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KB Home Third Quarter Earnings Call
Author: Albena Toncheva
123jump.com
Last Update: 9:03 AM EDT October 01 2007

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The leading homebuilder of the US reported 32% year over year decline in revenue to $1.54 billion, mainly due to 28% fall in unit deliveries and 7% drop in average selling prices. During the quarter, the market conditions continued to be challenged with an excess supply of unsold homes, lack of affordability and declining consumer confidence affecting pricing and demand. KB Home is collaborating with Disney and it will be able to create custom Disney rooms from the beginning of 2008.


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This summary is based on the third quarter fiscal 2007 earnings call conducted by KB Home (KBH) on September 27, 2007.

President, Chief Executive Officer: Jeffrey Mezger
EVP, Chief Financial Officer: Dom Cecere

Key Investors Issues

- The net loss was $6.19 per share versus net income of $1.60 per share in prior year.
- Revenue dropped 32% over the prior year to $1.54 billion.
- In Q3, KB Home reduced its net debt by 55% to $1.5 billion.

Third Quarter Fiscal 2007 Financial Highlights

Revenues totaled $1.54 billion in the third quarter, down 32% from $2.28 billion for the third quarter of 2006 due to lower housing revenues.

Third quarter housing revenues of $1.53 billion were 33% lower than the year-earlier period, reflecting a 28% decrease in unit deliveries to 5,699 from 7,893 and a 7% decrease in the average selling price to $267,700 from $288,000.

For the third quarter, KB Home reported a loss from continuing operations, net of an income tax benefit, of $478.6 million or $6.19 per diluted share.

This was due largely to pretax non-cash charges of $690.1 million related to inventory and joint venture impairments and the abandonment of land option contracts, and $107.9 million related to goodwill impairment. In the third quarter of 2006, the company''s continuing operations generated after-tax income of $129.3 million or $1.60 per diluted share. The French discontinued operations contributed third quarter after-tax income of $443.0 million or $5.73 per diluted share in 2007, including the gain realized on the sale of the operations, compared to $23.9 million or 30 cents per share in the third quarter of 2006. Overall, the company posted a net loss in the 2007 third quarter of $35.6 million or 46 cents per share, compared to net income of $153.2 million or $1.90 per diluted share in the year-earlier period

KB Home completed the sale of its entire 49% equity interest in its French subsidiary, Kaufman & Broad SA.

The sale generated total gross proceeds of $807.2 million and an after-tax gain of $438.1 million. The French operations are presented as discontinued operations in the company''s current financial statements and results from prior periods have been reclassified to conform to this presentation.

Net orders of 3,907 new homes were down 6% on a year-over-year basis.

Community counts this quarter were down 15% from the prior year quarter, with 372 active selling communities compared to 439 active selling communities in the third quarter of 2006. The firm entered the third quarter with 13,672 sold homes in backlog, and converted 5,699 or 42% of its backlog through revenue in the quarter, compared to a conversion ratio of 43% last quarter and 38% in the third quarter of 2006.

KB Home experienced a 50% cancellation rate against gross orders in the third quarter.

In the third quarter, approximately 3,900 orders for new homes were cancelled compared to 3,656 cancellations in the second quarter of 2007. Cancellations were 29% of the beginning backlog in the third quarter of 2007, and as a percentage of beginning backlog have ranged between 29% to 33% for the last five quarters. The company is entering the fourth quarter with 11,880 sold homes in backlog, still one of the largest backlogs of sold homes in the home building industry.

The average sales price of homes delivered in the third quarter of 2007 decreased by 7% to $267,700 from $288,000 in the third quarter of 2006.

At $267,700, the average sales price for a KB Home was just slightly below the $269,000 average sales price for a resale home in the month of August. Sales prices in the Southeast and on the West Coast were down 10% year over year. Sales prices in the Southwest are down 17%, and the Central region is up 9% due solely to mix.

Housing gross margin excluding impairments and abandonments was 13.9% in the third quarter compared to 14.9% in the second quarter of 2007 and 23.3% in the third quarter of 2006.

SG&A was 12.8% of construction revenue in the third quarter, up slightly from 12.6% one year ago. SG&A expenses have been reduced by 31% on a year-over-year basis, roughly in line with a 32% decrease in construction revenues.

The construction pre-tax loss from continuing operations for the third quarter included $627 million of inventory and joint venture impairment charges, $63 million of option abandonment charges related to 6,500 lots under option contract, and $108 million of goodwill writedowns. Excluding these charges, continuing operations remained profitable.
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