Hovnanian Enterprises Inc (HOVNP) 2002 Q3 法說會逐字稿

Good morning. And thank you for joining us today for Hovnanian's third quarter 2002 conference call. By now, you should have all received a copy of this morning's press release. However, if anyone is missing a copy and would like one, please contact Dana Almack at 732-747-7800. And we will send you one and ensure that you are on the company's 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, 258434. Again, the replay number is 800-428-6051. Pass code, 258434. This conference is being recorded for rebroadcast and all participants are currently in a listen-only mode.

Management will take some opening remarks about the quarter and then open up the line for questions. The company will also be webcasting a slide presentation along with the opening comments from management. The slides are available on the investors page of the company's website, at www.khov.com. Those listeners who would like to follow along should log on to the website at this time.

Before we begin, I would like to remind everyone that the cautionary language about 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 over the conference to Ara Hovnanian, President and Chief Executive Officer of Hovnanian Enterprises. Ara, please go ahead.

Good morning. Joining me on the call today to address questions are Geaton DeCesaris, COO and President of Homebuilding Operations, Larry Sorsby, Executive Vice President and Chief Financial Officer, Paul Buchanan, Senior Vice President and Corporate Controller, Kevin Hake, Vice President and Treasurer, and Brian Churifka [ph], Assistant Director of Investor Relations. I'm pleased to report that we have once again set new records for virtually every category of performance, and we've again exceeded analysts' expectations and our own guidance. In addition to the general underlying strength of the housing market, the dry weather pattern in many of our markets helped to us deliver (inaudible) ahead of schedule. Sales have also been ahead of our plans so our backlog remains very healthy despite the faster delivery pace. In addition, we continue to benefit from significant price escalation in our core markets, particularly California and also Washington, D.C. and the Northeast.

For those of you that are following along and viewing the slides on the investors page of our website at www.khov.com, if you'd please turn to slide number 1 and we'll begin the slide part at the same time. Hovnanian Enterprises significantly exceeded projections and last year's results by reporting net income of $1.20 per fully diluted share for the third quarter ended July 31, '02. This represents a 69 percent increase in earnings per share from the record level achieved in last year's third quarter, and it's the highest level of earnings per share ever recorded in any quarter in our Company's history.

If you turn to slide 2, as you see net income was $39.2 million. That increased by 87 percent over last year's third quarter. And also set an all-time quarterly record for our company. We continued our trend of sizable improvements in our performance measurements with many setting all time company records for any quarter in our Company's 42-year history.

Slide 3, total revenues increased 38 percent to 705 million, the highest ever achieved for any quarter. We're pleased at our ability to continue our -- increasing our earnings at a faster rate than our revenues is continuing again this quarter. Our company's pre-tax margins rose to 8.8 percent from 6.9 percent in last year's third quarter.

Slide 4, deliveries increased to 2,647 homes, also an all-time company record for the Company in any quarter eclipsing '01's record third quarter by 31 percent.

Slide 5, as a positive sign for our continued strong performance going forward, net contracts in the period also rose to an all-time third quarter record of 2,549 homes, valued at 653 million, an increase of 36 percent in dollar volume from last year's results. We achieved this with only about a 9 percent increase in the number of active selling communities. Incidentally, net contracts increased substantially in the Northeast and the D.C. markets, two large markets for our company that were unaffected by the Forecast Homes acquisition.

Slide 6, sales backlog as of July 31 reached 4,403 homes with the sales value of $1.2 billion. Both all-time records for any third quarter in our history. The value of our sales backlog represents a 30 percent increase over the end of July '01. We're beginning to build a considerable book of business for '03 that I'll expand on in a moment. We are taking a $7.6 million after-tax charge in the third quarter related to our decision not to continue with the implementation of a company wide enterprise software system developed by SAP. Prior to that charge, third quarter earnings would have been $1.43 per fully diluted share, more than double the prior year's result, as shown in slide number 5. We'll explain our decision regarding information systems in a moment.

Despite the write-off, we are -- we still set an all-time quarterly record for earnings per share and we're very pleased with our strong financial performance. Overall, we continue to see solid demand in our markets. As of the quarter end, July 31 '02, virtually all of the deliveries we need to make this year's forecast were either under contract or already closed so we feel there is very little market risk remaining in our forecast for the current fiscal year.

Sales have continued at a very strong pace in August. We're finalizing our numbers for the month and expect to release them by the end of the week. Preliminary results were in line with our internal plan and and indicate year-over-year improvement close to the 80 percent increase in July, so another very strong month.

If you turn to slide number 8, the combination of the strong backlog and the good margins gives us the confidence to increase our earnings projection yet again for fiscal '02 to a range of between $4 and $4.10 per fully diluted share, a 30 percent increase from our prior guidance. This represents between $206 million and $211 million in earnings before tax and $129 million to $132 million in net income. The midpoint of this range in net profits is more than double last year's record earnings. This increase in '02 is on top of our 47 percent annual compounded growth in operating earnings that we have achieved over the past five years.

Obviously, this year is easier to forecast since we have less than two months remaining. Our crystal ball gets a little foggier the longer we look out, but let me shed some light on next year and talk about why we have confidence in our forecast. Many of the company's markets are beginning to build a strong backlog of new home orders for fiscal '03 as I already mentioned. Our Northeast and D.C. markets are leading the way with almost exactly 75 percent of the first two quarters of '03 already in backlog. These are in contracts with substantial down payments and solid margins.

Our projections assume that current absorption rates per community continue and that at the communities that are already open for sale, but we assume zero house price appreciation from the current levels. If house prices continue to appreciate, there is continued upside in our margins as we sell more homes with each passing week. In addition, we expect to open many new communities, each of these additional communities is already owned by the company or controlled under option so our lot costs are locked in at prices that are several years old on average.

Again, we assume zero price escalation and we use current absorptions and current prices in comparable markets to create our forecast. We are still subject to potential delays in the exact timing of regulatory approvals in a few of the new community -- few communities, but it represents about 5 percent of next year's '03 deliveries so it's not a huge exposure. Based on these factors, we anticipate increasing revenues by at least 10 percent in '03 and we are increasing our preliminary estimate of '03 earnings to grow to a range of $4.50 to $4.75 per share. This is an increase of more than 75 cents per share over our prior guidance for '03.

I'm also happy to say that we should begin next fiscal year with a solid first quarter showing significant increase in earnings per share over last year's first quarter. Our projected growth is entirely through internal expansion. Any acquisition opportunities would represent additional upside from these numbers and we are always looking, although we don't have anything specific to report at this moment. I'd like to now turn it over to Larry Sorsby to discuss our financial performance in greater detail.

Thank you, Ara. Moving to slide 9, for the nine months ended July 31, 2002, revenue grew 43 percent to 1.72 billion from 1.2 billion in the year earlier period. Net income for the first nine months of fiscal 2002 was up 98 percent to 83.3 million, or $2.61 per fully diluted share compared to 42 million, or $1.54 per share, in 2001. Year to year, the number of net contracts during the nine-month period increased by 30 percent and the number of home deliveries rose by 37 percent.

Ara reviewed the highlights of our results for the three-month period and I will now get into some of the specifics. Our third quarter contracts, deliveries and backlog all represented record levels for any third quarter in our history. The Forecast acquisition clearly added to our results in this year's third quarter when compared with last year.

Moving to slide 10, in addition, we have continued to achieve organic growth in many of our markets. Our third quarter sales contract value was up 25 percent in our Northeast region and 28 percent in metro Washington, D.C. And in California, the dollar value of our net contracts for the third quarter was up 55 percent on a pro forma basis for the Forecast Homes acquisition, after including Forecast's third quarter 2001 contracts in the comparison. To illustrate our strong organic growth in earnings this year, excluding the SAP write-offs, EPS in the third quarter was $1.43, 47 percent higher than last year' third quarter when calculated on a pro forma basis for our last two acquisitions.

On that basis, EPS was 97 cents in last year's third quarter. This is calculated as if the Forecast acquisition earlier this year and the Washington Homes merger in fiscal 2001 occurred on November 1, 2000.

Our Dallas markets remain steady. Although third quarter contracts were down year-over-year in Dallas, this was primarily driven by a decline in our number of open communities in that market, a trend that we expect to reverse during 2003. More importantly, our profits continued to increase in that market. Our one softer market continues to be North Carolina.

Moving on to slide 11, despite the elimination of 18 communities due to our decision to exit from our mid south markets, we now have 199 communities open company wide as of July 31st, a 9.3 percent increase over the prior year. Our current plan is to have approximately 203 communities open at our fiscal year end, October 31, 2002, up 18 percent from 172 communities at the end of fiscal 2001. By the middle of fiscal 2003, we expect to have about 220 communities open for sale.

Moving to slide 12, in most of our markets, the company achieved substantially higher gross margins on a community-by-community basis in the third quarter of fiscal 2002 than in the third quarter of fiscal 2001. Primarily due to higher sales prices. As a result, the company's consolidated home building gross margin for the third quarter, excluding land sales, was 22.2 percent, 220 basis points higher than in the third quarter of fiscal 2001. We now expect our home building gross margins for the full year in fiscal 2002 to be higher than the consolidated gross margin for fiscal 2001 by about 50 basis points, despite the effect of the Forecast Homes acquisition which caused downward pressure on our consolidated gross margins primarily due to the write-up of inventory in conjunction with purchase accounting.

As you may recall, of the $100 million premium we paid for acquisition of Forecast, 50 million was allocated to goodwill and 50 million to stepped-up inventory in other purchase accounting adjustments. Year to date, we have expensed 12.8 million of the 50 million non-goodwill purchase accounting adjustments related to our acquisition of Forecast. Our returns on the Forecast Homes operations are very strong even after the amortization of the purchase accounting adjustments.

Moving to slide 13, the average sales price per home delivered company wide for the three months was $256,000. A 5.7 percent increase from the average sales price of $242,300 in the prior year's third quarter. The average sales price in our markets outside California was up 8.2 percent as a result of our continued ability to raise prices in many communities and some variations in the mix of communities. However, our average sales price in California declined 21 percent from last year's third quarter as a result of the Forecast Homes acquisition. We expect our average sales price to remain unchanged in the range of $255,000 to $260,000 for the fourth quarter of this fiscal year.

Moving to slide 14, total selling, general and administrative expense including corporate expense as a percentage of total revenues was 9.2 percent in the third quarter of 2002, a 50 basis points improvement from 9.7 percent in last year's third quarter and a reflection of the company's increased scale and improved operating efficiency.

Moving to slide 15, the Company's pre-tax margin rose 190 basis points to 8.8 percent, from 6.9 percent in the prior year's third quarter. Our financial services segment continues to improve on its healthy performance. Pre-tax earnings from financial services were 5 million in the third quarter, up 45 percent from 3.4 million in the prior year's third quarter.

Moving to slide 16, EBITDA for the third quarter rose 78 percent to 93.4 million, from 52.4 million in the third quarter of 2001. EBITDA covered the amount of interest incurred in the quarter by 5.9 times, reflecting the Company's ability to more than adequately service its debt requirements. EBITDA for the full year is expected to be between 293 and $300 million. We continue to have ample liquidity under our 440 million unsecured revolving credit line to fund 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 $90 million of excess cash.

Moving to slide 17. The Company's ratio of debt-to-equity was only 1.13:1 at July 31, 2002, after taking into account the excess cash on the balance sheet. This compares with a ratio of 1.24:1 at the end of the third quarter 2001. We anticipate that the Company's leverage ratio at fiscal year end, October 31, 2002, will be approximately 1:1 and the average ratio of debt to equity for fiscal 2002 will be less than 1.2:1. We are making excellent progress toward our goal of averaging a 1:1 ratio of debt to equity by 2004, and in fact we may even achieve that goal sooner.

Moving to slide 18, shareholders' equity grew 35 percent to 508 million, or $16.73 per share, as of July 31, 2002, from 376 million, or $13.48 per share at the end of fiscal 2001. We anticipate shareholders's equity will be approximately 555 million at fiscal year end or approximately $18.15 per share.

Moving to slide 19, the Company's return on average equity for the 9 months ended July 31 on an annualized basis, was 24.8 percent, up from 19.3 percent for the full year in fiscal 2001. For the full year in 2002, we expect our return on average equity to exceed 27 percent and our after tax return on capital should exceed 17 percent, as well.

Moving to slide 20. Looking forward, we anticipate a substantial year-over-year earnings increase for the fourth quarter of this fiscal year. The implied range for the fourth quarter is $1.42 to $1.52 per share in order to total up to the range of earnings of between $4 and $4.10 that we are projecting for the year. The midpoint of this range for the quarter represents a doubling of the 74 cents per share reported for the fourth quarter of 2001, and is expected again to set new all-time quarterly records for earnings per share.

Moving to slide 21, fiscal 2002 revenue is expected to climb more than 42 percent into a range between 2.46 and $2.5 billion and deliveries are anticipated to exceed 9200 homes. On that 42 percent increase in revenues, we expect net income to increase 105 percent to $130 million from 63.7 million dollars last year. Assuming that current economic conditions hold, we anticipate increasing revenues by at least 10 percent in 2003. Earnings per share are anticipated to grow tie range of $4.50 to $4.75 per share in fiscal 2003.

We expect our pattern of quarterly deliveries and earnings to be more even in fiscal 2003 than in fiscal 2002. As a result, we expect to show substantial improvement in our earnings per share in the first two quarters of fiscal 2003 compared with the first two quarters of fiscal 2002. The third and fourth quarters will be tougher comparisons given the very strong third quarter that we're reporting today and the similarly robust fourth quarter that we're anticipating. Details on our updated summary projections for fiscal years ending October 31, 2002 and 2003 are available on the company projection page of investors section of our website at www.khov.com.

Moving to slide 22, let me elaborate on our decision regarding our information systems. We have been working for several years to implement SAP as our comprehensive information management system. While we have successfully installed the SAP system at several pilot locations, we have found the effort to enter all the necessary information for each new community to be too cumbersome and overhead-intensive. It is substantially more inefficient than what we initially believed. Due to the difficulty of the community startup process in SAP, the overall complexity of SAP, and certain SAP software limitations, we explored other possible software packages that were available.

Fortunately, we have recently identified an alternative software package that we believe will give us the functionality we desire with much greater efficiency and simplicity using many of the redesigned processes we have developed over the last two years. We expect to get to the finish line sooner and at a lower cost with this decision. We are planning to have our first pilot community online by the end of this calendar year. We expect to be fully implemented company wide much sooner than under the SAP implementation plan. Our new solution will be extremely Web centric, not just for the systems needs of our associates but also for our customers and our vendors. The costs we are writing off today are those associated with the development of the SAP system that were required to be capitalized on our balance sheet in accordance with GAAP. Now I'll turn it back to Ara for some closing comments.

Through the 1990s and the early part of this decade, we have been building at an average of 1.5 million new housing units each year in the United States as shown on chart number 23, slide number 23. This is the same average level of housing production that was built in the prior three decades. Contrary to all this talk about a housing bubble, housing production today is similar to what it's been for the last 30 years.

In addition, the prior ten years have been much steadier than the past, without peaks and valleys that occurred in the prior two housing cycles which peaked at more than 2 million housing units in some years. Indeed, in the past 10 years, we have probably built less new housing than the growth in population in households would normally have demanded, thanks largely to a tightening regulatory environment that makes it very difficult to get new land parcels approved. This can be seen in the widening gap between the population growth and the housing starts in the chart. Simply said, the United States population continues to grow at significant paces.

Nonetheless, there are many who perceive that the housing is unduly strong of late and this perception inevitably leads to a lot of discussion about the possibility of a housing bubble. The fear of a bubble in the housing recession has prevented many investors from participating in the tremendous performance of the industry over the past few years. If they stay on the sidelines, these investors will continue to miss out on a future that we believe is equally bright.

Slide 24. I'd like to point out several factors that support the likelihood of a bright future for housing and, in particular, for large public home builders like Hovnanian. First, demographics support a continued robust long-term housing market due to the continued household growth and immigration I just spoke of. While economic forecasts vary dramatically from one economist to another, long-term projections for household growth are very consistent among the various demographic forecasters. They rely more on actuarial and demographic science than on modeling and economic forecasts. They use birth rates, death rates, marriage rates, divorce rates, immigration rates, and a few other factors.

These are all factors, by the way, that are highly predictable and don't fluctuate greatly from year to year. Factor these in and can accurately project long-term demand and have done so for many decades. The demographers are projecting a slight increase in annual household formation over the next ten years compared to the last ten years. This is not a view which is subject to a tremendous variance or debate. Now, based on these household formations, long-term demand for housing over the decade is projected to remain at levels very similar to the current levels of production, again slightly higher than what we have experienced over the last 10 years.

The second point we want to emphasize is that not only are the household numbers good and continuing to increase steadily, but the baby boom generation is a huge part of the growing population. This is extremely important since the baby boom generation is nearing the middle of their peak years for earnings, their peak years for savings, and their peak years for housing needs. They have the highest home ownership rates of any group -- age group in the population. We have not seen the effects of a group like this moving through our population in our recent history.

In addition, the immigrant population has been growing at a faster rate and immigrants have a higher home ownership rate after 10 years in this country than native-born Americans. This is higher than previously estimated. This pattern of higher housing demand from immigration is expected to continue. These demographic factors clearly bode well for the housing market.

The third point, is that the home building market is consolidating with the larger home builders like Hovnanian grabbing ever larger market shares. This is allowing the larger builder like ourselves to show strong growth even as the national housing market remains fairly steady with modest increases or declines from year to year.

We have been an active participant in this consolidation with several very attractive and strategic acquisitions over the past several years. And as builders are becoming significantly larger and more sophisticated, they are likely to act in a more disciplined and rational manner than the fragmented group of smaller builders, much like we had existing years before. Plus, the public home builders are a much larger and better capitalized group than they have ever been in their history. The home building industry is clearly changing.

Slide 25, the fourth point, while our current interest rates are clearly advantageous, 2000 was a great year for housing, as well. In the 30-year fixed-rate mortgages were over 8.5 percent for much of that year. This was more than 200 basis points higher than the current rate levels and it's still produced a great environment for home builders.

In addition, recent history has shown consumers are readily willing to switch to an adjustable rate mortgage during periods of higher mortgage rates, an opportunity which frankly only began in the early '80s and we never had in prior cycles. We may sell a fewer number of upgraded granite countertops or marble floors, but the market overall should stay steady even if mortgage rates begin to tick up toward the 2000 levels again. Most importantly, history has shown that a stronger overall economy and increased job growth and increased consumer confidence, leads to a solid housing market regardless of the typical increases in rates that follow a recession.

Finally, there is another very important phenomenon that's leading to greater profitability for the larger builders by restricting the housing supply. The markets with the greatest regulatory challenges have had the greatest house price appreciation. This is because the regulatory environment severely restricts the supply of lots and, therefore, restricts the number of houses in the market.

The result is economics 101. Solid demand with constrained supply translates to higher prices. In our case, approximately 2/3rds of our housing deliveries are in markets with extremely difficult regulatory conditions. I believe that's one of the highest in the industry. This has helped to contribute to record profit growth for our company. Interestingly in some of our largest markets in New Jersey, the greater Washington, D.C. market, Southern California, and Northern California, which are some of the highly regulated markets in the country that I spoke of, annual housing activity has been approximately 20 to 50 percent less than the peak levels in the late '80s. This is shown on the next four slides of annual historic housing permits in these markets.

Slide 26 shows you the housing permits in New Jersey where our headquarters is and where we're the largest builder. You can see that we're about half the level that we were in the peak of the '80s. You see the Washington, D.C. market, again, off significantly from where we were in the late '80s and actually in other markets like New Jersey which was slightly down in '01 in terms of housing activity yet very strong in terms of pricing.

You see coastal Southern California where we're a significant builder -- all the larger now with our Forecast acquisition. Housing starts and permits are less than half of what they were in the peak of the '80s. And finally in the Sacramento market where we're very active, again, significantly off from where we were in the '80s.

Because demand has been much greater than supply, there continues to be tremendous appreciation in these markets. However, as I stated earlier, our company assumes zero house price escalation in our budgeting. Any upward pressure that continues on house prices will only add to our profitability.

Further, the prospects for overbuilding in these markets is remote because of the regulatory constrictions. Builders are barely able to keep up with sales in these markets, let alone build spec, unsold homes. Unsold inventory is very low in these markets in particular. Markets like Dallas and North Carolina where we're also participating, these are markets with much easier regulatory environments. Well, these markets have seen much smaller price increases and the competition for sales is much greater there.

We do not see the regulatory environment in our markets decreasing. In fact, the opposite is occurring. It's getting much more difficult. This is a frustrating -- frustrating phenomenon for many of the smaller builders in these markets. Fortunately, as one of the largest builders in each of these markets, and as you know from prior calls, we are the first, second or third largest builder in many of those markets I just talked about, we have an excellent land position at great prices.

Remember, uhm, that again, being the larger builder, we typically get some of the first calls on some of the prime pieces of property. We have a total of 48,000 lots controlled for future development. We have more than 70 percent of these lots controlled under option contract at prices set quite some time ago.

If you turn to slide 31, so our view of the future is sunny as it has been, but not overheated. Yet home building stocks are already selling at recessionary levels. With the industry average P/E multiple at about 8 times projected '02 earnings and only 7.2 times '03 earnings, and already less than half the equivalent P/E multiples of S&P 500 and it's well below prior averages for our industry. The current ratio of price to book for the industry is about 1 1/2 times which is also lower than S&P and also lower than the history in our industry.

The vastly improved margins, asset turnover and return on investment that the industry have achieved over the past decade provide a strong argument that the industry's ratio of shares to -- share prices to book value and earnings should not be higher than historical averages for the industry, not lower. While Hovnanian's share price has performed well over the past 12 months, our closing share price Friday at $31.12 represents a low multiple of 7.3 times the midpoint of our revised projection for '02 operating earnings and we've already sold -- as I've mentioned all the homes -- virtually all the homes we need to achieve that. Our P/E multiple of 6.7 times the midpoint of our '03 earnings projections.

We traded down substantially yesterday, so at yesterday's close these multiples were even lower. This is for a company that has achieved 40 percent annual compounded growth in earnings over the past 5 years and is at about a 1:1 debt-to-equity ratio with an ROE in the mid to high 20s. I'm pleased to say that we are recently recognized by Fortune and Forbes magazines as one of the top performing growth companies in the US and last year became a Fortune 1000 company. Our revised guidance for next year's earnings means that our company should continue to achieve recognition and climb on the Fortune list. We are confident that the excellent performance of our company and industry will continue and at the current price levels we think our shares represent an exceptional value for investors. That's the end of our presentation and we would like to open up the call now for questions.

Thank you. The question-and-answer session will begin at this time. If you are using a speaker phone, 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, please press 1 followed by 3. Your questions will be taken in the order that they are received. Please stand by for your first question. Your first question comes from Robert Manowitz. Please state your affiliation followed by your question.

Hi. Good morning. UBS Warburg. Two questions. First, on North Carolina, and your comments regarding deliveries and orders, can you talk a little bit about what we're seeing in your numbers versus what we're seeing in your average price?

I'm not sure I completely understand the question.

I guess I'm looking at the disconnect between the decline in unit volumes, whether it be orders or deliveries, versus the increase in your average price in that market.

Geaton, do you want to take a crack at this one?

Again, I'm not sure of the question. Average sales prices in North Carolina have been, you know, they have been up, you know, about probably about 8 percent year-over-year. But again, we've seen softness there primarily due to just lack of employment growth there. -- in North Carolina. But we've seen some improvements over the last probably 30 days.

Keep in mind, average sales price does not imply that we're able to move the price of the homes 8 percent. Average price is very affected by mix. And I suspect without having the data in front of me, that that's the phenomenon going on there right now.

Okay. Well, I guess where I was going was what should we expect going forward in terms of average price there? Should we expect that that mix issue continues to keep prices moving higher with your other markets? Or --

I -- I would not make any major assumption in shift in North Carolina average price. We're up from 174 to 185, I guess, in the nine months. We don't anticipate any dramatic changes. The backlog is at about 192. So it is up a bit. But it's not a significant increase.

Okay. And then secondly, on your comments regarding land supply. If we looked at your 48,000 lots by market and looked at that distribution, would it be relatively comparable to the distribution of your deliveries or orders or however you want to measure your unit activity?

The largest backlog of lots or lots supply is in the Northeast and the Washington, D.C. market. Those are the markets that have a particularly long regulatory process. So we optioned these many years ago and worked feverishly to go through the regulatory process. So I would say it's a little more weighted toward those markets, which has certainly been beneficial for us since those are two markets that have been appreciating tremendously. It's a much shorter position in North Carolina and Texas, which have less of a regulatory environment there. And that's good at the moment.

Right. Thank you very much.

Your next question comes from Mr. Mike Kender. Please state your affiliation followed by your question.

Yes. Salomon Smith Barney. Had a question about cash. You know, you're sitting on a lot of it at the end of July, $97 million. The October quarter is always a big cash generation quarter. You don't have any revolver borrowings. What are you going to do with -- you're piling up a lot of cash. What are your priorities near term with it?

We do have a lot of cash. And it is projected to increase later in the year from the already high levels. And it frankly does cost us a little bit as you can imagine. We're earning a little less than we're paying on some of the debt that we have. However, uhm, you know, we think since there are acquisition opportunities out there, that it's wise not to pay off some of our long-term debt. That's all we have right now short-term debt as I mentioned is down to zero. (overlapping speakers). You know, if we don't find any good opportunities soon, we'll consider other strategies to reduce cash and reduce debt.

Any parts of the country that you're focused on right now in terms of acquisition?

No. Our strategy, besides the fact that we're always looking for end market acquisitions because we're very focused on being a dominant builder in the markets that we're in, so that is always an ongoing part of our strategy and we have been successful there recently. But our strategy continues to be to look anywhere in the country that -- because we can make a pretty good case, frankly, for exciting sunbelt locations and we can for less exciting frostbelt locations. The key is, we want to find a builder of significant size with a great management team with an already existing track record. We don't want a turnaround. We want an already high-performing organization that we can get to perform even higher. And, you know, that starts to limit the choices. So we feel if we leave the entire field open for opportunities, we're going to increase our opportunities for an acquisition. So that's been our strategy thus far.

Okay. Fair enough. Thank you.

Your next question comes from Stephen Kim. Please state your affiliation followed by your question.

Salomon Smith Barney. I had a few questions for you but first off, excellent quarter, gentlemen. Uhm, the first question relates to your August orders. I thought I heard you say that you orders were up 80 percent, they were running in that direction. Is that in fact what you said and was that on a dollar basis, unit basis?

The August orders -- we're going to actually put a press release out tomorrow, Steve. Those are preliminary indications. They certainly will be in line with what was achieved in the quarter ended July. May or may not be quite as strong as we actually achieved in the month of July. But I think you'll be very pleased when we announce it.

Okay, great. That's fair enough. Thanks for that clarity. And then on the gross margins -- well actually, let me skip to my third question actually -- in the slide that you used to talk about your projection for the fourth quarter earnings, it looked like a range of 142 to 152. And yet in your guidance for the year, I think you said the high end of your range was 132 million in net income which would imply 46 million in net income in the fourth quarter. And, uhm, at least that's what my spreadsheet's generating and that would suggest an EPS at the high end of the fourth quarter of 141. I just want to make sure that, you know, there's not a confusion there.

Well, Steve, I think there is -- this is Kevin Hake. There's two -- I think maybe differences in looking at it. The main one is, we issued shares again in the first quarter which I think makes the numbers not add for the year. And -- so I think $1.42, $1.52 is what we would need to earn. I think that would add up to the $4 to $4.10 range that we're giving.

Okay. But you're still saying that's -- I mean, net income-wise for the fourth quarter might be a better number than to use, and that's still 46 million at the top end, right?

Uhm... yeah. We've given, you know, the shares should be similar to what they were in the third quarter. On a fully diluted basis for the fourth quarter. And so the $1.42 to $1.52, whatever we're saying that converts to in terms of net income is our guidance for the fourth quarter.

The top end of our range for '02 for net income is $132 million.

Okay. Great. I'll follow up if I need to later. Uhm, the last question I had related to your gross margin. Again, looking at some of your projections, it seemed to imply that your gross margin in the fourth quarter was going to be down somewhere around 50 to 70 basis points. In the fourth quarter versus the third. Is that in fact your intention or your expectation? And what kind of preliminary expectations do you have for gross margins in the first half of next year given what you know about your backlog relative to what you reported this third quarter?

You can do the fourth quarter, Kevin. [ Pause ]

Yeah, we haven't specifically talked about the fourth quarter gross margin. We do expect that for the year it will be up somewhere in the range of 50 basis points and I guess I'm not sure what you exactly are asking, whether that in your model implies that we'll be down in the fourth quarter for the full year?

No. That means that you would be down sequentially, uhm, you know, fairly noticeably.

Let me try and comment on part of this. For '01, our home building gross margin for the full year was 20.6 percent. For '02, our revised projections for the full year are 20.8 percent to 21.4 percent. I don't have the calculations right in front of me as to what that implies for the fourth quarter.

We have increased our projections for gross margins. While we mentioned that each market actually was projecting increases in the gross margin, the increased mix from the Forecast acquisition actually was going to, we believed was going to decrease our home building gross margins, because they would typically have slightly lower gross margins after we accounted for purchase accounting and stepped up some of the assets. We are now finding that all the margins overall have been increasing, so we are now seeing for the full year, we will be higher than '01 and it's somewhere between .2 percent to about .8 percent for the full year. We haven't been specific about margins in '03. But we've implied we're going to grow at least 10 percent in revenues and we've given you the earnings per share numbers of 450 to 475 so you can kind of do a little back of the envelope from there.

Great. And then following up on that the purchase acquisition -- the purchase accounting adjustments in the gross margin for the third quarter, uhm, you know, what was that in terms of the basis point impact?

I'm sorry, what was that in terms of what?

Of basis point impact.

We don't have that right in front of us, but I'll call you after the call, Steve, and give you the answer to that.

Great.

I believe, Larry, is it accurate, it's about $12.8 million?

That's year to date, Ara. He asked for the quarter.

Oh, okay.

I don't have that right in front of me.

Okay.

Great. Thanks very much. And great quarter, guys.

Thank you.

Your next question comes from John Stanley. Please state your affiliation followed by your question.

UBS Warburg. Also great numbers, guys, and I share your pain when it comes to the valuation. Anyway, uhm, the Forecast deal is looking particularly brilliant, I think, in hindsight. I think, Larry, you or Ara, when you first set your accretion target for that deal early on of about 50 cents, I think you were assuming that forecast EBITDA was down 25 percent this year. -- in the wake of what's happened in California, my guess is that's probably turned out to be awfully conservative. Would it be fair to assume that forecast EBITDA is actually up as much as 10 to 20 percent this year instead of down 25 percent?

It's definitely up and we were overly conservative. We don't want to be too specific because we don't give real specific details for competitive reasons about our returns in each of our markets. But suffice to say, Forecast has been performing better. Our original California operations are doing better and frankly our performance in almost every market has been ahead of our projections. It's not all a California story. We have had spectacular success in most of our markets and we are beating our budgets.

I appreciate that, Ara, and hopefully you can keep bolting on good deals like Forecast. Just a question maybe for Larry on the community count. Do you have the detail for the quarter and could you give me the Northeast and the middle Atlantic if you do?

We -- we typically don't give that out publicly.

It's in your Q so I didn't know whether you had it handy or not.

I don't right now but if we have put it in our Q, it will be in the Q next time and I'll be glad to share it with you.

What's in the Q, I guess, I think is existing. We don't actually do the forecasts.

I was just looking for the end of the most recent quarter.

We'll get back to you on that I don't have it here unless, Kevin, you have it in front you for the quarter.

I don't know about for the full quarter. But as of the end of July, 28 Northeast, 28 in D.C., 64 in North Carolina, uhm, 1 left in the mid south, winding out of.

Right.

41 in California. 37 in Texas. I think that adds to 199.

Perfect. Thanks, guys.

You bet.

And Steve Kim, if you are there, I think we do have a number for the third quarter, total of about $5.2 million was expensed associated with the purchase accounting adjustments on the Forecast Homes acquisition. Hopefully anybody else who wanted that answer uhm can all hear it that way.

This is a reminder ladies and gentlemen. Should have you a question, please press 1-4 on your push button phone. If there are no further questions, I will turn the conference back to Ara Hovnanian to conclude.

Thank you very much. Well, as you, you know, have heard, it's been a great quarter. It's shaping up to be a spectacular year. And based on our backlog, we're very confident we're going to be off to a great start for '03. We continue to be excited about the housing market. We are not concerned about the housing slowdown that many seem to be talking about. Frankly, we've heard about this for years now. One day, it may come true. But we feel very good (inaudible) household formation today which are the key for the long term. We look forward to reporting continued strong results in future quarters. Thank you very much. And as usual, Larry, Kevin or Brian in particular will be available for the follow-up questions.

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