Hovnanian Enterprises Management Discusses Q3 2012 Results - Earnings Call Transcript

Hovnanian Enterprises (HOV)

Q3 2012 Earnings Call

September 06, 2012 11:00 am ET

Executives

Jeffrey T. O'Keefe - Director of Investor Relations

Ara K. Hovnanian - Chairman, Chief Executive Officer and President

J. Larry Sorsby - Chief Financial Officer, Executive Vice President and Director

Brad G. O'Connor - Chief Accounting Officer, Vice President and Corporate Controller

Analysts

Jason A. Marcus - JP Morgan Chase & Co, Research Division

Michael Dahl - Crédit Suisse AG, Research Division

Ivy Lynne Zelman - Zelman & Associates, Research Division

Susan Maklari - UBS Investment Bank, Research Division

Joel Locker - FBN Securities, Inc., Research Division

Nishu Sood - Deutsche Bank AG, Research Division

Adam Rudiger - Wells Fargo Securities, LLC, Research Division

Susan Berliner - JP Morgan Chase & Co, Research Division

Michael S. Kim - CRT Capital Group LLC, Research Division

Andrew Casella - Imperial Capital, LLC, Research Division

Joshua Pollard - Goldman Sachs Group Inc., Research Division

Presentation

Operator

Good morning, and thank you for joining us today for Hovnanian Enterprises Fiscal 2012 Third 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 listen only mode. Management will make some opening remarks about the third quarter 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 Investor Relations page of 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 turn the call over to Jeff O'Keefe, Vice President of Investor Relations. Jeff, please go ahead.

Jeffrey T. O'Keefe

Thank you. I'm just going to read a -- some forward-looking statements very quickly.

All statements during this conference call that are not historical facts should be considered as forward-looking statements. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of the company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, we can give no assurance that such plans, intentions or expectations will be achieved. Such risks and uncertainties and other factors include but are not limited to, changes in general and local economic and industry and business conditions and impacts of the sustained homebuilding downturn; adverse weather and other environmental conditions and natural disasters;

Changes in market conditions and seasonality of the company's business; changes in home prices and sales activity in the markets where the company builds homes; government regulation, including regulations concerning development of land, the homebuilding sales and customer financing processes, tax laws and the environment; fluctuations in interest rates and the availability of mortgage financing; shortages in and price fluctuations of raw materials and labor; the availability and cost of suitable land and improved lots; levels of competition; availability of financing to the company; utility shortages and outages or rate fluctuations; levels of indebtedness and restrictions on the company's operations and activities imposed by the agreements governing the company's outstanding indebtedness; the company's sources of liquidity; changes in credit ratings; availability of net operating loss carryforwards; operations through joint ventures with third parties; product liability litigation, warranty claims and claims by mortgage investors; successful identification and integration of acquisitions; significant influence of the company's controlling stockholders; changes in tax laws affecting the after-tax cost of owning a home; geopolitical risks, terrorist acts and other acts of war; and other factors described in detail in the company's annual report on Form 10-K for the year ended October 31, 2011 and the company's quarterly report on Form 10-Q for the quarterly period ended April 30, 2012. Except as otherwise required by applicable securities laws, we are undertaking no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, changed circumstances or any other reason.

With that out of the way, I'll now turn the call over to Ara Hovnanian, our Chairman, President and Chief Executive Officer. Ara, go ahead.

Ara K. Hovnanian

Thanks, Jeff and thank you all for participating in this morning's call to review the results of our third quarter, and 9 months ended July 2012. Joining me today from the company are Larry Sorsby, Executive Vice President and CFO; Brad O'Connor, Vice President, Chief Accounting Officer and Corporate Controller; David Valiaveedan, Vice President of Finance and Treasurer; and Jeff O'Keefe, Vice President of Investor Relations.

On Slide 3, you can see a brief summary of our third quarter results and comparisons to the prior year's third quarter. All in all, we had a solid quarter by every metric. Our net contracts increased 32% on a dollar basis and the number of contracts were up 19%. Although we opened 22 new communities during the quarter, our community count declined slightly to 194 compared to 202 at the end of July last year. This decline was primarily due to selling through communities much more quickly than we anticipated with our solid sales pace. Compared to this year's second quarter, we had a decrease of 5 communities sequentially. The dollar value of our contract backlog and total revenues both rose more than 35% during the third quarter. Our land-related charges were significantly lower at less than $1 million. Our gross margin increased 290 basis points and SG&A, as a percentage of sales, decreased 390 basis points. As a result, our pretax income improved dramatically, just shy of breakeven at a loss of $1.8 million compared to a pretax loss of $56 million the year before. Our net income for the third quarter was positive $34.7 million compared to a net loss of $50.9 million last year. The current year includes a $37 million reversal of state tax reserves related to previously uncertain tax positions that have effectively been settled.

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