KB Home (KBH) 2005 Q4 法說會逐字稿

Good day, everyone, and welcome to KB Home's fourth-quarter earnings conference call. (OPERATOR INSTRUCTIONS). KB Home's discussion today will include certain projections and forward-looking statements intended to help investors better understand KB Home's business prospects. These are based on management's assessment of the Company's current businesses and operating conditions. Please be aware that KB Home's actual results may differ from those that may be expressed or implied by the projections and forward-looking statements that will be made today (technical difficulty)-- material. Some of the forward-looking 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 KB Home's actual results to differ from those that the Company will be projecting in the forward-looking statements that they will be making today, and the Company urges you to read those.

I would like to remind everyone that this conference is being webcast on KB Home's website at www.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. Good morning, everyone, and thank you for 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 EVP and Chief Operating Officer; Dom Cecere, our SVP and Chief Financial Officer; Bill Hollinger, our SVP and Controller, and Kelly Masuda, our SVP of Investor Relations and Treasurer.

We are pleased to report strong fourth-quarter results that concluded another excellent year for our shareholders. Our financial performance in 2005 reflects our continued focus on superior customer service and refining our KBNext operating model to improve all aspects of our business. 2005 marks another year of delivering on our promises and reflects on all the employees of KB Home who continue to embrace our KBNext principles.

Led me share some of the financial highlights with you. Companywide net orders of 9747 new homes for the fourth quarter increased by 15% when compared to a very strong fourth quarter last year where orders for new homes were up 29% over the prior year. During 2005, we sold a total of 42,405 homes, up 17% from 36,278 homes sold in 2004. We entered 2006 with a solid seventh month order backlog of 25,722 sold homes with a revenue value of approximately 6.8 billion. Our dollar backlog entering 2006 is up more than $1.9 billion or 40% compared to the beginning backlog entering 2005. We posted solid topline revenue growth in the fourth quarter with companywide unit deliveries up 16% on a year-over-year basis and revenues up 32% to 3.2 billion. Pretax income in the fourth quarter of 482 million was up 73% from the year earlier period. The Company's pretax margin of 15.3% was up 360 basis points from 11.7% for the fourth quarter last year. Our strong fourth-quarter performance contributed to the Company's solid financial results for the year. Total revenues of 9.4 billion were up 34% from the 7.1 billion recorded in 2004. The revenue growth translated into $1.3 billion of pretax income on 81% year-over-year increase with a pretax margin for the year of 13.7% versus 10.2% in 2004. Diluted earnings per share for the year rose 67% to $9.53 per share, up from $5.70 a year ago.

On December 8, 2005, our Board of Directors approved a 33% increase in the annual cash dividend on our common stock, raising the dividend to $1.00 per share. This reason action demonstrates our continued commitment to create value for our shareholders and represents the third consecutive year of dividend increases. During the fourth quarter, we repurchased 2 million shares of our common stock at an average price just under $65 per share. These repurchases exhausted the existing board authorized repurchase plan. The Board of Directors also authorized a new repurchase plan for an additional 10 million shares of the Company's common stock, representing 11% of the approximately 88 million diluted shares outstanding at the end of the fourth quarter 2005.

Over the last four years, we have repurchased 16 million shares of our common stock on a split adjusted basis at an average price just under $31 per share. And over the last seven years, we have repurchased 45 million shares of our common stock, which, along with our cash dividend, represented approximately 35% of net income over the comparable period. This demonstrates our ongoing commitment to directly returning capital to our shareholders while continuing to invest in the future growth of our Company and still maintain an investment-grade balance sheet.

2005 was truly a year where we solidified our position as a national homebuilder, building a foundation of solid results for years to come. We entered 2006 with strong community count growth, a seven-month order backlog of sold homes, an excellent operating model and a proven management team that can deliver on our 2006 and three-year plan. I will now ask Dom to take you through some of the 2005 financial highlights.

Thank you, Bruce. I will briefly recap some of the key financial highlights for 2005 and also comment on KBH's strong financial position entering 2006. We began the fourth quarter with 20,744 homes in backlog and converted 11,946 homes or 43% of our unit backlog to revenue in the quarter. The average sales price in the fourth quarter was up 15% for the Company, while the average sales price in the U.S. was up 21% to 278,200 from 230,800 in the fourth quarter of 2004. The average sales price in France was down 11%, resulting from foreign currency and/or expansion into a broader array of geographic markets.

In the fourth quarter, our housing gross margin rose to 27.1% from 25.1% in the fourth quarter of 2004, while selling, general and administrative expenses were lowered by 120 basis points to 11.4% this quarter from 12.6% of housing revenue in the fourth quarter of 2004. We entered 2006 with a solid seven-month backlog of sold homes, average U.S. sales prices in the fourth quarter up 21% and construction pretax margins right in line with our 2006 operating plan.

2005 was a year where we significantly improved our capital structure. In the last 12 months, we secured 750 million of new long-term fixed-rate financing at a weighted average cost of slightly above 6%. We also secured a new five-year $1.5 million revolver with investment-grade tenure. We concluded 2005 with a strong investment-grade balance sheet with debt to total capital net of cash at 44.8%, interest coverage for the year at an investment-grade 8.2 times, and debt to EBITDA an investment-grade 1.7 times. Community counts in the U.S. were up 12% in 2005, averaging 434 communities per year. Companywide net orders for new homes for the year were up 17%, closely consistent with our community count growth.

We entered 2006 in the best community count position we have been in for the last several years. All the communities are open or will be opened at the beginning of the 2006 selling season to support our 2006 delivery plan. Community counts in the U.S. will average over 500 next year, up 15 to 20% supporting our 2006 delivery plan and a six to seven-month backlog entering 2007.

In summary, we have the backlog of sold homes, the community count growth, the margins and backlog, the land portfolio and the continued balanced use of our cash flow to deliver our 2006 plan. Now I will turn it back to Bruce for the wrap-up of our fourth-quarter conference call.

Thank you, Dom. I have said this before, and it is worth repeating. We are a build to order homebuilder. It is as simple as that. Our outlook for 2006 reflects our continued strategy to maximize the favorable competitive advantages afforded to large public builders. We have become more diverse both geographically and in terms of our product than ever before, and the company is well positioned to deliver excellent results in 2006. We enter the new year from a position of strength with a solid dollar backlog of sold homes valued at nearly $6.8 billion up 40% and the average U.S. sales price in the fourth quarter up 21%. Housing demand remain solid in the vast majority of our markets, and absorptions per community are at targeted levels. As expected, the overall housing market has moderated, yet remaining at still historically high levels driven by a healthy U.S. economy, favorable demographic trends and strong population and employment growth in our served markets.

In 2006 our EPS guidance is $11.25, up 18% over $9.53 which we have just recorded in 2005, which was up 67% over the $5.70 we did in 2004. Total revenues in 2006 are forecasted at approximately $12 billion with strong growth on both coasts. In the Southeast, we have grown our business from just over $100 million in revenues in 2002 to a profitable $2.5 billion business in 2006 on 10,000 new home deliveries.

This now concludes our formal remarks, and we will be happy to take your questions.

(OPERATOR INSTRUCTIONS). Margaret Whelan, UBS.

Terrific results. Congratulations. I have two questions. The first one is just about your product mix. I am wondering the last couple of years you have had a lot of initiatives to move away from the first-time buyer, and I'm just wondering how much of the pricing that you got this year is apples-to-apples versus new products (inaudible) that you are building? Also, if you can give us some details on the Martha Stewart initiative and what you are doing in Louisiana?

Do we have a percentage on the move up, Dom?

We know that it is a favorable trend. It is probably going to be more impactive in '06 than it was in '05, but it's very difficult to be able to say how much of pricing was mixed versus just pure pricing fee.

One of the things (multiple speakers) -- did you have a follow-up?

I'm trying to figure out what percent of your sales or actually your units deliveries are to the first-time buyer now?

Well, it is less than 40. Is that fair?

Definitely less than 40, and when you think of the first-time buyer, and I just want to make sure we all understand this. If you look three or four years ago, 30 to 40% of our deliveries were in Texas, which was truly a first-time buyer with an average price of 125, $140,000 a house. That is now -- now when you look at that level of buyer, that level of buyer is probably no more than 10 or 15% of our total volume.

Okay.

And, you know, anecdotally two days ago, day before yesterday I was out in Riverside and Corona looking at our new luxury product, and I can tell you that not only am I excited about it, but it stands up so well to what I would call the competitive brands in the luxury business in Southern California. It is fabulous.

With respect to Martha, we concluded with Martha an extension of our initial agreement so that we can offer Martha communities throughout the United States. We have yet to determine exactly where else we are going to put them, but I'm encouraging all of our managers to look for appropriate communities to do it. Our initial feedback, although we have not opened up for sales, but our initial feedback in Raleigh is huge.

The interest by consumers I believe we have over 3000 names on an interest list of people. And remember this is Raleigh, North Carolina. And so we think it is -- the homes are going to be beautiful. Martha has done a -- made a personal commitment to get involved. And, you know, it is going to be very exciting, and I think we can market it well, and it will be a nice addition to our business.

Is that move up product?

It is move up.

Okay. And then Louisiana, how significant will that be in '06?

Well, Louisiana, it is a devastating situation. We decided that there was a business opportunity. There are going to be a lot of homes built in and around New Orleans for the foreseeable future, and we have taken Steve Davis, who, as many of you know, a longtime senior executive of our company who grew up in New Orleans as our President, and he is building a team. And we partnered with what is the largest company now in Louisiana, The Shaw Group, New York Stock Exchange listed engineering construction company, and we think it is a tremendous opportunity. How successful we are going to be, how fast it goes. There is lots of hurdles. But we feel good about it, and we will keep everybody updated.

Cool. And can I just skip in one last one. I was encouraged by the size of your buyback and the new buyback authorization. I am just wondering what the timing might be on that? Do you plan to issue a 10b5 or anything?

I don't believe we are going to do that. But what I can say is, you know, you are very familiar with our history in buybacks, and what I can say is that we do intend to continue buying back shares during Q1 of this year.

Great. Thank you very much. Well done.

Stephen Kim, Smith Barney Citigroup.

I want to add my add-on to Martha's comments and just compliment you on the quarter.

The question I had for you was also kind of a follow-up. Can you give some sense of the company's stance towards maybe eliminating share creep? Would it be fair to assume that the share count going forward would be not meaningfully higher than it was at the end of the or for the average for the fourth quarter for all of '06?

It would, Steve. I would say you could just to assume it will be flat year-over-year.

Okay. Great, which is very encouraging. I guess secondly, Dom, you know you have alluded to over the last few months that there was real opportunity here in the SG&A, but this really caught me by surprise. I was very encouraged by the SG&A performance in the quarter, and I guess what I want to make sure is that there is not something here which may be non-recurring. It looks to me like you have sort of brought the SG&A level back to a level that is comparable to what you have done sort of going back historically if you exclude the last couple of years. So are we back to sort of a normal SG&A? Is there additional room from here, or was there something unusual about what happened in '05?

There was nothing unusual as we said even in our September meeting at our Investor Day. We had it focused on all the management team and all the regions to take advantage of our -- of the growth that we have achieved over the last couple of years and optimize our SG&A, and you saw the full benefit of that in the fourth quarter.

So it was a good year for us, being up 120 basis points in the fourth quarter and I think 60 basis points for the total year. We should still see a slight improvement from '05 going into '06.

And I don't know if it had anything to do with it, but senior management has definitely laid themselves well out for incentive compensation calculations because SG&A was one of those measures. So --

Okay. Great. The last question I had was on gross margin. Can you give us some sense as to how the gross margins are looking for the units which are currently in your backlog? So I'm thinking the stuff that is going to deliver here in the first half of '06. I know that gross margins can vary somewhat seasonally here, but can you talk a little bit about what you see in your backlog of gross margin level versus what you reported recently?

Well, you know, again if you go back to our investor day, we said that in 2006 we would see overall gross margins moderate versus '05. I think I still believe that, although we still have 20,000 of our homes -- sold homes to still sell and deliver, so it's a little bit difficult to predict. But I think they still say that we will see improvements in our mortgage business. We will see improvements in SG&A. We have seen now improvements by flattening out our share count. Those are upsides that we have, and we still expect that we will see some moderating of margins throughout next year.

When you mean moderation, I guess I am specifically talking about the first half, which I would expect you to probably have a little greater visibility than you do for all of '06.

Yes, I think in the first half this year we did about -- we had about 26.8% gross margin. And then the -- what did we have in the first half of last year, 25-ish if I remember? But you know I would say that if you look at margins next year, they are going to be relatively flat all four quarters, which means a little bit more up in the first half and a little bit less than the second half is the way we are looking at it.

Okay. I understand. Thanks.

Greg Gieber, A.G. Edwards.

Could you go over your community count numbers again? I don't think I got them all down. Could you tell me what your average community count was in the fourth quarter, and what you expect it to be in the first quarter, and your best guess as to what it might be at the end of next year?

No, the end of the years are always an anomaly number because you have a lot of communities that you're selling out of and new ones opening, so it's kind of your peak. But let me just give you the -- I think you're better off looking at average year-to-year, and let me just give you that.

We averaged 434 communities in the U.S. in 2006 versus 380 (multiple speakers) in 2005 versus 386 in 2004. In the fourth quarter, we had approximately 487 active selling communities compared to 446 a year ago. In 2005 community counts were up, you know, over close to 20% in the West Coast, close to 40% in the Southeast, but they were down in the Southwest, which is why you saw orders down. That turns around in the first second quarter of next year. In 2006 we expect to average around 500 active selling communities, up 15 to 20% over 2005. The West Coast and Southeast will still be up over 20% and the Southwest up over 10%, while the central region will be up only slightly.

That is very helpful. (multiple speakers)

It was a favorable mix for us, Greg.

More favorable mix?

It was a favorable mix of community counts as far as average price, as well as margins.

Okay, that is positive.

And the growth is where we want it.

And the growth is where we want it.

Can you talk a minute about France? You know, I think many of us or most of us all have a very good command on what is happening in the U.S. housing market or at least we think we do, but we have little insight into France. Can you talk about your French operations? You know, your community count there, what is happening? It sounds let you are expanding to lower end product there, and also how do your margins in France compare to those -- your domestic margins?

France is expanding geographically, primarily in building low and midrise condominiums. The business -- and these are -- many are very small units with lower price, overall price, which is one of the factors why their average price decreased. The business is very strong and in spite of a lackluster economic, our business and generally speaking the housing market is very stable there.

I want to remind you that it is what, 10 to 15% on the topline and less on the bottom line. And with respect to margins, margins are lower in France. So if you look at our U.S. business, which is virtually all -- almost all of the company, all parameters financially would be improved without France.

That is helpful. One last question. Can you just tell us what is happening in your design center stores? How that is going as a percentage of revenue from this center's rising, or is it sort of stabilized, and how are margins -- (multiple speakers)?

Greg, this is Jeff. We had a great year in the studios in '05. We were actually up 26% in revenue per unit year-over-year, so we had a phenomenal year. As a percentage of a base, it was a little over 11%. So we are increasing from where we were, and we still have a higher target and think we can do even better going forward. And our margins are holding just fine in the studios as well. So it was a solid year for us in the studio.

Greg, another positive note is that in total our revenues in the design studios went from 556 million in '04 up 45% to 804 million in 2005. So it was a big year for the design studios, which helps our margins and bottom line.

Sounds great. Great quarter and I wish you all happy holidays.

Carl Reichardt, Wachovia Securities.

Hello? My questions have been answered. Thank you.

Ivy Zelman, CSFB.

Good morning, guys. Good quarter. I wanted to try to explore a little bit about your urban -- KB Urban and understand. We saw some press recently about your 40 story building in L.A. with (inaudible). I am curious if you can tell us about that project and when it will come to fruition and benefit the P&L? And then assuming you're going to do other projects like that one, maybe where you have some of those planned for 2006 and what contribution do you expect the overall urban business to represent for '06, and then I will have a follow-up, please.

Okay. The Urban business is something that we have been thinking about for a long time. We finally formed it as we hired Jeff Gault, an extremely experienced urban developer, an architect by education and a 25-year experience building urban projects. Our intention is to keep it our urban business into midrise more heavily dominating than high-rise. We have been doing midrise. We think we can do it well, and we think that most markets that we are in offer great opportunities to develop product for certain demographics by doing the midrise condominiums developments.

Specifically the development that you are referring to is a joint venture. I will tell you that there are, as is often the case, there are still some outstanding issues, so it is still not entirely certain that we will be moving forward with it. But it is a joint venture conceived of by LNR doing the commercial and us, and it is extremely well-placed. It is what we believe is ground zero in Los Angeles, and it is consistent with our view that as we densify the markets that make the most sense are the ones that we know best, which are essentially California, Nevada, Arizona, and Florida. So that is our intention, and we are just sort of ramping up. I think it will have very little effect, if any, on our earnings during '06, except possibly on the expense side which will -- obviously we have to cost off during the year without corresponding revenue on the other side.

Great. Well, that is interesting. Thank you. The follow-up, actually there is two, one relates to the Martha Stewart product. Realizing Martha Stewart is obviously an amazing visible person that you have now have partnered with, assuming there has to be a cost to that, can you kind of give us some idea of what it costs or what you were doing and how much that negative cost is roughly?

I cannot tell you what the transaction is, but what I will tell you is it is totally performance driven. So we are not putting some big fee upfront hoping that it works. It is entirely based on a per sale basis. It is we believe very fair and it also is -- leaves us with the option going forward of whether we want to do Martha communities or not. So if we are happy with how they evolve, we are going to do more and more and more, and if we are not, we will do less and less. We believe it is a phenomenal traffic driver. If markets soften, I will tell you as you know over the years real estate sections of newspapers get thicker and thicker, and as they get thicker and thicker with more and more incentive driven messages to try to attract traffic, I like being there with a picture and likeness of Martha standing in front of some beautiful home or inside one of our kitchens driving people out to our communities. And so I think it is going to be a big traffic driver. I will say, however, before overstating my case, we don't know that all of that is a fact. We are just -- this community in North Carolina is the first one, and that will be a test, but we have got to do more in other markets to see how folks in each of those markets react to Martha's branding.

Well, that is fair. Thank you for that. And then lastly, I think this is just a housecleaning item or two for us, and maybe, Dom, you can help us with respect to some of financials on the mortgage side of the Company, just what percent of the business right now is government loans? And what overall -- first, I guess overall, Dom, what is your FICO score overall, and has it changed? And what is it -- what percent are government loans and what the FICO scores on those government loans, and then maybe if you can help us on what can rates are relative to last quarter and then the I/O percent, you know, some of that detail, please?

In the mortgage business, the government loans are only 3%. So it's a very small portion in the fourth quarter of our business. (multiple speakers)

We're talking FHA loans are only 3%?

Yes, that is the very small portion. And by the way, the FICO scores really have not changed in the last several years. We hover right around 700, just under 700 FIFO.

Okay. And can rates relative to where they have been historically?

Well, the actual can rates were -- I believe, we were at 30.7% this quarter, which was 70 basis points better than the fourth quarter of 2004, and there were no unusual swings in any other regions.

And the I/O?

You know, I don't have the I/Os.

Do you have variable versus fixed?

We do have variable versus fixed. Do you have that, Kelly?

Yes, it was 47 -- I'm sorry, 54% fixed, 46% arms.

Okay. And we can follow-up with you guys on the percent of I/O, please?

Sure.

Okay. Thank you.

Dan Oppenheim, Banc of America.

I was wondering if you could comment a little bit more on your thoughts on use of capital going forward? When you're talking about the community count growth of 15 to 20% in '06, it makes me think that there's going to be a lot of capital used up and growing that way and that you may not be as aggressive with the share purchase as you were back from, let's say, 1999 and 2000. How do you think about the timing of the new authorization if you can just expand a little bit?

I mean I would you say that if you go back the last three years, you will say that community count growth has gone up 15 to 20% for the last three years, and at the same time, we bought back 16 million shares of our stock. So we have been able to do both in our business, so I don't see that changing in the future with the exception that we have a stronger balance sheet and more cash flow. So I think the next three years will mirror what we have done historically. We have been in our company one of the largest share buyback companies in the industry. (multiple speakers)

I recognize that. I guess I was wondering just in terms of in 1999 and 2000, you had slower order growth and just with more of a focus on deploying the capital into the share repurchases it seemed.

Yes, I don't think 1999 -- we are not saying 06, '07, '08 look like 1999 and 2000 where you had negative GDP growth right in that market. If we go into a recession, there might be a different discussion. But we are not seeing a recessionary outlook yet.

Okay. And then secondly, just one question on the numbers. Previously you talked about tax rate going up to 36% in '06, up from '05. I am wondering if there is going to be any benefit from the tax law changes that could help better, or do you still thinking 36% next year?

Well, that does -- that is net of the tax law, and remember our 36% is still below what most other public homebuilders have as a tax rate. So others are saying that coming down to 37 is a benefit, and we just had a defined number of benefits, and since our profits were up 80%, we're kind of burning through those. But we still have one of the lowest tax rates in the industry.

(OPERATOR INSTRUCTIONS). Michael Rehaut, J.P. Morgan.

A couple of questions. First, just on the guidance, I was wondering if it sounds like most of the guidance that you gave out at the end of September at this point you are sticking with, and I just wanted to make sure also from the community count you have given some detail before which was helpful. I believe you were targeting at that point you had said 535 U.S. communities by the end of '06. Is that -- it sounded a little bit different from what some of the prepared comments were.

Yes, well, now I'm saying over 500. No, it is very hard, as you know, in this industry to pinpoint exactly when communities get opened. But so why we decided it is probably better to go to a range and our range is 15 to 20% growth year-over-year.

Okay. And as far as the other details, 44,000 closings, 12 billion in revenue roughly, which I think had about 10% ASP growth.

12 billion in revenue and I say closings of between 43 and 44,000.

43 and 44?

Yes, I will let you know more as we get into our selling season. But what I do know is that we have a solid backlog going into the year. What I don't know is what our sales are going to be in February, March and April yet. When we know that, I can pinpoint deliveries for the year, and then we can give you a better outlook on our guidance for the year. But we are going in I think with one of the strongest earnings year-over-year outlooks, being up 18% after this year, being up 67%. So it is two years in a row where we are performing very well compared to the sector.

No, no, I'm not trying to belabor that. I was just curious on some of the detail. In the ASPs, again you are saying still roughly about 10% growth?

Yes (multiple speakers). You remember that is including France. It is closer to 15 with the U.S. I believe.

Okay. Next, if you could just give some regional color, Dom or Jeff, on Phoenix and Vegas in terms of where you see pricing right now, demand, inventories and perhaps the level of speculators if they are mostly flushed out of this point?

Michael, I can make a few comments on those two markets. We continue to have very solid backlog there. Market fundamentals are still in place. As you know, we went away from investor business a year and a half ago, so we did not have to really purge anything. My general impression is the investor activity in those markets is less than significantly from what it was back in the frenzied period of late '04, early '05.

Relative to inventory, as you know, Michael, we don't really have any in our business because we are a build to order. We sell and then build. So in either market we have minimal if any inventory today, and we are just running our business model with a healthy backlog in both places. Pricing has slowed a bit. In either market, there is submarkets that are extremely strong today, others that have moderated a little. We have had some pricing upside, but definitely lesser than a year ago.

Okay and that is really helpful, Jeff. Just to hone in on that for a second, certainly you guys try and limit your inventory, but I was wondering if you could comment in terms of the markets overall in Vegas and Phoenix, and also in terms of pricing, would you say that granted obviously it has slowed here, but has pricing levels held, or are they still actually gaining small increases, or how would you say the overall market looks in terms of where we are in terms of pricing trends?

We are still seeing incremental small increases in both markets. In terms of inventory, I cannot speak to the new home inventory. In Vegas the resale listings are actually down a little bit from early in the year, and I think the last time I looked at Phoenix it was about flat year-over-year. So we are not seeing a lot of buildup in the resale inventories. It is hard to read what the new home inventory is.

So you actually saw in Phoenix the resale inventory is flat year-over-year?

Flat to slightly up.

Sam Weaver, Alpine Funds.

Gentlemen, great quarter, great year. First, I want to commend you on getting involved with the rebuilding of New Orleans. I think it is a great thing for builders to be doing and potentially could be profitable. Along those lines, could you comment on what the impact of pending legislation in Louisiana might have in terms of creating your reconstruction bank and how essential that might be towards your building your effort there?

We are not approaching our business based on any federal or state money strictly in the same way as we would going into any other market. However, so I think it is all wonderful, and obviously the levee situation has got to get resolved. It appears like it has picked up steam in the last week before business. We will have confidence to invest in New Orleans. I think that is going to happen.

What I will tell is we believe that the state government has the power along with cities to accelerate the permit activity, which means that the kind of hoops that we normally go through in getting entitlements ought to be accelerated in Louisiana for the sake of an emergency situation, which we think will benefit everyone. And while that has yet to happen, we think that will happen.

All right. But I guess this is a fluid situation, and I guess you cannot really give a sense of how many meaningful this will be over the next few years?

I cannot. I mean we are going about it day by day. I can tell you that the availability of land to build homes is extremely restricted. It is counterintuitive, but it is real. And so we are working very hard to find the parcels that allow us to accelerate our construction.

Okay. Well, you have certainly got the right partners to be doing that with. On a different tack, France. What do you anticipate the relevance of France to your business long-term is going to be?

Well, it is a question that somebody always asks, and France has just announced recommending a significant increase in the dividend, which we benefit from as a 53% shareholder. The business is very well-run as you know. It is operated in a very cash-flow friendly environment because we are able to transfer title as soon as a foundation is poured and collect money. So basically all of our construction is financed by the buyers, and the value of the business just continue to increase significantly. I think this morning it was trading at about EUR68. If you remember back a few years ago, we did the IPO at what, 22, around 22. So we don't see any reason to do anything other than applaud, and you know there may be some good learning experiences from our condo development there that might be helpful as we move forward in the United States.

Well, the reason why I raised the question is we get stocks trading at 10 6 multiple there, and you are trading at 6 3 here, heck, if you're involved with a significant share buyback here now, you can certainly free up additional funds, and there is a nice arbitrage to be had. Presumably even after-tax.

We have done the calculation, too. But long-term we think that it makes sense right now to just hang with what we have had for 35 years, and but that is an interesting data point.

Fair enough. Thanks and again a great year, and I look forward to next year.

Larry Horan, Janney Montgomery Scott.

A quick question. I heard Dom talk about design center or either revenues or profits, and I did not get the figures. Could you repeat those?

Actually it was I think Jeff.

It was Jeff, okay.

The per unit was up 26% year-over-year to around 26,000 a unit. As a Company, our revenue was up 45% from 556 million in '04 to 804 in '05.

Okay. Great. Thanks.

Alex Baron, JMP Securities.

Yes, thanks and again great quarter, great year for you guys. You know, I wanted to -- it seems to me that this year you guys had pretty significant growth in your -- well, in all regions, but particularly in the Southeast. And I'm kind of wondering as you look forward over the next year or so which regions you think will have the highest growth and (inaudible) what you see as your potential for (technical difficulty)-- to gain market share in a place like Florida?

Well, if you looked at our backlog, you would see that we have got pretty much strong backlog across the region, but the West Coast and the Southeast is probably where we have our strongest community count growth and strongest backlog position. And, you know, we are also, as we have said before, entering organically some new markets -- Bakersville, Fresno, Reno, Palm Springs, Colorado Springs, Sarasota, Daytona Beach, Washington D.C., Baltimore and New Orleans. So we are spreading our wings in a very capital efficient cost-efficient way that also helps this grow.

Okay. And are there any markets that you guys are maybe seeing very different slow conditions today versus what you were seeing maybe a few months ago where you are having to change your thought process to what you want to do there?

No. As a matter-of-fact I would say -- I mean you are comparing it to a few months ago. I would say generally improving conditions in the weaker markets.

Okay. All right, great.

Timothy Jones, Wasserman & Associates.

Good morning. A couple of questions. What do you expect -- your average decided your buybacks, diluted shares were up about 5% last year. Where do you expect them to be this coming year?

We said that our share count would be flat year-over-year in 2006 over 2005.

Okay. I missed that. I have a question then, you have got your deliveries up about 17% or so on the high side and your average revenues up about 27%. You are assuming flat earnings -- diluted shares, and yet you only have the shares up 18%. If you've got revenues up 27 and shares up 18 and flat shares, that implies lower margins, is that correct?

We have said that we would see some margins subside, and hey, we also have, you know, going into next year, it's a different economic environment than the last two years, and we still have 20,000 homes to sell and build and deliver, and so you know, I am going with a little bit of cushion until I see how the year unfolds.

I don't blame you at all, but I mean you obviously will have -- with 58% of your deliveries in backlog, you should have a very good healthy first-half margin.

We should have a good year, which is why our earnings outlook at 18% is one of the highest in the industry.

Is there anyone else, operator?

Michael Momar (ph), Goldman Sachs.

A few quick questions. Can you give some color on how your 2006 forecast might slow over the next few quarters? Are you seeing it maybe more on the back-end or the front-end, or will it be sort of as it has been in the past?

It is going to be fairly close to what it has been in the past, maybe a little bit stronger in the first-half, but generally the trends will stay the same.

Okay. And then just a couple of minor things. The stock option expense, I'm assuming your projections sort of take that out, and there has been no -- has there been any material changes, or is still about 3 to 5 million per quarter? Is that a reasonable -- (multiple speakers)

The impact of expensing stock options, it is about $0.10 for the year.

Okay. And that is included in the 1125?

It is included, so I covered that.

And then just one quick question, the 6.8 million in the financial services for the quarter, can you just help me understand that?

(multiple speakers) -- that was asked earlier. And then the total financial services from the sale of the mortgage business, 7 million net of adjustments with a favorable impact. And then also in the quarter, remember we had our tax rate go up from 33% last year to 35, so that more than offset that onetime gain.

Steve Fockens, Lehman Brothers.

Just one point of clarification. I'm assuming your current outlook for next year does not include any impact from potential buybacks of the 10 million authorization?

I would say there is a modest buyback included because my question of you would be, what will our stockprice be by the end of next year? So I understand my dilution. So you know I would guess that we will have some buybacks, which will keep it neutral. (multiple speakers). It is hard for me to predict right now.

But, again, back to what you said earlier, just on a net share count, you are assuming flat for the year?

I am, yes.

Fred Taylor, Lord Abbett.

I think most of mine are answered. I just want to point out a great job on the leverage. You are ahead of schedule from the book you handed out at your investor meeting in September which said 47% debt to cap. You are under 45. Should we ratchet down '06 and '07, or is that 46, 43 sort of where you think you will be?

In our outlook, I think we are kind of comfortable in this 45% range as being a range that is the investment-grade, along with our interest coverage and our debt to EBITDA. So that is a range where we believe we have a very strong balance sheet and warrant an investment-grade rating.

Right. And would you expect your inventory growth -- it may have been asked before in a different way, to sort of mirror the 16 to 18% growth in community count? (multiple speakers)

It will be a little bit higher, the 16 to 18, because the cost of lots are going up. So if you look at it historically, you will see that it is maybe 100 basis points higher. You're going to see 25, 30% inventory growth on 15, 16% roughly, and I am giving you a big ballpark community count growth.

20 to 30 on inventory? It clicked there.

Close -- yes, 25 to 30 I would say.

25 to 30. And then just, we're getting long here, but just Louisiana will be more of an '07, '08 thing for the sale of homes?

Yes.

Joel Locker, Carlin Financial.

Strong quarter. I just wanted to say that first. I'm inquiring about the joint venture that actually at the end the third quarter I saw in your Q was around 1.17 billion. I was wondering has that changed much at the end of the fourth quarter? I'm saying overall, not your portion.

(multiple speakers). Debt on the JVs was roughly 1.3 billion.

1.3. What proportion is that of yours or your second --?

That is the total aggregate for it. So roughly for 50%, it would be 650 million.

650.

Slightly less than 50.

Right. Just one follow-up question. On the community count in the West, what was it in the fourth quarter of '05 versus '04 if you have an average?

Fourth-quarter of '05 versus fourth quarter of '04 on the West Coast?

Right.

It was up about 20% -- 20, 25%.

Up about 20 or 25%? So is it safe to say that absorption rates were a little lower in '05 versus '04? Or was it just (multiple speakers)

Yes, we are assuming that absorption because the West Coast was red hot in '04, that it is starting to slowdown to more normal levels, but still well above Company averages.

William Nobler (ph), Atlanta Capital (ph).

Congratulations, a good quarter, good year, and good outlook. I don't think you mentioned the number of land lots you have, how much owned, how much optioned, and also the impact of the hurricane.

Yes, the land that we owned and controlled at the end of the year was 187,444 lots, which was up 17% from a year ago. And the amount options went up slightly until 53% of those lots were under option contract. I mean it is difficult to say what the impact of the hurricanes were in both Texas and Florida, but if I had to peg a number, it would be 500, 600 units impact on deliveries up again orders also.

And also I realize everyone and for proper reasons is trying to start out the year fairly conservatively. But it strikes me that what you indicated was your highest growth this year should be in the West Coast and the Southeast where you have the strongest backlog and also your best community count increases, which in total will be up 15 to 20%. So with flat shares and with margins -- say, I was in the higher margin areas, it strikes me that is a pretty positive outlook.

We are going into the year in the best business position we have been in a long time from an inventory position, lot count, backlog, community counts, but we are going into a different economic environment than what we went into going into '04 and '05, and that is where we want to wait and see how the year unfolds.

Okay. Have a great year and a healthy happy holiday to everybody.

Tony Campbell, Knott Partners.

Actually our question was answered. Thank you very much, and let me add our congratulations as well.

Okay. So if that is the end, let me just make a final comment that we have set our 2006 Annual Investor Conference to be held in New York beginning with dinner on Tuesday, May 9th and continuing through Wednesday, May 10th, so get that on your calendars, please. And I want to thank everybody for joining us today for the wrap-up of a very successful year, and all of us at KB Home wish you and your families a very very happy holiday and a healthy new year. And we look forward to talking with you in 2006.

Thank you. That does conclude today's conference. We thank you for your participation.