Hovnanian Enterprises (HOV)
Q4 2012 Earnings Call
December 13, 2012 11:00 am ET
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
Nishu Sood - Deutsche Bank AG, Research Division
Michael Jason Rehaut - JP Morgan Chase & Co, Research Division
Alan Ratner - Zelman & Associates, LLC
Michael Dahl - Crédit Suisse AG, Research Division
Megan McGrath - MKM Partners LLC, Research Division
Joel Locker - FBN Securities, Inc., Research Division
David Goldberg - UBS Investment Bank, Research Division
Jeremy W. Pinchot - Gilford Securities Inc., Research Division
Alex Barrón - Housing Research Center, LLC
Susan Berliner - JP Morgan Chase & Co, Research Division
Michael S. Kim - CRT Capital Group LLC, Research Division
Previous Statements by HOV
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Before we begin, I would like to turn the call over to Jeff O'Keefe, Vice President, Investor Relations. Jeff, please go ahead.
Jeffrey T. O'Keefe
Thank you. I'm going to read through our forward-looking statement very quickly. All statements during this conference 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, 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 activities in the markets where the company builds homes; government regulations, 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 on the company's annual report on the 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 undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason.
Now I'd like to 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 fourth quarter and year end of October 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 fourth quarter results and comparisons to the prior year. The homebuilding recovery continues to move forward. First, not necessarily in the order of the chart, we are reporting our first quarterly pretax profit before gains or losses from debt extinguishment in many years. This is a major milestone for us; hopefully, the first of many profitable quarters to come. Virtually every metric improved again except for community count, which I will discuss more fully in a moment. Throughout the year, we have made steady progress on our operating performance. We show the drivers of these improvements on Slide 4.
In the top left quadrant of the slide, you can see that we reported steady growth in our total revenues in each of the 4 quarters of fiscal '12. At the same time, our top line was growing. We reported 180 basis point improvement in gross margin from the beginning of the year, which can be seen in the upper right-hand portion of the slide. In fact, it's our sixth sequential quarterly improvement in gross margin.
On the bottom left-hand quadrant, we show quarterly SG&A percent in yellow bars and quarterly interest percentage in the red bars. The graph demonstrates the benefit of our operating leverage, which is the result of revenue growth while maintaining SG&A and interest dollars nearly constant.
During the fourth quarter, our SG&A ratio to total revenues declined to historically normal levels; and our interest ratio, while not yet at normalized levels, has decreased significantly. Due to our recent $800 million debt refinancing, which reduced our annual cash interest cost by $17 million, our future interest expense should decline even further going forward.
The net results of all of these positive trends is that for the fourth quarter of 2012, we reported the first profit before taxes and land and debt charges since the first quarter of 2007. In fact, the fourth quarter profit before taxes and losses on debt extinguishment, was a positive $2.8 million even after including land charges. As a reminder, Hurricane Sandy struck our Northeastern markets in the critical last closing days of our fiscal year end, delaying deliveries, affecting sales in that market and delaying cash from some homes that did close from being received until November. Fortunately, our delivery and net contract performance in markets less affected by the storm made up for some of the shortfall.
Let me take a step back and talk about our most recent net contracts data. If you turn to Slide 5. As I mentioned earlier, starting on the upper left-hand quadrant, you can see our net contract dollars increased by 46% comparing the fourth quarter to the prior year. The number of net contracts, including unconsolidated joint ventures, increased 23% during the fourth quarter, while our community count actually dropped 12% year-over-year, resulting in a 38% increase in net contracts per community. The dollar amount of contract backlog at the end of fiscal '12 increased 34% compared to the end of the prior year. Assuming stable market conditions, these increases in net contracts and contract backlog should lead to quarterly revenue growth in each quarter of fiscal '13 compared to the same quarters of fiscal '12.