Hovnanian Enterprises Inc (HOVNP) 2003 Q1 法說會逐字稿

Good morning and thank you for joining us today for Hovnanian's fiscal 2003 first-quarter 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. We will send you a copy of today's release and ensure that you are on the company's distribution list.

There will be a replay of today's call. This replay will be available one hour after the completion of the call and run for one week. The replay can be accessed by dialing 1-800-428-6051, pass code 286608. Again, the replay number is 800-428-6051, pass code 286608.

This conference is being recorded for rebroadcast and all participants are currently in a listen-only mode. Management will make some opening remarks about the first-quarter results and then open up the line for questions. The company will also be webcasting a slide presentation along with the opening remarks 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 onto the company's 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 the conference over to Ara Hovnanian, president and chief executive officer of Hovnanian Enterprise. Ara, please go ahead.

Thank you. Good morning.

I'm pleased to report the results for our first quarter of fiscal 2003. We've once again exceeded analysts' expectations and our own forecasts with an exceptional financial performance for the quarter. We set all-time first-quarter records for our company in many categories of our financial performance, including net contracts, sales backlog, home deliveries, revenues, and net income. We also continued to position the company for future growth and healthy returns during the quarter with the acquisition of two separate home-building companies in the Houston market and we have some exciting new communities coming on-line in several of our markets and in great locations.

Joining me on the call today from the company are Larry Sorsby, executive vice president and chief financial officer, Paul Buchanan (ph), senior vice president and corporate controller, and Bryan Taripca (ph), assistant director of investment relations.

As you saw in our press release, we significantly exceeded projections and last year's results by reporting net income of $1.35 per fully diluted share for the first quarter ended January 31, 2003. This represents a 127% increase in earnings per share from the prior record earnings of 60 cents per share achieved in fiscal 2002's first quarter, as shown on slide no. 1 for those of you that are following along and viewing our slides on www.khov.com.

We've now more than doubled our first-quarter EPS results for three consecutive years. I don't think we can continue to double our first-quarter earnings every year, but I do think we'll continue to achieve healthy increases and needless to say, we're proud of our performance.

As shown on slide no. 2, net income of $44.8 million increased by 147% over last year's first-quarter income of $18.2 million.

Slide 3. Just as important as our growth in earnings is our return on invested capital. The company's after-tax return on beginning capital for the first quarter of '03 was 17.4%, compared to 13.7% in last year's first quarter. For our fiscal year '02, we achieved a 17.5% average return on capital. On a trailing 12-month basis, our average return on capital for the period ended January 31, '03, was 17.3% compared to 12.5% for the trailing 12 months last year.

Our return on capital ranks us as one of the best in the industry.

Go to Slide 4. The company's return on beginning equity, another very important measure for our industry, for the three months ended January 31 on an annualized basis was 31.8% compared to 19.3% in last year's first fiscal quarter, and compared to our very strong return on beginning equity of 34% that we achieved for the full year in fiscal '02. On a trailing 12-month basis, if you haven't had enough statistics yet on this area, our average return on equity for the period ended January 31st, 2003, was 31.8%, compared to 20.5% for the trailing 12-month period last year.

We also continued our trend of sizable improvements in other performance measures during the quarter, with most setting all-time company records for any first quarter in our 43-year history.

Slide 5, you see that total revenues for the three months increased 38% to 628 million from 454 million last year.

Slide 6, our company's pre-tax margin rose by a phenomenal 470 basis points to 11.3% from 6.6% in prior year's first quarter, an indication of our ability to raise prices in a number of communities as well as our improved operating efficiency. We've remained very focused on increasing our earnings at a faster pace than revenues.

Slide 7, you see that deliveries increased to 2285 homes, surpassing last year's record of 1750 homes by 31%.

Slide 8, as a positive sign of our continued strong performance going forward, net contracts in the period also rose to an all-time first-quarter record of 2141 homes valued at $567 million. That's a 49% increase in dollar value from last year's results. We achieved this with only a 15.3% increase in the active number of communities. Now, these numbers do include the effect of our two Houston acquisitions, Parkside Homes and Brighton Homes, which contributed 83% in increase -- excuse me, to a 83% increase in new contracts in Texas for the quarter, but obviously from an absolute perspective, the effect was, while very positive -- well, positive, was not particularly big in our overall picture.

Dallas-Fort Worth, unaffected by the acquisitions in Texas, was up 16% for the quarter, and the value of our new contracts was up 5% in the Northeast and 20% in the Washington, D.C. markets, also unaffected by the acquisitions. And you see those on Slide 9.

Our California contracts were up 178% over last year's first quarter, but this was obviously affected by our forecast acquisition a year ago. However, if you look pro forma as if we owned forecast for the full quarter of last fiscal year, we were still up 37%. So as you can see, there's been a lot of internal organic growth in addition to the added boost of our acquisitions.

As shown in Slide 10, sales backlog at quarter end reached 3,875 homes with a sales value of 1.1 billion, again, records for our company. The value of the sales backlog represents a 28% increase over last year's first quarter. This includes the sales backlog of Brighton and Parkside at the quarter end. The combined backlog of these two companies was 162 homes valued at 31.1 million, obviously, again, positive but a minimal impact on the overall company.

We continue to book a considerable amount of business for the remainder of fiscal '03. At quarter end, we had more than 57% of our projected deliveries for '03 either in sales backlog or already closed. In fact, the 57% number has grown since the quarter end, as our sales pace in February has been very strong. In fact, in spite of all the concerns about Iraq and Wall Street and despite all the housing bubble rhetoric that we continue to hear and read about everywhere, last week we had a phenomenal sales week.

Some of the frenzy and frothiness of a year ago is gone but the market continues to be very solid. Demand for new homes has remained particularly strong in several of our more highly regulated markets, which has allowed us to continue to raise prices in those communities. Such price escalation has not been factored into our forecast at all.

As we stated before, our projections assume that current absorption rates continue at our locations that are already open and we assume zero price appreciation from historic levels. If prices do go up, that's additional upside in our projections. While our logic may tell us that home prices can't continue to escalate much further, the forces of supply and demand are continuing to work as they always do, and the supply of new lots for housing is very, very constrained in our highly regulated markets, including Washington, D.C., southern California, northern California, and the entire Northeast region.

As we've previously stated, the markets with the greatest regulatory challenges have had the greatest home price appreciation. In our case, approximately two-thirds of our housing deliveries are in markets with extremely difficult regulatory conditions. I believe that one of -- we are one of the highest in the industry in this regard. The prospect for overbuilding in these markets is remote because of the regulatory restrictions. There are no signs of a housing bubble in the highly-regulated markets in terms of production. In fact, in these markets, housing production is 20 to 50% less today than it was during the mid to late '80s, yet demand remains stronger.

Markets like Dallas and North Carolina, where we also build, with much easier regulatory environments, have seen much smaller price increases and much greater competition for sales. We believe that our strong position in highly-regulated markets is one of the factors that contribute to our industry-leading performance. While we raise prices aggressively wherever we can, we also continue to maintain a healthy sales pace in each of our communities. Sales activity has obviously benefited from record-low mortgage rates, but there is more to demand than just rates. Household formation, driven by demographic factors such as immigration, population increases and the Baby Boomer generation entering the workforce are driving demand for entry-level housing, while the aging Baby Boomers are creating pent-up demand for active adult community, luxury homes, and second homes.

In fact, economists predict that there will be about 10 million more households in the 45 to 65-year-old range at the end of the decade than there were at the beginning of the decade, and I might add that the home ownership rate in this group is extremely high at in excess of 79%.At the same time, tight regulations in many of our markets have artificially restricted the available supply of housing, thus leading to excess demand and, in many cases, double-digit percentage price increases.

We have had a very strong sales performance in the first quarter and over the past two years, while the economy has been lethargic and jobs have been declining in many markets. At some point, the economy will turn around and gain momentum, and the housing markets are typically at their best when the economy is in a recovery phase. In fact, on an historical basis, new housing activity is more closely correlated with job growth than mortgage rate fluctuations.

In the coming year we'll be opening many communities in the Northeast and the D.C. markets, both markets that are important to our company. Due to our long-term land position in these markets, our land prices were locked in many years ago at considerably lower prices than the current market. This will enhance already excellent returns if the market's steady and allow us to earn solid results even if the market slows down a bit.

Nevertheless, we also remain cautious about the balance of '03 on a couple of fronts. First, the January quarter is traditionally a slow season for the year for new home sales nationally, from Thanksgiving all the way through January, and it's really difficult to gauge the market clearly during this period. While our new contracts were ahead of our plan for the quarter, and our sales activity has exhibited particular strength over the last couple of weeks since the February selling season began, we'll really only get a clear picture of the market as the spring selling season unfolds.

Secondly, severe weather in the Northeast, the D.C. and the North Carolina markets -- those of you that are there know what I'm talking about -- have delayed our ability somewhat to start and complete some of our homes that we now have under contract, and this may impact some of our deliveries for the second and third quarters in these markets. Luckily, our sales continue to be ahead of plan and our backlog remains healthy and we're making good progress in deliveries.

North Carolina, which we previously characterized as a slower market and in fact we've said that for the last year-and-a-half or more, has seen indications over the last few months that the market may have bottomed out and is actually showing signs of a rebound in housing demand. Dallas has seen some weakness in higher price points as we've reported in previous quarters, but, again, fortunately the majority of our product is in the lower price points and that remains solid.

All our other markets, which include our brand-new Houston market, are performing extremely well in all price points. The value of our new contracts was up 5% in the Northeast for the quarter, as I mentioned earlier, but the number of new contracts declined modestly. This is a reflection of our -- the difficulty in getting new communities approved and opened up while housing prices continue to escalate. The level of housing activity in the Northeast has not been growing and we don't expect overall housing starts to grow in the Northeast going forward, as the regulatory environments get tougher and tougher, but our profits and our market share have continued to grow nicely as we're the market leader in that location.

We are excited that we have an excellent land position in the Northeast, and we expect our number of open communities to increase this year, positioning us for a very strong performance in that market in '04.

Let me remind you that the strength of our performance is not contingent on an increase in the national housing starts or new home sales. We've all been expecting these numbers to fall off somewhat for the past couple of years, as the economy slowed down, and nationally new home sales continue to set records in spite of this and we've all been amazed. However, regardless of whether they're up a bit or down a bit each month, the market for new housing is relatively flat and boring over the long term. This is not a traditional growth industry.

We expect to build 1.6 million new homes nationally for the next decade or so, on average, and this is up only slightly from the prior couple of decades. It's been a very steady market over the long term, and this has been based on demographics that I've already discussed. However, our growth has been driven by the tremendous consolidation that's occurring in our industry with larger builders like ourselves rapidly taking market share from smaller builders through acquisitions and competitive advantages in buying and developing new land parcels. We've grown our deliveries at a compounded growth rate of 23% over the past five years, while national housing starts have been relatively flat. We expect this consolidation to continue, and perhaps to even escalate, so please don't get confused and sell our shares or any other homebuilder's shares in a given month if national starts are announced and they decline or go up or down by one or two percent.

We're very excited about our recent acquisitions of Parkside Homes and Brighton Homes, two privately-held home-building companies headquartered in Houston. We acquired the assets of Parkside Homes on November 6th of '02 and completed the acquisition of Brighton Homes on December 31st of '02, so their operations -- at least partially -- were included in our results for the quarter from the respective dates of their closings.

These acquisitions further our strategy of becoming a dominant builder in each of our selected markets. In our first year of Houston operations, with these two companies, we're now expected to be the seventh largest homebuilder in Houston. We expect to deliver more than a thousand homes in this market this year. The product diversity offered by Parkside Homes and Brighton Homes is an excellent complement to our strategy of developing a broad product array in each market. Brighton's primary price range is in the 150 to $250,000 price targets, and Parkside Homes, which develops unique home styles targeted at the very price-conscious buyer is in the 80 to $150,000 price range.

The addition of these two companies has also brought some strong home building operations and management teams into our fold as well. As with all of our prior acquisitions over the last five years, the price that we paid for these companies will enable us to generate good returns on our investment, even without the benefits of -- from further improved efficiencies or the expansion of product offerings that we think we can bring to these operations. We're excited about moving forward to leverage the combined strengths of Parkside Homes and Brighton Homes.

Although we are confident that we're going to gain cost savings from regional suppliers and national contracts due to our increased market presence and our ability to create partnering relationships with local trades, we have not factored any of those additional savings into our forecast. We expect our Houston operation to be similar to our Fort Worth-Dallas -- excuse me, Dallas-Fort Worth market from the standpoint of having slightly lower margins but a very high inventory turnover in order to generate our target return on investment.

In Houston, we're generally a buyer of finished lots from land developers that are well-established in the marketplace. Brighton and Parkside have excellent relationships with these developers and that will allow us to immediately establish a strong presence in the market and build a solid platform for future growth. Additionally, we have a strong presence in the growing Houston infill (ph) market and we develop those properties on our own.

Now, let me comment on our updated '03 projection, to go to Slide 11. The continued solid demand for our homes in most of our markets, along with a strong first quarter results and a healthy sales backlog have given us the confidence, once again, to increase our projections for the full fiscal year to a range of earnings between $5.25 and $5.50 per fully diluted share, and this obviously assumes the current economic conditions, which I wouldn't describe as vibrant for the overall economy, but nonetheless, we assume they stay the same.

The mid point of this range represents a 26% increase from last year's record earnings of $4.28 per share, and this is on top of the 66% compounded growth rate in earnings that we achieved over the prior three years. This revised projection of EPS represents an increase of about $1.55 more per share, or about 40% over our initial guidance of '03, which we provided last summer.

Slide12. Fiscal '03 revenue is expected to climb more than 13% into a range of about -- between 2.8 and $3 billion, and deliveries are anticipated to be between 10,500 and 11,000 homes. Net income is expected to grow by more than 26% to a range of 173 to $182 million, and obviously that's after tax.

Slide No. 13. We expect to continue the year with a solid second quarter, with earnings in the range of $1.15 to $1.25 per share, showing a healthy increase in earnings per share over last year's second quarter of 80 cents per share. We expect our pattern of quarterly deliveries in earnings to be more even in fiscal '03 than in fiscal '02, and this has been a goal that we've been working on for many years.

As a result, the third and fourth quarters will be a little tougher comparison, given the very strong results that we achieved over the last six months of last year, but obviously we're expecting a strong finish, nonetheless. Details on our updated summary projections for the fiscal year '03 are available in the financial information page of the investors section of the company's website at khov.com.

I'll now turn it over to Larry Sorsby to discuss our financial performance in greater detail.

Thank you, Ara.

Ara reviewed the highlights of our results for the first quarter, which are displayed on Slide No. 14. And I'll now get into some of the specifics.

Our first-quarter contract deliveries, backlog, revenues and earnings all represented record levels for any first quarter in our history. Moving to Slide 15, the company's consolidated home building gross margins for the first quarter, excluding land sales was 24.7%, 400 basis points higher than in the first quarter of fiscal 2002.This improvement was primarily due to increases in home prices and improved operating efficiencies.

Moving to Slide 16, total selling, general, and administrative expense, including corporate expense as a percentage of total revenues, was 11% in the first quarter of 2003, a 30 basis points increase from 10.7% in last year's first quarter. This is partially the result of increased administrative costs associated with our recent acquisitions, and partially due to our coastal California and Northeast region operations gearing up to open a number of additional communities later this year.

Due to these additional communities, we're very optimistic about both our Northeast region's performance and our coastal California performance in 2004 and beyond.

Moving to Slide 17, the average sales price for home delivered company-wide for the three months was $265,000, a 4.8% increase from the average sales price of 253,000 in the prior year's first quarter. The average sales price in our markets increased as a result of our continued ability to raise prices in many communities and some variation in the mix of communities. We expect our average sales price to remain in the range of 260 to $270,000 for the remainder of this fiscal year.

Our financial services segment continues to improve on its healthy performance. Pretax earnings from financial services were 4.7 million in the first quarter, up 29% from 3.6 million in the prior year's first quarter.

Moving to Slide 18, EBITDA for the first quarter rose 90% to 88.5 million from 46.7 million in the first quarter of 2002. EBITDA covered the amount of interest incurred in the quarter by 5.8 times, reflecting the company's ability to more than adequately service its debt requirements. EBITDA for the full year is expected to be between 365 and $380 million. Our credit statistics continue to be excellent, and are at levels that many investment-grade companies would be pleased with.

We continue to have ample liquidity under our unsecured revolving credit line to fund our continued growth objectives. Last week, we increased the aggregate commitment amount of our credit facility from $440 million to 505 million, and have the ability to seek additional lenders to increase the total facility amount to 590 million as our needs increase in the future.

There was no outstanding balance under the company's unsecured revolving credit agreement at the end of the quarter, and we had approximately $80 million of excess cash, even after our two recent acquisitions. The Houston acquisitions had no significant impact on the company's leverage.

Moving to Slide 19, the company's ratio of net debt to equity was only .96 to 1 at January 31st, 2003, after taking into account the $80 million of excess cash on the balance sheet. This compares with a ratio of nearly 1.3 to 1 at the end of the first quarter of 2002. We anticipate that the company's average leverage ratio for fiscal 2003 will be around 1 to 1. Thus, we're on track to achieve our target of a 1 to 1 ratio of debt to equity this year, one full year ahead of our 2004 goal.

Moving to Slide 20, shareholders' equity grew 8% to 607.3 million or $19.82 per share as of January 31st, 2003, from 562.5 million, or $18.41 per share at the end of fiscal 2002.We anticipate shareholders' equity to be approximately 740 million at year-end, or approximately $24 per share. Year-to-date, we've bought back 250,000 shares of our stock with a total purchase cost of approximately $7.3 million, or $29.04 per share. We have now 1.1 million shares remaining under our July 2001 share repurchase authorization of 2 million shares.

Moving to Slide 21, with the addition of the new communities from our recent Texas acquisitions, we have 233 communities open company-wide as of January 31st, a 15.3% increase over the prior year. Our current plan is to have about 260 communities, including approximately 35 in Houston, open at our fiscal year-end of October 31st, 2003.This will represent a 33% increase from the 196 communities open at the end of fiscal 2002, or about a 15% increase without the Houston acquisition communities. Although we are subject to potential delays and the exact timing of regulatory approvals in a few of these new communities, we have significant experience in managing and projecting the approval process, and each of these additional communities is already owned by the company or controlled under option so our lot costs are locked in, providing good earnings visibility.

The full benefit of sales for many of these new communities will not be felt until fiscal 2004. We're very optimistic about our prospects for continued organic growth in 2004 and beyond. To illustrate our strong organic growth in earnings this quarter, EPS in the first quarter of $1.35 per share was 101% higher than last year's first quarter when calculated on a pro forma basis for our acquisition of Forecast Homes in January 2002. Perform for forecast, our EPS would have been 67 cents in last year's first quarter.

We are one of the last public home building companies that still releases monthly order activity. Next week, we will release our results for February. Assuming reasonable sales in the last week of February, in the aggregate they should be up slightly over February of last year. Yes, in part, this reflects our Texas acquisitions, but each month and quarter, certain analysts that cover us and other public home builders spend a great deal of energy trying to figure out how much of our growth is due to acquisitions and some put out comments that seem to degrade any growth if it only comes from acquisitions.

Let me tell you that first of all, organic growth continues to be very strong, as indicated by our market-by-market results, and the pro forma EPS results for our forecast home acquisition I discussed earlier. Secondly, acquisitions of other companies can be and certainly have been, for Hovnanian, a powerful way for us to achieve growth while maintaining strong returns on capital. We are in the acquisition business every day. Whether we are buying small builders, a pool of land assets, individual land parcels for development, or individual lots under rolling lot options from developers, it's imperative that we underwrite and value each of these types of acquisitions appropriately. That's the business we're in.

We're not in the retail business trying to increase our same-store sales. We prefer to raise prices and increase margins, rather than increase same-store sales. We must increase our number of storefronts and one of the different ways I just described in order to achieve volume growth. Yes, we expanded our same-store sales in the first quarter, since our new contracts were up 49%, while the number of communities was only up 15%, but it is primarily the community growth that we're driving at.

I hope at least some of the investors that have been following the industry and investing in our shares have grasped this concept. I would also like to mention that some of our analysts have also been pointing to the strong performance of our company and our industry and have been beating the drum loudly in support of the home building stocks which they argue are grossly undervalued. Coincidentally, we happen to concur with these analysts and our strong new order and profit performance backs up their views.

As Ara mentioned earlier in the call, we were able to acquire both Brighton Homes and Parkside Homes at prices that will allow us to generate good returns on our investment. Consistent with our approach on previous acquisitions, we were as conservative as possible with respect to the creation of goodwill, since it can no longer be amortized, a policy which we don't like or agree with.

With respect to our Parkside acquisition, we booked no goodwill or any type of intangibles. With respect to our Brighton Homes acquisition, we did not book any goodwill, but instead, stepped up the value of inventories and assigned the balance of the purchase premium to intangible assets with finite lives. Those that can be depreciated over a range of 2 to 5 years. This will result in lower earnings from our Houston operations over the next year or two, but will ensure better returns on invested capital from a GAAP accounting perspective over the long term.

We are confident that even after the effects of this conservative purchasing accounting, the Houston acquisitions will be accretive to our earnings per share in fiscal 2003 and beyond. Our projected returns on our investment in these acquired operations are healthy even after the amortization of the asset write-up and definite-lived intangibles.

I'd like to take a minute to further emphasize our conservative historical approach to accounting for acquisitions. Using our purchase of Forecast Homes a year ago as an example. The aggregate purchase price for the forecast home acquisition, which closed in January 2002, was $196.5 million. The total purchase price amounted to $90.4 million over forecast's book value. Of the 90.4 million, 49.8 million was allocated to goodwill, and 40.6 million to inventory step-up and other contractual items that are being itemized over a few years. Although this strategy will compare our earnings more over the first few years than if we had allocated the full 90 million premium to goodwill, it is far more conservative and we believe more accurately reflects our performance.

In addition, it will ensure better returns on invested capital in the long term. Had we taken the same more aggressive accounting treatment as some of our peers and booked 100%, the entire $90 million premium, to goodwill, we would have increased our pretax earnings in fiscal 2002 by roughly 14 million or 28 cents per share, and similar earning benefits over the next few years would have been realized as well. We've also taken this conservative approach with regard to our most recent acquisition of Brighton Homes.

As I mentioned earlier, on Parkside Homes, we did not book any goodwill or intangibles, so this concept was not applicable to that transaction. On Brighton Homes, we've allocated 41.7 million, the full amount of the premium from this acquisition, to stepping up the basis of housing inventory or to definite-lived assets that can be amortized over a period of time. Of the 41.7 million premium, 14.9 million was allocated to step-up in the value of inventories, which will be expensed over the next several years, 26.8 million of the premium was allocated to definite-lived intangibles which will be amortized over the next 2 to 5 years. Had we allocated 100% of the premium to goodwill, our projected pretax income would have been roughly $8.7 million higher in 2003, equal to approximately 16 cents per share, and, again, we would have had similar earnings benefits over the next several years from our Brighton Homes acquisition as well.

But not all our competitors in our industry are taking this conservative approach toward goodwill in accounting for recent acquisitions. Some are allocating the entire premium amount to goodwill, so that the reported earnings and returns from these acquisitions will appear better in the short-term at the expense of long-term GAAP return on capital. We remain hopeful that our competitors will not become more aggressive in bidding on other home builders based on this more ache aggressive accounting methodology.

In fact, we're counting on some of the analysts listening to this call to keep our competitors more conservative in their acquisition accounting methodology. Again, this is all from a GAAP accounting perspective. The most important analysis is the cash return on cash investment analysis that we perform at the time we make an acquisition. On that basis, our returns on prior acquisitions have been exceptional and the prices that we're paying for companies today are well-founded, leading to continued strong returns in the future.

Now I'll turn it back to Ara for some closing comments.

Well, this was another excellent quarter for our company. We further expanded our company with a strong presence in another healthy market and we've continued to make significant progress toward becoming a better and more efficient home-building company. Hovnanian continues to achieve financial results that place us near the top of the industry in terms of earning growth and return on investment and most measures.

I'd like to emphasize that Hovnanian is a company focused on return on investment. We analyze every new community and every potential acquisition based on return on investment, and as a result, we've achieved improved financial performance and are providing greater return to our shareholders. Since we operate in a diverse group of markets, we achieve our targeted ROI differently in each region. Several of the company's markets achieve the desired return through higher margins and lower inventory turns, while others experience higher inventory turns and lower margins. On a consolidated basis, the company has a very healthy EBIT margin and ranks in the mid of the range by this particular measure of financial performance. You see that on Slide 2.

However, the combination of the company's healthy EBIT margin and the industry-leading inventory turnover ratio, which you see in Slide 23, of 2.3 times turns in fiscal '02, results in a return on investment, including the impact of intangibles, by the way, that places our company near the very top of the industry. That's on Slide 24.We believe that this focus is the best way to create long-term value and profitability for our shareholders.

Slide25. Despite the good news to come out of the industry, home-building stocks continue to sell at recessionary levels, with the industry average P/E at only 5.8 projected '03 earnings. This is already less than half the equivalent P/E multiples in the S&P 500 and well below the prior averages for our industry. Hovnanian's share price has performed well over the past 12 months. However, our closing share price of $32.34 represents a low multiple of about six times the mid point of our revised projections for our fiscal '03 earnings and we've already sold, as I mentioned earlier, 57% of the homes we need to achieve these earnings.

This is a company which has achieved almost a 40% compounded growth rate in earnings over the last five years. We're confident that the excellent performance of our company and our industry will continue, and at current price levels, our shares continue to represent an exceptional value for investors.

Thank you very much, and we're pleased to open the call up to questions now.

Thank you, sir. The question-and-answer session will begin at this time. If you're using a speakerphone, please pick up the handset before pressing any numbers. Should you have a question, please press star 1 on your push-button telephone. If you'd like to withdraw your question, please press star 2. Your questions will be taken in the order that it is received. Please stand by for your first question, sir.

The first question comes from Carlos Ribeiro (ph) from BC First Boston. Please state your question.

I'm sorry. Good afternoon, congratulations on your quarterly results. The first question, actually, pertains to your gross margin. Larry, during the last quarter, you guided -- or you issued guidance of roughly a gross margin approximately around 23% for the full year. Obviously you've come way above that here in the first quarter. Where do you see your gross margin going here for the rest of the year?

We're going to be projecting -- when we put out our website projections later today, Carlos -- that gross margins will be in the range of 23.5 to 24.5%.

Okay. Particularly what happened this quarter? Why the big surprise here on the gross margin?

Well, as we've told people many times before, when we make our projections, we do not anticipate any additional price increases from our ability to raise prices at select communities. We have -- in some of our more heavily regulated markets, that of northern and southern California, D.C., and the Northeast, continued to be able to raise prices selectively, and that is flowing through.

What have margins been, if there was flat pricing.

It would have been lower.

Okay. Just another he can -- just a cleanup question here. In terms of, Larry, you mentioned about your lot costs and trying to keep them down. Can you give us some sort of percentage of what your land costs are, a percentage of costs of goods sold?

It varies so much by marketplace, you know. If you go to the North Carolina markets, it may be the -- the developed lot may be 15% of the sales price, and in some of the expensive markets, in California, D.C., and in the Northeast, it can be as much as 40% of the marketplace -- excuse me, market price. So it really varies dramatically, depending on what the mix is geographically from quarter to quarter of our deliveries.

Same thing could be said of northern New Jersey so southern New Jersey.

Right. No, I understand that but would it be fair to say that the company average would be somewhere around the 30% range.

I'll get back. I don't have it at my fingers. If you give me or Bryan a call, we'll try to give you that data after the call.

Thanks, guys. Congratulations again.

Thanks again.

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

Thanks. Congratulations, guys, on another really excellent quarter. My first question relates to your sub count progression. You indicated that you thought 233 may go to 260 by the end of the year. Any sense on, you know, is it going to be sort of a steady progression over the course of the year, given what you -- you know, see now. I know that there's going to be some -- you know, some you know predictability there, or is it sort of going to reach the 260 level by mid year or something like that?

I think it will be a relatively steady progression deferring the year, Steve.

Okay. Great.

I mean that's the hardest number for a builder to project, in all candor. There's two things that can impact it. One is we could have faster sales than we were expecting.

Right.

We don't count a community, if there's 10 or fewer homes left to be contracted in the community, so we could get out of one sooner than we expected or there could be various regulatory delays. So it's a difficult number to absolutely project with certainty.

Sure. No, I understand that. And I appreciate also your comment about the -- you know, the organic versus the acquired growth. I thought that was, you know, a very well said -- with respect to your focus on return on invested capital, I was wondering if you could address for us-reiterate for us, really, how you've driven that down into your organization via compensation for your division, regional managers and really how far deep does it go, and if you could give some indication of, you know, how that may differ from how you were compensating people 10 or 15 years ago.

Sure. I'll be glad to tackle that. First of all, we -- you know, their bonuses are driven by a combination of profits and return on investment. We define return on investment as their profits divided by their average inventory. ROI profits are divide -- are after a 12% across the board charge, 1% per month, on our average net investments. So we are -- you know, we want them to focus on the high expense of holding inventories right off the bat. Beyond that, we -- the higher the return on investment goes, the higher their bonus percentage will be.

That is different than 10 or 15 years ago, when we were not as focused on ROI and we were just focused on absolute dollars of profit. That does not yield the kind of return on investments that -- and that whole mentality that we have now. They would be compensated more if they delivered 30 million of profit instead of 20 million, even though they might have deployed, you know, twice the dollars in assets. We wanted to change that thinking, and we really have worked hard over the last 10 years to reinforce that culture throughout our organization. It certainly is pervasive throughout the -- at the profit center business head level, and we probably have, you know, 30-plus people at that level, senior management but, even all of the divisional staff at those companies -- at those divisions have their bonuses driven by return on investment for the division. So there are really many people at many levels that are driven by that focus.

Great. That's very helpful. If I could have -- ask you to talk about your closings quickly, and you may have given this and I may have missed it, but you had indicated in your release that weather and so forth might cause an infringement of closings in the second and third quarter and that's understandable, but you also indicated, I thought, that you still anticipated to have somewhat of a steadier progression of closings so you weren't going to have like this big balloon of deliveries at the end of the fourth quarter is what I assumed you meant. So I just wanted to try to understand those two things. It seemed like they might be kind of at odds and I just want to make sure I understand. What are you targeting for closings over the next couple of quarters?

Well, I think we've released a general guidance for the next quarter in terms of earnings and you can see it's fairly stable compared to the first quarter. So that puts us at about -- the halfway point. And basically, we are hoping for -- and I think we can achieve pretty steady progression, as you pointed out, without a big fourth-quarter bulge in each of the quarters. Snowfall. You know, I didn't want to misconstrue the -- you know, the comment about the weather. Steve, you're in the New York area, you know what a challenge it can be.

Right.

-- right now, and there's no question it's frustrating right now. I mean the frostline is down, you know, over three feet in the Northeast and I think pretty close to that in the D.C. markets. But, you know, we project a certain amount of that. Frankly, I guess we're hoping we'd be able to really accelerate closings. We're making some good progress and we're hoping to, you know, pull more closings even further up, earlier into the year. That will likely not happen, given this current weather condition, but nonetheless, we expect to have solid and reasonably even deliveries throughout the year.

Okay. That does help. Great. And then finally, I don't know if you addressed this also but your tax rate was a little on the lower side relative to what I was expecting. Can you talk about what you expect for your tax rate over the course of the year?

Well, last year, the tax rate ended up being a little higher than it was in the first quarter, and I think you will see our tax rate be a little higher for the full year than it is now. Our public projections are going to be at the 40% level that we put on the website, Steve.

Oh, okay. Great. Thanks very much, and congratulations.

Okay. Thank you.

The next question comes from Timothy Jones (ph) with Watson and Associates. Please state your question.

Yes. Could you give me what the two acquisitions in Texas did in deliveries last year?

I do not have that pro forma data-

Roughly, can you even -- you know, I'm not going to hold you to it.

Yeah. Roughly, I think, last year they delivered about a thousand houses.

So -- I mean, so, okay that was the whole year. So basically -- and is that your only operations in Houston, or do you have any existing ones?

No, just those two.

Okay.

So they'll be up. They're projected to be up roughly 10% for the full year. Obviously, we won't own them for the full year, so that's why we're saying, you know, we'll be over a thousand homes, roughly.

So you -- but given your sharp rise in orders and so forth, that beat you in the first quarter, I think you had 9500 deliveries before, are you just being conservative, given the fact you got 57% sold? Are you just being conservative on the deliveries or are you sort of into the 10,000 five to eleven?

Well, you know, there's a lot of uncertainty in the marketplace right now, and, you know, 57 to 60% is great, but, you know, we still have another 40% to go. And given all the world conditions, we'd prefer to be on the conservative side and under-promise and over-deliver as we have for many, many years. So that's really -- you know, that's really what you see in our projections.

And how much of your 400 basis point improvement in margins was cost reductions?

You know, it's so difficult to -- to break out specifically where it is. You know, I can tell you that we really continue to make good progress on many fronts -

I mean is it a hundred -- a hundred and fifty, two hundred-just, you know, I mean, a rough guess.

I wish I could be more specific. It's really hard to be very specific. You know, it -- you know, a lot of it comes from, number one, obviously, bigger volume in the first quarter. That certainly has helped. A lot of it comes from price appreciation. A lot of it comes from a mix of communities. A lot of it does come from cost reductions.

Okay. We'll work it backwards. Roughly what would you say the price increases are for the quarter?

I would love -- you know, we get this asked all the time, and I wish there was a scientific way for us to answer this. I mean, we are asked every quarter, every conference call, so is every other builder. It's just an impossible number to really measure very easily. There are so many variables changing in so many locations. I think it's just fair to say it's -- it's a good mix of all of those factors.

And it looks like -

And also-

Oh, go ahead.

The other thing I would say, Tim, is that the -- you know, the ability to wring costs out of the supply chain is far from over. We still think we're scraping the tip of the iceberg and that for years to come, we're going to continue to for example on driving costs out of -- out of our system, and we think we'll get there even additional benefits in the future.

Yeah and I think it's definitely safe to say our costs, our hard construction costs, are absolutely not going up, and are slightly coming down, due to a variety of the initiatives that we've talked about over the last few years that are taking place. Certainly our national contracts with some of our suppliers are among those many initiatives. In fact, I was just sitting in on a meeting yesterday, and, you know, we continue to make good progress on this front. It's one of the areas where our increase in size certainly helps, you know, as we're delivering 11,000 houses, we're buying materials at better prices than we did last year at 9500 or the year before at 6700 or the year before that at 4500. It just really drives the pricing down.

Okay. Then let's follow that up. Roughly, what do you expect to say from volume discounting? I have mean combined. Either being rebates or lower prices. Any way -- you know, most builders are running like, oh, anywhere -- a lot of them 15 to 1800 per model. Do you have a number on how you're running on the combined savings?

You know, I think we have numbers that are in that same ballpark burnings that's only half the -- the answer, Tim. You're talking about national contracts-

Right.

-- of, you know, whether it be faucets or appliances. We actually deploy that same content at the local level. Since there are no national plumbers, no national electric traditions, no national brick layers, but when we are the 2,000-pound gorilla and our dominant market concentration approach in each of our markets we're able to go and, you know, the first thing we do is vendor consolidation instead of dealing with 20 plumbers, we deal two or three. Trade them volume for price and then try to partner with them to look for ways to drive costs out of the supply chain. We're taking that same concept that all the other builders talk about only with respect to faucets and appliances and the like. We do that and we do these other things at the regional level. We could talk for hours about the things that we're trying to do to drive cost out of the system. I can't quantify for you precisely the benefits.

Yeah I mean, it varies a bit from region to region but for give you a little benchmark, I think your number is pretty close. We just did a quickie analysis in Houston, keep in mind, you know, we've only owned these two companies for a couple of months, and haven't had the time to do the thorough analysis yet, but just looking at their current purchases, and comparing them to our national contract prices, it appears we'll easily be able to achieve savings of a thousand dollars a house plus, and that's quite conservative at this point, but we'll -- we'll be in excess of that in Houston. You know, as I said, it varies quite a bit from geography to geography, and depends on what the size of the entity was before and so forth, but we feel very confident we'll be in excess of that. And by the way, those are all kind of positive synergies that we never depend on to make our analysis in underwriting an acquisition. Those are all kind of upside when we achieve them.

Okay. And lastly, real quickly, the estimate for the second quarter, it looks like basically just in a nutshell, it's a repeat of the first quarter with lower gross margins because you don't expect them to keep up because you were surprised on that. Is that basically how it falls in with the deliveries and -- in other words, the deliveries roughly the same as the first quarter and everything would be roughly the same, the prices and so -- average price but the margins coming down from the first-quarter level that obviously are on -- appear unsustainable, just given your projection for the year.

Yeah. Well, the projection for the gross margin for the full year, we said 23.5 to 24.5 percent.

Yeah.

I guess we came in at 24.7 in the first quarter. I mean, just slightly ahead of that. But, you know, we -- we think we will be reasonably steady in our gross margin percentage. Obviously, we think -- we got off to a fine, fine start in the first quarter. You know, weather is going to have an impact. It is a little more expensive to build in the winter months. Particularly in the areas that are affected by that.

Okay. That's what -- that's what's going to happen. Is it -- but you've -- but do you have roughly deliveries the same? You'll be affected by the weather -- the weather inter first quarter when you were building them in the frostline and everything delivered in the second quarter?

Yeah, I think that's part of it, and just, you know, a healthy dose of conservatism because of the uncertainty of the -

I figured that out.

Yeah. We will add one other comment. You know. As the mix-as we described in the conference call, different markets achieve their return on investment in different ways. Some have lower margins and higher turns. Some have higher margins and lower turns. As we mentioned, the Houston acquisitions which will now will be in for a full year in the second quarter have lower gross margins than the -- most of our other locations or many of our other locations. That make -- they make up for it with much higher inventory turns, so gross margins are just one of the factors.

Thank you so much.

Thank you, Tim.

The next question comes from Robert Manowitz of UBS Warburg. Please state your question.

Hi. Good morning. In the first-or in the most recent quarter, California, as a percentage of your deliveries, was just under 38%, and I'm looking at your order trends and clearly California is outpacing the rest of your markets and I'm wondering if you could provide guidance on two fronts. One, where do you expect California to be as a percentage of your total deliveries in '03 and '04, and probably even more importantly, since I can run some projections, where do you feel comfortable sort of putting a cap on that concentration?

Well, first of all, you know, we are active in almost really three very different markets and I think it's worth mentioning that. We're in northern California in the Sacramento area. It is not the -- we are not active in the Silicon Valley area, which was hard-hit, I guess, by some of the tech meltdown. Frankly it's probably a good market to enter right now. But anyway, a big chunk of our business is in the Sacramento area, much lower prices, more affordable. We're also in two different markets in southern California. The one is the higher-end coastal areas of southern California, and in that market, our average price is about 450 to $500,000. That's a slug of our business. And then we also build in the inland market of southern California, much more affordable, further away from the L.A. and the cost line. There our average price is about 230 to $240,000 in ballpark.

So it is important to not just cast California as one monolithic market. It's really many different markets. Anyway, we're expecting a similar percentage of deliveries coming from California for the full fiscal year, and somewhat similar, really -- maybe slightly less -- in '04. Only slightly less because we'll be adding other geographies like -- like Houston to the mix, and we also are seeing and projecting pretty healthy growth in '04 in our Northeast and D.C. markets, because of organic growth. So that might ratchet it down a bit. That percentage, you know, in a stabilized basis, maybe roughly a third, and we're very comfortable with having a third of our business there, particularly because we're in, as I mentioned, very different markets within California, very -- and are operating at very different price points there.

Right. And the composition within California, in terms of units, Sacramento, the inland empire, and the coastal markets, would they be comparable in size?

No. In the -- well, the Sacramento and the inland market are fair -- probably fairly similar in size and product type. In those markets, we're largely building detached single-family homes, and they would range from maybe 1800 square feet to 3,000 square feet. In the coastal markets, our products are frankly much more varied. We go from as small as a thousand square feet to 5,000 square feet, but the ones that are smaller square footage, some of them are obviously attached multifamily products, and they're high-end in terms of price per square foot, so there's huge variation in terms of the product in the coastal area.

Right. I'm sorry, I probably asked that question poorly. The question I was getting at is the distribution of your units throughout California, would it be sort of a third, a third, a third, in those three markets?

No. In very rough numbers, we're probably going to deliver about -- ballpark, you know, seven to eight hundred homes in the coastal area of southern California, roughly 1100 homes in -- no, I guess it's a little higher than that, maybe 1200 homes in the Sacramento market, and about 1800 homes in the southern California market, plus or minus a couple hundred homes in the markets. That's about the relationship.

Great.

Now, keep in mind, obviously, if we're doing 700 homes at twice the price in the coastal area, revenues would be a little more even than -- than just pure home deliveries. And in northern California our prices are a little higher, on average, than southern California's inland area as well, so a little more even from the revenue standpoint.

Understood. Thank you very much.

Okay.

The next question comes from Greg Nejmeh with Deutsche Bank. Please state your question.

Good afternoon. Once again, a job well done.

Thanks, Greg.

A couple of questions. Ara, you mentioned that you never make assumptions with regard to pricing. With regard to the guidance that you issued, five and a quarter to five fifty, can I assume that any price increases that have been realized and are contained in backlog are implicit in that guidance but any increases that might be realized on orders from this point forward are not?

That would be correct.

Okay. On the incentive system, you know, you mentioned that earlier and the fact that that's now been -

Greg, I'll just -- I'll just, you know, give a little further clarification. We don't update, you know, every single month based on our backlog. Basically we update our budgets every, you know -- three times a year. So any increases that we had basically in place a couple of months ago when we produced the budgets -- actually closer to November -- are built into the numbers, so, you know, we have had some price increases already that are in backlog that might not be reflected in there. But, you know, we just don't quantify it that frequently.

Okay. On the incentive system, Ara, you mentioned that that's now been extended into the organization. I'm wondering, you know, for those managers who operate in markets that are less highly regulated -- the Texas markets, as an example -- do you make any adjustment or any modification to recognize the fact that operationally they may be performing every bit as well as the managers who operate in more highly-regulated markets. It's simply that they're not getting the price escalations and therefore, they couldn't possibly command the same returns as those managers operating in more highly regulated markets?

Well, first of all, in Texas, although we don't get the price escalations, they run a pretty efficient shop there, both in our older Dallas operation and in our new Houston operations. Lower margins, but they do get very high ROIs because in those markets, you're typically able to get developed lots on a rolling basis. So your inventory numbers are low. But overall, I think it's fair to say we get higher returns in our higher-regulated markets. What's really critical is that the managers understand whatever their absolute level is of return on investment, the higher their return on investment, the higher their bonuses, the lower their return on investment, the lower their bonuses and it really affects regardless of whether you're in a real high ROI market or a slightly less high ROI market, it really affects their mentality. It changes the way they think about absorption and pricing relationships.

It changes the way they think about front-end loading, land development, and it really localizes that decision, which is important because we can't figure out everything in Red Bank, New Jersey. But it gets them to think about the kind of things that really drive our company and results, so hopefully that gives you a long-winded answer to your question.

Okay. Along those same lines, with regard to acquisitions, do you consider or is one of the criteria that you -- you look at with regard to acquisitions the degree to which the company operates in a highly regulated market versus a less highly regulated market? Is that one of the core criteria that you evaluate?

Well, it was one of the things that we're comfortable, you know, with, and have been, and it was something we focused on a little more in our past. However, just, you know, as an overall hedge, I'd say we're looking to mix our overall markets a little more, and, hence, the -- the addition like the companies in Houston. What's interesting, Greg, is as you look around and, boy, we see lots and lots of acquisitions all over the place -- or lots of acquisition candidates all over the place. We find companies, after you, you know, weed through the hay pile, so to speak, that earn some excellent returns all over the country. In some cases, highly regulated markets. In other cases, not so highly regulated markets. I do think you get a higher boost right now from the highly regulated markets and I think that's part of our overall performance.

But there are only so many markets out there that are highly regulated. I mean if you take out the northeast, which you already dominate, we're already number two in D.C., we're quite substantial in different locations in California, we're number two, roughly, in the inland empire and I think we're number one or two in the Sacramento market if you include the central valley and Modesto-Stockton areas. There aren't too many other markets left so I think we've got to be realistic and look more broadly.

Uh-huh. Larry, I thought you did an excellent job differentiating the manner in which you account for your acquisitions in terms of purchase accounting adjustments and goodwill vis-a-vis what some of the peer companies may do. I'm curious to know whether or not -- and obviously you're appealing to the equity market to make that distinction as well. I'm curious to know whether or not you think the rating agencies recognize that difference with respect to the ratings that they assign, the debts of the public builders.

Well, we're so far under what we think we ought to be rated at that they're certainly not giving us credit for our conservatism. I -- I can't really address what they take into account with the ratings of our peer group.

I can assure you we're meeting with them soon and we'll -- you know -- really beat the drum on the same point with them as well.

I mean in the past when you've had discussions with them and presented your case, has this been a point of emphasis for them or have they not really focused on it all that -

One of the things you have to keep in mind, you used to be able to -- and allowed to -- amortizes goodwill. That's been a relatively recent change. You know, over the last year-and-a-half or so. You know, the difference is, once that change happened, we've completely shied away from, you know, acquisitions that require a lot of goodwill, whereas in spite of that change, other builders, you know, without being specific, I think, have felt fine about booking goodwill and in our opinion inflating earnings somewhat in that regard. But it's a new phenomenon, and therefore, we really have to emphasize it on a new basis to the rating agencies.

Terrific. Thank you.

Thank you. The next question comes from Steve Pococo (ph) with Lark (ph) Research. Please state your question.

Thanks. Could you talk about the Washington market and what's happened? I mean, you're -- your unit activity was up quite a bit. Your average price was up quite a bit in Washington, D.C. What's going on with the business there?

Well, it continues to be very solid, Steve, and, you know, we just love it there. We're working aggressively to add more communities. It's quite difficult. It is a very regulated market and it's supply constrained, so it is a challenge to do that. But we're making reasonably good progress. Particularly exciting right now for us is our growth in the active adult business. We opened -- in this past 12 months -- our first active adult community. It's over a thousand homes, and we're just beginning, but it's really taking off as a great business with great margins for us there, and, you know, we're expecting some great profit contributions as we continue to accelerate that community. We're also working hard on a major approval for a 1300 home community in Maryland that we think will be equally well-received.

So we're working on many fronts and many different products. As you know, we're in the condo business there, we do townhouses, we do single-family homes in low-end positions, in high-end positions, in close-in locations and far-out locations, and high-density and in very low-density. You know, and it's been helpful that we have a broad product array perspective in that market, because land is hard to come by and you have to be prepared to execute with whatever good opportunities come your way.

The -- what I'm getting at, I mean your average price was up 20%, and that would suggest to me, while some of that was -- is price increase, that you've moved into higher price points there. And at the same time, your units have gone up. So I mean I don't know in terms of numbers of communities for deliveries, have -- have you made more of a shift towards higher-priced single-family detached there over the past year, or what's -- what's gone on?

You know, it really depends, Steve, on the mix of communities that are available. You know, our company is more comfortable than Washington Homes was, in and of itself, with higher price points, so, you know, we have taken a more aggressive attitude in that part of the market. But I think it's fair to say we're aggressively searching communities at all price points. The market there is very solid, we've found, at high price points, mid price points, low price points, condos -- urban infill. It's really been a consequence of the deals that happen to come out and, you know, I wouldn't be nervous if you saw our average price reduced because we're able to find more condominiums. We'll take any opportunities we can get in that market right now.

And I assume that your community count is up year over year. Can you give us a sense of that? And then what do you anticipate -

Are you talking about in D.C.

In D.C.

You know, the community count isn't really that dramatically different. Just looking -- I guess I don't have it going back year over year here. I only have going back to October in front of me. Do you have it further back, Bryan?

No, not right at the moment.

No. We do project it going up slightly. You know, we've had -- started the year with about 27 communities, you know. In October of '02, we got about, you know -- we've got, I think, about 30-ish or so open right now that will be going up quite a bit in '03. I don't have the exact numbers, but I'd say I wouldn't be surprised to see a 20% growth in community count in '03 in the D.C. marketplace this year.

20%?

Yes. I'd say that would be a very achievable number.

Okay. If I could shift to California and getting back on the previous questions there, I mean, it's the -- the same -- you've outlined the three markets that you operate in, and while I don't have forecast's units here with me for last year, you did give the pro forma numbers and it suggests that even adjusting for forecast, your activity is up a lot there, and I guess my question is the same: Where have you been growing? It would seem to me that a fair amount of that has been in Orange County, but maybe not. Maybe it's in Sacramento. But given the increase in the average price, it would seem to me that the higher price points have been growing faster there. Is that a reasonable -

One thing you shouldn't pay too much attention to the year-over-year increase in average price because it's not pro forma for forecast and forecast had dramatically lower average prices than our coastal California did.

Right. Well, that's why I'm saying for -- just looking at the difference in the revenues, you had 75 million in revenues. The difference between your pro forma and your actual reported. I mean is, roughly speaking. And if I add -- if I assume all of that is forecast and add that to it, that would suggest that your deliveries were close to a hundred and 90 million.

Well, it can also mean that we were growing forecast operations year-over-year as well.

Yeah and in fact, that is what's happened.

Right. But if forecast was a lower price point, then that would have pulled last year's average down.

Trust me, Steve, it's growing both forecast -- historic operations and our coastal.

Yeah. We've grown forecast in the North, we're growing forecast in the South, and our coastal operations are also growing, so we're really seeing great strength in all categories.

But to get a big boost in the average price there, I mean, is that all price increase or I mean are you -

No. It's a -- it's -- as always, it's a combination of price increases and community mixes. Even in the lower priced inland areas, we are doing more higher-priced communities than we were, you know, a year-and-a-half ago.

Okay. And the question is, you know, looking out to next year and communities, where in California -- is California one of the places you're looking to expand, and -- and if so, where, and -

I'd say as a percent of their business, we'll probably see more -- the most aggressive growth in the Northeast and the D.C. market, but we will continue to see solid growth in the California market in all three categories -- in all three geographies. The place where you'll see the least growth is in the North Carolina market. Obviously, Texas, in total, will show great growth because we've added Houston, but I'd say, you know, if you look out, we'd have targeted somewhere in between where we're where I just talked about in the Northeast and where I was in North Carolina for both the Dallas operations and on a pro forma basis for Houston.

Uh-huh.

So most aggressive growth in the Northeast region and in D.C., California and Texas will be kind of strong but moderate growth. And very minimal growth in the North Carolina market.

And -

Steve, Steve, with that, you know, please feel free to get back in the queue for more questions or to call either Bryan or myself afterwards but I want to let the next guy ask questions.

The next question comes from Tony Campbell (ph) with Knott (ph) Partners. Please state your question.

Good morning. Congratulations, by the way, on your numbers. They're terrific.

Thank you.

I'm going to actually preface it by a comment and then I've got a question. Every homebuilder talks about how cheap their stock is and 'how undervalued they are in the marketplace, but I don't see -- and the one thing that's missing in the equation is,(a), insider buying, and (b), share repurchases, so I would urge you to get more aggressive on your share repurchase and I'd love to see some insider buying. My question is -

Just -- just -- just -- I can't let that go without a comment. My father and I and the Hovnanian family are in -- already owns close to half the company. It's the highest percentage of insider ownership in the entire public home building arena. So, you know, whether we buy or not, we're -- we are the biggest position in any of the, you know -- you know, compared to anybody else in the industry. Secondly, as we just announced, in the last three months alone, we bought a quarter of a million shares back. That's on top of about 3-and-a-half million shares I think we've bought over the last few years, so I think we've put our money where our mouth is where that's concerned.

Well, you know, there are other employees. I'd point to Fifth Third Bank and others that are pretty well run. In fact, in Fifth Third, I don't think the employees ever sell the stock and I think Sandy Weil (ph) has some pretty strict -

Well, in that regard, I'll just point out one thing. Where you might not see actual acquisitions across the tape, in our senior managers, about 30% of their bonus is paid in restricted stock, so they were -- they've got a real incentive and they're very pleased to get it today in terms of stock. It doesn't cross the ticker tape, but they are owners.

Yeah. I think -- I still think my point is relevant. Maybe not as relevant to you guys, but if everything is -- if it is as attractive as we all think, then we ought to be seeing a lot of insider buying across the board, and a lot of aggressive corporate buybacks and we're not, okay? I mean, and believe you me, I'm very bullish on this group. Anyway, on to my -- on to my question, if I might. Given the pressures on all the private home builders, and you obviously are in the market to make acquisitions, are we starting to see any discounting in terms of our -- are the prices of these acquisitions coming down, or do the private guys still have a -- an inflated value of what they're really worth?

Well, you know, I wish I could tell you prices were coming down, but there is a law -- you know, many of the home builders are interested in consolidating and buying, so, you know, I can't say that's the case. What's important is, you know, to -- we see, and as well as our peers, I'm sure, see many, many opportunities that come across and what's important is to find the right strategic mix and match, the right cultural match, as well as, you know, the -- the right partner for the public homebuilder. So there are a lot of factors that come into play.

So essentially, too much competition for acquisitions is keeping the prices up?

Yes, I would say -- I would say in general, that's true. Obviously, nonetheless, we've been able to make financially sound acquisitions in the industry, but, you know, we look at 30 deals for every one or two that seem reasonable.

And I guess just finally, is -- are there any markets that you're seeing any kind of discounting?

Sure. You know -

Is it -- is it sort of extraordinary or is it just normal kind of business in the course of business?

Well, as I've mentioned, the increase market for North Carolina market has been weaker. Discounting is part of it. That's been going on for two years or so. If anything, it's starting to improve a little bit right now, as I mentioned. The other place might be in the high-end market in Dallas, which we've got a little bit of activity, not a lot. Other than that, you know, discounting is not really an issue. I mean there are always -- at all locations, you know, some -- there's some discounting for certain lots or locations, even in the healthiest of markets. That has been misinterpreted by some as saying, " here's a signal that the market is awful" because they see a discount here or there. but I'd say in most cases, it's quite normalized.

Thanks and good luck.

Okay. Thank you.

The next question comes from Dennis McGill (ph) with CSFB. Please state your question.

Thank you, gentlemen. I'd hate to belabor the point on your gross margin guidance, but what assumptions go into the 23.5 lower end of that range? In other words, where do you need to be pleasantly surprised to get to the higher end of your guidance?

Well, you know, we still have 40 -- 40% or so of our homes to sell. In some locations, like the northeast and D.C., the -- we typically sell well in advance. In other locations, like California, we sell more currently, so to speak. So, you know, what we'd have to see is, you know, on new communities, pricing coming in on the higher end of our internal projections when we open up those communities and get ready to price, and see premiums come along on the higher end of our internal projections and on the lower end and so forth.

And the other thing is, frankly, you know, there is a lot of noise out in the economy and who knows what the Iraqi war can bear -- will bring upon the -- you know, the housing market. And we've plugged in enough money so that, you know, we could afford to -- you know, to promote more heavily than we are having to promote today and still make our numbers. So if we have to promote a lot more heavily or the market slows a bit, that would be on the lower end of the range, and, you know, if it's very steady, that would be in the upper end of the range, and if we continue to see price appreciation as we've been seeing for the past umpteen years, we would once again exceed the range.

Okay. So the majority of that variance is going to be due to fluctuations in the price that you're able to achieve, not so much on the cost side of things?

I think that's right. Costs are pretty stable right now.

Okay. All right. And lastly, do you have any kind of area that you're budgeting for inventories at year-end, and if you could talk a little bit about what your budget has for land expenditures for the year, including land and land development?

Yeah. We don't have those numbers just at the tip of our fingertips. But if you call afterwards and chat with Bryan, he may be able to help you there. I will tell you that basically our average debt-to-equity ratio, we anticipate being at or below 1 to 1 throughout the year, so, you know, we don't expect -- you know, we expect our growth in inventories pretty much to keep pace with the growth in equity we have.

Okay. Very good. Thank you, guys.

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

Okay. Oh, yeah. Thanks. I just wanted to circle back. Can you talk a little bit about your SG&A guidance for the year? Obviously, this quarter was, you know, up year over year. I'm sure there's a lot of reasons for that name subdivision growth and integration of acquisitions but I just wanted to see if you could talk about where you expect that number for the year.

Yes. Our guidance for the full year is between 10 and 10-and-a-half percent. That's a little bit higher than last year, where we were at 9.7%. It's a little bit less than where we were in '01 where we were at 10.6%. So we're fairly comfortable with that number. You know, again, similar to the point I made earlier, if we've got enough in our marketing budgets that if the market slows down, then we may spend a little more on the (a) part and be on the higher end of the range. If it's steady we'll be on the lower end of that range.

And that obviously assumes SG&A as well as your corporate expense, correct?

Correct.

Right. Okay. Great. Thanks very much.

Okay. Thanks. And at this point, given that we've gone hour-and-a-half already, I'm going to cut off the conference call. We actually have a couple of interviews to get to. But as always, we're pleased with the level of interest and we'll be glad to follow up with individual questions after the call. Thank you very much, and we look forward to reporting another great result in the next quarter, and continue on throughout the year.

Ladies and gentlemen, once again, if you wish to access the replay for this call, you may do so by dialing 1-800-428-6051 or 973-709-2089 with an ID number of 286608. This concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.