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Edited Transcript of HOV earnings conference call or presentation 7-Mar-19 4:00pm GMT

Q1 2019 Hovnanian Enterprises Inc Earnings Call

RED BANK Mar 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Hovnanian Enterprises Inc earnings conference call or presentation Thursday, March 7, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ara K. Hovnanian

Hovnanian Enterprises, Inc. - President, CEO & Chairman of the Board

* Brad G. O’Connor

Hovnanian Enterprises, Inc. - VP, CAO & Corporate Controller

* J. Larry Sorsby

Hovnanian Enterprises, Inc. - Executive VP, CFO & Director

* Jeffrey T. O'Keefe

Hovnanian Enterprises, Inc. - VP of IR

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Conference Call Participants

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* Alex Barrón

Housing Research Center, LLC - Founder and Senior Research Analyst

* Arjun C. Chandar

JP Morgan Chase & Co, Research Division - Research Analyst

* Mary Ross Gilbert

Imperial Capital, LLC, Research Division - MD of Institutional Research Group

* Megan McGrath

* Thomas Patrick Maguire

Zelman & Associates LLC - Senior Associate

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Presentation

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Operator [1]

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Good morning, and thank you for joining us today for Hovnanian Enterprises Fiscal 2019 First 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. (Operator Instructions) Management will make some opening remarks about the first 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 page of the company's website at www.khov.com. (Operator Instructions)

Before we begin, I would now like to turn the call over to Jeff O'Keefe, Vice President, Investor Relations. Jeff, please go ahead.

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Jeffrey T. O'Keefe, Hovnanian Enterprises, Inc. - VP of IR [2]

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Thank you, Gigi, and thank you all for participating in this morning's call to review the results for our first quarter, which ended January 31, 2019. All statements in this conference call that are not historical facts should be considered as forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

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. Such forward-looking statements include, but are not limited to, statements related to the company's goals and expectations with respect to its financial results for future financial periods.

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. By their nature, forward-looking statements speak only as of the date they are made, are not guarantees of future performance or results and are subjects to risks, uncertainties and assumptions that are difficult to predict or quantify. Therefore, actual results could differ materially and adversely from those forward-looking statements as a result of a variety of factors. Such risks, uncertainties and other factors are described in detail in the sections entitled Risk Factors in Management's Discussion and Analysis, particularly the portion of MD&A entitled Safe Harbor statement, in our annual report on Form 10-K for the fiscal year ended October 31, 2018, and subsequent filings with the Securities and Exchange Commission.

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.

Joining me today on the call are Ara Hovnanian, Chairman, President and CEO; Larry Sorsby, Executive Vice President and CFO; Brad O'Connor, Vice President, Chief Accounting Officer and Controller; and David Bachstetter, Vice President, Finance, and Treasurer.

I'll now turn the call over to Ara. Ara, go ahead.

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Ara K. Hovnanian, Hovnanian Enterprises, Inc. - President, CEO & Chairman of the Board [3]

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Thanks, Jeff. I'm going to review our operating results for the first quarter and also talk about the current sales environment. As usual, Larry will follow me in more detail.

Our overall first quarter results were in line with our guidance, met our expectations, and exceeded consensus estimates for pretax profits. Because we realized sales are an issue that are top of mind for the industry and for Hovnanian, I'd like to begin by talking about sales, starting with Slide 4.

At first blush, contracts per community for the quarter looked weak, declining from 7.6 last year to 7 this year. However, as you look closer into the monthly data on Slide 5, you see a slightly different picture. The slide shows monthly contracts per community for each of the past 12 months. The most recent month is in blue and the same month a year ago is in gray.

The quarter clearly began with a very weak November compared to last year. We reported that during our year-end call. Fortunately, you can also see that December and January reversed that trend with contracts per community similar to last year.

While I'm happy to say that the most recent month of February, the first month of our second quarter, strengthened further. February sales results were slightly ahead of last year's strong results. Our February sales pace increased from 3.3 contracts per community last year to 3.4 this year.

We're especially pleased to report that the absolute number of contracts in February were also slightly better than last year's February contract at 503 contracts compared to 528 contracts a year ago. This was a combination of a good sales pace and slight year-over-year growth in community count. We're optimistic that the improved February results, as well as a growing community count, bode well for the rest of the spring selling season.

Anecdotally, I can tell you that I've toured several different geographies over the past weeks, in the greater D.C. market, in Florida and in Southern California. There's definitely a reinvigorated sense of excitement and energy in the sales offices. While I'd like to say I only felt that energy in our sales offices, the reality is that there was a similar enthusiasm in our competitors' sales offices. That was not the case in the past fall.

I will say that the higher price points, especially in California, did not share that same enthusiasm. On the whole, however, we've been shifting our mix slightly to lower price points in general and have only 2 high-priced communities in California.

Another anecdotal observation is that our sales associates report that mortgage rates returning to prior lower levels added momentum to our buyers' positive outlook.

In general, while we used incentives a little more liberally during the past few months, our current backlog has margins similar to what we delivered in the first quarter as lower lumber prices helped offset the use of this incentive.

So that's the highlight of our leading indicator contract. Let me get back to the full results for the quarter. Slide 6 begins with revenues. We show consolidated revenues in gray and joint venture revenues in blue. As you can see, consolidated revenues declined, but joint venture revenues increased by a similar amount. If you treated unconsolidated joint venture revenues as if wholly owned, our 2019 first quarter revenues were virtually flat compared to last year.

While we're certainly not happy with flat revenues, considering the lower community count that we had and the slower selling environment last fall, it was a reasonable achievement. The decline in consolidated revenues is primarily because we moved some wholly owned communities to unconsolidated joint ventures in 2016. As we discussed many times, that was a period when the high-yield market was close to us and we needed to raise liquidity to pay off maturing bond debt. This was the third quarter in a row where the combined level of JV and consolidated revenues has been close to or greater than it was for the same period a year ago. Again, this occurred despite the declines in community count during the prior year.

As we increased our community count as we did sequentially this quarter, the growth in storefronts should lead to future growth in revenues and, ultimately, to pretax profit.

Now turning to Slide 7. In the top left-hand portion of the slide, you can see that our gross margin was 17.8% for the first quarter of 2019. In spite of some of the extra incentives we offer to sell spec homes in the slower fall and holiday period, it's essentially flat compared to last year.

In the upper right-hand portion of the slide, you can see that our total SG&A dollars were down 3% year-over-year, from $62 million last year to $60 million in this year's first quarter.

As is typical during our first quarter, our SG&A ratio remains high. It's even more challenging this year as we're growing our community count. There are costs associated with opening new communities, but there are initially no deliveries from these communities to help offset these extra costs.

Once we start to get deliveries from these new communities, we would expect to be able to leverage our costs and get our SG&A ratio back to the normalized 10% range.

On the bottom of the slide, we show that our interest expense was lower during the first quarter of 2019 at $33 million compared to $41 million last year. Interest was lower, primarily due to the steps we took in fiscal '18 to refinance our unsecured debt. Further, our inventories under development increased, resulted -- resulting in more interest being capitalized into inventory.

On Slide 8, we show that our income from joint ventures increased to $10 million profit in this year's first quarter compared to a loss of $5 million in last year's first quarter. Our income from joint ventures has been strong for the past 3 quarters.

Turning to Slide 9. Here, we show that we reported a first quarter adjusted pretax loss before charges and impairments of $16 million compared to a loss of $29 million last year. As we expected, the loss was significantly less than what we reported in the same quarter a year ago. Our first quarter is typically the slowest quarter of the year. And as you can see on the right side of the slide, despite the loss in last year's first quarter, we are still profitable for the full year last year. While we're not satisfied with the loss in the quarter, the substantial improvement over last year gives us confidence in our 2019 full year's performance. As usual, the last half of the year should substantially outperform the first half. While we anticipate a weaker second quarter compared to last year, we expect the first half of this year will continue to show improvement over last year's first half.

Turning to Slide 10. We believe we turned a corner with respect to the declines in our community count and have finally shown growth in communities. That was an important step forward toward our goal of ultimately growing our revenues and achieving higher levels of sustainable profitability. Our consolidated community count increased 11% sequentially during the first quarter.

As you can see on the slide, we grew from 123 consolidated communities at the end of October to 137 at the end of January. Our total community count, which includes JVs, also increased sequentially from 142 communities at year-end to 153 communities at the end of the first quarter.

We're pleased to report the sequential increase, consistent with the previous guidance that sequential growth would occur in the first half of this year. We expect our community count will continue to grow in the second quarter of 2019. The increased community count should lead to increased sales in future quarters, even if the housing market is a little sluggish.

I'll now turn it over to Larry Sorsby, our Executive Vice President and Chief Financial Officer.

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J. Larry Sorsby, Hovnanian Enterprises, Inc. - Executive VP, CFO & Director [4]

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Thanks, Ara. Ara began with a granular monthly view of sales. If you turn to Slide 11, you can see another view of contracts per community with longer-term trends. On the far left-hand side of the slide, we show our annual contracts per community from 1997 to 2002. We averaged 44 contracts per community during a time period that was neither a boom nor a bust for the housing industry.

On the center portion of the slide, you can clearly see the steady growth in contracts per community for each of the past several years. On the far right-hand portion of the slide, we show that net contracts per community for the trailing 12 months ended January 31, 2019 were 35.7 compared to 35.1 for the trailing 12 months ended January 2018. We are gradually migrating back to normal absorption levels.

During the first quarter, our contract cancellation rate, including cancellations from joint venture communities, increased to 23% from 20% in the same period last year.

On Slide 12, you can see in gray, the 30-year mortgage rate trends over the past year; and in blue, our monthly cancellation rate trends over that same period. In February of 2018, the 30-year mortgage rate was about 4.4%, an increase to around 4.6% by April of '18. Mortgage rates then stayed relatively steady until September when they spiked up and peaked at close to 5% in November of 2018. By February 2019, rates have fallen back to about 4.35%, the lowest level in the past 12 months.

During the past year, we believe there's a correlation between mortgage rate trends and our monthly cancellation rates. As mortgage rates started to increase in March last year, we saw our cancellation rates began to modestly increase as well. When mortgage rates spiked up starting in September to a November peak of almost 5%, our cancellation rate peaked in November at 26%. We believe that as mortgage rates rose last year, it caused our cancellation rate to increase as some of our customers were unable to sell their existing homes or were concerned about the impact of rising mortgage rates on their monthly payments.

Since that 26% November peak, our cancellation rate declined to 24% in December, and then to more normalized levels in January and February of 20% and 18%, respectively. Mortgage rates over that same period -- same time period fell. And today, 30-year mortgage rates are back down to 4.35%, just a bit lower than the level they were at in February last year.

Recently, oil prices have once again trended downwards, and we're getting more questions about how our Houston operations are performing.

Turning to Slide 13. You can see that for the first quarter, our sales pace per community in Houston increased to 5.9 homes from 5.4 homes in the same period last year. Although our Houston pace improved year-over-year, we did spur activities slightly with more aggressive concessions. As a result, during the first quarter, our gross margin in Houston was slightly lower year-over-year. Although we expect Houston margins to get a small benefit from lower lumber cost in future periods, we believe margins will remain similar to the levels we achieved during the first quarter.

Now I'm going to provide more detail on our continued efforts to grow our community count.

Turning to Slide 14. We show our total consolidated lots controlled at the end of the first quarter increased 11% year-over-year. Our option lot position increased by 22%, while our owned lot position actually decreased by 1%. The increase in our lots controlled through option contracts gives us considerable flexibility. We are aware of the housing market choppiness in recent months and remain disciplined to our underwriting standards of using current home sales price, sales pace and construction costs when purchasing new land parcels. Specifically, we look at recent home sales prices, net of incentives, of our competitors in determining the correct current pricing. Similarly, we look at our competitors most recent 13-week sales pace and seasonally adjust them for the full year. In the recent quarter, these metrics reflected a -- well in the market. While land sellers are generally slow to adjust land prices down, they have been willing to make minor adjustments to terms that help returns.

The result is that we've been able to find land acquisitions that underwrite to our standards, and we're pleased with the recent acquisitions we have made. Our proven ability to utilize options to grow our land home is -- also provides us with a built-in market hedge.

If you turn to Slide 15, you can see our year's supply of total lots controlled, both owned and option, compared to our peers. Our year supply of lots ranks just above medium. However, we control a higher percentage of our lots via options compared to most of our peers. This becomes clear on Slide 16. Here, you can see that we have the third highest percent of land controlled via options. As I pointed out earlier, all of our year-over-year growth in our land position was through increases in our option land position rather than owned. We continued to use options as much as possible in order to both achieve high inventory turns and to reduce land risk.

We have been getting a lot of questions recently about our spec strategy. We believe that it is prudent to have a few started unsold homes on hand in each of our communities to accommodate buyers who are looking to move in quickly.

On Slide 17, we show that we had 4.4 started unsold homes per community at the end of the first quarter of 2019. There really has been no change in our strategy with respect to started unsold homes, since the third quarter of 2014, we have ranged between 3.7 and 4.6 starting (sic) [started] unsold homes per community. We have averaged 4.6 started unsold homes per community since 1997. We remain very comfortable with our spec home position.

As is typical, we are more aggressive with the use of incentives on these started unsold homes or spec homes compared to our to-be-built homes. We were hoping the recent trend in lower lumber prices would have benefited margins, but in reality, lower lumber costs have offset the slightly more aggressive incentives we've recently been offering on spec homes.

Looking at all of our consolidated communities in the aggregate, including mothballed communities and the $113 million of inventory not owned, we have an inventory book value of $1.2 billion net of $235 million of impairments.

We believe one of the key pure operating metrics for the homebuilding industry is EBIT to inventory. This metric neutralizes the impact of debt. On Slide 18, we show the trailing 12-month EBIT to inventory for us and our peers. This ROI metric measures pure operating performance before interest expense. We remain in the top half when compared to our peers on this metric. This metric has been challenging for us recently as we returned our focus to growth and have made new investments in land parcels that are not yet generating revenues. As these new investments start generating profits, we expect our EBIT to inventory performance will bounce back to the higher levels we achieved a year or 2 ago. We and the entire industry are still not at normalized ROI levels, but we believe this will improve as we get further into the housing industry's recovery. One of the ways we're able to achieve this is by maintaining our focus on high inventory turns.

Turning now to Slide 19. Compared to our peers, you see that we have the second highest inventory turnover rate over the trailing 12 months. Although we lag NVR's industry leading turnover number, our turns are 42% higher than the next highest peer below us. High inventory turns are a key component of our overall strategy.

Another area for discussion is related to our deferred tax asset valuation allowance. Our deferred tax asset valuation allowance is very significant and not currently reflected on our balance sheet. We've taken numerous steps to protect it. As of January 31, 2019, our valuation allowance in the aggregate was $640 million. We will not have to pay federal cash income taxes on approximately $2 billion of future pretax earnings.

On Slide 20, we show that we ended the first quarter with a total shareholders deficit of $470 million. If you add back our valuation allowance, as we've done on this slide, then our shareholders' equity would be a positive $170 million. Over time, we believe that we can repair our balance sheet and have no current intentions of issuing equity anytime soon.

As most of you are aware, our shareholders will be voting on a reverse stock split at our shareholders meeting on March 19. Both [ISS] and Glass Lewis have recommended that shareholders vote in favor of the reverse split. We expect a reverse split proposal will be approved.

Now let me comment on our current liquidity position. As seen on Slide 21, after spending $141 million on land and land development, we ended the first quarter with liquidity of $215 million, which is well within our targeted liquidity range of between $170 million and $245 million. We continue to add sources of liquidity to further grow our land position, which ultimately should drive increases in our community count.

On Slide 22, we show our maturity profile as it looked at January 31, 2019. The first of the larger maturities occur in about 3 years from now. We are confident that our performance will improve in the intervening years, allowing for a smooth refinancing in the future.

Let me turn it back to Ara for some brief closing remarks.

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Ara K. Hovnanian, Hovnanian Enterprises, Inc. - President, CEO & Chairman of the Board [5]

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Thanks, Larry.

On our call last quarter, I spoke about our efforts to increase our first-time product through offering Aspire communities. We're glad that we've increased our presence with this low-priced offering because that end of the market seems to be holding up better in most geographies.

We continue to believe that offering a broad product offering is the right path for us. But throughout the cycle, of course, there are times when you wish you had more of one product type than another.

Right now, our Aspire communities are a good place to have a little more exposure.

We've had good success in our active adult communities as well, which is another strategic focus I've discussed on prior calls. The early stages of the spring selling season are off to a good start. We're pleased with our positioning, and we look forward to getting more communities open, and soon after, delivering more homes. We're confident that top line growth will leverage our SG&A and interest costs and improve our bottom line performance in the future.

That concludes our formal remarks, and we're happy to open it up for questions now.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Thomas Maguire from Zelman.

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Thomas Patrick Maguire, Zelman & Associates LLC - Senior Associate [2]

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Just wanted to quickly touch base on the order trends. You talked about the relative improvement through the quarter and then absorption activity up year-over-year in February. I guess just in your view, what's driving that? Is it just mortgage rates? Is that the only piece? And just more broadly, can you talk a little bit more about today's sales environment relative to a few months ago?

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Ara K. Hovnanian, Hovnanian Enterprises, Inc. - President, CEO & Chairman of the Board [3]

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Sure. I think mortgage rates, clearly, are a big driver. I'd also say there's -- with a little less fear about big trade wars coming up, that gives a little more confidence. And in spite of this morning's drop in the Dow, in general, there's been just a little less volatility in the stock market. So I think when you combine all of those together, that's been a helpful overall environment. And in general, obviously, we just ended February, so that's pretty current. We are 7 days into March, and I'd say we continue to feel encouraged with the results so far. It's very early, but so far, so good.

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Thomas Patrick Maguire, Zelman & Associates LLC - Senior Associate [4]

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That's really good to hear. And then you just talked about the higher-end activity in California still being weak. I mean, have you seen any improvement there at all on a relative basis, understanding it's still more depressed? And then maybe if we just move out the California, would you say those comments hold for the high-end in other markets, or how would you think about high-end trends outside of that California?

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Ara K. Hovnanian, Hovnanian Enterprises, Inc. - President, CEO & Chairman of the Board [5]

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Sure. I'd say Southern California, we have one higher-end community, and that has improved a bit, but it's improved because there've been more concessions and incentives. In Northern California, it's improving a little bit, but we only have one community, really, over the higher-end in Northern, but we haven't been as aggressive with incentives. In Northern New Jersey, we have some higher-end communities. And interestingly, there, it's held quite well. So it's without doing much in incentives. And in fact, in some of them, we've actually been able to adjust prices upward a little bit. So it's definitely been a mixed bag. But in general, I'd say the performance of our lower-priced community and active adults have done a little better than the higher-priced communities.

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Operator [6]

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Our next question is from Arjun Chandar from JPMorgan.

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Arjun C. Chandar, JP Morgan Chase & Co, Research Division - Research Analyst [7]

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Can you talk a little bit more on a consolidated basis about the evolution of incentives in the quarter? You just mentioned that in Southern California, you had to increase concessions and incentives a little bit during the quarter, but I wanted to get a sense from November versus December, January, February, how that incentive offering has evolved over the course of the last 4 months.

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Ara K. Hovnanian, Hovnanian Enterprises, Inc. - President, CEO & Chairman of the Board [8]

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Yes. I'd say we were less aggressive in November, but -- and I think you saw the corresponding slow sales in November. And then I'd say we got a little more aggressive after that. There hasn't been a big change between January, December and February anecdotally. I don't have the exact numbers. But really, it hasn't changed dramatically. It just feels like the combination of some of the incentives we did adjust, and many in the market adjusted in December, combined with lower rates and just a little more enthusiasm in the market and confidence, is what really spurred sales after November.

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J. Larry Sorsby, Hovnanian Enterprises, Inc. - Executive VP, CFO & Director [9]

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Yes. Arjun, I would also add that, I mean, I don't want anybody getting off this call and thinking that we're across the board doing incentives and concessions. It's very community-specific and market-specific where we have communities that are falling behind our expected sales pace, and the problem isn't presentation or sales associate, we just think it's market-driven. We will add incentives. We also closely monitor what our peers are doing. And as I mentioned on the call, the incentives -- the extra incentives have been more focused on started and unsold homes rather than to-be-built.

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Arjun C. Chandar, JP Morgan Chase & Co, Research Division - Research Analyst [10]

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And just a follow-up on the balance sheet. You had a nice sequential improvement in owned inventory from the October quarter to the January quarter, clearly deployed some of your cash to spend on land in the quarter. But when I look at the old secured groups adjusted collateral ratio, it was down sequentially. How can we reconcile the 2 numbers, both the consolidated inventory number with what we see in the adjusted collateral ratio for the old secured group?

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Brad G. O’Connor, Hovnanian Enterprises, Inc. - VP, CAO & Corporate Controller [11]

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So a few things that impact the collateral ratio you're seeing is in the quarter, we pay -- the first and third quarters are the larger quarters for our interest payments. So you see the cash go down as a result of interest payments as opposed to being spent into inventory. The other big item is some of the inventory spend in the quarter, as we talked about our option, our lots going up, we put down deposits, and there's some predevelopment dollars that are spent on lots that are under option. That property can't be mortgaged and is not in the inventory numbers and collateral. It will eventually become collateral when we take down those properties. But in the interim, it's not. So there was about an increase of about $21 million in that spend, so you don't see that yet reflected in the collateral, but it will be in the future. And then the last item is if you look at the liabilities, accounts payable on our liabilities are down $38 million from October, and that comes out of cash without a corresponding increase in inventory. It would already -- been in the inventory at the time that the accounts payable was created. In the first quarter, we typically have a lot of accounts payable spend because we build up accounts payable in the fourth. The other big item is that the annual bonuses are accrued at year-end and they're paid during the first quarter, so you see the cash go out there. So those are the items that they're seeing, decreasing the collateral ratio in the first quarter.

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Operator [12]

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Our next question is from Megan McGrath from Buckingham Research.

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Megan McGrath, [13]

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Just wanted to follow up a little bit on your February comments and looking out over the next couple of months. How are you feeling about the comparison in March and April? Looking at your monthly chart, they look pretty tough, but maybe give us some historical perspective there.

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J. Larry Sorsby, Hovnanian Enterprises, Inc. - Executive VP, CFO & Director [14]

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I'm not so sure I heard -- how are margins? Is that what you asked? I'm not sure...

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Megan McGrath, [15]

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No, no. The order compare. It looks like the compare in March and April looks pretty difficult this year.

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J. Larry Sorsby, Hovnanian Enterprises, Inc. - Executive VP, CFO & Director [16]

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Yes. Well, all indications from my perspective at this point. I mean, we start with February being above last year's difficult comparisons, so we're very encouraged. The spring selling season is off to a strong start. And time will tell, but we're hopeful that we'll be around the same level we were in March and April of last year based on our recent February results.

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Ara K. Hovnanian, Hovnanian Enterprises, Inc. - President, CEO & Chairman of the Board [17]

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Megan, I understand where the comment is coming from. We certainly had a great March last year. It was at 3.8 sales per community. But February of this year was 3.4, and March is typically a little bit better than February. So hopefully, we will see a similar seasonal climb that we see every year in March. So it's a big number, but it usually is a big number. March and April and May are big months in the season.

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Megan McGrath, [18]

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Okay. That's helpful. And Larry, a little follow-up on your commentary on the lumber prices versus incentives. Obviously, hard to call with all the volatility in lumber. But the recent move down in lumber, do you think that's for -- fully incorporated into your margin? Or should there be continued incremental benefit going forward as those lumber prices gets passed along to you?

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J. Larry Sorsby, Hovnanian Enterprises, Inc. - Executive VP, CFO & Director [19]

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Clearly, there's going to be incremental lower cost of lumber reflected in our margins. We just think that, that lower cost, rather than having a net increase in margins, is just going to offset some of the incentives that we've offered up there. So we're just not expecting -- what we would have hoped was that it would accrue to a benefit in margins. But because we've tweaked incentives upward, I think it's going to push from a margin perspective.

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Megan McGrath, [20]

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Got you. And then if I could sneak one more in. In terms of the West Coast, you talked about the high end in the West Coast, but can you give us any commentary on the general California market?

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Ara K. Hovnanian, Hovnanian Enterprises, Inc. - President, CEO & Chairman of the Board [21]

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Yes. I'd say the low-end on the West Coast, both Northern and Southern California, is doing quite nicely, particularly our Aspire lines are doing very nicely in California.

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Megan McGrath, [22]

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Better than they have been in 4Q?

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Ara K. Hovnanian, Hovnanian Enterprises, Inc. - President, CEO & Chairman of the Board [23]

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Well, it's hard to say because we've been growing our Aspire line. But I can't say I honestly looked specifically at the fourth Q, but it -- I would guess, just my gut feeling is, yes, I'd say the pace is a little bit better now than it was in general in the fourth Q in California.

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J. Larry Sorsby, Hovnanian Enterprises, Inc. - Executive VP, CFO & Director [24]

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Yes. Let me answer it this way, Megan. I would say that we saw some of our Northern California communities get behind their expected pace in November and December, and we saw the -- them claw that negative budget variance to a positive variance by the end of February. So it just feels like it's bouncing back overall pretty nicely.

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Operator [25]

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Our next question is from Mary Gilbert from Imperial Capital.

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Mary Ross Gilbert, Imperial Capital, LLC, Research Division - MD of Institutional Research Group [26]

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So I had a question with regard to the time line to achieve your targets, for example, $275 million of EBITDA. What kind of time horizon can it take to get there? And then number two, following up on the question regarding the collateral coverage with regard to the old group. Is there an idea of how we could -- given that there is seasonality negatively impacting that coverage ratio in the first quarter, how we can look at it on an average basis kind of going forward, just so that we're kind of [evening] out the seasonality impact, especially since the Q1 is lower and with the drawdown first in purchases that you made in the accounts payable, et cetera? That would be super helpful.

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Ara K. Hovnanian, Hovnanian Enterprises, Inc. - President, CEO & Chairman of the Board [27]

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So let me start. I think what you're referring to is our key metric targets that we talked about last summer. I think at that point in time, we said it would be a few years to achieve them. We didn't get uber specific. I think that as we're seeing the market bounce back, that we still think we're on target to achieve that over the next few years. Maybe just a few months of setback with the market level we had, but assuming the market is returning, which certainly, our results seem to indicate that it is, I think we're still on target to achieving those key metric targets in the future. With respect to the collateral coverage, I may defer to Brad O'Connor, who was speaking earlier, but I think it's a very difficult number for us to project. As we look at individual communities, it depends on whether we put them in the new group or the old group, that's determined by which group has more excess liquidity. We don't make a determination to put one type of product into one group and another type of product into the other group. We do have seasonal interest rates. I don't think there's any interest payment on the old group that this next quarter, so there shouldn't be a deterioration from an interest rate perspective. But if you compare it to the new group, I mean, it's just more leverage in the old group than there is new group, and it does have an impact over time. I don't know, Brad, whether you have...

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Brad G. O’Connor, Hovnanian Enterprises, Inc. - VP, CAO & Corporate Controller [28]

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The recommendation to try to adjust for the seasonality or the quarterly impact, my recommendation would be to look at last year and the trends that occur within there each quarter, that would be the best marker. Because the debt payments I talked about, the accounts payable I talked about, are seasonal type things that should reflect results the same way in fiscal '19. So that would be my best recommendation.

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Mary Ross Gilbert, Imperial Capital, LLC, Research Division - MD of Institutional Research Group [29]

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Okay. That's very helpful. And then also, as you weigh the opportunities in continuing to increase your control of land and making those investments and achieving your ROI, I just wondered how you weigh any potential opportunity in looking at the debt, particularly in the old group that has traded off to a fairly low level with the big coupon, if that kind of weighs into how you're looking at any source of capitalizing on that sales return.

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J. Larry Sorsby, Hovnanian Enterprises, Inc. - Executive VP, CFO & Director [30]

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Yes. I mean, historically, we've certainly, from time to time, when the yields start getting attractive as compared to new land purchase, we've demonstrated historically that we do look at buying back debt, and actually do buy some debt back. Certainly, the yields on the old group are approaching those kinds of levels. We have to balance that with when we buy a new land parcel, it absorbs some overhead. So that's another thing that goes into our decision-making factor. But safe to say, if yields continued to fall, we will -- or excuse me, rise, it will be a more interesting alternative investment for us to give serious thought to.

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Operator [31]

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(Operator Instructions) And our next question is from Alex Barrón from Housing Research Center.

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Alex Barrón, Housing Research Center, LLC - Founder and Senior Research Analyst [32]

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I'm not sure if I heard, or wondering if you can provide any comments or guidance on where you think the margins are going to go next quarter and the remainder of the year.

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J. Larry Sorsby, Hovnanian Enterprises, Inc. - Executive VP, CFO & Director [33]

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I don't think we gave anything specific as a projection there. But I think our comments, the margins were somewhere in the first quarter. We don't expect any real benefit from the lower lumber cost. We've seen that offset the incentives. So kind of put that into your calculus as you try to run your model. We just didn't give any specific guidance. I don't think it's going to move a lot one way or the other. I'll put it that way.

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Alex Barrón, Housing Research Center, LLC - Founder and Senior Research Analyst [34]

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Got it. And with regards to the SG&A, so you guys had a kind of lower numbers towards the end of the back half of last year. Do you think this year is going to be closer to what this quarter looked like? Or more...

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Ara K. Hovnanian, Hovnanian Enterprises, Inc. - President, CEO & Chairman of the Board [35]

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No, no. We often -- we almost always have lower SG&A percentages at the end of the year, and it's not so much that the spend varies dramatically, but our revenues typically go up in the last half of the year. So when you apply a more consistent SG&A dollars with higher top line revenues in the later quarters, that brings our ratios down at the later parts of the year. So we'd absolutely intend on having lower SG&A than what we just reported as a percent.

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Alex Barrón, Housing Research Center, LLC - Founder and Senior Research Analyst [36]

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Right. But I'm saying, do you think the dollars will be similar, closer to what this quarter was, or closer to the dollars reported in the back half of last year?

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J. Larry Sorsby, Hovnanian Enterprises, Inc. - Executive VP, CFO & Director [37]

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Yes. There was a onetime event or an unusual event in the fourth quarter in terms of the dollars. We had a benefit from reversing or lowering our reserves on insurance. So we -- if you look at our fourth quarter call on the slide, we show exactly how much that is, I don't remember, it's 12 -- $10 million, $12 million -- I don't remember exactly what it was, but you should not assume that, that is a benefit that we're going to get every quarter or even for the year, or next year, that the $10 million or $12 million benefit that we got from lowering our insurance reserves for construction defects.

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Operator [38]

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At this time, I am showing no further questions. I would like to turn the call back over to Ara for closing remarks.

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Ara K. Hovnanian, Hovnanian Enterprises, Inc. - President, CEO & Chairman of the Board [39]

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Thanks very much. We feel very good about a number of things in our call, but certainly, first and foremost, we're -- the uptick in sales and the better pretax performance compared to last year. We look forward to giving you more positive results as the year unfolds. Thank you.

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Operator [40]

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This concludes our conference call for today. Thank you all for participating, and have a nice day. All parties may now disconnect.