Hovnanian Enterprises, Inc. (HOV)
Q4 2008 Earnings Call Transcript
December 17, 2008 11:00 a.m. ET

Executives

Ara K. Hovnanian – President, Chief Executive Officer & Director
J. Larry Sorsby – Chief Financial Officer, Executive Vice President & Director
Brad O’Connor – Vice President and Corporate Controller

Analysts

David Goldberg - UBS
Dan Oppenheim - Credit Suisse
Ivy Zelman - Zelman & Associates
Michael Rehaut - JP Morgan Securities, Inc.
Rob Hansen - Deutsche Bank
Megan Talbott McGrath - Barclays Capital
Joel Locker - FBN Securities
Timothy Jones - Wasserman & Associates
Alex Barron - Agency Trading Group
James Wilson - JMP Securities
Cheryl Van Winkle

Presentation

Operator

Good morning and thank you for joining us today for Hovnanian Enterprises fiscal 2008 year-end earnings conference call. By now you should have all received a copy of the earnings press release. However, if anyone is missing a copy and would like one, please contact Donna Roberts at 732-383-2200. We will send you a copy of the release and ensure you are on the company’s distribution list.

There will be a replay of today’s call. This telephone replay will be available after the completion of the call and run for one week. The replay can be accessed by dialing 888-286-8010, pass code 95838352. Again, the replay number is 888-286-8010, pass code 95838352. An archive of the webcast slides will be available 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 fourth 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 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 remind everyone that the cautionary language about the 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 the call over to Ara Hovnanian, President and Chief Executive Officer of Hovnanian Enterprises. Ara, please go ahead.

Ara K. Hovnanian

Good morning and thank you for participating in today’s call to review the results of our fourth quarter and fiscal year ’08. Joining me today 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 Jeff O’Keefe, Director of Investor Relations.

As you are well aware, the housing market remains challenging. Some of the obstacles we face today include rising unemployment levels, a steady stream of foreclosures, dwindling consumer confidence and continued disruptions in the credit and financial markets. This presents a very difficult backdrop for just about any industry today and makes for particularly hard times for home builders.

If you turn to Slide One, you can see the impact these factors have had on our full year results. We gave all this data and more in our press release which we issued yesterday so as we did in prior quarters. I’m not going to review all of the data points but instead I’m going to focus on the key parameters driving our performance and the current market conditions as well as what we’re doing to manage through this current time.

Our results are reflective of the challenging market conditions that persist and have, in fact, deteriorated since we reported our third quarter earnings in the beginning of September. Our goal today is to maximize cash flow even at the expense of margins. We are happy in this environment to clear land off of our balance sheet as long as our cash flow is positive.

On Slide Two you can see that with that broad operating principle in mind, we generated $175 million of cash flow during the fourth quarter of 2008. Increasing and preserving our cash position is very much a focus with every decision we make today. We ended the year with $838 million in cash as you see in Slide Three. This was slightly above the guidance of about $800 million of cash that we gave on September 3rd.

The world has changed a number of times since the beginning of September but we were able to reach our cash generation targets. Looking forward, given the continued deterioration in the housing market, generating cash flow is clearly going to be more challenging. However, we will continue to move forward with projects when cash flow makes sense in order to maximize our liquidity.

Of note, we do expect to get our federal tax refund in February of ’09 for about $145 million. On Slide Four, we show a breakdown of the 23,000 thousand plus lots that we have owned at the end of the year. Approximately 53% of those lots were 80% or more finished, 18% had between 30% to 80% of the improvement costs already in place, the remaining 29% were less than 30% finished.

Given the fact that more than half of the lots that we own are largely finished and our net contracts for ’08 were down 41% year-over-year we did not feel the necessity to spend a significant amount of cash on land development this year. We perform a lot recovery analysis to determine the amount of cash we can generate by building and selling a home on an owned lot. If we are unable to obtain a reasonable recovery of our land costs relative to the perceived long term value, we will mothball the community.