Hovnanian Enterprises Inc (HOV)

HOV 
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Hovnanian Enterprises (HOV)

Q1 2013 Earnings Call

March 06, 2013 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

Analysts

David Goldberg - UBS Investment Bank, Research Division

Joey Matthews - Wells Fargo Securities, LLC, Research Division

Joel Locker - FBN Securities, Inc., Research Division

Michael Dahl - Crédit Suisse AG, Research Division

Alan Ratner - Zelman & Associates, LLC

Megan McGrath - MKM Partners LLC, Research Division

Nishu Sood - Deutsche Bank AG, Research Division

Alex Barrón - Housing Research Center, LLC

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

Presentation

Operator

Good morning, and thank you for joining us today for Hovnanian Enterprises Fiscal 2013 First Quarter Earnings Conference Call. An archive of this webcast will be available after the completion of the call and run for 12 months. This conference is being recorded for rebroadcast. [Operator Instructions] Management will make some opening remarks about the first quarter results and then open 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 of the company's website at www.khov.com. Those listeners who would like to follow along should log on to the website at this time. 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 very much. I'm going to read through our forward-looking statements very quickly. All statements during this conference that are not historical fact 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, 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 activities 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 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 acquisition; 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 Form 10-K for the year ended October 31, 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 K. Hovnanian

Thanks, Jeff and thank you all for participating in this morning's call to review the results of our first quarter ended January 2013. 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.

Starting on the top left-hand corner of Slide 3, we show that our new order trends have continued the robust growth that we experienced last year with net contract dollars, including unconsolidated joint ventures, posting year-over-year increases of 42%. Moving across the top of the slide, our net contract increased 25% on a unit basis despite a slight drop in our active selling communities. That resulted in a 43% increase in net contracts per community, which we shown in the lower left-hand corner. The dollar value of our backlog increased by 40% during the first quarter to $812 million. Continuing with our first quarter performance, please turn to Slide 4. Here, we showed our total revenues increased 33%, which is shown on the top left-hand quadrant. On the upper right-hand side, you see that our gross margin expanded 50 basis points year-over-year during the first quarter. While we'll discuss this in more detail momentarily, I'm pleased to say we expect continued growth in gross margins in the later quarters of this year. As you can see in the lower left-hand quadrant, the increases in our total revenues allowed us to leverage our fixed costs. As such, both SG&A as a percentage of sales and total interest as a percentage of sales were significantly lower during the first quarter of 2013 compared to last year's first quarter. Finally, in the lower right-hand corner, loss before debt and land-related charges was $20 million in the first quarter of '13 compared to $34 million in the first quarter of last year.

Turning to Slide 5, given the size and gross margin of our contract backlog and assuming market conditions and our current sales pace remains steady, we are pleased to report that and project our return to profitability through the full fiscal '13. We expect our deliveries, revenues and gross margins to increase in fiscal '13 compared to fiscal '12 with the greatest improvements in these metrics to occur during the second half of the year. In addition, we're optimistic that the recent increases in the pace of net contracts we've reported will continue and could lead to the best spring selling season in years.

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