Question-and-Answer Session
Operator
(Operator Instructions)
Our first question comes from Margaret Whelan, UBS.
Dave Goldberg - UBS
It’s actually Dave Goldberg on for Margaret. I was wondering if you guys could give us an idea on where you think free cash flow could be for ’07, what your expectations are there and what the priority is going to be between paying down debt and de-levering versus share repurchases moving forward?
Jeffrey T. Mezger
Dom can answer that.
Domenico Cecere
Hi, Dave. We have positioned ourselves very well for generating free cash flow, but free cash flow really comes in the second-half of the year when our deliveries pick up. But our investments that we have made in buying land and developing land are significantly below a year ago, and as soon as the next eight to ten weeks that we can determine the number of deliveries that we are going to have for the year, we will have a good feel for free cash flow, and exactly when the market is going to begin to stabilize will determine how much is used for share repurchase versus growth versus reducing debt.
Dave Goldberg - UBS
Do you have a point that you are trying to get to on the debt? Is there a target debt-to-cap level?
Domenico Cecere
Yes, our targeted debt-to-cap has continued to stay between 45% and 50% and we have been at the low-end of that range.
Dave Goldberg - UBS
As a follow-up, I was wondering where margins were for homes that are currently in backlog and if you know what percent of buyers that are in backlog are using sub-prime financing?
Jeffrey T. Mezger
That is two different questions, Dave. If you want to talk to margins, Dom.
Domenico Cecere
The margins in backlog aren’t dissimilar than what we may have today. The question is will that be the margin when we close? It has gotten more stable so we cannot fully answer it, Dave. We are still seeing some pressure on margins, but we had 17.7% average margin in the first quarter and I do not think it is going to be down significantly but we do not know, we cannot peg exactly where it is going to be yet in Q2.
Dave Goldberg - UBS
And in terms of the sub-prime exposure in the backlog?
Jeffrey T. Mezger
As to that question, Dave, let me start with a few general comments because I know this will be a topic on the call. If you were to line up 50 mortgage bankers and 50 people from the investment community, you would not get a consensus on what a sub-prime loan is. Everybody has a different opinion so I can only share with you sub-prime relative to how we see it here at KB. As we stated, it was less than 15% in ’06. We expect obviously it will go down here from that level even in ’07.
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