Hovnanian Enterprises Inc. F2Q10 (Qtr End 04/30/10) Earnings Call Transcript - TheStreet

Hovnanian Enterprises Inc. F2Q10 (Qtr End 04/30/10) Earnings Call Transcript

Hovnanian Enterprises Inc. F2Q10 (Qtr End 04/30/10) Earnings Call Transcript
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Hovnanian Enterprises Inc. (HOV)

F2Q10 (Qtr End 04/30/10) Earnings Call

June 3, 2010 11:00 am ET


Ara Hovnanian – Chairman, President and CEO

Larry Sorsby – EVP and CFO


Michael Rehaut – JP Morgan

Nishu Sood – Deutsche Bank

Jonathan Ellis – Banc of America/Merrill Lynch

Ivy Zelman – Zelman & Associates

Megan McGrath – Barclays Capital

David Goldberg – UBS

Alex Barron – Housing Research Center

Dan Oppenheim – Credit Suisse

Joel Locker – FBN Securities

Jim Wilson – JMP Securities

Susan Berliner – JP Morgan

Michael Kim – CRT

Jason Marcus [ph] – JP Morgan

Timothy Jones – Moloney Securities



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Good morning and thank you for joining us today for Hovnanian Enterprises fiscal 2010 second quarter earnings conference call. An archive of the webcast will be available after the completion of the call and run for 12 months. This conference is being recorded for rebroadcast and all participants are currently in a listen-only mode. Management will make some opening remarks about the second quarter results and then open up the lines for questions. The company will also be webcasting a slide presentation along with the opening comments from management.

The slides are available on the Investor's 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 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 second quarter ended April 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 of Finance and Treasurer and Jeff O'Keefe, Director of Investor Relations.

On slide three, you can see a brief summary of our second quarter results. Our second quarter was in line with our expectations and better than last year's second quarter. Sequentially, it was also better than the first quarter from an operational perspective, absent a tax benefit we received in the first quarter. Slide four lists the three trends that we need to see continue in order for us to get back to profitability; increasing sales pace, improving margins and reloading our land position.

Second quarter net contracts were better than our internal plans but I'd be less than candid if I didn't say we were hoping for even better sales due to the impact of the home buyer tax credit. With respect to sales pace per community, instead of seeing steady year-over-year growth again, we seem to bounce along the bottom during the second quarter.

As seen on slide number five, our monthly net sales pace per community is increased in 15 of the last 18 months on a year-over-year basis. In February and March, our net sales per community were flat compared to the same month in the prior year. April sales were higher, likely due to home buyers trying to beat the deadline on the home buyer tax credit.

Slide six shows the sales trend on a quarterly basis. After five consecutive quarters of year-over-year increases in net contracts per active selling community, the pace in the second quarter of 2010 was unchanged when compared to the same period a year ago.

Slide seven puts these improvements into perspective. The seasonally adjusted annual absorption pace in the first half of 2010 was 25. That was better than the last two years but still significantly below our average of 44 homes per active selling community between ‘97 and ‘02, a period generally described as more normal times. We still have ways to go before sales absorption rates are back to normal levels.

In the month of May, our net contracts per community were 2.0 compared to 2.6 in May of ‘09. Clearly, the April expiration of the tax credit pulled some home sales into our second quarter, which was to be expected. Given the fact that the tax credit is no longer in place, this reduction in sales per community in May seems reasonable.

The jury is still out as to what the impact will be on the expiration of the credit on sales going forward. I will note that California reenacted a $10,000 tax credit and the New Jersey Assembly passed a $15,000 tax credit with an upcoming Senate vote expected next week.

We've seen stability in the selling pace per community, notwithstanding the understandable decline right after the expiration of the tax credit. This is probably a good segue to the second component of our returning to profitability, improving margins.

Let me start with gross margins. Slide eight illustrates the trends that we have seen in our gross margins over the last year and a half. Our gross margin has increased sequentially for the sixth quarter in a row to 17.3% in the second quarter of 2010.

The improvements in gross margin are due to several factors, including impairment reversals which were $42.8 million for the second quarter. Gross margins would have improved without the impairment reversals, just less so. We also had a better mix of deliveries coming from communities that generate higher margins and price increases in a few of our communities as well.

In the short term, quarterly gross margin results from our legacy communities will definitely fluctuate due to product and community mixes and any changes in home prices or incentives. Rising raw materials, particularly wallboard and lumber, could present a headwind to further margin improvement. However, we actively monitor commodity prices and have taken a series of steps with our suppliers and distributors that allowed us to lock in lower costs than today's prices for gypsum and lumber for three to 12 months into the future in many of our geographies.

The recent gains in gross margin have come without a significant number of deliveries on newly acquired land. Homes delivered on new land should yield a more normalized gross margin in the 20% range. The percentage of deliveries that we expect from newly acquired lots for all of 2010 is less than 10%. In 2011, deliveries from newly identified lots are projected to account for about 40% of our deliveries and in 2012, deliveries from newly identified lots should be a larger percentage of deliveries than from legacy lots.

Although we've already signed contracts for over 5,200 newly identified lots, we have to continue to purchase a significant number of new lots every quarter going forward. Fortunately, the deal flow remains steady as we continue to approve land acquisitions on a regular basis. As our mix of deliveries on newly acquired lots increases, even with zero home price appreciation, our gross margin should continue to gravitate to more normalized 20% to 21%.

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