Hovnanian Enterprises Inc (HOVNP) 2002 Q2 法說會逐字稿

Good morning and welcome, ladies and gentlemen, to the Hovnanian Enterprises second-quarter 2002 conference call. At this time, I would like to inform you that this conference is being recorded for rebroadcast, and that all participants are in a listen-only mode. At the request of the company, we will open the conference up for questions and answers after the presentation.

I will now turn the conference over to Ms. Julie [Tu], from FRB [Weber Shamwick]. Please go ahead, ma'am

Good morning. Thank you for all for joining us today for Hovnanian's conference call to discuss the company's second-quarter results. By now, you should all have received a copy of the press release. However, if anyone is missing a copy and would like one, please contact Samantha [Alsonzo] at 212-445-8473, and we'll send you one and ensure that you're on a distribution list.

There will be a replay for today's call which will begin one hour after this call and run for one week. The replay can be accessed by dialing 800-428-6051, pass code 241761.

On the line with us today is Ara Hovnanian, president and chief executive officer and his management team. Management will make some opening remarks about the quarter and then open up the line for questions.

Before we begin, I would like to remind everyone that the cautionary language about forward-looking statements contained in the press release, that same language applies to any comments made during this call. Ara, would you please go ahead, then

Sure. Thank you. Good morning, everyone. Well, this morning, we released the results of our second quarter ended April 30th. We reported all-time record highs for any quarter in our company's history in net contracts, home deliveries, sales backlog, revenues, and, most important, net earnings.

Our earnings per share for the quarter were significantly ahead of last year's second-quarter results and once again, we were able to exceed the market's expectation for our company. Our own growth initiatives and improved margins, combined with the fundamental underlying strength of the housing market, have allowed us to continue to exceed our own forecasts. The lack of available lots for developing new housing has clearly contributed to the market's strength as well. This supply/demand imbalance is one of the many reasons why our communities continue to experience strong demand and why we've been able to continue to selectively raise prices and improve our margins. Despite a general slowing in certain parts of the economy this past year.

As a market leader in several key markets across the country, we have some of the best land parcels under our control, and we believe that we can continue to grow our market share at the expense of smaller builders who are finding the competitive housing environment to be increasingly difficult, particularly in regard to acquiring and developing land for home Joining me on the call today to comment on the strong performance and answer questions afterwards are Geaton DeCesaris, COO and president of home building operations, Larry Sorsby, executive vice president and CFO, Paul Buchanan, senior vice president and corporate controller, and Kevin [Hake], vice president and treasurer.

Hovnanian Enterprises significantly exceeded projections in last year's results by reporting net income of $25.9 million, or 80 cents per fully diluted share for the second quarter ended April '02. This represents an 8 4% increase in absolute earnings from the record level achieved in fiscal '01 second quarter. Second-quarter earnings per share were 82 cents prior to a 2-cent per share charge for the early retirement of debt. That represents a 71% increase over last year's second quarter's earnings per share.

We continued our trend of improvements in performance measures, with many setting all-time company records for any quarter in our 42-year history. Total revenues increased 40% to $562 million for the quarter, the highest ever in any quarter for our company. We're pleased that our ability to continue increasing our earnings at a faster rate than our revenues. As a result, our pretax margin rose from - to 7.6% from 5.6% in last year's second quarter.

Deliveries increased to 2,158 homes, an all-time record for the company in any quarter, and certainly eclipsing last year's record quarter by about 31%.

a positive sign for our continued strong performance going going forward, net contracts in the period also rose to an all-time quarterly record of 2,922 homes valued at $762 million. That's a 32% increase from last year's results. And finally, sales backlog at April 30th reached 4,001 homes, with a sales value of $1.2 billion, both all time records for any quarter in our history, and 20% higher than the end of April, '01.

the second quarter was our first full quarter of operations, together with Forecast Homes. We completed the acquisition of the California home-building operations of the Forecast Group on January 10th, '02, near the end of our first quarter. The Forecast Group was a privately held single-family home builder headquartered in southern California.

Like the successful merger of Washington Homes a year earlier, the acquisition of Forecast furthers our strategy of becoming a dominant builder in each of our markets. With the addition of Forecast's operations, we are now the second largest builder in the inland empire and high desert region of southern California, as well as the second largest builder of the combined Sacramento and Central Valley markets of northern California.

As anticipated, Forecast Homes is quickly turning out to be another strategic and highly profitable acquisition for our company. We're extremely pleased with the strategic fit of the two companies and the way in which the senior managers of our operations are blending together.

the forecast acquisition clearly added to our results in this year's second quarter when compared to last year.

the forecast acquisition is accretive to our return on equity and also to our return on investment capital, which will both be at higher levels this year than compared - than '01. In addition, we've continued to achieve organic growth in our other markets. Our second-quarter sales contract value was up 6% in the northeast region, up 14% in Texas, and up 18% in Metro DC, and obviously none of those were affected by the forecast acquisition.

During the second quarter, we continued to increase our leading market position in the northeast region through the acquisition of approximately 1,500 remaining lots in 27 different residential communities in New Jersey and Pennsylvania. We purchased the residential communities of the Quaker Group, a privately-held home building and real estate company in the Philadelphia suburbs both in New Jersey and Pennsylvania. Eight of the communities we acquired are near the final closeout stage and are obviously all active. Nine others are open and ongoing and actively selling communities. And the remaining 10 will be opening over the next 12 to 18 months.

the acquired communities include homes across a wide spectrum of price points, from about 150,000 to $500,000.

With the additional communities, Hovnanian will enjoy a significantly higher profile in southern New Jersey and eastern Pennsylvania. We're already New Jersey's largest home builder, but we wanted to be stronger in the southwestern part of the state, and in the Philadelphia suburbs.

Hovnanian retained nearly all of Quaker's on-site sales, construction, and service personnel, and will supplement those with our operations - those operations with our own people to ensure a continued high level of service to our current and future home buyers at these locations.

We're very excited about the addition of these communities to our current operations in the northeast, and excited about our ability to increase our already dominant position in this very important market.

We also successfully exited two of our small mid-south markets during the second quarter by selling our remaining lot positions in Mississippi and Alabama to other builders. We are finishing the construction and sellout of the homes that we've started in these two markets but expect to be completely out of these markets within about six months.

We're currently seeking a similar exit strategy for our operations in Nashville, Tennessee. We expect to exit all three markets at a price roughly equivalent to book value, with no significant gain or loss.

We obtained our position in these three mid-south markets as part of our merger with Washington homes in January of '01. Although we were a market leader in these markets, their small presence and that combined with the delivery of only about 300 homes last year did not meet our market concentration and size strategy.

the returns on invested capital in these markets have also been below our targets, and we expect we can improve our performance by redeploying the capital invested in these markets to our other existing markets.

Overall, we continue to see solid demand in our markets. As of the end of the quarter, we already had about 95% of this year's planned deliveries under contract or already closed, so there's little market risk remaining for our forecast for this current fiscal year in terms of deliveries.

the combination of the strong backlog and the strong margins in the backlog give us a confidence to increase our earnings projections once again for fiscal '02 to a range of between $3.10 and $3.20 per fully diluted share.

Assuming that the current economic conditions hold, we anticipate earnings per share in the range of 3.75 to $3.90 for fiscal '03, which begins for us on November 1st.

This is obviously a little higher than we had indicated at our last call.

the midpoint of this range represents about a 21% increase over the midpoint of our projection for '02, and it represents a compounded annual growth rate of about 37% for fiscal 2000.

We feel our forward-looking earnings visibility is very good based on our current sales pace in our existing communities and our pricing, as well as the projected openings of additional communities over the next 12 months. And it's important to note that all of the communities we're hoping to open are already con- - either owned by our company or controlled by options, so our land position and pipeline and costs are pretty much locked in.

I'll now turn it over to Larry Sorsby, our CFO, to discuss some of the financial performance in greater detail.

Thank you, Ara.

For the quarter ended January 31st, 2002, we reported net income of 25.9 million, or 80 cents per fully diluted share, on 561.5 million in total revenue.

Prior to a $582,000 extraordinary after-tax charge for the early retirement of debt, the company earned 26.5 million, or 82 cents per share for the quarter. This compares with net income of 14.1 million or 48 cents per share on revenue of 402.3 million in last year's second quarter.

the consensus of earnings estimates for the second quarter among analysts who cover the company was 67 cents per share. Pretax earnings from financial services were 3.6 million in the second quarter, up 76% from 2 million in the prior year's second quarter.

the 32% increase in net contract value was accomplished despite a flat average community count for most of the quarter.

Net contract value was higher in each of our markets, except North Carolina, where the market has softened a bit from the exceptional sales pace in last year's spring sales season, which was sparked by the introduction of our super value product lines in those markets.

For the six months ended April 30th, 2002, revenue grew to 1.02 billion from 695.5 million in the year-earlier period. Net income for the first six months of fiscal 2002 was 44.1 million, or $1.40 per fully diluted share, compared to 21 million, or 80 cents per share, in 2001.

Year to year, the number of net contracts during this six-month period increased by 19.2%, and the number of home deliveries rose by 40.9%.

the company achieved substantially higher gross market - gross margins on a market by market basis in the second quarter of fiscal 2002, when compared to the second quarter of fiscal 2001. These increased margins were a result of higher sales prices, lower costs, and certain changes in product mix.

As a result of these higher margins in each of our markets, the company's consolidated home building gross margins for the second quarter, excluding land sales, was 20.9%, 50 basis points higher than the second quarter of fiscal 2001, despite the negative impact of the Forecast Homes acquisition on our consolidated gross margin.

the Forecast Homes operations has a lower gross margin than the company's average gross margin, due to the stepped-up basis that we applied to the Forecast Homes assets upon acquisition.

Despite the lower average gross margin, we are achieving very high returns on our total investment in Forecast Homes, due to very low overheads, high inventory turnovers, in that operation.

However, as a result of the lower margins on the Forecast Homes assets, we expect our home building gross margins for our full fiscal 2002 year to be flat or slightly lower than the gross margin for fiscal 2001.

the average sales price per home delivered company-wide for the three months was $246,700, a 3.6% increase from the average sales price of $238,076 in the prior year's second quarter.

However, our average sales price in California declined 30% from last year's second quarter as a result of the forecast acquisition. As we announced previously, Forecast primarily targets its first-time home buyers with an average sales price of 224,000 in California in fiscal 2001, whereas Hovnanian's customers in California have historically been a wide range of moveup, urban, and active adult home buyers. Hovnanian's average sales price in California for all fiscal 2001 was about 370,000, substantially higher than Forecast's 224,000.

the average sales price in our other markets was, in fact, up 10.6% as a result of our continued ability to raise prices in certain communities and some variation in our mix of communities.

As a result of the forecast acquisition, we expect our average sales price to remain unchanged, in the range of 245 to 250,000 for the remaining two quarters of this fiscal year.

Total selling, general, and administrative expense, including corporate overhead expense, as a percentage of total revenues, was 10.4% in the second quarter of 2002, a 60 basis points improvement from 11% in last year's second quarter and a reflection of the company's increased scale and improved operating efficiency.

the company's pretax margin rose 200 basis points to 7.6% from 5.6% in the prior year's second quarter.

EBITDA for the second quarter rose 48% to 59 point 9 million from 40.5 million in the second quarter of 2001

EBITDA is covered - EBITDA covered the amount of interest incurred in the quarter by 4.1 times.

As we projected in our last conference call, we now have more communities open as of the end of the second quarter, than we did at April 30th, 2001.

Specifically, we have 205 communities open as of April 30th, an 8-and-a-half percent increase over the prior year, despite the elimination of the mid-south markets with 15 active selling communities. Our current plan is to have approximately 220 communities open at our fiscal year-end October 31st, 2002, up 11% from 199 communities at the end of fiscal 2001.

During the second quarter, Hovnanian completed a refinancing of 250 million of debt by issuing 100 million of senior notes due in 2012, with an 8% coupon, and 150 million of senior subordinated notes due in 2012 at 8 and seven-eighths percent coupon. The net proceeds were used to retire 99.7 million principal balance outstanding of 9 and three-quarter percent subordinated notes due in 2005 and to pay down 50 million of the company's 165 million term loan due in 2007. The balance was used to refinance amounts outstanding under the company's 440 million unsecured revolving credit facility.

We were able to take advantage of favorable conditions in the public debt markets, to lock in long-term debts at what we believe are very attractive rates. This long-term debt allows us to maintain ample liquidity under our 440 million unsecured revolving credit line to fund our ongoing operations and our continued growth objectives.

There was no balance outstanding under the company's revolving credit line at the end of the quarter, and we had approximately $25 million of excess cash. The company's ratio of debt to equity was only 1.36 to 1 at April 30th, 2002, after taking into account the excess cash on our balance sheet.

This compares with a ratio of 1.48 to 1 at the end of the second quarter 2001.

We expect this level of debt to be near our seasonal high for the the year, and we anticipate that the company's leverage ratio at fiscal year end October 31st, 2002, will be approximately 1.1 to 1.

We are on track to achieve our target of averaging 1 to 1 ratio of debt to equity by fiscal 2004. Inspect shareholders equity grew 24% to 466.7 million, or $15.43 per share as of April 30th, 2002, from 365.6 million, or $13.48 per share at the end of fiscal 2001.

We anticipate healthy year-over-year earnings increases for each of the remaining two quarters of this fiscal year. We are comfortable that we will meet or exceed analysts' estimates for our third quarter, which average 80 cents per share, with the fourth quarter having the strongest quarterly earnings of between $3.10 and $3.20, we're projecting for the total year. The midpoint of this range equates to a hundred million of net income, a 57% increase from fiscal 2001's record net income, which was 92% higher than fiscal 2000's.

The increase in 2002 is on top of the 47% compounded growth in operating earnings that we've achieved over the past five years. Fiscal 2002 revenue is expected to climb more than 30%, into a range of between 200 - excuse me, 2.26 and 2.31 billion, and deliveries are anticipated to exceed 8800 homes.

Looking forward, assuming that current economic conditions hold relatively steady, we anticipate earnings per share in the range of $3.75 to $3.90 for fiscal 2003. Beyond 2003, due to both controlling a five-year supply of land and our dedicated team of Hovnanian associates, we are confident that we will continue our track record of achieving strong growth in earnings.

This growth assumes no additional acquisitions of other home building companies and no expansion into new markets. It's all organic growth.

If we acquire home building companies, additional profitable growth is achievable. We anticipate that the consolidation trend will continue in the home building industry with larger builders taking ever more market share. Details on our updated summary projections for the fiscal year ending October 31st, 2002 and 2003 are available on the company projection page of the investors section of our website at www.khav.com. Now I'll turn it back over to Ara for some loafing comments.

Well, of course our crystal ball gets foggier as you forecast further out, but our ability to forecast is enhanced by the long-term nature of our land position.

Today we control about 48,000 home sites on a consolidated basis, which is critical in a market with tight supply. That's about a five-year supply at the current delivery levels, and it gives us the confidence in our ability to achieve our business plan and put us in a great competitive position in all of our markets.

the substantial majority of home deliveries in our growth plan for the next three years will come from communities that we currently own or have under control through options.

70% of our land position is controlled through options. That significantly reduces our risk and allows us to maintain balance sheet flexibility and liquidity.

Our continued strong financial performance reflects the success of our market dominance strategy, our attractive land position, our sharp focus on improving the efficiency of our operations and our skills in acquisitions.

While our share price has performed well over the last 12 months, our closing price yesterday at $27.50 represents a multiple - a P/E multiple of about 8.7, against the midpoint of our projected fiscal '02 earnings. And again, we've sold about 95% or delivered, of what we need to achieve those earnings this year.

Our P/E multiple is only 7.2 times the midpoint of our forward-projected earnings for fiscal '03, and remember, we're October year-end, so we begin '03 in about five months and we're already beginning to build backlog for our first quarter of fiscal '03.

This compares with a forward P/E multiple in the S and P 500 of about 22 times. This is obviously a little frustrating for not only our company, but other home builders in our industry. We've all been growing at a much greater pace historically than the S and P 500. The industry is growing, the players are getting larger and more sophisticated, have superb balance sheets, and have developed a great track record.

This year, Hovnanian grew our way into the fortune 1000, landing at No. 774, and that was prior to our acquisition of Forecast Homes, which adds about a half a billion in revenues.

Others in the industry have moved up on the list as well, with those home builders in the top 1,000 having some of the best growth and return parameters of all the industry groups.

We're confident that our excellent performance of our company and the industry is going to continue. Long-term demand in our industry is a matter of demographics and actuarial science, and the fact is the U.S. population is growing steadily and is going to continue to grow. The long-term die is cast, and it doesn't change month to month with the release of the latest government statistics. For those that are concerned about monthly data, I can tell you that our markets remain very solid. In the last four weeks, our sales are up about 20% over last year so the strength just continues and keeps on going.

While demand is rock solid and growing, the industry is consolidating with larger builders taking an ever-larger share of the national market. We are confident that the outlook for our company is excellent.

That ends our formal presentation, and we'd be pleased to open it up for questions.

Thank you. The question and answer session will begin now. If you're using a speakerphone, please pick up the handset before pressing any numbers. Should you have a question, please press 1, followed by 4, on your push-button phone. Should you wish to withdraw your question, you may press 1, followed by 3. Your question will be taken in the order it is received. Please stand by for your first question.

Our first question comes from Steven Kim. Please state your affiliation followed by your question.

Yeah, Steve Kim, Salomon Smith Barney. Good job, guys, once again.

Quick question for you related to the potential impact of September 11th on these numbers. Given you had an April fiscal quarter - given you had a - given that you had an April quarter-end, I was curious whether or not some of the deliveries that we saw this quarter were booked in the period immediately following September 11th, or if those deliveries might fall in your subsequent quarter.

Well, first of all, we really had very little sales effect, amazingly, from September 11th. In the period - if you looked at the sales per week for the five or ten weeks prior to September 11th, and compared it to the five or ten weeks after September 11th, amazingly, there was hardly a blip.

Traffic did drop dramatically, as you may recall, but the conversion rates were very high. Those that did come out were very serious buyers.

That really was contrary to logic, where you might think more buyers would hold back. That simply wasn't the case.

Regarding the specific answer to your question, there - it really, I think, was a mix. Obviously we had some sales that delivered in that quarter. Some of those sales are delivering in future quarters. So it's really a mix.

Yeah. And I think, Steve, just to elaborate a little bit, we really didn't do any special concessions or incentives shortly after September 11th that would have any negative impact on margins, so regardless of whether the homes were sold shortly after September 11th or a long time after, they weren't impacted by us doing special incentives shortly after September 11th.

Yeah. You're right. That may be more applicable to some of your peers, actually.

But it's good to see, though, that you had such strong results, despite having some units, from that time period.

the sub count, I guess, was - was the second question I had for you. Where was your average subdivision count this quarter, and sort of where do you expect that to be going? Or if - maybe if you only have the ending sub count, whatever you have.

Kevin, why don't you take that.

Well, we ended with 205 communities and as we said, we're expecting to be close to 220 by the end of the fiscal year.

Okay.

Most of that increase comes through openings in the beginning of the fourth quarter, so the third quarter, we'll see a little increase and a lot more increase in the fourth quarter?

Okay. Great. And then your share count, where - what kind of share count should we be using for the third and fourth quarters? Any guidance on that that was by the CEO.

Paul?

It's not going to change significantly. No, it's not going to change. The only change would be that as the forecast shares that came in from the forecast acquisition, they'll have a less dilutive effect as we go along. [inaudible] increase during the year. The share count that we had for the end of April, for the second quarter, was 32,402,000, okay? And we'll probably, after getting rid of the dilutive effect, we'll probably - after getting rid of the dilutive effect, we'll probably be around - the next couple of quarters - higher to - closer to $33 million. But - for the 33 million shares - okay? But for the year, probably around thirty-two five for the 12 months ending October.

Okay. Great. And then finally, you indicated an earnings guidance range this year of 3.10 to 3.20 and you also indicated about 95% of that is already sort of, you know, booked. I guess I was kind of curious, you know, it looks like you beat the street consensus by about 15 cents and you've taken up your guidance range by about 10 cents on either end. Should we be reading anything into that, or if - or is that just simply, you know, some additional conservatism on your part?

We had a few deliveries probably pulled forward into the second quarter that could, you know, just have accelerated during the year versus changed the total year's deliveries, Steve.

I see. Was that a function of some of the very mild winter weather we saw or was that just - just something else?

That certainly was part of it. You know, we did have a very mild winter, although it's been a little rainy now in the spring, so, you know, the weather - obviously we're effectively a manufacturer, but we manufacture outdoors, so our production is affected by weather. So we have to kind of try and gauge in the middle of the range and we can always, you know, outdeliver a little bit or be slightly short, but, you know, we're - we're pretty close to that average.

Great. Well, thanks very much. I'll let somebody else get in. Thanks.

Okay.

Thank you. Our next question comes from Mike Kender. Please state your affiliation, followed by your question.

Yes. Salomon Smith Barney. Had a couple question - land-related questions.

First was you threw out a number of 48,000 lots. What was the owned versus optioned mix on those?

It's about 70% are through options. 30% are owned, roughly.

Okay. And on the 1500 lots that you bought from - in the Quaker deal -

Uh-huh.

- was that - in terms of the - the terms of that transaction, was it all cash up front or is there some sort of earnout on the back end?

There is no earnout. It was - in rough numbers, it was about $80 million of cash up front and about $40 million of future land takedowns over the next year and a half.

Okay. And the last question was: In North Carolina, you know, the orders were down year over year. You referenced the market weakness. Was there any major shift in terms of community count there, as well? Up or down? Or was it - was the community count sideways there?

Hold on. I'll be able to answer that.

And Geaton, while he's looking for that, will you comment on the North Carolina market?

Yeah. The North Carolina market, in general, last year we had introduced a new product, our super value product, which had, you know, really great sales as we introduced it. So we were comparing - had, you know, tough comparisons there. But the market in general is a little softer than our other markets.

But we are taking some, you know, actions there and getting a little aggressive in our marketing approach and we expect sales to turn around here in the coming months.

Okay.

Community count was roughly flat year over year in North Carolina.

Okay. Great. Thank you.

Uh-huh.

Thank you. Our next question comes from Greg Nejmeh. Please state your affiliation followed by your question.

Good morning, Ara. Greg Nejmah with Deutsche Bank. A couple of questions. Larry, I'll start with one for you. Did you make any mention of purchase accounting adjustments that may have influenced the quarter, and if so, could you just clarify what they were?

Well, when we did the forecast acquisition, we - we did explain what we did in purchase accounting upon consummating that acquisition at the end of the first quarter. Basically, there was about a hundred million dollar premium paid, of which half went to goodwill and half went to various other write-ups of assets, which would cause their margins to actually deteriorate over the next several years.

When he means it would deteriorate, it's not deteriorating more than what we've reported. We - because we're stepping up the assets, the earnings that we are reporting are lower right now than they otherwise would be from Forecast Homes.

Right. And I guess my question is, on a - you know on a normalized basis, that is, if you were to remove the distortion created by the write-up of assets in the quarter, what would your margins have looked like?

Well, margins would have been higher. In fact, our gross margins, if you go market by market, were higher in virtually every market across the country. Obviously, we're affected by gross margins in the mix, what's coming from what area.

Right.

But margin momentum is, on the whole, quite positive.

And what - Ara, would that have been a factor of 25 basis points? 50 basis points? In other words, if you look at the core operations, the margins in the core operations, ignoring the purchase accounting adjustments -

Well, I mean rough numbers, Greg - by the way, I chuckled. I don't know whose name is mispronounced more often, mine or yours, but, you know, the numbers Larry used, if you take about $45 million of the stepped-up costs that we're expensing, we're doing that roughly over three years. It's somewhat close to being even. So that had a pretax effect of lowering our margins that we're reporting by about $15 million a year.

Okay.

If that gives you an idea. And that's from the Forecast acquisition.

Got a little more specifics for you, Greg. The margins that forecast - our operations from Forecast Homes would have generated, had we not had the accounting adjustments, would have been about 300 basis points higher in their operations or somewhere between 5 and $6 million higher for the company as a whole. So -

Great. Okay.

You can back into the number.

No, that's helpful.

You know, Ara, we hear a lot about tight land supplies and slow growth/no growth initiatives and the ability to raise prices. Obviously, one of the offsets to that is the impact on affordability. Do you conduct any - any surveys of your buyers or of your markets generally to discern the affordability index, if you will, of your particular markets, given that home prices have risen appreciably in many of the markets in which you operate?

and if so, how do you do feel affordability stacks up at this point in time?

Well, first of all, the affordability is dramatically different from one market to the other. The less restricted markets are frankly more affordable, so if you look at our North Carolina operations or our Texas operations, both of which have a far easier regulatory environment, housing relative to the average income there is simply more affordable.

What is happening in the more highly regulated markets to deal with the affordability issue is two things. Number one, you see more multifamily housing, and it's multifamily for sale when I say that - condominiums and townhouses - than you would in the less expensive markets. Townhouses and condominiums play a much smaller role in Texas and North Carolina, where it's much more affordable, than it is on the, you know, for example, coastal areas of California or in DC or the New York or Philadelphia suburbs.

Secondly - so that's, by the way, one of the ways that they deal with affordability. They make a different housing choice. They'd prefer the single-family homes but it's simply not an alternative for most. Or many.

Secondly, the other phenomenon that happens is the housing just moves a little further from the employment areas and the people are commuting a little further. Again, that's more pronounced in the higher cost hires, highly regulated areas like the northeast, California, and the DC markets.

So while affordability is a concern, the market via multifamily housing and via further-out locations, does adjust for it. We don't do any specific surveys, so to speak, of our different marketplaces to deal with that.

Okay. One final question. At your analysts' meeting several weeks back, you detailed a series of technology initiatives that you'd been engaged in, and you sort of walked us through where you stood with regard to the implementation of some of those projects on a - on a macro basis.

You know, any update that you could provide with regard to the implementation of some of those practices and kind of progress that you've achieved in any of the major areas?

There's no significant change, really, from where we, you know, talked a month ago or so, Greg. It's - you know, the changes in systems, the changes in processes, are something that happened very gradually over time.

One of the challenges, you know, for a company like ourselves is that we have done acquisitions, so there are other operating systems and other operating processes throughout the company, so it makes the implementation a little slower.

But what we've done is focused on the low-hanging fruit, made sure we get that implemented first, and things like national contracts and so forth are a little more straightforward to do than some of the other operating processes.

But we're meeting regularly with the senior management and really focused on getting a lot of the state-of-the-art and streamlined and best practice processes implemented throughout our company. But it's not something that's going to dramatically change from one month to another, or one quarter to another. It's something that's going to be happening gradually, a little bit more every quarter over the next couple of years.

Any idea, Ara, as to how much you're currently expensing for the implementation and processing of some of these initiatives?

You know, it's hard to say because it's really blended in with our ongoing operations, and, you know, I think it would be safe to say - [Connection to the conference call was lost and resumed at the following point]

Okay. Mr. Nejmeh. Your line is now live.

Ara, there's no better testament to the virtue of home building stocks than what just happened on the phone.

Absolutely. It was humorous. What a perfect answer to the - to our question of implementing technology and how quickly.

for those that didn't hear, the phone company experienced some technical surge and disconnected everyone, but I think about 40 people are back on, and another 10 are in the process, so I think we can resume.

I went on for about 10 minutes, Greg, before I realized I was talking to myself, but in summary, what I was saying is that, you know, the - because we have done a number of acquisitions, it does take longer to implement new systems and processes throughout, but we're meeting regularly and are making great progress. But it's not something that's going to change dramatically month to month or quarter to quarter, but it's going to happen very gradually as we discussed at our conference over the next two or three years.

But we're confident that the changes we are making are good ones. The - I think the performance is speaking for itself and I think over time, it will only get better and better.

Uh-huh. Is there a point, Ara - you know, presumably at this point in time, the costs associated with the implementation still outweigh the benefits, and as a - you know, as some of these initiatives become more fully implemented throughout your communities and subdivisions and so forth, you reach a crossover point or a threshold. Any - any idea as to, you know, when we'll arrive at that point and when the costs associated with implementing these programs that are presumably penalizing you now result in net benefits?

You know, it's so hard, Greg, to be so - to be quantitative. And I know it's tempting to want to try and quantify it. We try to as well. Some of them are just very difficult to quantify. But suffice it to say I think our investment in improvements in both technology and processes will be an ongoing effort. I think that's just the reality of the business world today.

Will it be at a slightly lower pace than today? Perhaps. But, you know, in the meantime, the benefits will continue to roll in.

It's hard to be a lot more quantitative than that.

Great. Okay. Thank you.

Uh-huh.

Thank you. Our next question comes from Steve [Percoca]. Please state your affiliation followed by your question.

Lark Research. Thank you, and good morning.

When I calculate the backlog for the northeast region off of the beginning quarter's backlog, I come up with a number of - for the end of the quarter of 1200 homes, and $337 million worth of value, which is significantly below the 1600 units and $453 million of value that you're reporting, and I'm assuming that you've added in the backlog of Quaker to get to the 1600 homes. Is that correct?

That's correct.

Well, I guess it raises a question in my mind, given that this was a fairly significant acquisition. I mean, you could look at it in many ways like an acquisition of a home builder and it seems to me that you guys ought to be reporting on a pro forma basis, especially given the forecast acquisition, for one. I mean, the questions that follow from that, first of all, for example, did - did Quaker add to sales and orders and deliveries in the quarter?

Steve, we're following all the proper rules in terms of how we're reporting this. It's determined to not be material due to its size, and, you know, we stand by our numbers.

Yeah. I mean essentially, Steve, you have to look at the fact that we are constantly in the market to replenish our land inventory, and there are a number of ways to do it. You know, some of the ways, obviously, is to buy it directly from developers, buy it directly from farmers. In other cases, we have bought large portfolios from other home builders. This is not the first time we've done that, and we've done that - we did that the prior year with a large portfolio from the Cushner companies, another home builder in the state.

So obviously as we do that, it occupies a larger portfolio, it takes a lot more time and you make trade-offs. You don't buy some of the individual parcels that you might otherwise because you've got your team tied up in doing due diligence on a large portfolio of parcels.

But we have to be resourceful and look at every possible avenue for getting some of the best parcels out there, and we simply view this - and in fact, we represented it as a land play, in buying lots.

There was backlog associated with that. We bought communities in - under construction and underway, and we did inherit the backlog that was associated with that.

But, you know, again, I mean another question that flows from that, if you take out the Quaker backlog, it suggests that the backlog in the northeast region was down 9 to 10%, and I've noted that permit activity, for example, in New Jersey, northern New Jersey, and the middle part of the state, was down about 11% for the quarter, and it - it paints a picture that suggests that there is at least a moderate amount of weakness in the -

Actually, you, I think, are completely misunderstanding it. There is, I guess agree, a slowing in permits. That's accurate. And a slowing in starts. But if you remember, we've talked a lot about the supply/demand. We've talked a lot in prior calls, as well as this, about the regulatory environment. The reality is, this very strong market in New Jersey is also highly regulated, so much so that we are going to see a reduction, it's likely, in state housing permits this year.

But that in no way means there's weakness in the market. In fact, we are regularly increasing our prices, and in fact, probably the - some of the highest price increases we have in the country are in the New Jersey market right now. Why is that? It's because demand remains steady and supply is getting tougher and tougher to come by, and it's resulting in a net reduction in permits but it's not represented in a reduction in - or a weakness in the marketplace.

Well, let's look at it, again, on a companywide basis. If you take Forecast's backlog out for the - the - that was added, something like 500 million in the first quarter, it suggests that your backlog - adjusted backlog at the second quarter was down about 12% in units companywide, which, again, points to - raises some questions, at least, about whether, on a pro forma basis, there is some weakness in the overall business.

Steve, I can only tell you what I've told you. There is absolutely no weakness in our markets other than what we've described already. The North Carolina market, which you haven't focused on, is actually the only market where we can say there is some inherent weakness in the marketplace.

Short of that, we really don't see a dramatic amount of weakness.

As we also discussed with our - when we did the forecast acquisition, and I think in that quarter's conference call, we did discuss that community count prior to Forecast Homes was starting to decrease, and part of that was, again, as a result of the regulatory environments which do make it difficult and is part of the reason why we like at numerous alternatives to increasing our community count, including acquisitions of companies, acquisitions of large portfolios, and so forth.

So that also, obviously, took a hand in perhaps the backlog numbers you're looking at. Now, again, I don't know the specific numbers you're looking at. But I can just tell you that the market is incredibly strong and solid right now. The most solid are clearing California, both northern and southern, the DC market, and the New Jersey market. Less solid - or less strong compared to those, but still a very good market, is the Texas market for us, and then the weakest of all the markets, but still a reasonable market, is the North Carolina market. And we build in all three markets there, in the Raleigh market, in the Charlotte market, in the Greensboro market, and I'd say the commentary is really about the same for all three of those. They're all a little weaker than they were last year. We find that for our company and we think we - we understand that's the case for the competitors as well.

Okay. Thank.

Thank you. Our next question comes from Carlos [Robero]. Please state your affiliation followed by your question.

Credit Suisse First Boston. Congratulations, guys.

Thank you.

A couple of cleanup items. Larry, you gave the expected gross margin of - on the Forecast Homes without the purchase accounting. Can you kind of give us a range of what forecast delivered this quarter? You know, my guess is somewhere in the 5 to 550 but can you just give us a little bit more clarity on that.

Yeah. Let me give you a little clarification first. The numbers that I said earlier of 5 to $6 million was really for a four-month period of time. For the three-month period of time, it's closer to $4 million. And, no, we're not going to break out what forecast did versus our organic California operation. We just don't want to break out specific details of where our deliveries are coming, further than what we publicly report already.

Fair enough. The Quaker acquisition, or the land acquisition or whatever you want to call it, when was it closed and when was - when was the deal done?

Paul, do you recall the exact date in March?

It closed on March 21st.

So your April new orders were impacted by the acquisitions?

Yes.

Okay. Back on Quaker, did you have to write up the fair - write up the backlog to fair market value?

For GAAP purposes, we did, yes.

Okay.

Yes. There is zero goodwill booked in - on the Quaker land. Again, we treated it purely as land, so it's on - a hundred percent of the costs are associated with the land and are expensed out as we deliver each home.

Okay. And can you give us a - you know, some sort of estimate in terms of the accretive impact of Quaker and the communities that you acquired for 2003?

To be honest, I'm not sure if we've decided to publicly disclose specifics in that acquisition. If you follow up afterwards, we'll have had time to decide whether or not we're going to - would be able to do that. And I'm not trying to be coy. I just don't recall specifically what our agreement was with this private transaction. It's a little more difficult in some of the private transactions because of privacy concerns of the seller.

Fair enough. Okay. And just two more questions, if I may.

What are your expected land expenditures for 2002? I mean, we're halfway through the year here how much do you guys expect to spend on acquiring or controlling land for the remainder of the year?

I don't have that number handy. Obviously, we're buying land and expensing off land all the time. I can tell you that it's not a very significant change in the overall plan. With all the acquisitions that we're talking about, we still expect to reduce our debt-to-equity ratio from about 1.3-to-1, which is where we were at the end of the April quarter, to about 1.1-to-1 at the end of the fiscal year, five months from now.

So, you know, while we're obviously purchasing new land, we're also delivering a lot of homes, and expensing off a lot of land as well.

Right. But you don't have a net estimate or at least do you have the net number for last year? I mean, I guess what I'm trying to get at: Has it significant - is it going to significantly be higher than last year's number?

Well, we have a net increase in community count. We don't typically track it that way. What we're buying simply in land. In some cases, we buy raw land and then develop it. In other cases, we're buying developed land. But if you are curious, I'm sure we could probably dig up some of the information post-phone call, and see if we can't get that for you.

Fair enough. Thanks, guys.

Okay.

Thank you. If there are no further questions, I will turn the conference back to Mr. Hovnanian to conclude.

Any last questions?

Great. Well, thank you very much. As I've tried to indicate, the market remains extremely strong. I know there are concerns, and jitteriness from time to time - if there's such a word - and there's a lot of focus on a monthly statistic or a - or the monthly sales reports by one company or another company. I can just tell you on the whole, the market is very solid. Long-term demographics remain rock solid. Supply remains constrained. And home building consolidation is really playing into the hands of the larger home builders, and we're trying to take advantage of that.

At the same time, we're focused on growing, we're very focused on margins, and on improving the bottom line, and I'm pleased to say the results speak for themselves, and we hope to continue to report positive results over the next two quarters for the fiscal year.

Thanks so much, and as usual, Kevin [Hake] and Larry Sorsby, in particular, are available after the call to answer more detailed questions. Thank you, and look forward to the next quarter.

Thank you. Ladies and gentlemen, a rebroadcast of this call will be available approximately one hour from now. To access this rebroadcast, you may dial into 1-800-428-6051 with a Cass code idea newspaper of 241761. That concludes our conference call for today. Thank you all for participating and have a nice day. All parties may disconnect now.