Hovnanian Enterprises Inc (HOV) 2003 Q4 法說會逐字稿

Good morning. Thank you for joining us today for Hovnanian Enterprises fiscal and year-end conference call. You should have received a copy of the press release, but if you're missing one, contact 732-747-7800. We will send you a copy of the release and ensure you're on the company's distribution list. There will be a replay of today's call. This replay will be available one hour after the completion of the call and run for one month. It could be accessed by dialing 800-428-6051, pass code 315431. Again, the number is 800-428-6051, passcode 315431. This conference is being recorded for rebroadcast, and all participants are currently in a listen-only mode. Management will make some opening remarks about year-end 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 company's web site at this time. Before we begin, precautionary language about 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 conference call over to Ara Hovnanian. Ara, please go ahead, sir.

Good morning. Thanks for joining us on today's call. We are pleased to report our results for the fourth quarter and fiscal 2003, which ended on October 31st. We're reporting our sixth consecutive year of record earnings and record revenues, and the best financial performance in our 44-year history. We once again set new records for virtually every category of performance in the fourth quarter and for the full year, including revenues, earnings, deliveries and contract backlog. Most importantly, we generated an after-tax return on beginning equity of 45.8% and an after-tax return on beginning capital of 24.3% for the fiscal 2003. These are at the top levels for our industry and are a clear indication of the tremendous value we continue to create for our shareholders.

In addition, our net income increased 87% for fiscal 2003 to $257.4 million after doubling last year from 2001. On a per-share basis, our earnings increased 83% to $7.85 per share for fiscal 2003. Net earnings have grown at an annual compounded rate of 74% over the past three years, or 47% over the past five years. These are among the highest levels of earnings growth in our history, and certainly far exceeding the average of the S&P 500 and these are growth rates that are higher than 97% of the company's in last year's fortune 500. When the rankings are finalized for this year, we're confident our combination of earning growth and higher returns will place us near the absolute top performance of the Fortune 1,000 for the past year.

Excluding any potential impact from further acquisitions, we're confident we can continue to achieve 15% to 20% growth in earnings going forward. We have good visibility of our future organic growth due to our six-year supply of lots, the expected increase in our community count, and the further deployment of our broad product array in each of our markets. It's important to notice that 90% of our growth and earnings in fiscal 2003 came from our organic operations, those that have been in place for more than a year. I'll talk more about our continued growth prospects in a minute.

Our stock price has performed very well in the last calendar year, increasing 205% year to date through yesterday's close. This performance has certainly made us the top performing stock in the consumer goods sector for the past year or 52 weeks, according to the recent rankings in USA today, and near the top for any company in any industry. Yet the closing price yesterday of $96.61 represents a multiple of only 10.7 times the consensus estimates by analysts for our 04 earnings. Considering our high returns on invested capital, our track record of earnings growth, and our strong sales backlog as we begin this year, we believe our stock still remains a tremendous value even at these price levels. As I mentioned, the highlights of our strong performance in 2003 I cannot neglect to mention an area which we remain very focused, and that's the important area of our conservative balance sheet management. I'm extremely pleased to report that even with the phenomenal levels of growth and earnings in 2003, we achieved our goal of operating at an average net debt to total capital of less than 50%. Our actual average ratio for the year was 47.4%, and year-end was less than that.

Joining me on the call today are Larry Sorsby, Executive Vice-President and Chief Financial Officer, Paul Buchanan, SVP, Kevin Hake, Vice President and Treasurer, and Brian Cheripka, Assistant Director of Investors Relations. For those of you viewing the slides at www.khov.com, you may now begin with slide number 1, which displays the increase in our earnings in fiscal 2003 compared to 02. If you turn to slide 2, increase in earnings on a per share basis which are up 83% from the record levels in '02 to $7.85 per fully diluted share and the highest earnings per share ever recorded in the Company’s history. Slide 3, total revenues for the year increased 26% to $3.2 billion, another record. We continue to increase our earnings at a faster pace than revenues, as you see in slide 4, our pretax margin increased 410 basis points for the year, 12.9% from 8.8% in fiscal 02. Slide 5, the number of home deliveries increased 21% to 11,531 homes, another record as well. Slide 6, in addition to our strong housing performance, our mortgage and title operation contributed in a meaningful way, pre-tax earnings from financial services improved 26% to $22.9 million in fiscal '2003 from $18.2 million in fiscal 02, and I will add a note that virtually none of that business was from refinancing. It's really from creating mortgages for our customers.

Our record financial performance in 2003 reflects a number of factors, first and foremost, we have an exceptional management team which we have developed both internally and through acquisitions, and they're responsible for our strong growth and high returns. In addition, our company's superior performance relative to our peers, although all our peers are doing quite well also, reflects the success of our market concentration strategy, our exceptional land position in some of the most highly regulated markets in the country in terms of a housing environment, our diverse product strategy, and our continued focus on improving the efficiency of our operations.

On a macro level, most of the large builders, certainly including Hovnanian, continue to perform very well for two reasons. First, the overall housing market remains very healthy, but not overheated. We are on a pace to build about 1.7-plus million new housing units this year, which is less than a 17% increase from the average annual production over the last three decades, and it's well below the peaks achieved in the '70s and '80s, in many markets our industry is producing significantly fewer new homes than the growth in populations and households would otherwise demand. And in some of the heavily regulated markets, Washington D.C., California and New Jersey, the supply-demand imbalance allows us to selectively raise prices in many of our locations.

Slide 7. The second and most significant contributor to our strong growth at the macro level is the fact that larger builders continue to achieve tremendous gains in market share through the consolidation and through competitive pressures on the smaller builders. Home builders compete for new land transactions in the market every day, and larger builders, including our company are winning more and more of the deals due to the greater access to capital, cost efficiencies and sophisticated teams of specialists that we have, that have the capability to process these transactions through the increasingly complex regulatory environment.

At Hovnanian, we have been a leader in both organic growth through market share gains, and in the consolidation process through the acquisition of other home builders as a means of entering new markets. We remain focused on this two-prong growth strategy, consisting of achieving a 15 to 20% organic growth in earnings from our existing markets, and making financially sound company acquisitions in new markets. Over the last 12 months we've made five acquisitions that expanded our geographic footprint into Houston, Ohio, Arizona and Florida and further enhanced our future growth opportunities. Slide 8, the four acquisitions that we made during fiscal 2003 are listed on slide number eight along with the acquisitions of Windward homes, a privately held homebuilder that we acquired at the beginning of this year. Windward’s operations are not included are not included in fiscal 2003 since we purchased them just afterwards. This acquisition of Windward marks our entry into the Florida market. Currently Windward served fist time and move up homebuyers with single detached product. As we have done with other acquisitions, we'll begin to share our knowledge of other product segments that, combined with the strong local knowledge, will allow us to achieve solid organic growth in Tampa. While we achieved a large number -- while we acquired a large number of home builders in 2003, more than in prior years, the aggregate size of these acquisitions in terms of dollars invested was similar to each of the larger acquisitions of forecast homes and Washington homes that we made in '02 and '01 respectively. These recent transactions are evidence that the smaller acquisition opportunities are taking place today rather than the larger deals. However, we continue to actively seek to acquire builders who are producing more than 500 homes and where possible more than 1,000 homes in a market in conjunction with our strategy of being a dominant builder in each of those markets. We just go to where the values seem to be. Although we expect great things from these acquired operations in the near future, our recent acquisitions in Texas, Ohio, Arizona and Florida have not had a significant impact on our earnings to date. They will help to ensure our future growth and solidify our operating platform over the next several years. Amortizing 100% of any purchase premium, our conservative approach to accounting for acquisitions will cause an acquisitions contribution to earnings to be reduced during the first few years after we acquire them. In spite of our conservative accounting approach, every one of our acquisitions over the past five years has exceeded our return on capital expectations and is generating solid returns and increasing absolute profit levels for us.

As long as we can continue to find acquisition candidates that meet our targets in automatic areas, including financial targets, we will continue to make strategic acquisitions. Let me be clear, any acquisitions we make in the future will provide growth on top of the 15-20% growth of earnings that we believe is achievable through the organic growth of our existing operations.

Slide 9, we continue to review selective acquisitions of local and regional home-building companies, and we think it's the best way to enter new markets. We believe this strategy is less risky. Basically our other choices are, number one, we can start up a new operation where we hire a local individual that is knowledgeable of the market, but is new to our company and untested. The second choice is transferring one of our existing and tried and true managers from one of our current geographies and move them into a brand-new market they don't know. We find deficiencies with both those alternatives. Our experience has shown us that with either of those, we end up having losses as we start up a new operation in the early years and often don't end up with some of the best land deals and we miss out on the advantages that accrue to a larger dominant builder. Thus, we continue to believe that entering the new market is best accomplished by the acquisition of an existing homebuilder that has been operating in the market for a number of years, and has a proven track record of generating solid returns. Company acquisitions add multiple communities to our growth platform and provide immediate cash flows with communities that are already under construction and generating sales and closings.

Acquisitions limit our market-specific start-up costs and allow Hovnanian to gain an immediate foothold in the market without the usual learning curve and associated risks. Since we focus on producers who produce more than 500 homes annually with a strong market presence and position, acquisitions allow Hovnanian to obtain critical scale advantages and the market powers of being a top-tier builder. We have consistently been able to generate our targeted returns on capital invested with our acquisitions, instead of absorbing losses for several years during start up. In fact our track record with respect to achieving target returns is quite strong.

Of course, an acquisition does entail integration risk. However, we believe our ability to integrate a new acquisition successfully is a core competency of Hovnanian. This is evidenced by the fact that virtually 100% of the managers in a large majority of the rank and file associates from all the acquisitions we've had made are still with us today.

Our strategic approach to acquisitions is based on a consistent and proven methodology that is now a core strength of our company. Our approach emphasizes stability and creating an environment that encourages entrepreneurs to remain with the company. By aligning ourselves with proven management teams that have a strong local knowledge of that marketplace, and have been generating solid returns, we are confident that we have the right team in place in each of our markets. If a downturn in the local or national housing market were to occur, these individuals are the best managers to have in place, because they are entrepreneurs and have previously operated the business and know how to manage through downturns. While there are differences among various home building companies that we look to acquire, one of the advantages in the homebuilding business, is there are also many commonalties among the smaller homebuilding companies. We had can build on these consistent operating methods as well as employing some of our own best practices in integrating each acquired company’s operations into our overall company. We believe there's generally a lower level of integration risk in our industry compared to some of the other industries in the marketplace.

Our proven ability to successfully integrate the companies we have acquired is evidence in our bottom-line performance and our strong returns. We haven't lost a single manager in our acquisitions over the years. Instead, we've woven them into the management fabric of our organization and as part of our senior management team and in many cases part of our strategic planning group. Today the senior managers of our most recent acquisitions are reporting to group presidents, several of whom have joined the company within the last five years as part of prior acquisitions, so we've been successfully adding tremendous depth to our senior management team.

Each company we've acquired has demonstrated significant organic growth after being part of our company by building on the diverse product expertise and ready capital availability without the time requirement of seeking it on their own, which they used to do when they were independent. Organic growth after an acquisition is boosted by our broad product knowledge and our expertise in many different product niches, giving us tremendous growth opportunities in these new markets. We can evaluate all land opportunities, not just ones that fit a single niche as they had to do often during the prior acquisition. This strategy, different from many of our peers, allows for significant organic growth.

Slide 10; we have 257 communities open company-wide as of October 31st, as compared to 196 communities at the end of fiscal 02. Our current plan is to have approximately 43 more communities open at the fiscal year-end 04, up 17% from our community count at the beginning of the year. Each of these additional communities is already owned by our company or controlled under options, so our lot costs are locked in and our storefronts are about ready. Only about 30% of the additional growth in community count in 04 will come from the recent acquisition of Tampa. 70% was from our prior operations.

As of 11/30, including the Tampa communities that we have acquired, we already have 280 communities open for sale. In addition to closing the Tampa acquisition in November, we also added nine additional communities in our other operations. We continue to experience solid demand for new homes in our markets and we're achieving very strong returns on our capital investments.

Slide 11, the dollar value of net contracts for the 12-month period increased 35% to $3.3 billion, and the pace of net contracts for the fourth quarter rose 36%, providing an indication of the strength of our markets as we finished up the year. It's particularly important to note that our net contract in the Northeast were up 22% for the fourth quarter, excluding the effect of the Ohio acquisition. Contracts were up 41% in Washington, D.C., and 62% in North Carolina, and in none of these operations did we have acquisitions that distorted the figures. It’s purely from organic growth.

The value of net contracts did fall 8% in California in the fourth quarter, but that's only because we experienced a decline in the number of actively selling communities in that quarter and the change of mix in that communities. We are opening a significant number of new communities in the west over the next six months and expect to report an increase in net contracts in fiscal 04 in that region which compared to fiscal 2003. We've already begun to turn that around in November. While the contracts in the west declined 5%, the value of the net contract increased 8%. Even though the number of communities still went down 8% year over year. Again, we anticipate correcting that. Net contracts also continued on a strong pace for the most recent month of November. We released this data last week and the dollar value of net sales contracts, showed year over year improvement of 65% for the month well in excess of the possible effect of any acquisitions.

We are encouraged by our recent sales activity in North Carolina as well, which has been one of our softer markets in recent history. Our returns are now improving in one of the few markets that has been underperforming our internal targets. Slide 12, sales backlog at October 31 reached 5,761 homes with a sales value of $1.5 billion, an all-time record for any year end in our history. The value of our sales backlog represents a 42% increase over the end of fiscal 02. We are entering 04 with the highest yearend backlog in home sales in our 44-year history. By the end of November, we already had approximately 50% of this year's projected deliveries either in sales backlog or already delivered.

Slide 13, our strong backlog, recent sales pace and solid margins, along with the small accretive effect of our recent acquisitions gives us the confidence to raise our earnings per share estimate in fiscal 04 to $9 per fully diluted share. This represents an increase from our prior 04 projections of $8.25. The revised projection represents $481 million in earnings before taxes and $298 million in net income. We anticipate increasing revenues about 22% in 04 to $3.9 billion and we're not expecting 04 deliveries to grow to 14,600 homes. Our projected net income represents a 17% increase over the strong earnings growth that we're reporting right now for 2003. This is on top of a 47% compounded growth in earnings that we've been achieving, on average, over the past five years.

As we display on slide 14, we have been generating very strong growth in earnings per share. I'll now turn it over to Larry Sorsby who will discuss our financial performance in a little greater detail.

I'll give you a few highlights, and some of the specifics behind the full-year results. For the fourth quarter of 2003, total revenues grew 26% to $1.05 billion from fiscal 2002 4q revenues of $831 million, on slide 15 you'll see net income for the last three months of fiscal 2003 was $91.2 million or $2.79 per diluted share, a 68% increase compared to $54.4 million or $1.66 per share in 2002. Our fourth quarter deliveries and backlog represent record levels for any fourth quarter in our history.

Going to slide 16, the dollar value of net contracts during the three-month period increased by 34% from the fourth quarter of 02, and the number of home deliveries rose by 25%. Total acquired backlog in 4Q was 456 homes with a sales value of $56.2 million.

Going to slide 17, throughout 2003, we have continued to expand our geographic footprint and are now more diversified in terms of deliveries and earnings. To reflect our growing geographic diversification, we have changed our reporting format and categorized operations into 4 distinct regions. In fiscal 2003, 34% of our delivery volume came from the west, 24% was in the southeast, 21% came from our northeast operations, and 21% from the southwest.

Going to slide 18, the company's consolidated home building gross margins for the fourth quarter, excluding land sales was 25.9%, 240 basis points higher than in the fourth quarter of fiscal 2002. For the full year in fiscal 2003 the company's consolidated home building gross margins were 25.5%, 350 basis points higher than the gross margin of 22% in fiscal 2002.

Moving to slide 19, the average sales price per home delivered company-wide was $278,000, a 2.2% increase from the average sales price of $272,000 in the prior year's fourth quarter. We anticipate the average sales price will be lower, somewhere in the range of the lower 260,000 point in fiscal 2004 as a result of the Arizona and Florida acquisitions and a shift in our mix of communities and some of our other markets to lower-priced product.

Going to slide 20, total SG&A, including corporate expense as a percentage of total revenue was 9.1% in the fourth quarter of 2003. A ten basis points increase from 9%. For the full year of 2003, total SG&A expense as a percent of total revenue was 10%, a 30 basis points increase from last year's ratio of 9.7%. We are projecting that our total SG&A expense ratio will improve to 9.7% of total revenues in fiscal 2004.

Moving to slide 21, the company's pretax margin in the fourth quarter increased 290 basis points to 14% from 11.1% in the prior year's fourth quarter, bringing the pretax margin to 12.9% for the full year. On slide 22, our financial services segment continues to improve on its healthy performance. Pretax earnings from financial services were $7.5 million in the fourth quarter, up 23% in the prior year's fourth quarter.

I'd like to talk about our balance sheet at fiscal year end, which is as strong as ever. Our excellent credit statistics have gained positive attention this past year from all three of the major rating agencies that rate our company. During fiscal 2003, Hovnanian received upgrades of our credit ratings from both S&P and Moody's and had coverage initiated by Fitch ratings at one notch below investment grade.

On slide 23, shareholders' equity grew 46%, $820 million as of October 31st from 563 million at the end of fiscal 2002. Based on our earnings projection, we expect shareholders' equity to grow to about $1.1 billion by October 31, 2004.

Slide 24, the company's ratio of net recourse debt to capitalization was 45.4% at October 31, 2003, after taking into account the excess cash on the balance sheet. For the full year in fiscal 2003, we achieved an average ratio of net debt to capital of 47.4%. We're very proud of the fact we've been able to accomplish our record growth while simultaneously deleveraging our balance sheet. There was no balance outstanding under the company's $590m unsecured revolving credit line and we had approximately $120 million of excess cash. We continue to have ample liquidity to achieve our long-term growth objective. After the close of the 4th quarter, the company completed an offering of 6.5% senior notes which generated proceeds of approximately $215m. We will use this financing to fund ongoing operations as we continue to increase our number of active communities over the next several months. In May 04, our nine and an eighth senior notes will become callable. If rates remain active, it is likely we'll call those notes at that time.

Slide 25, in fiscal 2003, EBITDA rose 61% to $500.6 million, and covered interest incurred during the year by 7.5 times.

Moving to slide 26, the ratio of EBITDA to recourse debt at year end was only 1.6 to 1 reflecting our strong capability to service our debt requirements.

EBITDA for the fourth quarter increased 53% to $174.4 million from $113.8 million in the fourth quarter of 2002, and covered the amount of interest incurred in the quarter by 9.6 times. Under the terms of our 1999 acquisition of Goodman homes in Dallas, Texas, during 4Q we exercised the right to buy back approximately 47,000 class A common shares of HOV from the selling principals of the Dallas acquisition at a net cost of $7.88 per share. During the full year, we bought back or retired more than 1 million shares of Hovnanian. We currently have 1.1 million shares remaining under our July 2001 buyback authorization of 2 million. The company also issued 244,000 shares of Hovnanian class A common stock in conjunction with the acquisition of Windward homes. The decision to issue a small amount equity was based upon our commitment to maintain a 50% net debt to capitalization ratio.

With the recent acquisition of Windward homes, approximately 23 million of purchase premium was allocated to definite intangibles on our balance sheet. This write-up, unlike goodwill, is being amortized over a range of two to seven years and will reduce our earnings from this acquisition over the next few years. At October 31, 2003, there was a total of 57 million of definite life intangibles on our balance sheet and we expect to amortize a significant portion of these assets over the next several years. Total inventories at 10/31/03 were $1.66 billion, including $205 million of inventory we don't own. Since the implementation of FASB interpretation 46, or FIN 46, as it's commonly referred to during our second quarter, we've consolidated a total of approximately 100 million in land inventory and 11 VIE entities. For each of these entities, the company holds a lot option contract for a majority if not all of the lots. These consolidations have also added net of our option deposits 87.3 million of minority interest and no liabilities from those entities on the balance sheet as of October 31, 2003. In accordance with the Requirements of FIN 46, the company expects to apply the consolidation provisions of FIN-46 to all of the company's VIEs no later than January 31, 2004.

For the inventory not owned that we've consolidated under the requirements of FIN 46 our only exposure to loss is our option deposit and approval cost, not the total assets consolidated on our balance sheet.

Moving to slide 27, which shows our aggregate option position for all of our lot options and the amount of aggregate deposits we have at risk, which is only 7.4% of the total purchase price of the lots, we are continuing to execute our strategy of using lot option contracts with regard to minimizing our land risk and maximizing our ability to adjust any slow down in the housing market. As one of the largest builders in each of our markets, and particularly in three highly regulated markets of the northeast, California and Washington D.C., we have an excellent land position at a very attractive cost basis.

Moving to slide 28, we have a total of nearly 74,000 lots controlled for future development company-wide, with 71% controlled under an option contract. The substantial majority of home deliveries in the company’s organic growth plan for the next three years will come from communities that we currently own or control under an option contract today.

As Ara stated, assuming current economic conditions hold we anticipate earnings of $9 per diluted share in fiscal 04. As always, this projection is based on current sales pace and current pricings in each of our communities currently open for sale. While we've actually continued to achieve price increases over the past few weeks and months, the pace of price increases has moderated somewhat, and while we continue to open new communities with strong initial sales demand in most cases, our $9 per share projection for '04 assumes certain sales prices and absorption paces for many new communities we will be opening up over the next several months. We won't know the actual price until we open the communities for sale. Thus I would caution our analysts and investors from immediately calculating the higher projections based on the higher gross margins than we are projecting. Earnings in 2004 of $9 per share would represent a 15% growth in our net earnings and would be another phenomenal year for our company. Based on the margins currently in our sales backlog and anticipated sales price at our newer communities, we expect the gross margins to fall modestly to approximately 24.5% in fiscal 2004. We remind you that our new communities that we are just now opening have a higher land cost than recent communities we are now selling out of and completing. As usual, we will provide you with regularly updated reports on our progress throughout the year regarding our pricing, sales pace and any new community openings.

We expect our pattern of quarterly deliveries and earnings to be somewhat more even in 2004 than in 2003, and we expect to show improvement in our earnings per share, in each quarter compared to the same quarters of fiscal 2003. But fiscal 04 will still be weighted a bit towards the back half of the year. Thus, we are not comfortable, I repeat not comfortable with the current analyst consensus estimate of $2 per share for our first quarter of 2004.

Moving to slide 29, we're estimating that we will earn about $1.65 per share for our first quarter. This would be a 22% increase in earnings over the same period in fiscal 2003. Details on our updated summary projections for the fiscal year ending October 31, 2004 are available on the company's projection page of the investors section of the company's website at www.khov.com. Our forecast for fiscal 2004 includes the effect of the recent acquisitions we've made in 2003, including Windward homes early in 2004, however, due to our conservative purchasing accounting adjustments, we do not expect the Windward operations to have a significant impact or for that matter any of the acquisitions we've made over the last 12 months to have a significant impact on the fiscal 04 profits.

With the revised earnings projection, going to slide 30, it shows that our compounded EPS growth for the period 2000 through 2004 is projected to be 57% compounded annual growth rate, a stellar growth rate for any company in any industry. Now I'll turn if back to Ara for closing comments.

Thanks, Larry. We expect the housing market to remain fairly steady in 04, perhaps even to strengthen as the general economy to show signs of a recovery and a meaningful job creation returns to our markets. Historically the housing industry has performed very well in a recovering market, even with an accompanying increase in interest rates.

As we expect the significant consolidation and market share gains of the past several years to continue to the benefit of the large builders in particular, and particularly to our company, we expect a solid future. We expect to participate in these market gains with strong organic growth and opportunistic acquisitions. This will allow for our continued healthy growth, regardless in the changes of housing activity.

If you look at slide 31, you see that over the past three years, while our earnings have grown at a 74% annual compounded rates and our deliveries have grown at a 38.22% annual compounded rate, the overall housing market has only grown at a 4% annual rate. This is an indication of the effect of the market share gains that are driving our revenue and earnings growth. It's not simply a reflection of a strong housing market or low interest rates. 04 should be another strong year for organic growth. I say this because we began opening many new communities in fiscal 2003 which should begin delivering homes in 04. We feel as optimistic as we ever have been about our future performance.

A critical part of our strategy has been to be a dominant builder in a handful of select markets. In addition, we have not limited ourselves to a product niche or a price point. Our financial success reflects our ability to match the right product to the right land opportunity. Our diverse product strategy allows us to build townhomes, condos, first time, move up, luxury and active adult homes. We're one of the few large builders that specialized in urban in-fill opportunities.

This fiscal 2003, we further broadened or product array by undertaking our first mid-rise communities and increasing it in our pipeline.

Turning to slide 32, this is a picture of an example of one of our mid-rise condominium buildings, in this case in the northeast region, a product that offers increased growth opportunities in our more highly regulated markets. The result of this strategy is our ability to develop communities in areas where the supply and demand trends are more favorable. This combined strategy of a broad product array and market dominance has been paying off handsomely, leading us to one of the best earnings growths and highest ROEs in the industry. Based on our lot position, we feel bullish about our prospects for '04.

Slide 33, as I mentioned before, the company achieved an after-tax return on beginning equity of 45.8% per share in fiscal 2003. The after-tax return on beginning capital per share for the year was a healthy 23.4%. These are key measurements of our performance against which we regularly gauge our progress, and they indicate we're creating significant value for our shareholders.

About before we open the call for questions, I would like to mention that Geaton DeCesaris has rejoined the company after successful treatment and recovery for cancer. While I announced Geaton’s diagnosis on this call at the end of fiscal 02, I mentioned he was as strong as an ox and we felt he would eventually return to our team. Today we are pleased to welcome him back in excellent health. Geaton will come back as President of the newly formed investment group. The primary objective of the new group will be to seek out and identify opportunities to invest in large-scale developments and to attract investment partners to participate in these land ventures. We will sell land to other home Builders as well as our own operation. This is an ideal opportunity for our company and for Geaton, because it matches his vast experience and knowledge of land acquisitions with the increasingly complex and challenging markets for finding good land opportunities. We will not replace the position of COO and President of home building operations previously held by Geaton at this time. Our group and the division presidents will continue to report directly to me for the foreseeable future. With that, we end the formal part of our presentation and would be glad to open it up for questions and answers

Thank you, sir. If you're using a speakerphone, pick up the handset before pressing numbers. If you have questions, press star-one on your telephone. If you'd like to withdraw the question, press star-2. The question will be taken in the order it is received. Please stand by, sir. Our first question comes from Carlos Rebeiro.

Good morning. Larry, can you give us an update on the cancellation rate for the quarter?

I don't have it right in front of me, Carlos. We'll see if we can gather that data.

I can tell you overall we haven't experienced much volatility or fluctuation overall in our cancellation rate.

Okay. Thanks. Ara, on the mid-rise tower developments that you guys are doing, how many do you have currently? And how many do you project for '04.

We have two open for sale, we have one in the northeast, one in the D.C. area that's about to open, and we will be adding two or three more on both coasts. We have a couple lined up in southern California, and a couple in the northeast, and I think one more in the D.C. market -- excuse me, we have three active for sale in the northeast.

In terms of total units per development, is there an average?

They are typically smaller, in some cases I would say 150 homes on average, plus or minus. I think we have one that's a very large one, that's 350 homes but that's unusual. I would say most are in the mid 100s.

And you're recognizing revenue and earnings at point of sale?

At closing and delivery.

Lastly, Larry, you mentioned higher land costs could mitigate some of the gross margin expansion, but shouldn't your efficiency gains, volume leverage and some cost rationalization offset higher land costs?

They do to some degree, but they haven't fully offset it.

Keep in mind, volume gains help us amortize our overheads more efficiently, but those are not in gross margin.

Fair enough, guys, thanks.

Carlos, I have the answer to your question. Our cancellation for fiscal 2003 was a little over 21%, and it was a percent or two higher than that in the fourth quarter.

Great, guys. Thank you.

The next question comes from Fred Taylor with Fleet.

Just again on the mid-rise, I assume one building is counted as a community. Is that correct?

No, if there are two buildings at a community -- in fact, the one that's in the photograph are two buildings which together comprise 150 homes. So we count that as one community.

Just curious, I'm familiar with some of the high-rise home builders, when do you break ground and start construction? Do you need a full order book? Is there a sense it will be successful from the get-go even if they are not all pre-sold?

There are a variety of different circumstances. Interestingly, two of the opportunities, one that's currently under way and one that will be under way, were actually constructed by someone else and designed initially as rentals. As the market has shifted, less in favor of rentals, and more in terms of economic advantage, they decided to sell those. In those cases, obviously construction had begun. We had in one case begun pre-marketing before we actually closed on the first one, with great success, I might add. The other one we'll have a similar situation; we'll have an opportunity to pre-market before selling. Generally speaking our goal would be to pre-market before we begin construction, and in most cases we plan to have 30%, 40% in backlog, generally speaking, before we begin construction.

Then finally on just sort of a capital structure strategy, philosophy, obviously you've de-leveraged significantly. Do you want to keep going in this regard, given your option strategy, I use the term "de-capitalize the company" given the size of sales. Is there a stock repurchase program that may be more significant than the one that's been announced?

Ara Hovnanian - Hovnanian Enterprises Inc. - President and CEO

We don't at the moment plan to buy back a dramatically different number of shares than what we've announced. We are a growing company, there are many markets that we are still not active in, and we have been achieving very high returns on equity. So we're keeping our capital, we think we can deploy it with very good returns in our home building business, and continue to look for opportunities, both for organic growth with land opportunities, and new market growth with company acquisitions.

Okay. Thank you very much.

The next question comes from Stephen Kim of Smith Barney. Please state your.

Hi, it's Judd Benner for Steve Kim. Congratulations on the quarter. First of all, in regards to the comments on what you're comfortable with for the first quarter, could you help us with any of the other guidance-related items that are baked into the assumption for the EPS?

If you call us after the call we'll try to give you some detail on that, unless, Kevin, you have it on your fingertips there.

We really haven't given detail, you know, with -- what would you be looking for, Judd?

I guess in particular what you would be looking for in terms of the margins?

I think the margin we've given for the year, I think you can go ahead and assume a gradual sort of straight-line reduction from where we ended the 4Q to what we want we're going to average for '04.

Okay. Secondly, do you -- I missed it on the call, actually, the number of shares that you purchased during the fourth quarter bought back.

I think we just did it for the year. Just the 47,000 from Goodman is all we did in the quarter.

Okay. Great. Perfect. Thanks very much.

The next question comes from Craig Kucera. Please state your question.

Thank you. Your margins have improved pretty substantially this far in the year, and more than I would have expected given that your average sales price was up less than 5%. Can you give a bit more color on where you're achieving the greatest cost savings in your cost structure?

You know, I can't say that, you know, a huge amount of the gains is from cost savings. It's really from numerous factors, and cost savings is one of, you know, a variety of places. Price appreciation has been another factor, the increase in communities, good land purchases good company acquisitions, all of these are leading to it. To ask specifically on the cost structure, I would say we're making some good progress in national purchasing, you know, we continue to see great leverage as we become a larger and larger company, and the advantages are quite helpful. I mean, it's not unlike, obviously on a smaller scale, some of the advantages that Wal-Mart has over its lower, smaller competitors when it enters local markets. In many cases we're competing with smaller builders. When we're buying materials and can make buys based on volumes of $4 billion of revenues, 15,000 houses, we've been able to make some pretty good inroads there, to the point where I would say that's easily adding 1% to our bottom line, or close to it, in aggregate, if you look at all facets of the advantages of those national purchases.

Okay. Great. Are there any markets out there you're willing to comment on that look appealing for potential new entry?

Well, you know, we continue to be very opportunistic in our acquisitions, and I think that's where we find the best values, and the best combination of all of the factors that we look for. You know, we can make a great case about the non-glamorous markets, compared to some of the you know, more glamorous Sunbelt markets. Having said that, I would say we would love to be in Las Vegas. We'd love to be in Denver, even though it's weak at the moment. We love the long-term prospects there. We'd love to be in Chicago, in more communities and locations in Florida. So those are some that I would highlight, but that absolutely doesn't rule out any of the other locations. We're really focused on a great management team that has a great track record, that wants to stick around and be part of our organization, a team that feels like our broad product array and access to capital and our strategies fit nicely, and cultures fit nicely with them, and a company that's looking for a fair and reasonable price and wants to be part of a bigger team. If that kind of company showed up in Kansas City or who knows where, we could be just as interested as or more interested than if they were located in some of the cities I just mentioned.

Okay. Just a kind of housekeeping thing, where are your spec counts maybe on a community basis?

They're pretty flat line from where they've been. We report it in the 10-Qs, and report it publicly on a per community basis they've not been increasing. They've been pretty flat.

Okay. On the financial side, we've been seeing sort of a gradual increase in arms, as a percentage of originations, what do you guys think?

Very modest increase in ARMs, nothing all that substantial.

And second, are you disclosing your average loan to value for your customers?

I don't have that data right here. I could get it if it's critical to you, but don't have it right at my fingertips.

Craig Kucera - Friedman, Billings Ramsey - Analyst

Maybe I'll follow up with you. Thanks again. Great quarter.

Once again, ladies and gentlemen, as a reminder if you wish to ask a question at this time, press star-1 on your push-button telephones. If there are no further questions, I will turn the conference back over to Mr. Ara Hovnanian for final remarks.

Thanks very much. As you can imagine, we're pleased with the results, but we're more excited about the prospects for '04 and '05. We look forward to giving you an update at our next conference call next quarter. Thank you. As usual, if there are further questions or clarifications, our team is available for them.

Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 1-800, 428-6051 or 973-709-2089 with an I.D. number of 315431. You may also log on to the company's website at www.khov.com. This concludes our conference for today. Thank you for participating. Have a nice day. All parties may now disconnect.