Hovnanian CEO Discusses F4Q10 Results - Earnings Call Transcript

Hovnanian CEO Discusses F4Q10 Results - Earnings Call Transcript
By Seeking Alpha ,

Hovnanian Homes (HOV)

F4Q10 Earnings Call

December 22, 2010 11:00 a.m. ET

Executives

Ara Hovnanian – Chairman, President and CEO

Larry Sorsby – EVP and CFO

Paul Buchanan – Senior Vice President and Chief Accounting Officer

Brad O'Connor – Vice President and Corporate Controller

David Valiaveedan – Vice President, Finance and Treasurer

Jeff O'Keefe – Director of Investor Relations

Analysts

Nishu Sood – Deutsche Bank

Carl Reichardt – Wells Fargo Securities

Jonathan Ellis – Bank of America Merrill Lynch

Michael Rehaut - JP Morgan

Joel Locker – FBN Securities

David Goldberg – UBS

Alan Rattner - Zelman & Associates

Susan Berliner – JP Morgan

Presentation

Operator

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Good morning and thank you for joining us today for Hovnanian Enterprises fiscal 2010 fourth quarter and year-end earnings conference call. An archive of the webcast will be available after the completion of the call and run for 12 months. [Operator Instructions.]

Management will make some opening remarks about the fourth quarter and year-end results and then open up the line for questions. The company will also be webcasting a slide presentation along with the opening comments from management. The slides are available on the Investors page at the company's website at www.khov.com. Those listeners who would like to follow along should log onto the website at this time.

Before we begin, I would like to remind everyone that the cautionary language about forward-looking statements contained in the press release also applies to any comments made during this conference call and to the information in the slide presentation.

I would now like to turn over the conference call over to Ara Hovnanian, Chairman, President, and Chief Executive Officer of Hovnanian Enterprises. Ara, please go ahead.

Ara Hovnanian

Good morning and thank you for participating in today's call to review the results of our fourth quarter and fiscal year ended October 2010. Joining me today from the company are Larry Sorsby, Executive Vice President and CFO; Paul Buchanan, Senior Vice President and Chief Accounting Officer; Brad O'Connor, Vice President and Corporate Controller; David Valiaveedan, Vice President, Finance and Treasurer; and Jeff O'Keefe, Director of Investor Relations.

On slide 3, you can see a brief summary of our full-year results, which were in line with our expectations but still obviously far from where we'd like to be. The year can generally be described as one where we and the industry were bouncing along the bottom.

Slide 4 shows that we saw improving trends from November '09 at the beginning of our fiscal year through April of 2010, and then sales dropped off significantly in May and June after the expiration of the tax credit.

The market gradually improved from July through September, but was still below the levels we saw a year ago. In October, sales per community improved again, finally matching the same levels as the prior year. However, sales pace slowed more than expected in November and fell back below last year again.

You can see this in our monthly data, which we show on slide 5. When you look at the change in the absolute level of monthly net contracts this year, compared to last year, as we do on slide 6, you can see that the gap narrowed every month from June through September, which reflects the market beginning to rebound after the expiration of the tax credit.

In October, we signed more contracts this year than we did in October of '09, helped by a slightly higher community count. However, in November we experienced slower sales for the entire month, similar to what we experienced in sales per community. Mid-November through mid-January is the holiday season when it's difficult to gauge what trends are really occurring in residential for sale housing. We'll not get another good read on the housing market until early February, when the spring selling season kicks off.

Slide 7 looks at net contracts per community on an annual basis. This slide certainly makes the point that we are bouncing along the bottom. 2010 net contracts per community were 23.1, which is almost identical to last year, when we reported 23.3 net contracts per community.

Clearly the market has stabilized from the dramatic declines we saw in sales pace per community from 56.6 in '04 down to 17.7 in '08. However, the market has a lot of upside before we reach more normalized levels like what we saw from 97 to '02 of about 44 net contracts per community, a period which was neither a boom nor bust period.

While we do believe that there's pent-up consumer demand for homes based on demographics, consumers are clearly waiting to see signs of an economic recovery and job growth before they make their decision to purchase a home. The good news is that our internal forecasts do not require any improvement in sales pace or sales price for us to get back to profitability.

The key drivers for us getting back to profitability are increasing the mix of deliveries from our newly identified communities versus our legacy communities and for us to grow our top line through increases in our community count.

On average, the newly identified communities are expected to generate a 20% gross margin, which is another key to our ability to return to profitability. As we increase our mix of newly identified communities and shrink our mix of legacy communities, our consolidated margins should continue to improve.

We took steps down this path throughout 2010. On slide 8, after several years of quarterly declines you can see that our community count leveled off early in fiscal 2010. In the July quarter, it increased for the first time sequentially since the summer of '07 and in the fourth quarter it increased year-over-year for the first time since the summer of '07.

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