.S. economy expected to strengthen, we believe the homebuilding industry will continue to perform well, even if interest rates increase modestly, we believe that the higher consumer confidence and job growth that would accompany an economic recovery would offset any negative impact. We are confident that the disciplines we have in place will continue to guide our business in the right direction and continue our proven track record. Right now, KB Home is in its best geographic position in its 45-year history. We entered 2004 strategically positioned in over 30 major U.S. markets where 450,000 housing permits are issued annually with only a modest 5% share of the overall market.

In our West Coast region we enter 2004 stronger than ever, having made significant land investments to insure a healthy pipeline of new community openings in 2004 and beyond. Our dollar backlog is up 19% and we expect to see new communities drive additional demand in the second half of 2004. Our West Coast region accounted for only 20% of our total unit deliveries in 2003, clearly showing how we have expanded beyond the borders of our home state. In the southwest we entered the new year with a strong dollar backlog up over 49%, anchored by a seasoned team in a healthy Las Vegas market poised for another record year of deliveries, revenues, profits and return on invested capital.

Our business in the southwest remains vibrant and we continue to make strides in top line growth and bottom line profitability. We remain a formidable force in our central region delivering over 7600 homes in Denver, Dallas, Ft. Worth, Houston, San Antonio, Austin, Mcallen and Chicago in 2003. We have reset our overhead structure to mirror market demand and expect to have an excellent year recovering nicely from our repositioning in 2003. In our newest region, the southeast, we enter 2004 on an upbeat with a strong backlog, improving margins, new community openings with our full array of KB offerings.

Our housing revenues in the southeast are expected to approach $1 billion in 2004 up from being just over 100 million in 2002. And we are expanding our offerings for attached products, active adults and first time and second time move up buyers. We intend to remain a product leader in the first time home buyer segment where the demographics will continue to be favorable for the next decade to come. Today this segment represents approximately 40 to 45% of our unit deliveries in the U.S. which equates to less than 30% of our overhaul revenues. More than 20% of our buyers are over the age of 50. Commonly labeled active adult, and this percentage continues to grow.

Our market presence in the sun belt states and recent expansion into the southeast leaves us strategically to design product, acquire land and market to this buyer group more aggressively. We are also going more aggressively against the first time and second time move up buyers to take full advantage of our market presence in some of the best housing markets in the U.S. where we have established brand and market position. We are designing more lower and medium density attached product to address higher land costs in the California markets. We are also moving these proven floor plans to other regional markets where land is becoming more scarce as cities build out, urban sprawl takes its course and more expensive but less competitive in fill land opportunities become available.

We are excited about the strong foundation and momentum at KB Home as we enter fiscal '04. We have become more diverse both geographically and in terms of our product than ever before and we have a well defined business and financial strategy fully supported by our board of directors. Our financial position is solid and we intend to maintain a balanced approach to growth. As we enter 2004 it bears repeating that the company is well positioned to continue delivering excellent results. We have expanded our market presence from 20 to 31 of the top 75 MSAs in the U.S. The company's invested in land to expand our presence in land constrained markets.

We are developing a broader array of attached products to address rising land costs and in fill opportunities where there is a shortage of housing supply. We are expanding our product breadth and price points to better reach active adults in first time and second time move up buyers and the company enters the new year with more than 129,000 lots owned and controlled, a backlog of $3.1 billion up 31%, a sound balance sheet, improving margins and high returns on invested capital. And we will also continue to supplement our business with strategic acquisitions in new markets that meet our business and financial criteria for success while maintaining our focus on obtaining investment grade rating. We intend to be disciplined in our approach to acquisitions to facilitate controlled growth that makes sense for our business.

In addition to our solid financial performance, we are just as proud of our commitment to customer service. We continue to improve on our outstanding customer satisfaction record. In the latest JD Power survey KB Home consistently improved its customer satisfaction rating over the prior year and now ranks high among the national publicly held home builders. Lastly, before turning my remarks to our outlook, I would like to mention that we are pleased to be part of a growth industry. Recently, it was brought to my attention that the annual median year over year EPS percentage change for the nine largest publicly held home builders has out paced the S&P 500 for the last 8 consecutive years. Furthermore, this home builder EPS growth has exceeded the S&P 500 in 10 of the last 12 years. The large public home builders have proven that our industry has consistently generated superior performance and outperformed the overall market.

Next I will turn to our outlook for '04. In summary, we are forecasting revenues in 2004 of approximately 6.6 billion on 31,000 unit deliveries. Our housing gross margins are expected to improve slightly, and our SG&A ratio is anticipated to improve. We are, therefore, raising our earnings per share guidance from our last call of 9.50 to approximately $10 per share in 2004 up 14% from the 8.80 delivered in '03. This now concludes our formal remarks, and we will open up the line to take your questions.

Today's question and answer session will be conducted electronically. If you would like to ask a question you may do so by pressing the star key followed by the digit 1. If you have been utilizing your mute function please disengage that so your signal will be registered. We will pause just a moment. Our first question comes from Joseph Sroka with Merrill Lynch.

Hi, Joe.

Hey, Bruce, can you go over those percentage breakdowns between first time buyer, the 2 move up class and the active adults again?

The first time is 45%.

30% of the revenues.

And 30% of the revenues, approximately 20% of our buyers are over 50. So you can extrapolate the difference would be first time and second time move up.

Now, did that shift occur because of the acquisitions you made over the last two-years, or, in existing markets have you just shifted the product?

There's been a slight shift in the over 50 as we continue to expand in sun belt states. But essentially, this represents where we have been for a number of years. I just don't think we have done as good a job as we could in explaining it to investors. But what we did want to communicate this morning was that we are actively, as part of our overall strategy, expanding our product line.

Okay, fair enough. And then a quick question for Dom. Dom, what was the U.S. and French community count at the end of the quarter and where do you anticipate your taking that by the end of 2004.

Hi, Joe. Joe, in the fourth quarter we had approximately 470 active communities which was up 22% from 386 a year ago. In the U.S. it was 362 active communities in the fourth quarter up 26% from 288 a year ago. I mean, I would expect our community counts in the U.S. in 2004 to be around 375, which would be up 20% and France would be around 90 which would be up 14%.

Okay. Perfect, thank you.

You are welcome.

We will next go to Stephen Kim with Smith Barney.

Hi, Jed Barron for Steve Kim. Two questions, if I could. First of all, well congratulations on a strong quarter again. To start with your margin's quite strong here this quarter, just wanted to understand a little bit more what helped drive those margins and what sort of trajectory in margins we can expect in in '04?

We have said that in the closing that the margins in '04 will be up slightly over where they are this year. We don't assume in our outlook any additional price increases in 2004. So there is some upside there. What drove the margins overall has been our continued focus on our KB Next operating model and the fact that even though our business was sluggish in the central region and there was a lot of price concessions, we actually did quite well in holding our margins in the central region, in fact our margins in the central region, even though the business was down, was 22.5%, the same as it is for the overall company. So we have strong margins in the southwest, strong margins in the west, we maintained our margins in central and we invested in the southeast.

Great. One more, if I could. Do you have, Dom, the inventory breakdown for the fourth quarter between the construction progress and land and land development?

We have about, if I looked at inventory, was 2.9 billion. About 1 billion was for, I'm going to give it to you the same way, $1 billion was for a backlog of homes that were already sold, 1.2 billion was for where we already had finished lots, 400 million or so was homes under construction, about 300 million was in options.

Great, thanks very much.

Hey, Dom. Actually it's Steve Kim as well. Could I jump jump in and ask a couple of questions.

Hi, Steve.

You upped your dividend recently, I think, close to a buck.

To a dollar.

To a dollar, right..

1.356%, pretty good dividend.

It is a nice dividend. It is nice to see you guys taking those kinds of actions. I guess my question is do you anticipate that the dividend is something that you are going to be revisiting on a regular basis to be taking it up, or should we view this as perhaps a one time catchup kind of action?

The way our board viewed it, Steve, was that this was something, I think, that has to be reviewed, frankly, as it was in the passed on a regular basis, and it would be a combination of our earnings, free cash flow and obviously some focus on yield, and so I think it is fair to say that we would continue on at least an annual basis to look at the dividend.

Great, that's encouraging. And one last question, you indicated, Dom, that pricing in the central and southeast areas was really a function of mix, in terms of seeing the year over year percentages be down. Could you tell us, excluding the impact of mix, were you able to hold pricing roughly flat or were you actually able to increase prices at all in those reasons, excluding mix?

Well, I believe in the central, just based on our margins, we absolutely held price flat year over year. In the southeast, I think margins are flat with the exception of Florida were we are probably seeing some price come up.

Great. Thanks a lot, guys, great quarter.

Thank you.

We will go to Ivy Zelman with Credit Suisse First Boston.

Good morning, gentlemen, Dennis, I'm speaking on behalf of Ivy.

Hi.

Just quickly you mentioned that the land and land development that you put into California and Nevada, do you have that on a companywide basis for what was in 2003?

You mean the amount, the increase?

Yes.

You mean over all how much?

Yes. And where do you see that going for '04 as well.

I think California was around 800 million in '03. Total inventory.

I am looking for companywide.

All right. Maybe state the question again. We are not --

Okay. You had commented that you

Raised the inventory 275.

Right.

Companywide it was 710 million.

That's how much was spent on land and land development?

Yes.

And the forecast.

It isn't exactly. That's the increase.

So the total replenishment would be --

Yes, we are talking about in addition to replacing what was sold off.

Okay. Do you have a forecast where that might go for '04?

Have we given? We haven't given that. We could do that, we can't do it right here though, Dennis.

No problem. Dom, along those same lines, do you see as you grow the land inventory, the interest capitalized in '04 to be more similar to what we saw in '03 or do you get back more to a historically level?

Probably down slightly from what you saw in '03.

And then just following up what you mentioned in central, you said that you maintained margins near 225 in the central which was pretty impressive. Would that hold true as well from the operating line?

No, because what we had said last year was that we had to get our fixed costs back in line. So that happened by the end of the year, so the fixed costs were probably up 200 and 300 basis points which isn't too bad. Now we go into the year with that normalized, we should have a good year in 2004 in central.

Okay. I guess I will just wrap up with your outlook for the financial services knowing that you will probably have a little bit tougher comparison in the first couple of quarters?

In 2004.

Yes.

We expect the mortgage banking business to be up in 2004 but because of our backlog, it will probably show up more in the second half than the first half.

Okay. Is that up including the impact of the accounting adjustment in the first quarter or are you excluding that?

No, I am including the accounting adjustment in the first quarter. So, yes it will be up.

Okay. Thank you very much.

Dennis, just real quick, this is Bill, I think your first question was how much in the way of new land purchases have we made for the year of 2003? It was about 876 million, and that was compared to 2002 of about 715 million. That's the over all company.

That is the incremental?

Yes.

Okay, very good Thank you, Guys.

And we will next go to Michael Rehaut with JP Morgan.

Good morning, it is John Barlow on behalf of Mike.

Good morning.

I just wanted to ask you a question on your SG&A. You said you expected it to improve in '04. Can you give us any sort of a basis point range?

It will be between 12 and 12.5%.

Okay. And at what point, in which quarter, the first quarter or the second quarter, would you expect us to see SG&A margin fall on a year over year basis?

The biggest impact we will start to see the down will be in the third and the fourth quarters of next year, second half.

Okay, thank you.

And our next question will come from Steve Fockens with Lehman Brothers.

Hi, good morning. Just a quick question. Of the 20% or so of the buyers that are over 50. One, do they tend to buy on average higher priced homes than the company average and, two, we have heard in the past that about half of active adult buyers pay cash for the homes, is that true for your over 50 buyers as well and are you finding that the LTV on the over 50 tends to be a lot lower than your average buyer?

Steve, this is Jeff. The active adult buyer typically does pay cash more than our traditional buyer. Probably half of those buyers do pay cash. The type of product that they purchase is very similar to the other buyers in the community, mostly single story product but the floor plans, the features, they may put more into their studio selections cause it is a home they're going to stay in but a fairly typical product.

But on average, compared to other big builders, you tend to have somewhat lower average sales prices so that over 50 buyers would buy similar product but they would tend to put a lot more money down. Is that a fair way to characterize it?

Sure. This is a buyer that wants to remain active, does not want to get branded in an age restricted community and just wants to be part of the community.

I was about to ask that. Those are generally not age restricted communities, they're just part of your overall communities?

That's correct.

Great, thank you very much.

Our next question will come from Robert Kirkpatrick with Cardinal Capital.

Good morning. Could you talk a little bit about why the debt that is associated with the mortgage subsidiary has come down as rapidly as it has over the last 12 months?

Yes, if you will see, it really follows the highly correlated with the receivables. And the receivables are obviously generated from the fundings that we make on our houses. We have pushed very hard to get our deliveries earlier in the quarter, and so basically where as in the past we typically settle with our investors 30 and 45 days after, and that's what gives rise to the receivable. What happens now, as we have been delivering our homes earlier, we are collecting the cash and we're paying down the debt.

By the time you get to the end of the quarter of '04?

Yes.

Super, thank you so much. Congratulation.

Have a good year, Rob.

Thank you, you too, Bruce.

We will go to Jim Wilson with JNP Securities.

Good morning. Bruce, as you maybe look forward a little farther, like maybe over the next couple of years, any thoughts on how you see the mix, the product mix of business moving by the same categories and the second part of that would be any thoughts on just potential change in ASP for KB just simply based on product mix as opposed to price appreciation?

Well, as I indicated, Jim, we clearly are emphasizing broadening our product offering and, therefore, as our position in each of these markets continues to get larger and larger, we are looking at core growth by expanding our product offering. In terms of ASP, I think that, one, we do have a desire to continue to offer the most attractive pricing to bring in the largest segment of the population, and so as, like in California, which is the highest price market that we operate in, you are going to see more attached product which will keep ASP moderated. It is difficult to forecast where prices in general will move. We are not forecasting the kind of price appreciation next year that we saw this year, but I wouldn't be shocked to see it still quite healthy throughout the year.

Maybe, if ASP is potentially for California on mix goes down but if you diversify in other parts of the country those ASP's might go up?

It might happen except that as we continue to grow our southeastern business those markets have lower ASPs.

In general.

So, our thinking is next year, ASP is going to stay about where it is, at least this is what we are planning, as it was in '03, and I would think that we continue to see some kind of growth slightly higher than inflation.

And then one final question on your approach or strategy to the active adults, will this still, like relative to let's say a Dell web product, would have comparable amenities

No, no. We do not have as part of our strategy a plan to compete head on in age-restricted communities with WEB. Our thinking is that we reach 20% of our business in the over-- over 50 market with out having to invest in any special amenities nor restrict the buyers because of age. We think now as we expand our business in Florida as well as in the southwest, that we can, through product offering, attract a greater and greater number of over 50 buyers that are just different buyers from those selecting an age-restricted community and we want to do it through product and through advertising and marketing as opposed to the amenity package.

Right, very good. Great job this quarter.

Thanks, Jim.

We will next go to Margaret Whelen with UBS.

Good morning, it's actually Will Lamb. I had two, three questions, actually. One is in terms of California, are you building more attached products there and as a followup to that is what are the margins on those products versus the detached ones?

Yes, this is Jeff. We are increasing our activity levels in the SFA product today in California. It's still a small part of our overall business but it will be growing over the next few years as we go to higher densities to lower our average sales price. The margins typically are higher, the returns are similar because it takes longer to build the product.

And my, our second question is, in terms of, as you look to expand more in the Midwest and the southeast, has your profile for acquisition targets changed?

Yes, I mean geographically they have changed, so the names are different. The profile in certain areas has broadened because, as you know, in a market like Chicago, ASPs are higher. It's a land constrained market similar to several other markets that we are in, so we are familiar with it, and are comfortable in operating in a higher land price environment. So in some ways, I guess, you could say that we are broadening a little bit the criteria, but it is still a very disciplined approach of finding companies that we feel will fit in well with the rest of our company that has a land pipeline that we believe will allow us to ramp up the size of the business and has a management team that we think will be complimentary to our own management team.

Thank you, and congratulations.

Thanks, Will.

We will next go to Barbara Allen at Natexis Bleichroeder Inc.

Thank you, good morning, all.

Hi, Barbara.

I wanted to ask you, three months ago your guidance was 850 for the year, where were you presently surprised at this quarter to come in at 880 for the year?

Well, you know, as the quarter, as the quarter evolved, and as closings came in and margins were achieved, it is something that evolves during the quarter.

The margins then were better than you had been expecting originally?

Yes.

Okay. I 'm seeing increasing number of JVs in your backlog. Where are the joint ventures, are they predominantly in the U.S. or is there a mixture?

Barbara, it is Bill. It is primarily a mixture, most of them are actually in France, but we have added a couple here in California.

Okay.

It's a minuscule part of our business in the U.S, and it is not anything that we are emphasizing. It is really a France driven.

Okay. Yes, I thought it was. I just wanted to be sure.

Yes.

Well then that brings up that your same store sales roughly measured on domestic communities declined this quarter. Can you give me an assessment of what you are seeing happening there?

Yes. What you will see happening was that in the West Coast, we slowed down absorption to maximize price. In the central, where there was pricing pressure, we maintained our margins and slowed down absorption rather then flow through the land at substandard margin. So that's where that happened more than anywhere else in our states.

So it's been more of a deliberate --

Been very deliberate.

For different reasons.

For differing reasons. Okay. The last one I think I must have gotten the number wrong, but U.S. community account was 362 versus 288?

Yes, for the fourth quarter.

Right, but then you said, I wrote down 375 for next year and plus 20% which doesn't compute.

Now you are talking about the average for next year we said would be 375 in the U.S, up 20% on average. You have to watch going quarter to quarter and average to average, because the fourth quarter is a different quarter. So you have to look average to average and quarter to quarter. That's why it doesn't compute.

So your average at the end of next year you are assuming would be up 20%, is that what we are looking at?

Yes.

Okay All right, thank you.

Okay, Barbara. Have a nice New Year.

You too.

We next go to Timothy Jones of Wasserman Associates.

Good morning.

Tim, good morning.

How are you. A couple questions. First of all on balance sheet, I don't see anything on FIN 46. Is it included somewhere or where is it broken out?

Tim, it is Bill again, it is just included in inventories, it will be broken out on a footnote in our 10K, but

Can you tell me how much it was?

Yes, it was about 27 million.

That's all?

Yes. Keep in mind, though, the full implementation of FIN 46 does not take place for us until the end of our first quarter, but we might see a little creep up from there but I am not anticipating anything significant.

I see tremendous difference. Some people have nothing on FIN 46 and Centex has 250 million. I know everybody is completely scratching their heads on it but can't the accounting profession get their act together a little bit?

Well, I hate to comment on another builder, but specific to that one, if I am not mistaken, over 100 million of it is due to their financial service side and the way they do something special with - but I don't think that's all related to the inventories.

Okay. I have to check into that. That's good to know. Secondly, you have maintained a 33% tax rate, obviously, you are doing some tax -- are you doing this with land that has a tax loss carry forward or how are you doing that tax strategy and how long will it last?

Well, one of the benefits with respect to our tax rate is our business starts shifting outside of California. California is a heavily tax state, so, we have gone from a business 10 years ago that was California dominant, to a business now where 20% of our delivery is in California, so that helps us as we get to places like your area that is a little bit kinder in tax imposition. The other is, we have implemented tax strategies to lower our rate through tax credit investments which we have done for at least the last dozen years, and we believe that we can maintain this rate for at least the next three to five years.

We will next go, then, to Wayne Cooperman with Cobalt Capital.

Hey, Bruce, how are you?

Fine, Wayne.

In the guidance did you give a delivery number and secondly, are you going to continue to buy back shares or are you going to shift more of your cash flow to dividends on a go forward basis.

The guidance, Wayne, was 31,000 deliveries.

Okay, great.

And with respect to buybacks, we still believe it is part of our overall strategy, to the extent that it is paid out of free cash flow. We don't anticipate that share buybacks would occur until the second half of the year when we started feeling that we had it sort of in the bank for the year.

Gotcha. All right, great. Thank you very much. Have a nice new year.

Yes, same to you.

We will next go to William Nabler with [inaudible].

Thank you, congratulations on a good quarter and a very good year.

Thank you.

In terms of the southeast, I believe you said that you should generate $1 billion in revenues up from 100 million in '02.

Yes.

What was it in '03?

About 500 million, I believe.

Right, and the perception I have is you feel, because of the investments you made in the southeast, the profitability should grow much more rapidly than the revenues, would that be true?

Yes, that would be true. Both in '04 and then in '05 for the full benefit in '05.

Right. And in terms of the backlog, the very dramatic increase in backlog and also the unit growth in the fourth quarter, and looking at last year, when it was much more sluggish in the first half, should we assume that the first half will be stronger than the historic kind of relationship?

No, I think from our perspective the second half is still going to be very powerful next year. We are just building momentum all the way through the year from the investments that we made in 2003. For example, the 275 million that we put in land and land development in the land constrained markets of California and Las Vegas take a year to develop and they'll start selling and showing deliveries in the last half of the year.

Right.

I think it will be very similar then what we see this year.

Similar, you mean in terms of the way the percentage numbers unfold?

Yes.

Okay. And my last question is, I guess, a strategic one. With the strength of the Euro and, my feeling that U.S. investors probably don't pay that much for your French investments, why wouldn't it make some sense at some point for you to be out of that investment?

Well, we have talked about it with investors over several years. Because of the Euro, it does seem in some ways to be opportunistic time to perhaps cash in. But the one thing you have to keep in mind is that on a cash flow basis, this business is generating a huge amount of cash for us and that we are not investing any dollars in the business. Now, it isn't obvious, in looking at the balance sheet, because although we own 53% of the business, we consolidate 100% of their debt. There's no holding company guarantees, it is strictly financed independently in France. So when you add it all together, what I can tell you and we do continue to look at it on a frequent basis. It frankly makes more sense for the corporation to continue its 53% ownership with the strong royalty payment that we receive along with dividends. Dividends in the French business were just increased 10% this week going forward. It just continues to be a nice performer and a strong cash flow provider. And let me also just add, even though the French business continues to grow and do nicely, it continues to be a smaller percentage of our overall company.

Right. Thanks again. Have a healthy, happy new year.

Same to you.

This does conclude today's question and answer session. At this time I would like to turn the conference back to Bruce Karatz for any additional or closing remarks.

Well, thank you, and just lastly I want to reiterate the solid state of our current business conditions and the optimism we have. All of us at KB Home wish all of you and your families a happy holiday and a joyous new year and we look forward to talking with all of you again in 2004.

Again, this does conclude today's conference call. We would like to wish every one a good day. You may now disconnect at this time