Good day everyone and welcome to KB Home's Fourth Quarter Earnings Call. As a reminder, today's call is being recorded and webcast on KB Home's website at www.kbhome.com. KB Home's discussion today may include certain projections and forward-looking statements regarding KB Home's business, future actions, and expected results. These are based on management's assessment of the company's current business and assumptions about future operating conditions, but should not be considered guarantees of future performance. Please be aware that KB Home's actual results may differ from those that are expressed or implied by the projections and forward-looking statements that may be made today due to risks, assumptions, uncertainties, and other risks and events outside of the company's control and that the differences may be material. Many of these risk factors are identified in the company's periodic reports filed with the SEC, including the annual report on Form 10-K to be filed later today and the company urges you to read them. For opening remarks and introduction, I would now like to turn the call over to KB Home's President and Chief Executive Officer, Mr. Jeffrey Mezger. Please go ahead, sir.

Thank you. Good morning everyone. Thank you for joining us today to discuss the financial results for our fourth quarter and fiscal year ended November 30th, 2006. With me this morning are Dom Cecere, our Executive Vice President and CFO; Bill Hollinger, our Senior Vice President and Chief Accounting Officer; and Kelly Masuda, our Senior Vice President of Investor Relations and Treasurer. I want to thank everyone for their understanding and patience, while our independent committee y of the Board diligently worked to complete their stock option review. Today, we are pleased to resume our regular communication of KB Home's quarterly results to shareholders, investors, and analyst. During this Board review period, I can assure you that all of us at KB Home kept focus on our customers and our business, and I am very happy to report that we will file our third quarter 10-Q and 2006 10-K today, bringing our financial reporting up-to-date. We are also very pleased to share with you our financial performance for 2006, given the challenging market conditions. Our results are driven by our customer focused business model, which reflects on all the employees of KB Home, who execute the fundamentals of KBNXT everyday. While I am honored and humbled to have been selected by the Board as our company's Chief Executive, I am also very proud to be leading the amazing group of employees at KB Home. Your investment is a vote of confidence in our future and I promise you our organization will continue to earn the trust you have placed in us. Now, let me share some of the financial highlights with you. We posted solid top-line revenue growth in the fourth quarter with revenues of $3.5 billion, up 13% over the fourth quarter of 2005, and for the year reached…

Thank you, Dom. We are encouraged by the number of potential home buyers that are visiting our communities and also the success we are having in our co-branded communities with Martha Stewart, where sales and margins continue to demonstrate that choice, quality, and brand are more important than price concessions. We are also encouraged by the national statistics for new housing permits and housing starts which indicate the homebuilders are reducing housing starts, which will eventually reduce the excess supply of unsold new and resale homes that still exist in the market today. We continue to focus on our KBNXT operating model, as a build-to-order homebuilder, featuring choice and value with a six-month order backlog and experienced management team and world-class training tools essential to creating value for our shareholders. We are staying very selective in land purchases, until markets become more stable and the cost of land gets in balance with today's home prices. With only 64,000 lots owned in US, we are well positioned to begin purchasing land at lot prices that will provide better margins and returns than we are experiencing today. We are reducing the cycle time from the sale of home to close to our even flow production focus, which reduces cost and improves inventory turns. In many of our businesses, we have already experienced over a 30-day reduction in the cycle time to deliver a home. We are driving additional direct cost savings through our KBNXT initiative called Pathfinder. In fact in many of our new communities in the one supply constrained coastal markets we are seeing an 8% to 10% reduction in the cost per square foot to build. Our Pathfinder initiative applies to our overhead structure as well, where we have quickly position ourselves this year to comparable SG&A ratios as in…

Thank you. (Operator Questions) And we'll go first to Michael Rehaut with JP Morgan.

Hi, good morning.

Good morning Michael.

I just wanted to make sure I understood that correctly regarding your comments on quarter-to-date trends. When you said the Can rate returning to normal levels, as I've looked over the last couple of years, it appears that the normal Can rate for KB is maybe in the high 20s to low 30s. Is that type of level that you saw quarter to-date?

That's correct Michael. We will be changing the way we report our Cans to go to a percent of backlog at the beginning of the quarter. But at our quarter end call, we will clarify that. But as we said here today, our Can rate as we've historically reported is flat with '06.

That's great. And in terms of the order you set down 10%. Were there any regions that were positive year-over-year or were most still negative?

Interesting question Michael, I appreciate it. We actually are seeing positive sales comps on the coast, both California and on the East Coast. Our sales are off in the Central region in large part because our community count is down significantly, where we've lowered our investment due to not obtaining our required returns.

Okay. And just last question on order ASP that we noticed for 4Q, it's down about 25%. I was wondering if you could give some color on that, it appears that there -- might have been in part of mix shift. But, for example, in the South West you're down to -- we calculated 155,000 per unit per order. But in many regions you are still looking at a pretty sizable decline. So if you can talk about if its mix and also I assume there is a lot of pricing action going on as well?

Yeah. Michael let me refer to Dom on that question.

Mike, you are backing into it by looking at the backlog, entering the year in the backlog at the end. And since you have adjustments to the backlog and pricing when they come to the table, it distorts the orders. I would tell you that the average price is probably down about 4% or 5% entering 2007 from the fourth quarter. The fourth quarter prices were up 1%, year-over-year it will be down 4% or 5% as we begin our 2007. I would also like to tell you Mike just so you understand that, as we bring in new communities with lower square footage and a lower spec level, our prices will be coming down without impacting margins. So, that is happening as on an ongoing basis starting in the second half of last year.

I appreciate that. And when you said the 4%, that's on a nominal basis, correct?

Yes.

Okay. Thank you.

And next we will go to Margaret Whelan with UBS.

Good morning, guys.

Good morning Margaret. How are you?

Perfect. Thanks, congratulations on the promotion, both of you.

Thank you.

Thank you.

Okay. So, here is the first question I have for Dom. If you think that your SG&A is going to be flat, does that mean that you are going to kind of maintain kind of focus on margin strategy and not chase volume what so ever?

Well, our SG&A is going to stay flat and volume will come when we start to see some demand and the market pick up. So, the answer is we are focusing still on maintaining our margins and taking volume when can get it.

Okay. But you are just not going to compete on pricing, not going to discounting as much as some of your peers, it sounds like?

Well, I think I would agree with that.

Yeah, Margaret, we are focused on returns and it's a per community analysis, we will set a run rate and a margin rate to give us the most cash back and that -- then we hold to that to the get sales and if we can't get our returns, we are not going to keep chasing the units.

Okay. Good.

I mean the good news, Margaret, in the first quarter was that, our community counts were down 8%, however our orders were -- and were only down 10%.

Yeah.

So, our sales per community, we are actually doing pretty good on a year-over-year basis.

If I am thinking about that right, then you have about 24,000 houses in backlog, is that at 17 plus about 7,000 orders to date?

No, because of deliveries also, we've about 18,000 homes in backlog.

Okay.

With 17,700 going in the year.

Okay.

I mean deliver homes and pick up orders, and that hasn't changed much.

Okay. So, that -- so, what kind of….

And in the first quarter, I would guess it might be up slightly.

You're order?

The backlog.

You're backlog. Okay. And did Jeff say you have 111,000 lots?

We have a 111,000 lots in the US, 64,000 of those are owned.

Okay

And the 47,000 are the optioned. Then, we have 20,000 lots in France.

Okay. And then, so that's about for years of supply, at what point would you be buying dirt. It seems like you're more liquid then lot of the other big cap here?

We definitely are Margaret. And with the dry powder we have we can be selective and opportunistic. We have the lots to achieve our business plan for '07 and frankly '08. So, we don't have the urgency to go do something. We will, as we sense each market stabilize and we see opportunities in the market, we're going to go after them at that time. But, it is not something we're going to rush out and do in the next month or two.

Do you see anything that's penciling right now? Any --

Yeah. We're actually approving a few deals in our Land Committee process and it's most easy options in markets that haven't depreciated as much, but not a lot, very little.

And so, last question from me, what is your priority on use of cash? Should we expect any buybacks this year? And then any plans to divest France in '07?

As we've always said Margaret, we have a balanced approach to cash. We've been the largest buyback company over the last few years. We want to wait and see how the business shapes up for the year, so we have a firm understanding of our cash projections for the end of the year. If we think there is opportunities in acquiring assets we will go that way. If we don't see those opportunities, we could take our debt down or we can go buyback more stock. We do have 4 million authorized on our buyback by the Board today. But, we want to, again, wait and see how the year unfolds. Relative to France, as I keep saying, it’s a world-class situation to be in. We have a great business over there. We are the second largest builder in France. I have known [Gee] for 14 years. I visited Paris in December to gain his commitment and trust in our relationship. They have a great year projected for '07. They are very profitable, very tenured. It's a low risk for us, but it also may be an opportunity. So, we haven't finalized any strategic analysis yet on what to do.

And next we will go to Stephen Kim with Citigroup.

Thanks. I was wondering if you could elaborate a little bit on your comment about the gross margin. I thought I heard you say that in the first half of next -- I guess this year, you anticipate that the gross margins would continue to moderate and then in the second half there was opportunity for rebound. Could you talk a little bit more about what you meant by -- continuing to moderate, moderate year-over-year, moderate sequentially, some sort of order of magnitude that sort of thing?

Stephen, I would say moderate sequentially. The fact is we are still under pricing pressure. There is still an excess supply and therefore, we believe in the first half. And by the way margins in our business, because deliveries are stronger in the second half than the first half, always start out the year lower than they were in the third and fourth quarter than in first and second quarter. So, all of those trends are going against us, and the fact is that as we begin to swap out old communities with new communities. And by the way, by the time that we get through this year, we will probably have replaced two-thirds of our communities with new communities with lower square footages and better price points which will help our margins overall. All of these things are going to start to really, will start to see the full benefit of in the second half of 2007. So we got a couple more quarters where we think pricing and margins will be under some pressure until we start to see some of the dynamics move more in our favor.

And you were saying that you saw the opportunity for a rebound in margin in the back half, not just the stabilization I guess, right as you see the --

Things like that.

Right. Okay, and you had --

Actually, we said they could improve if the market stabilizes.

Exactly right, okay. And in terms of your subdivision count, I think you indicated that your subs were down about 8% here in -- currently. And I was curious as to whether you had a projection for where that might be later this year?

We said overall for the year that we would be at around 423, down 5% from the 444 that we averaged this year and actually being up on both coasts, but down in the Central, some in the Southwest.

And next, we'll go to Ivy Zelman with Credit Suisse.

Hi guys, good morning, and congratulations.

Good morning Ivy.

Relative performance obviously doing very good. Can you kind of talk a little bit about some of the buyers today, what's your requirement on deposit for today's buyer on average when they are --

It will vary by market, Ivy, but it's about 2%.

2%. Okay.

Yeah.

And one of the things that I am sure you guys are focused on, or worried about as your comments have been very balanced, Jeff, with respect to the expectation on '07 and, if and could, I like those words, I think they are carefully chosen. When you think about the lending environment today, we're hearing from the mortgage originators out there that some of the subprime blow up is spilling over into the convectional prime market with clearly tightening going on with the documentation. First thing, we are seeing is low-doc loans or no-doc loans are starting to no longer be easily underwritten and even pullback entirely. Seconds, they are being eliminated by some mortgage originators, Fremont announced that they are not going to do seconds any more. So there is a lot of concern that even prime and conventional mortgages are going to start to be impacted 100% LTVs, IOs. Is this something that you're factoring into your outlook and clearly the demand improvements that you might be seeing today, some of those underwriters. Can you talk about what the mortgage portfolio of your buyers look like? How much of it is 100% LTV? How much of it has seconds, I guess that's the same saying? How much of it is interest only, kind of walk us through it, so we can understand where the demand or how the demand is shaping out?

Okay. What I can share with you Ivy because the question was raised earlier this week, for starters, we have a great partner in Countrywide, very sophisticated, very stable long-term company. And when I was getting ready this morning, I heard that another subprime company out here in California closed yesterday. So it's the classic case of a mortgage industry tightening up. The quality performers will stay. Those that were opportunistic and didn't run so well are now going away. In the terms of subprimes within our venture, it's about 12% of our business, primarily in the Central region. The coastal buyers are more conventional, high FICO scores, solid incomes. They do have a lot of 100% loans. I think Dom has the numbers here. But if subprime were to go, my point is that it may impact our markets where we have lesser margins in the first place and a little lower quality buyer profile than some of the higher price product we have on the coast.

I think the good news is that our FICO scores for buyers still remain slightly above 700, so they can qualify for a loan. And the more we can do, when we open new communities to lower the price point, the more affordable for buyers and that's our focus.

No, and I appreciate that. I guess what I am trying to understand is how much of your business is 100% LTV and then clearly even with Countrywide, I am realizing that the environment is changing. They may get a little bit tougher to underwrite someone who might be a 7% -- a 700 FICO score with only a 90% LTV or a 100% LTV, and clearly demand to be negativity impacted by what's happening in the mortgage arena. And I am just wondering if you look at the people that are in current backlog, can you give us the sort of the profile of that buyer, how much is the 100% LTV? You gave the FICO score, how much is interest only, how does that interest only breakdown years in terms of a reset?

No, Ivy, I will get that for you. I honestly don't have for Countrywide in front of me.

Okay.

But I mean I can't argue the fact that these will all cause some level of the demand -- impact on demand. The good news is that at least to a quarter, our traffic and our communities have only been done about 10%. We didn’t see the net orders at the last half or last year because we had cancellation rates, but now when those cancellation rates subsided, we are now seeing orders being in line with traffic.

I do think, Ivy, it's a fair comment that if subprime tightens up and underwriting tightens up, it's going to restrict demand. If it's not new, it's resale and we'll have to cycle through that. These large vendors have been creative for years and whenever one program goes away, they've quickly come up with another program that replaces it, maybe more conservative, but still has flexibility. So, I think that's what you'll see. But, certainly could affect affordability in the short run. As to how much we don’t know.

(Operator Instructions) And next we'll go to Dan Oppenheim with Banc of America.

Hi this is [Mike Wood]. Can you characterize the improvement that you've seen in the first quarter so far with the less -- lesser the decline in orders in terms of -- is this primarily the result of pricing or you seeing a pick up in demand? Just if you could give us some color on that?

I think a good data point, Mike, is that our traffic levels are tracking with our community count and tracking with sales. So, there is buyers in the market, there is affordability pressure, and we've told you that our margins have moderated some, and I think it's parts of the spring selling season. I think it's part what we have done to sell homes. That’s why we are cautious about the year, because it's unclear at this point in time how strong the spring selling season is going to be. And in another 10 or 12 weeks, we'll have a very clear picture on where the markets are heading and where our year is heading.

We also think that our KB's price point as a price point will be more in demand than the second move up to luxury buyer.

Okay. And can you just also give us sense of the -- with the homes sold I guess so far this quarter and last quarter, just how that breaks out generally with spec homes and pre-sales?

Well, we have only -- in our production and this is been pretty consistent. 83% of the homes we have under construction are sold and only 17% are spec. So we've been -- and that’s probably one of the best production spec levels in the industry. So, based on -- and that's been that way for several quarter. So, the vast majority of the homes that we have in construction and are selling are sold.

Okay. Thanks.

And next we will go to Steven Fockens with Lehman Brothers.

Thanks guys. Hey, as you look forward and when business starts to moderate a little bit, what are your thoughts about ongoing redeployment of cash and maybe being ongoing more consistent generator of cash -- free cash, I guess, I should say?

I think going forward, Steve, you will us focus on a balance of -- in normal times, we want to have 10% top-line and generate cash every quarter. And we think we can do both.

Steven, remember we -- I mean -- I think the footprint would say, hey we generated being to [encash] in last three months. And we are not expanding community counts for growth, we are curtailing community counts until we see the market demand more communities. And by curtailing community accounts, you are not putting more into land and land development going into year. So, we have a plan in place that we will continue to generate free cash flow and we will use some of that free cash flow to invest in land. If the opportunity arises, that's a good opportunity and markets have stabilized. And it's a market-by-market look. But right now we are free cash flow generator.

Great, thanks very much.

And next we will go to Timothy Jones with Wasserman & Associates. Timothy Jones - Wasserman & Associates: Good morning.

Good morning Tim. Timothy Jones - Wasserman & Associates: Kelly, your main number isn't working, may be some people who are listening on the Internet would like the backup number 866-558-6905, just to let you know. Okay. I have first question, and on you gave the lot count, could you give the owned and optioned last year with the 180,000?

Over the last year, I believe it was around 54% options and 46% owned and closed. Timothy Jones - Wasserman & Associates: Okay, close enough. Okay. 46% owned, right?

It's, yeah, we are 54%. 54.46, that was pretty good. Timothy Jones - Wasserman & Associates: Okay. The -- I want to make sure that something you just said. Do you see today that your homes -- did your spec homes are 17% of your homes under construction, because there is no other builder that is under 25 and there is a number of home that at 50%?

That's exactly right. That's why we are a built-to-order homebuilder, not a spec production builder and to do that you have to have a backlog.

Tim, philosophically we believe strongly in our business model and the senior management team is driving starts through having a pre-sold backlog. We are not going to chase a business plan by building a bunch of specs and hoping the buyer show up. They are much more predictable.

And next we will go to Susan Berliner with Bear Stearns.

First some comments on some of your larger markets in California, Las Vegas et cetera, and also I was wondering with the sizeable amount of cash you have sitting on your balance sheet, if you thought about taking out your 9.5 callables?

Anyone talk to that?

Well the 9 and 9.5 callables we have thought about taking back. And probably we will do that further years out. No doubt Jeff will give the--

As I shared in my comments, Susan, we are actually seeing positive sales comps in the East Coast, and the West Coast we are off, and the Southwest and Central in part due to community count in the case of Vegas or Phoenix, while we are seeing signs that it starting to stir, they are still pretty challenged and competitive. So we are not seeing big sales through out of Las Vegas or Arizona. Within California, it's spotty. We actually have communities where we hit the price points that target what I call the local demographic, the incomes in the area, and job levels in the area. When you can hit those price points today, you actually can still have campouts for your product. And we've had that in an area in the Inland Empire where we brought a product to market around 400,000 which believe or not is a first-time homebuyer and had campouts in the community. So if you can get to the price point in any market, there is underlying demand there, where it gets slow is when you are above that and it's just an affordability issue.

Are you having better -- do you think the markets will rebound faster in Las Vegas or Phoenix?

Phoenix is not as land constrained.

Right.

There is a lot more inventory on the ground, which will probably put pressure on pricing. I think my hunch and this is the crystal ball would be that Vegas would rebound ahead of Phoenix, but that -- both on them still to be told.

Great. Thanks very much.

And next, we'll go to Carl Reichardt with Wachovia Securities.

Hi guys. How are you?

Good morning, Carl.

Give me a moment into the call. I assume I just shouldn’t ask this question because I missed part of it. But can you talk a little bit about your net community openings in the first quarter and second quarter of the year relative to last year in terms of sort of pricing and square footage, Jeff? I am sorry if that was just asked.

Dom can give you the net community number. As to square footage Carl, there is really three buckets that we are chasing to lower our cost and lower our price to the buyer. One is by building smaller homes as the market were so strong over the last few years, you could make more money by building a bigger home on the same lots, in our average size home in many communities was up 300 to 400 square feet. So we are quickly retooling product on our new openings to go to smaller product. In some cases, we can lower our spec level by $20,000 to $30,000 from what was in the larger product. And then third would be whatever we can get back from the subcontractor base in the way of savings. Between the three, you can potentially lower your price, $50,000, $60,000, $70,000 and that impact your margin, and that's where we are headed with our new community openings in '07. Dom, do you have the number for?

Yeah. In '07, we are going to open 180 new communities. It's about 42% of the average communities that will have opened this year and it's 80 in the first half and 100 in the second half. Last year it was about 260 communities, and again that was about 150 that came in the second half. So we have been able to at least in at that level be able to on those new ones that will open in the second half we are looking to reducing the cost per square footage and making it more affordable.

Terrific. Okay. I appreciate that very much guys. Thank you.

Thanks.

And next we'll hear from Ken Zener with Merrill Lynch.

Good morning.

Good morning, Ken.

I am just -- if you could quantify you are facing some pricing pressure. I realized, Jeff, you talked about -- you guys ability to offset the cost input. But could you kind of give us a little more sense of, what do you mean by moderating margins in the first few quarters here sequentially relative to the fourth quarter?

I will defer that to my good friend and running buddy Dom Cecere.

I mean it's just what you have seen. We are going into the New Year and we are only two weeks into the sales cycle. We still have pressures on pricing. And therefore, our best look today is that margins are going to moderate some until we some demand pick up. And we just want to make sure that the analyst understood that the margin improvement that will happen in this industry is, well, it going to be a second half of that and not a first half of that. It's still going to be difficult to peg the margins until we understand what happens with pricing in the first quarter and the second quarter.

Right, I guess would you consider the 300 basis point decline third quarter to fourth quarter as moderating?

No, I wouldn't. And you have to remember, in the third quarter, there were significant cancellations starting in the industry. That ended up -- we ended up with a lot of unsold spec homes by builders being pushed through the system. And when that happened that really drove prices down more. So, I think the fourth quarter was probably a tougher quarter. The first and sixth should not be as bad as the fourth as far as declining margins go.

Okay. And then, in terms of the communities where you have the impairments, what is the margin that you're kind of resetting these communities to, if you can kind of describe your thought process? And then, how much of the charges that you've taken in '06 will be benefiting '07 deliveries? Thank you.

By community, each one can be different, but our net margins are only between 10% to 15% gross margins on these impaired communities and in the -- what is it Kelly? It's about 40% of that flows to the P&L in 2007.

Yeah. In 2006, we had about 37 impaired communities and about 29% flows through '07, 43% in '08, and remainder after '08.

We can underwrite every quarter, every community to our net present value on cash. And while we do that methodology it defaults back to a margin that will range from 10% to 15%.

(Operator Instructions). And next we'll turn to Michael Rehaut with J.P Morgan.

Hi. Thanks. I was wondering Jeff, if you could address one of the, I think unique aspect of KB, now that you are moving into the CEO seat, which is the France unit. And obviously from time-to-time people ask about that in terms if that's going to continue to be a core part of the business as most other US builders concentrate domestically. What are your thoughts on that business and is that something that you might take a fresh look at over the next 12 months?

Mike, I don't know if you were on the phone, but somebody already raised this question. We've been in France for over 30 years. We have a phenomenal business with a tenured management team with succession plans in place. We've had a great growth track for the last two years. They now build in every province. So, it's a very well run, very profitable business with projections in '07 for more growth in revenue and earnings. So, we have this business that runs well, it's been part of our strategy for the years. I think we are the only US public builder that has a success story in another country, and we are in no hurry to make a decision to do anything right now, because we're -- it's running very well and we have a good relationship with our French management team. So, we will continually evaluate their results and opportunities in the future. Right now, we haven't cutout our strategy.

And Mike, it's hidden matters that we probably don't get as -- enough credit for it. I mean, the KBSA has -- stock has rallied up 20% just in last few weeks and it's current market value is about $800 million. So, one of the things that people should realize when they own KB Home is we have got an $800 million market value that I think is only on our books for a couple of million bucks. So, it's, from a book value perspective it's a jewel.

I appreciate that, and sorry I repeated the question there. But just switching gears for a moment, you mentioned some very good balance sheet shape, particularly in terms of spec. I was wondering, looking into '07 in the first half of the year, particularly, do you expect to continue to reduce your spec and also your [lock count] and with the 10,000 homes under -- under construction only 17% without an order. I mean is that something that can continue to come down?

Over the years, Mike, our typical ratio was 90% sold, 10% unsold. With the cancellations spike in Q3 and Q4, that number went up even above 17, I think at the end of the third quarter, early fourth quarter. So, we're going continue to work that number down back to the 10% range. And the market and the sales rates and everything we do per community will drive how bigger construction pipeline we have and what our lot needs on a go forward basis.

Do you have an idea what the differential is between the cancelled homes that you're reselling now versus the new orders that you are writing today in terms of looking at the gross margins?

When we've looked at it Mike, it has ranged from 500 to 1000 basis points lower and price per our cancelled home that’s resold versus build-to-order home. So, it's a significant difference.

And that will conclude our question-and-answer session for today. I will now turn things back over to Jeff Mezger for any additional or concluding remarks.

Thank you. Thank you for joining us today for our fourth quarter and total year 2006 Earnings Call. I hope to see many of you later this month at the Wachovia Homebuilding conference in Las Vegas. Have a great day.

And that does conclude our conference. Thank you everyone to your participation.