KB Home (KBH) 2004 Q4 法說會逐字稿

Welcome to the KB Home fourth-quarter and year end 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 investors better understand KB Home's business prospects. These are based on their assessment of current business and operating conditions.

Please be aware that actual results may differ from those that may be expressed or implied by the projections and forward-looking statements and the differences may be material. These discussions in the Company's annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K 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 statements that will be made today and we urge you to read those.

I would like to remind everyone that this conference call is being webcast on KB Home's website KBHome.com. For opening remarks and introductions I would now like to turn the call over to KB Home's Chairman and Chief Executive Officer, Mr. Bruce Karatz. Please go ahead, sir.

Thank you, and good morning to everyone. We're happy to be here to discuss the results of our fourth quarter and fiscal year ending 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; Bill Hollinger, our Senior Vice President, Controller; and Kelly Masuda, Vice President of Investor Relations and our Treasurer.

We're pleased to report strong fourth-quarter results that concluded another excellent year for our shareholders. Our financial performance in 2004 reflects our continued focus on superior customer service and refining our KB next (ph) operating model to improve all aspects of our business. 2004 marks another year of delivering on our promises and reflects on all the employees of KB Home who continue to embrace our KB next principles. Let me share some of the 2004 highlights with you.

In 2004 we further solidified our position as a leading national homebuilder having sold homes in 484 active selling communities across the nation and in France, up 23 percent from 392 communities last year. Companywide net orders of 8,516 new homes for the fourth quarter increased by 28 percent when compared to the fourth quarter of '03. Order growth remained strong throughout the year, exceeding 20 percent in every quarter. During 2004 we sold a total of 36,278 homes, up 26 percent from 28,894 homes sold in 2003.

We enter '05 with a solid 6-month order backlog of 20,280 sold homes with a revenue value of approximately 4.8 billion. Our backlog value entering 2005 is up $1.8 billion or 57 percent compared to the beginning backlog entering 2004. We posted solid topline revenue growth in the fourth quarter with companywide unit deliveries up 16 percent on a year-over-year basis and revenues up 27 percent to 2.4 billion.

Our strong fourth-quarter performance contributed to the Company's solid financial results for the year. We delivered 31,646 homes during the year, up 16 percent, and total revenues of 7.1 billion, up 21 percent from a year earlier. The revenue growth translated into a 30 percent year-over-year increase in pretax income and a 30 percent improvement in diluted EPS to $11.40 per share.

During 2004 we repurchased 1 million shares of our common stock; over the last 3 years we have repurchased 7 million shares of our common stock at an average price of just over $50 per share, representing approximately 17 percent of the diluted shares outstanding at the beginning of the 3-year period. On December 2nd we announced a 50 percent increase in our annual cash dividend from $1.00 per common share to $1.50, providing the industry-leading dividend yield to our shareholders while maintaining our stated objective of becoming investment grade. At the same time we announced our Board of Directors intent to affect a 2 for 1 stock split subject to our shareholders approval to increase the number of authorized shares.

And let me remind everyone again of our ongoing commitment to providing a quality home buying experience to our customers. In 2004 we ranked as one of the top three home builders nationally in customer service according to an independent survey by JD Power. Now let's take a brief look at the market outlook for KB Home in each of our geographic regions.

In our West Coast region community counts grew from 58 last quarter to 66 in the fourth quarter. Net orders for new KB Home in California were up 30 percent in the fourth quarter and our dollar backlog of sold homes entering 2005 was $1.5 billion, up 62 percent. In our Southwest region traffic, community counts and gross orders in the fourth quarter were well relatively flat over record levels in 2003. However, cancellation rates returned to a more normalized mid 20 percent level in the quarter which drove the Southwest net orders down 8 percent. We enter 2005 with just over $1 billion of new homes sold and in backlog in the Southwest which is up 42 percent over the dollar backlog at November 30, 2003.

In our central region, net orders for new homes were up 24 percent in very competitive and price sensitive markets. We enter 2005 with approximately 4,058 sold homes in backlog, up 14 percent from this time last year. In the Southeast, net orders for new homes were up 85 percent for the quarter and continue to outpace overall market demand reflecting the strong organic growth we are achieving in these markets. We enter 2005 from a position of strength in the Southeast with 4,280 sold homes in backlog. The Southeast dollar backlog at year end was up 138 percent to 824 million with improving margins.

2004 was truly a year where we solidified our position as a national homebuilder, building a foundation for solid results for years to come. We have a national footprint in place, operating in 36 of the top 75 markets in the U.S. We enter 2005 with the wind at our back, with strong community count comparisons, a solid 6-month order backlog of sold homes and an excellent operating model for continued profitable growth. I'd now like to ask Dom to take us through some of the financial highlights of the fourth quarter and the year.

Thank you, Bruce. We began the quarter with 22,049 homes in backlog and converted 10,285 homes, or 47 percent of our unit backlog, to revenue in the quarter. Deliveries in the fourth quarter continue to be impacted by weather-related delays in the Southeast and central regions again pushing about 500 deliveries and 100 million of revenues in expected cash proceeds into 2005.

The average sales price of homes across the Company increased 11 percent from the 207,400 in the fourth quarter of 2003 to 229,200 in the fourth quarter of 2004. The average sales price of our homes have benefited from both price improvement and the continued diversification of our product mix into more move up buyer markets. For the year the housing gross margin was 24 percent, up a healthy 150 basis points over the 2003 housing gross margin of 22.5 percent. Solid gross margins from our core housing business drove our pretax income ratio on total annual revenues up to 10.2 percent.

Construction pretax income improved by 37 percent year-over-year with the construction pretax income ratio improving by 110 basis points. Our mortgage banking operations delivered 3 million in pretax income for the quarter compared to 1.2 million last quarter and 8.2 million in the fourth quarter of 2003. Our fourth-quarter mortgage retention rate was 55 percent and the average loan to value ratio remained unchanged versus the prior year at approximately 86 percent.

Average FICO scores improved slightly from the third quarter to 684 for fixed rate loans and to 709 for ARMs. Of the loans processed in the quarter, 65 percent were fixed-rate loans and 35 percent ARMs consisting of primarily high grade mortgages where the rates are fixed for 3, 5 or 7 years.

The Company closed the quarter with approximately 191 million in cash related to construction operations, our net debt to total capital taking cash into consideration was 46.5 percent; the shift of approximately 500 deliveries into 2005 due to storms negatively impacted debt by approximately 100 million and our debt to total capital ratio by approximately 150 basis points at year end.

2004 was a year where we significantly improved our long-term debt structure. In the last 12 months we secured 900 million of new long-term fixed-rate financing at a weighted average cost just slightly above 6 percent. We concluded 2004 with a 6.3 times interest coverage ratio. We are lowering the Company's overall interest rate on our debt which will continue to strengthen the capital structure of our company for years to come.

Inventories at November 30, 2004 totaled 4.1 billion, including both land and homes under construction, up 1.3 billion from 2003. This additional investment in land drove strong community count growth in our served markets that resulted in net orders increasing 26 percent in 2004 and our dollar backlog entering 2005 of 4.8 billion increasing by 57 percent. We expect to continue to improve inventory turns to 75 percent of the seller (ph) inventory flow through the income statement over the next six quarters.

Company wide we had approximately 160,000 lots owned and controlled at November 30, 2004 compared to approximately 129,000 a year earlier. Our land positions have become more geographically diverse as we have expanded our business; approximately 51 percent of the lots were under option contract. 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, 2004, which approximated one unsold home per active selling community or 3 percent of the total units under construction.

Our investment in inventory continues to be guided by our detailed analysis of each submarket where we sell homes and our overall focus on after-tax returns on invested capital which in 2004 was a solid 16.6 percent. Our returns on investments in new communities continue to be well above our cost of capital, delivering real economic value to our shareholders.

We have a very geographically balanced business entering 2005, with 3,467 homes sold and in backlog on the West Coast; 4,552 in the Southwest; 4,058 in Central; 4,280 in the Southeast; and 3,923 in France. The dollar value of our backlog, again, is up 57 percent to 4.8 billion from 3.1 billion at November 30, 2003. Now I will turn it back to Bruce for the wrap-up of our fourth-quarter conference call.

Thanks, Dom. We entered 2005 strategically positioned in 36 major U.S. markets where 480,000 housing permits are issued annually with a modest 7 percent market share of the overall served markets. We're excited about the strong foundation for profitable growth at KB Home as we enter fiscal 2005. We've become more diverse, both geographically and in terms of our product, than ever before and it bears repeating that the Company is well-positioned to continue delivering excellent results quarter after quarter.

We've expanded our market presence to 36 of the top 75 MSAs in the U.S. and plan to expand organically into several new adjacent markets in 2005. We are seeing nice growth in our West Coast markets with our new community openings being well received by California home buyers resulting in fourth-quarter net orders being up 30 percent and $1.5 billion of homes in backlog entering 2005 which increased 62 percent over a year ago.

In the Southeast we saw an 85 percent increase in orders in the fourth quarter and we enter 2005 with improving margins and over 4,200 homes sold and in backlog. We've developed a broader array of attach product that has addressed rising land costs and infill opportunities where there is a shortage of supply. And we are expanding our product breadth and price points to better reach active adults and first time and second time move up buyers.

We are entering 2005 from a position of strength with stronger than expected order growth in the fourth quarter and a 57 percent increase in our year-over-year beginning dollar backlog of sold homes. We are therefore not only confirming but increasing our EPS guidance for 2005.

Revenues in 2005 are expected to reach approximately 9 billion, up 28 percent on approximately 38,000 unit deliveries. Housing gross margins are expected to remain at a solid 24 percent at today's sales prices, and SG&A as a percentage of sales is expected to improve slightly. Our 2005 tax rate will increase from 33 percent to 34 percent and diluted shares outstanding will average around 43 million.

We are raising our earnings per share guidance for 2005 to $14.50 per share, up 27 percent from the $11.40 delivered in 2004. This is $1.06 or 8 percent higher than the current consensus estimates for 2005 of $13.44. This concludes our formal remarks and we will now open up the lines for your questions.

(OPERATOR INSTRUCTIONS) Margaret Whelan, UBS.

Well done, very well done, great year, Bruce and Domenico. And in terms of the guidance you've provided for '05, do you want to help us to understand maybe the seasonality or should we assume it's going to be the same -- in terms of how profits are going to be realized throughout the quarter?

Well, I think what we're giving you is we think the first half ought to be better because of our strong backlog. And so in terms of the way it ought to flow out over the year, it ought to be stronger growth in the first half than the second half.

Okay, the rate of growth will taper off?

Yes.

And then, I think what's where the consensus members are now, anyway. And then the second thing I had was in terms of debt your SG&A (indiscernible), what are you actually doing there?

I indicated that we think SG&A will improve well. The percentage stayed about the same year-over-year. We think it's an area -- a fertile area to drive further profits. And there are a number of initiatives under way now whether it's selling commissions -- there's a whole host of line items that we are attacking. We hope to make significant progress during the year. Although it's not baked into the plan.

Okay. Can you give us some details around particular issues that you're working on or is it just all kind of commission related?

No, Margaret -- this is Jeff. We focused on growth over the last few years in the Southeast and going into '05 those businesses will pay off automatically by a lower SG&A as the investments turn into deliveries. But as a company we're constantly -- I use the term sharpening ourselves. We're constantly looking for ways to improve or SG&A ratio. And we're rolling out initiatives per division -- each division has individual targets and individual plans with a challenge to lower their overhead level for '05. But we think it's a healthy process to constantly push to be more lean.

Okay. And in terms of the share creep, Bruce, versus the 200 million in cash on your balance sheet now, have you thought about buying in any stock? I know it's at an all-time high, but --?

We have always had a balanced outlook for use of our cash. And if the past is a prolog for the future I think you can expect that we'll use it to continue growing the business, buying back shares and we're proud of our industry leading dividend that we paid, but also want to maintain an investment-grade balance sheet.

Can I just ask one last one? We're getting a lot of questions about the extreme makeover, about the show? It seems to have been very well received. And do you plan on doing any more builds and what has the response been versus your expectations?

I don't know whether you had a chance to see it, but it was certainly -- it exceeded our expectations and it was an opportunity. One, I don't know whether you could find an opportunity that would match this one, but what it did for us and I think for the whole home building industry; one, was to put home builders in its rightful -- in our rightful position of providing an unbelievable product for American families. In this particular case it was a particularly deserving family. What it did for KBH was incredible brand building.

And while we have discussed on a number of occasions whether brand matters, we -- as you know, we think it does. And this was an opportunity where -- and it's demonstrated by the literally thousands of e-mails that we are getting following the broadcast of that program which will be rebroadcast in March during March sweeps. So we get a second bite of the apple in March. And it was just very good. And great for KB home employees to see us doing good things like this.

Sure. Okay, thanks very much. Well done.

Stephen Kim, Smith Barney.

Congratulations on really just a great quarter. First question relates to your gross margin guidance. I think you said 24 which would be basically flat, right, year-on-year?

Yes, it is.

My question is would you anticipate that your gross margin might be -- or at least what you're baking into the plan conservatively -- might actually be higher than the 24 in the first half than the back half? The reason I ask the question is because typically it looks like your margin from your fourth quarter to your first quarter can drop as much -- 100 -- roughly like 100'ish type basis points. Should we be expecting something like that in the first quarter or is it perhaps possible that you would do better than that or not have as much of a drop in the first quarter?

From the fourth quarter there will be a drop just because you have fixed cost in your direct cost and therefore when you have a big volume quarter your gross margins are higher. So it does drop in the first quarter. But you'll see next year that the margins I think will be a little bit better in the second half than the first half just based on volume. Higher volumes will make your overall margins go up slightly.

Okay. So what you're saying is that you would expect probably a little below 24 in the first half and a little bit higher than 24 in the second half?

It should be up a little bit in the first half.

Okay. Now the second question I had related to your volumes. You gave -- I believe you reiterated your 38,000 unit guidance with is the same you gave in September. Which I find interesting because you just had a 28 percent increase in your orders which is certainly not something I had baked into my number. Any commentary there on why your order growth being as robust as it was here heading into next year you're sort of keeping the lid on 38,000?

One is the year has just begun and I think you're right that fourth-quarter order growth makes the first half look very, very solid. And who knows what's going to happen during the prime selling season as we head into the spring. But if all conditions stay the same we certainly could have a stronger second half than what we're presently planning.

Great, thanks very much.

Aaron Robinson, Wachovia Securities.

You had mentioned that the increase in ASP of new orders this quarter -- and the last couple of quarters -- was driven by an expansion into the move up and active adult segments. Are you finding that the first time buyer base was exhausted or you're unable to produce product for them or is it something else?

The reason, Aaron, which we've talked about now for some time, is as we continue to grow the business and penetrate each submarket we think that there are opportunities for us that we can execute very well on and higher priced product. So we think that there's less risk in developing our productline than there is in just stepping out into new geographies. So that's really what's driving it. And interestingly it seems to be working very well.

And we expect KB to become, I guess, fully diversified or how far do you expect to go with the diversification into those product segments?

Well, I think you've got to take it step-by-step and succeed in each of them. The disciplines -- the basic disciplines are the same, product design is different, there's a little different purchasing effort, we're expanding some of the things that we offer in our studio, and to a certain degree sales agents go through a little different training and profile. But I think you can -- should expect to see more higher priced product, not in every single market we're in, but in the ones we think offer us opportunities, more attached product on the other end of the spectrum which would allow us to offer product at lower prices on more expensive land. And then from there, down the road there may be further diversification of product.

Thank you very much. I appreciate it.

Greg Gieber, AG Edwards.

Let me, again, offer my congratulations on your numbers. And Bruce, perhaps you could get ABC to do an extreme makeover of investor sentiment toward the home building group. It'd certainly help us. I wonder if you could give us your community counts by individual regions this year, ending this year versus last year as well as where you think it might well end up at the end of next year?

In the fourth quarter -- let's see, in the fourth quarter we had approximately 570 active selling communities which was up 21 percent from the 471 a year ago. In the U.S. we had 446, up 23 percent from 362 a year ago. Let's see, regions, can you take it -- well --.

I would just give the general guidance, Bruce. I mean, what we think is that -- we're going to be up 20 percent or so with community counts all year long next year over the four quarters.

It's going to be spread equally by regions?

No. I'm just saying quarterly just expect our community counts to have solid growth up 20 percent. And then if you look at it by region what we thought is the Southwest will be up modestly in 2005 and then in the other community counts -- if I have everything, hang on a second. Hang on, let me get that for you, Greg. We're going to be up over 20 percent on the West Coast and in France and closer to 40 percent in the Southeast and then modest in the Southwest.

Okay, that's helpful. I wonder if you could just kind of talk about both where you got the margin improvement this year and your guidance for next year. How that might be influenced by shifts between regions. You do more and more in the Southeast which I would assume has a lower margin than your traditional California product. That would normally, I would think, have a fairly -- you could have a meaningful negative impact on your gross margins. Are you getting margin improvements that are offsetting that or am I off base here?

Well, we said that in the Southeast we've got significant margin improvement year-over-year entering 2005. So that's a big uptick for us. On the West Coast margins are subsiding but not significantly. So that's a little bit of a down tick. Then we have an overall mix issue which has a mild impact on margins because of the growth in the Southeast. So overall we're just being conservative in saying, look, we think margins overall will hold right around 24 percent which is very healthy and with a slight improvement in S&A we see pretax profits improving next year and that's the way the plan is built today.

Okay. Thank you very much.

Ivy Zelman, Credit Suisse First Boston.

Good morning, guys, it's Dennis McGill. I'm wondering if you could talk a little bit about the different regions within California, obviously seeing an acceleration there both versus the trend for yourself and obviously I think outpacing a lot of the competitors as well.

Dennis, this is Jeff. The whole state continues to be a very solid market for us. There's been a lot of coverage on parts of the state slowing down, especially at the higher price points which has happened. If you look at Orange County as an example sales have slowed. But they've slowed at prices above where we operate. So whether it's Northern Cal or Southern Cal, our sales rates and our backlog continue at very steady levels supporting the business projections we've made.

And the Inland Empire and kind of Central Valley, would that be the biggest areas of contribution for you guys?

No, all through the state. I would tell you that I think -- I just saw a survey of California home builders that indicated their optimism for '05 was the highest of any of the home builders regions in the country. So I think we got a little ahead of ourselves with sort of the softening demand of these million dollar plus houses in Orange County. I think things look very good in virtually every part of the state.

But from a community standpoint, you don't have as much in those markets as you do inland or further up, is that right?

Well, in Northern California we're very heavy through South of San Jose up to Sacramento and San Diego. But the Inland Empire -- when we say the Inland Empire, it's two counties that I believe are the two biggest counties in the United States, each one of them. So it's a lot of territory.

And then just to clarify on your guidance for the gross margin. When you talk about the 24, you're already implying the probably higher than average margins that are in your backlog, but as far as the back half of the year on homes that you haven't sold yet you're not assuming price increases?

That's correct.

And then just lastly, I think the previous gentleman's question on the community count, you gave us west as far as where it is currently. Do you have the other three U.S. regions as far as how the 446 breaks down?

We didn't give it out. You mean for the fourth quarter?

Yes, you had said the west, I think, was up to 66 and the total U.S. at 446. I was just trying to close the gap on the other three segments?

In the fourth quarter the Southwest is at 96, Central is at 190 and the Southeast is at 94, France is at 124. Overall it's at 570.

Great. Thanks very much, guys.

Jim Wilson, JMP Securities.

Great quarter, guys. I only had one question lest which was sort of similar to the last one on California. If you could color Florida and obviously you've got Southeast and in total you've got tremendous growth continued to be planned for '05. And if you could give a little color on where and what kind of product mix and everything that you're growing out communities as you go through the year?

Florida is a phenomenal growth story for us as we've rolled out our business model there. We're now in six individual metro areas. Every one of them working equally well. The product ranges from entry-level town homes in Tampa, as an example, all the way up to price ranges approaching 400,000 in Orlando, the Treasure Coast, Jacksonville; we're entering the Daytona market as we speak. Our view of the market is it could potentially be the biggest region for KB at the end of the day. The dynamics of the demographics, the economy, job growth, it's a very positive environment for home building.

And then just the rest of the Southeast, how would you color that at the moment?

Not as vibrant as Florida certainly, but very solid markets in their own right. They're about a year behind Florida in the growth curve for us as we roll out the business model and absorb the Colony acquisition or the Palmetto acquisition. So our expectation is that in '06 and '07 they will produce much more even than '05 where there is solid business for us.

Thanks a lot.

Dan Oppenheimer, Banc of America. Michael Rehaut, JP Morgan.

I was wondering if you could give -- drill down a little bit. We've talked about pricing and the change in mix, and one thing I thought was impressive was the ASP -- order ASP gain of 22 percent where you had the West Coast and the Southeast both showing 30 plus -- 30 percent plus improvement in average price per orders. I was wondering if you could describe how much of that is coming from mix and, on the other side, and just in terms of pricing, particularly with discussion on the West Coast and California what are you seeing currently in terms of pricing trends?

Michael, you asked a lot of questions there. But as usual, there's a lot of things impacting why the prices are going up. Our revenue enhancement initiatives continue to pay off, whether it's studio, lot premiums, those types of things. In terms of mix, I'd estimate that the moved up product, the luxury product initiative is probably 10 percent of our business today or approaching 10 percent, so that certainly had a positive impact. In California we're still seeing some price movement but not nearly at the rate that it was early in '04. But that's still a solid market for us. I don't know if I answered all your questions.

You answered most of them. And you drilled a little bit in California which is helpful. Going forward in '05 -- I guess you're expecting flat pricing basically with the margins, a little bit above average margins in the backlog but you're being conservative on the second half with flat pricing expectations, is that correct?

We never underwrite inflation into our business (inaudible).

Our backlog -- the average price of our backlog is around 237,000 which is what we have in our plan. If you look at 38,000 units (indiscernible) being revenue.

Thanks a lot.

Dan Oppenheim, Banc of America.

Just wanted to talk about some of the price depreciation that you've seen recently, particularly the strong increase in the West region. How you look at the issue of affordability and especially now that you're operating in more segments of the market how you -- if you have more concerns about any one segment there?

One of the reasons that we're continuing to develop more attached product is our concern about affordability. We know that, particularly in the most land constrained markets it's pushing land values up and in turn housing prices. And it doesn't take long before you start shrinking the pool of buyers who can qualify. So to counteract that we're developing higher density, which keeps the price more moderated.

As far as the other end of the spectrum, in all housing markets, regardless of interest rates or other factors, there are buyers in all price ranges. And the question is, do you have a better mousetrap than your competitors and we think we're developing particularly attractive sought out product as well as selecting those parcels that we think will stand up under some market softening. I mean it's just a good defensive play whenever you're investing in new land.

Great. Thanks very much.

Robert Marcin, Defiance Asset Management.

Congratulations, guys, on a great quarter. With industry leading community count growth north of 20 percent, very strong unit growth in orders and deliveries next year and healthy ASP growth, it seems to me as though there's an opportunity to take pretax margins up a little higher from the 10.2 percent in '04 to the 10.4 percent forecasted in '05. Now the industry, the current industry competitors that just reported have pretax margins a few hundred basis points above that. Would you say that there's an opportunity to close the gap over the next year or two and, should the industry keep current levels of profitability, is there any chance that 2005 could be materially higher or much larger increase in pretax margins than you're now budgeting?

Robert, I just want to say one thing, although our pretax much be slightly lower than some others, we have one of the best after-tax returns on invested capital. So, you have to look at both how we manage our assets as well as our pretax dollars.

And without putting any pressure on Dom, I think it is possible, let's leave it at that. I think that you could see higher margins.

By the way, it is our target that we've told the Street that our goal is to achieve a 12 percent pretax margin in our Company.

Right, exactly. And that's a 2- to 3-year goal. And it just seems to me like you guys are being extremely conservative with the 2005 guidance because if you want to get to 12 percent you've got to go through 11 percent pretty quickly and the guidance for '05 assumes just about 30 bips of pretax margin improvement. So I would hope that you continue the trend of material earnings surprises as you progress through 2005.

Well, we had a great improvement in '04 and then '05 -- I mean '04, and we hope to continue.

Thanks a lot, guys.

Jeff Feinberg, JLS Asset Management. Jeff has disconnected. Robert Kirkpatrick, Cardinal Capital.

Bruce, relative to a year ago what surprises you most about the year that just got done and what surprises you most about the outlook you now have?

There was a lot of ink written over the last 12 months about how home buying demand was going to significantly soften for any one of a number of reasons and it never developed. And even us, sometimes we can -- some of this stuff can influence our own thinking. So I think that was one. Two, our business, new businesses in the Southeast continue to grow I think even faster and higher quality than, one, if I go back a year ago than I might have thought 12 months ago. And that's a good thing.

And three, our move in product diversification -- while I think we planned it well, you always worry about glitches. And I think that the divisions that are undertaking that product growth into the luxury on one end and attached on the other end seems to be going very smoothly which is a pleasant, pleasant surprise. Going forward -- and I'm a worrier by nature -- but the stars seem to be lining up right now for '05.

And secondly, do you have any further thoughts on a strategic basis about the French operations?

Nothing new. The dividend continues being raised. I think we got the money from the repurchase of the royalty so that transaction is over. Their business is growing very well, and our stock ownership now is at about US$52 or $53; and we took it public at 23 a few years ago. So that seems to be working well. No real change in our thinking about it.

Great. Congratulations on a fine year to the people at KB.

William Nabler (ph), Atlanta Softcom (ph).

Congratulations on a great year and great communications. Thanks a lot for the dividend increase and the stock split.

I think you were one that thought the dividend increase was a good idea.

I did and then I still do. Just adding a comment on France or a little color. That money that you think you got, what was that? About 90 or 100 million?

100. Actually we have not collected all of it. I mean we've got it, there's 2 payments and we got the first 1.

Can you give us some idea of, at $52, what that ownership would be worth in today's market?

It is worth about 275.

275 million? Okay. Of course, if you were to monetize it you would obviously be losing your share of the income; but you would also be improving your balance sheet, because you're picking up their debt. Or is that incorrect?

That is correct.

Okay. Thanks again. I look forward to hearing further good stuff in

From Cobalt Capital, Wayne Cooperman.

Just a quick question. Been reading a little bit about the Mexican home building market and the mortgage market developing there. It seems like a natural fit for you guys. Have you guys looked at that? Is that something that you're interested in?

I read the article this morning. We did have our experience in Mexico a few years ago.

I kind of remember that.

Not in the social housing that that article this morning was talking about, $25,000 houses. We were doing luxury homes. Someday when there truly is a secondary mortgage market in Mexico -- and I will tell you 10 years ago people assured me that it would be there within a few years. We're still talking about it.

Until there is a secondary mortgage market I don't think it's a market that would interest us. The stuff that you read about and the bulk of the market today is the social housing. It's quite politicized in getting those loans.

Actually, what I read about was regular, like the new Levittown of Mexico. It's real private people buying homes.

Okay. That was a different -- the article this morning I read was showing the incredible social housing that Fox has encouraged and is being built throughout the country. Send me the article. But I don't think it's in the cards for us at this time. There's too many -- you start talking about Daytona Beach; who needs Mexico right now?

I hear you. Good luck, thanks a lot.

Tony Campbell, Knott Partners.

Obviously, congratulations on just a terrific year; and I think you guys have fabulous momentum. Can you just clarify? I got on the call a little late. How much money did you lose because of a delay in terms of home closings because of weather in Florida?

We said that there were 500 units, which is about $100 million worth of revenue; and $100 million of cash that was moved out of there.

What do you think the bottom-line impact of that would be, in earnings per share?

If you want to use our overall pretext, it would be 10 million bucks. It's minor.

A cent here and a cent there. One of the issues that keeps coming up is the overall supply-demand issue. What are you guys seeing with regard to the entitlement process as you look at your business in your regions?

Entitlement? It's a broken record. It just keeps getting more and more difficult. I think we keep getting better and better at it. But in the areas under the tightest land constraints it is a long, long process. But when you get to the end you've got something that's got some great value.

If you were to look at things, say, this year versus last year, say, with the exception of Texas, which is pretty wide open, and a couple of smaller states, would you say it's getting -- it's lengthened year-over-year?

Hard to measure, but I think it is. There are more things that you have to be concerned about. If it's just simply drainage issues, other regulatory issues, you know, general environmental issues, not to mention local building constraints.

I think that what it all adds up to, which as you are very well aware of, is it's become a business really simply for big builders. You can not get into these areas and large parcels of land, and invest the kind of money that we invest, and have the expertise that we've developed over years on these parcels being a small entrepreneur. It's very, very difficult.

If I might, 1 final last question because you guys have been pretty active in the acquisition arena. What are you seeing in terms of acquisitions? How are you seeing the values?

There hasn't been much, interestingly. I think that the reason is that most of the big builders are in the markets that they want to be in. And they're not willing to pay premiums to acquire businesses that exist in the markets they already have their own business in. They wouldn't mind buying their assets, but they're not willing to pay a big premium for a going business.

So, if I were to predict I'd say the value of the smaller builders is probably going down, as opposed to going up if we look forward.

Thank you very much and keep up the good work.

Fred Taylor (ph), Lord Abbett.

At this point I think all my questions are answered. Just maybe a macro view on total housing starts in '05? And maybe temper that, if interest rates go up a little quicker than you think they might.

Our business model assumes that the '05 housing starts are down slightly year-over-year, which is kind of the economic outlook. Again, I always go back to say that we have such small share of the market that slight change in overall demand in housing would not have a significant effect on us.

Just take a look at this quarter, where they said it was down 13 percent and our orders were up 28 percent. I think we just have a business model they can be successful as long as demand stays reasonable.

I had missed the 13 percent. So total national housing, either starts or closings are down 13 percent; and you were up.

Starts.

Is a 1-9 to 1-7 number for next year in the ballpark of your economic?

1-9 was I believe the range, yes. 1-7 was low this month; that may very well be an anomaly.

And any word from the agencies in terms of investment-grade rating?

Well, they've got us on a positive outlook and they continue to watch us and we continue to deliver solid results so we're hoping that they finally give us our ranking. And as you know, when the go to the Capital Markets we get investment-grade money.

Thank you.

Dana Richardson, Argus Research.

Congratulations again on a great quarter. Just to revisit this general gross margin issue one more time. Am I correct in concluding that the 170 point basis -- 170 basis point expansion was due to the improved product mix which resulted in the higher average sales price?

That is a piece of it, it's a piece of it but I think you have to say it's driven by a lot. One has very strong West Coast and we're finally getting the business going in the Southeast. And so from very low margins that's now becoming more normalized. And you put all those pieces together and that contributes to the improvement.

Well, in 2005 aren't you expecting continued strong growth in the Southeast as well?

But as Dom explained, one, it is possible that margins could improve. We'll start with that. But in terms of what our plan is, there are other features that could have -- go the other way which is the very strong West Coast we're saying there might be some softening of the margin, still excellent but lesser which is balanced off by still stronger Southeast as that business continues to evolve. And the bottom-line is we're giving guidance at --.

A healthy 24 percent.

And did I hear correctly that the average sales price for next year is 237,000?

Yes, sir, that's what we have in backlog today.

That's significantly higher than what you had in 2004, is it not?

Yes, it is.

So one would assume that that would also contribute to the higher gross margin, would it not?

You also have higher land cost that you're replacing that normally goes up with the price of the house.

Thank you very much.

John Robin (ph), Morgan Stanley.

Just a quick record-keeping issue. What was your cash from ops in the quarter?

You mean net cash from ops?

Yes.

We don't have it yet.

Okay, alright. With respect to your '05 guidance, revenue growth of around 28 percent, what kind of working cap need will that necessitate? What's your inventory strategy and where do you expect turns to be at the end of the year?

I would expect that, again, we do land deals every week, so it can change based on the deals that we see. But we would assume that if orders continue at the strength that we're seeing today that -- and we generate the kind of profits that we're saying, that our inventory will be up 20, 25 percent next year for sure. And that will give us a very healthy inventory turn and a very healthy debt to total capital ratio. So it all stays and balances, but you have to watch it quarter by quarter. It's hard to predict still, but in balance with our overall capital structure of our Company.

Okay. Do you see any impact from your increased penetration in the move up market? Is there longer sales lead times in that market that would drive greater inventory carry need?

No.

No.

No.

Okay, final question. Just to circle back to the rating agency topic, have they provided any specific targets that you need to meet or debt to cap in order for them to pull the trigger and (indiscernible) up to investment-grade?

No, they haven't. I think from a financial perspective and from many of the ratio perspectives we're already there and we do have a positive outlook from both Moody's and Fitch. And so we're continuing to work with them and just continuing to do what we do.

Okay, thank you very much.

And gentlemen, we are out of time for questions. I'll hand the conference back to you for any closing comments you may have.

Okay. Thank you very much. I want to reiterate that the solid state of current business conditions and the optimism we have for 2005 and beyond and I want to remind all of you that our 2005 annual investor day will begin with a dinner on March 23rd here in Los Angeles and continue through March 24th. And for further information please contact Kelly in our IR department here in Los Angeles either at investor relations, KBHome.com or 310-893-7446. Have a very Merry Christmas and a healthy New Year and we look for to talking to you at the end of the first quarter.

And that does conclude this KB Home fourth-quarter year end earnings release conference call. Again, we'd like to thank everyone for their participation. We hope you have a great day. You may now disconnect.