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KB Home Second Quarter Earnings Call
Author: Staff
Last Update: 9:11 AM EDT July 15 2007


The US homebuilder took a pretax charge of $308.2 million related to inventory and joint venture impairments and the abandonment of land options. The company announced the sale of 49% interest in French subsidiary, Kaufman & Broad, SA. Revenue, excluding discontinued French operations, fell 36% to $1.41 billion, primarily because of lower housing revenue, which dropped 41%. Net orders for new homes, excluding the discontinued French operations, fell 3% from a year earlier to 7,265 homes.

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This summary is based on the second quarter fiscal 2007 earnings call conducted by KB Home (KBH) on June 28, 2007.

President, CEO and Director: Jeffrey Mezger
EVP and CFO: Dom Cecere
Senior VP and Chief Accounting Officer: Bill Hollinger
Senior VP, Investor Relations and Treasurer: Kelly Masuda

Key Investors Issues

- EPS from continuing operations were a loss of $2.26 a share compared to income $2.20 a share a year ago.
- Net income from continuing operations was a loss of $174.2 million compared to income of $184.4 million in the year-ago quarter.
- Revenue, excluding discontinued French operations, was $1.41 billion, primarily because of lower housing revenue.

Second Quarter Highlights

Total revenue was $1.41 billion, a decline of 36% from $2.20 billion in the second quarter of 2006.

- Inventories are now down by $1.7 billion, from $6.9 billion at the end of the second quarter of 2006 to $5.2 billion. Unfortunately, approximately $630 million of the reduction came from impairment and abandonment charges.
- The company did unlock over $1 billion of cash from working capital by reducing investments in under performing communities, improving cycle times, and lowering land pipeline by 44%.
- The cycle time to build a home has been reduced by approximately 40 days from one year ago, causing a 20% improvement in conversion of backlog and the company has reduced work in process by 39% from over 18,000 homes under construction at this time last year to 11,000 homes.
- The direct construction cost to build a home is being reduced by approximately 6% to 8% per square foot, excluding permits and fees, by negotiating price reductions with subcontractors and material suppliers, and also by introducing smaller homes with lower spec levels.

SG&A was reduced by 28% or $74 million from $268 million one year ago to $194 million, a $300 million reduction on an annualized basis.

The company is continuing to remove overhead from the business, until the business stabilizes and SG&A gets back in line with housing revenue.

- Debt, net of cash one year ago was $3.3 billion, which has been reduced by $800 million to $2.5 billion.
- The company lowered the average number of shares outstanding to approximately 77 million, down 3% from 79 million shares outstanding in the second quarter of 2006.

In the last 12 months, the company generated over $1 billion in cash.

The company uses this free cash flow to lower debt, strengthen balance sheet, and reduce the number of shares outstanding.

- The company is well positioned for reinvesting in business. For example, earlier this month it approved a land purchase from a bank for 139 finished lots and foreclosure, adjacent to an open KB Home community.
- The lots were purchased on a take-down schedule tied to current market absorptions, with a small deposit at 34% lower lot cost and homes that can be priced to the income level of the buyers.

The company generated over $1 billion in cash in the last four quarters, and is targeting to deliver another $1 billion in cash in the next two quarters.

- Land pipeline is back in balance with 97,000 lots owned or controlled, debt was reduced by $800 million, and the company has zero outstanding on $1.5 billion bank line.
- The company has a six month order backlog of 13,672 sold homes that added $3.7 billion.
- Cancellation rates have normalized to more historical levels and the business continues to be right-sized.
- The company is staying disciplined to business model as a build-to-order home builder, with production tied to the six month order backlog and only 1,200 or 11% of homes under production unsold.

- The company announced that had entered into an agreement to sell 49% ownership interest in Kaufman & Broad S.A. to PAI, a French private equity firm headquartered in Paris, France for approximately $800 million.
- The company has announced that it is redeeming $250 million of 9.5% senior subordinated notes.
- The inventory of existing unsold homes increased to an 8.9 month supply, and new home inventory increased to over a seven month supply.

Net orders for new homes were down 3% on a year-over-year basis with 18% fewer active selling communities.

- Orders for new homes on the West Coast were up 3% from a year ago.
- Orders in the Southwest were up 16%, and orders in the Southeast were up 19%.
- Orders in the Central region were down 30% driven primarily by a 35% reduction in the number of active selling communities in this region, primarily in Texas and Colorado.

Even with the tightening of credit standards and subprime fallout, cancellation rates have been at normalized levels relative to historical rates for the last two quarters.
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Sources: Data collected by and from company press releases, filings and corporate websites.
Market data: BATS Exchange. Inc.

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