Hovnanian

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Company Name: Hovnanian Enterprises

Company Ticker: HOV US

Date: 2015-06-09

Event Description: Q2 2015 Earnings Call

Market Cap: 407.73

Current PX: 2.785

YTD Change($): -1.345

YTD Change(%): -32.567

Bloomberg Estimates - EPS

Current Quarter: 0.050

Current Year: 0.045

Bloomberg Estimates - Sales


Current Year: 2378.833

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Q2 2015 Earnings Call

Company Participants• Jeffrey T. O'Keefe

• Ara K. Hovnanian

• J. Larry Sorsby

Other Participants• Susan Maklari

• Megan McGrath

• Jason Marcus

• Alan Ratner• Susan Berliner

MANAGEMENT DISCUSSION SECTION

Operator

Good morning and thank you for joining us today for Hovnanian Enterprise Fiscal 2015 Second Quarter Earnings

Conference Call. An archive of the webcast will be available after the completion of the call and run for 12 months.

This conference is being recorded for rebroadcast, and all participants are currently in a listen-only mode.

Management will make some opening remarks about the second quarter results and then open up the lines forquestions. The company will also be webcasting a slide presentation along with the opening comments from

management. The slides are available on the Investor Relations' page on 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'd like to turn the call over to Jeff O'Keefe, Vice President-Investor Relations. Jeff, please go ahead.

Jeffrey T. O'Keefe

Thank you, Amanda, and thank you all for participating in this morning's call to review the results for our second

quarter which ended April 30, 2015. All statements in this conference call that are not historical facts should be

considered as forward-looking statements within the meaning of the Safe Harbor provision of the Private Securities

Litigation Reform Act of 1995.

Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results,

performance or achievements expressed or implied by the forward-looking statements. Although we believe that our

plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, we can

give no assurance that such plans, intentions or expectations will be achieved.

Such risks, uncertainties and other factors include, but are not limited to, changes in general and local economic,

industry and business conditions and impacts of the sustained homebuilding downturn; adverse weather and other

environmental conditions and natural disasters; levels of indebtedness and restrictions on the company's operations and

activities imposed by the agreements governing the company's outstanding indebtedness; the company's sources of

liquidity; changes in credit ratings; changes in market conditions and seasonality of the company's business, the

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Market Cap: 407.73

Current PX: 2.785





Current Year: 0.045




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availability and cost of suitable land and improved lots, shortages in and price fluctuations of raw materials and labor;

regional and local economic factors including dependency on certain sectors of economy, and employment levels

affecting home prices and sales activity in the markets where the company builds homes; fluctuations in interest ratesand availability of mortgage financing; changes in the tax laws affecting the after-tax costs of owning a home,

operations through joint ventures with third-parties, government regulations including regulations concerning

development of land, the homebuilding, sales and customer financing processes, tax laws and the environment, product

liability litigation, warranty claims and claims made by mortgage investors; levels of competition; availability of

financing to the company; successful identification and integration of acquisitions; significant influence of the

company's controlling stockholders; availability of operating loss carry-forwards; utility shortages and outages or rate

fluctuations; geopolitical risks, terrorist acts and other acts of war; and certain risks, uncertainties and other factors

described in detail in the company's Annual Report on Form 10-K for the fiscal year ended October 31, 2014, and

subsequent filings with the Securities and Exchange Commission.

Except as otherwise required by applicable securities laws, we undertake no obligation to publicly update or revise any

forward-looking statements, whether as a result of new information, future events, changed circumstances or any other

reason.Joining me today from the company are Ara Hovnanian, Chairman, President and Chief Executive Officer; Larry

Sorsby, Executive Vice President and CFO; Brad O'Connor, Vice President, Chief Accounting Officer and Controller.

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

Ara K. Hovnanian

Thanks, Jeff. Let me get started with our second quarter results which can be found on slide 3. Our net contract dollars

increased 5% despite a slight decline in a number of net contracts we sign. This is due to a higher average sales price

primarily as a result of product mix.

We successfully opened up more communities during the quarter, and as a result, our active communities grew 6%

year-over-year. However, our net contracts per community declined 5% year-over-year negating the benefits of theincreased community count.

Our contract backlog was stronger at the end of the second quarter, growing to $1.171 billion. The dollar amount of the

backlog increased 12% and the number of homes in backlog increased 6%. This growth in the backlog gives us

confidence that we'll be able to continue to grow our top line in the second half of fiscal 2015 and improve our

performance.

Our total revenues grew by 4%. This growth was driven by a 5% increase in average sales price which was offset by a

1% decline in deliveries. Similar to what we've experienced in other recent quarters, the increase in average sales price

is primarily due to geographic and product mix changes and not related to our ability to raise prices on our homes.

Unfortunately, our second quarter gross margin declined by 410 basis points and our total SG&A as a percentage of

total revenues increased by 80 basis points. I'll go into more detail about these metrics in just a moment.

While we began the year with a year-over-year improvement in our first quarter results, we took a step backwards

during the second quarter of fiscal 2015 and our loss increased in the second quarter compared to a year ago. The

second quarter of 2015 was challenging for us.

As we move forward, we're very focused on generating further growth in revenues so that we can gain more

efficiencies. In addition, we're very focused on improving the results of our weaker divisions and, thereby, returning

our operating metrics to more normal levels.

Let me go into a little more detail about our gross margin and SG&A. And as you can see on the left-hand side of slide

4, we show our annual gross margin percentage for the last five years – four years. We're pleased that we made solid

progress from 2011 to 2012 to 2013, returning to more normalized gross margin levels of roughly 20% in both fiscal

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Market Cap: 407.73

Current PX: 2.785





Current Year: 0.045




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2013 and fiscal 2014.

However, we've taken a step back in 2015. On the right-hand side of the slide, you can see that we reported a 16.1%

gross margin for the second quarter, 410 basis points less than last year's second quarter. As we discussed last quarter,we expected the second quarter gross margin to be weak because of offering more incentives and concessions on

started unsold homes commonly referred to as spec homes.

We're not the only homebuilder that recently felt pressure on its gross margin. On slide 5, we show all nine of the

public builders that reported March quarter end results. All of them had year-over-year declines in gross margin. Five

of them had margin declines in excess of 200 basis points, and one was similar to our decline. Nonetheless, it doesn't

make us feel great about our decline. On slide 6, we show a trend of increasing the number of specs per community

from the second quarter of 2014 to the fourth quarter of 2014.

As we explained during our Analyst Call last quarter, we believe we are too aggressive in our spec starts, especially in

certain geographies and communities. We took action to reduce our specs with special incentives and concessions.

Unfortunately, as you would expect, that took a toll on our margins. However, we made progress on our goal of

reduction. The number of specs per community declined to 4.1 at the end of the second quarter of fiscal 2015, which isbelow the recent peak of 4.7 specs per community at the end of the fourth quarter of fiscal 2014. Let me explain the

negative impact that specs had on our gross margin during the second quarter and why we think the gross margin will

improve during the remainder of fiscal 2015.

Turning to slide 7. Our gross margin during the second quarter of 2015 was less than we thought, primarily because of

additional incentive concessions, as I said earlier, that we offered on specs. The following numbers excludes Houston

where our gross margins continue to improve during the second quarter.

Margins on our to-be-built homes declined 220 basis points during the second quarter of fiscal 2015, compared to last

year's second quarter. Relative to our peers' margin declines, our decline in gross margins on to-be-built homes would

have put us in the middle of the pack. However, margins on our spec homes declined two times that amount or 450

basis points over the same time period. You can clearly see from these numbers that the bulk of the pressure on gross

margin was from spec home deliveries.

Furthermore, the percentage of deliveries from spec homes in the second quarter increased to 52% in this year's second

quarter from 42% in last year's second quarter. It's difficult for spec homes to be sold with lower gross margins than

to-be-built homes, but the increased incentives we offered over the last six months exacerbated the typical spread.

Because 25% of the deliveries were specs sold during the quarter, the impact was greater than we anticipated when we

provided guidance during our first quarter conference call.

Spec deliveries in the second quarter of 2015 increased to 52% of our total deliveries from 46% in the first quarter.

Given the current level of specs and our expectations for specs per community going forward, we believe the

percentage of quarterly spec deliveries will gravitate back to the low 40% range over the next several quarters.

Turning to slide 8, we show that the discount on spec homes compared to-be-built homes was 250 basis points during

the second quarter of 2014 and that we increased the discount on spec homes compared with to-be-built homes to 480

basis points during the second quarter of 2015. The discount on specs compared to to-be-built homes appears to have

peaked this quarter. It was 230 basis points higher than it was in the second quarter a year ago. Clearly, you can see thatwe are aggressive in taking action to bringing our spec position into better balance by geography and by community.

Last quarter, we warned you that we were increasing incentives on our specs. Now, I'm happier to say that we are

scaling back our incentive and concessions that we are offering on spec homes, and we've already begun to see the

spread trending towards normalized levels.

The trend of fewer specs as a percentage of total deliveries and a more normal spread between specs and to-be-built

homes should lead to sequential improvements in gross margin in the final two quarters of fiscal 2015. It should also

lead to an improved gross margin in fiscal 2016.

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Date: 2015-06-09


Market Cap: 407.73

Current PX: 2.785





Current Year: 0.045




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Now, turning to slide 9, you can see that our SG&A as a percentage of total revenues increased year-over-year during

the second quarter of 2015 to 14.7 % from 13.9% in last year's second quarter. The majority of this increase was related

to our efforts to grow our community count including higher compensation costs related to increased staffing andincreased architectural expenses. Once these new communities begin to deliver, we expect to further leverage our fixed

SG&A expenses. Our SG&A ratio for the full fiscal 2015 year should be similar to last year and should decline in

2016.

On slide 10, we show our annual total SG&A expense as a percentage of total revenues going back to 2001. We

consider about 10% as a normalized SG&A ratio. As we continue to generate further revenue growth and achieve more

normalized sales pace per community, we expect to be able to leverage our fixed SG&A expenses further and get this

ratio back to normalized levels of 10%. As we've said in the past, it's not going to happen overnight but we will

continue to make progress to bring this number down over time.

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

J. Larry SorsbyThanks, Ara. Turning now to our current sales environment on slide 11. We show the dollar amount of our consolidated

net contracts per month for each of the past 12 months. The most recent month is shown in blue, the same month of the

previous year is shown in yellow, and we use green arrows pointing up to indicate an increase and down red arrows to

indicate a decrease.

Driven by the combination of increased community counts and, more recently, stronger sales result, 10 of the past 12

months have had year-over-year increases. In May, the first month of our third quarter, we saw an increase of 18.6% in

the dollar amount of net contracts.

While slide 10 showed the dollar amount of net contracts, slide 12 shows the number of monthly net contracts per

community. While there have been more positive than negative monthly comparisons recently, the market still seems a

bit choppy. If you take a step back and recall the steps that we took in the spring selling season of 2014, some of the

fluctuations for us make sense.

In March 2014, we did a national sales promotion called Big Deal Days. It was highly successful, and we had 3.4

contracts per community during the month of March 2014, making that a very tough year-over-year comparison. But it

likely pulled demand forward because we fell to 2.9 contracts per community in April 2014, which created an easier

comparison for the same month this year. So it should not be a surprise that net contracts per community declined

year-over-year in March 2015 and increased in April 2015. With sales promotion or no sales promotion, the market still

feels a bit tentative right now.

On slide 13, we try to put the current sales situation into perspective with a longer-term view. The dark-blue bar shows

the average net contracts per community for 1997 through 2002, a period of neither boom nor bust times. Then in

yellow, we show net contracts per community bottoming in 2011, followed by two years of improvement in 2012 and

2013.

Surprisingly, we in the homebuilding industry took a step backwards in sales pace per community in 2014. Looking atthe light-blue bar, it shows that the seasonally adjusted trailing 12-month net contracts per community increased to 30.4

and is approaching the 30.7 contract per community level we saw in 2013. This is certainly a step in the right direction

and will hopefully continue or improve in the back half of this year.

I want to provide a brief update on what we're seeing in Houston. Our profitability in Houston remains solid with gross

margins and revenues expected to increase over last year. The margins that we currently have in our backlog remain

solid and we continue to have pricing power in Houston.

Turning to slide 14, you can see our quarterly net contracts per community in Houston for 2013, 2014 and 21015. With

net contracts increasing to 9.1 per community in the second quarter of 2014, you can clearly see how white hot the

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Date: 2015-06-09


Market Cap: 407.73

Current PX: 2.785





Current Year: 0.045




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Houston market was in the second quarter last year. While we do not believe it's related to the declining oil prices, our

sales pace during the second quarter this year [ph] cooled (16:28) to 6.9 net contracts per community.

The decline in our second quarter sales pace was due to a combination of factors including a very difficultyear-over-year comparison and the fact that we intentionally slowed down or stopped selling homes in certain

communities where our land development were significantly delayed in delivering those finished lots. Due to these

longer cycle times, we were unwilling to guarantee a fixed home price to our customers when we could not lock in our

construction cost. We remain cautious about the impact of lower oil prices on the Houston economy and we'll continue

to keep a close eye on the market and any further developments we see there.

On slide 15, we showed that the dollar amount of consolidated net contracts increased 5% year-over-year to $701

million during the second quarter. Assuming no changes in market conditions, given the growth in our community

count plus the additional communities that we expect to open in the second half of 2015, we believe that we will be

able to grow our revenues significantly in fiscal 2016. This gives us confidence that 2016 will be solidly profitable and

we will break out of our string of low or no-profit performance years.

Turning to slide 16. It shows that our consolidated community count has grown steadily over the past two years.There's a lot of activity that goes into a net increase of 11 communities that we saw in the last year. During the last 12

months, we opened 97 new communities and closed out of 86 older ones. We expect to see continued community count

growth as we move forward.

Based on the community – on the growth in our community count and average selling price, the dollar amount of our

backlog has grown compared to last year. On slide 17, we show the dollar amount of our backlog increased 12% to

$1.17 billion from $1.05 billion at the end of last year's second quarter.

You can also see on the bottom of this slide that the number of homes in backlog grew to 2,972, up from 2,797 last

year. This increase in backlog, combined with the community count growth, provides further evidence that we'll be

able to continue to grow our top line throughout the remainder of this year, which we expect to result in sequentially

improved quarterly performance.

Turning to slide 18, you'll see our owned and optioned land position broken out by our publicly reported marketsegments. Our investment in land optioned deposits was $87 million on April 30, 2015, with $86 million in cash

deposits and $1 million of deposits being held by letters of credit. Additionally, we have another $22 million invested

in pre-development expenses.

Assuming current market conditions remain steady, we continue to anticipate un-mothballing approximately 900 lots in

fiscal 2015 in two locations, one in Natomas, California, and the other along the Hudson River Waterfront in New

Jersey. As the housing market improves, additional communities will be un-mothballed in future periods. Looking at all

of our consolidated communities in the aggregate, including mothballed communities, we have an inventory book value

of $1.5 billion, net of $559 million of impairments. We've recorded those impairments on 71 of our communities for

the properties that have impaired, we're carrying them at 22% of their pre-impaired value.

Another area of discussion for the quarter is related to our deferred tax asset valuation allowance. During the fourth

quarter of fiscal 2014, we reversed $285 million of our deferred tax asset valuation allowance. We've reversed the

remaining valuation allowance when we began to generate higher levels of sustained profitability. Back when we had avaluation allowance covering the full value of our deferred tax assets, other than minor amounts related to federal or

state tax reserves, any income tax benefit or expense was offset by adjustments in the valuation allowance, resulting to

no income tax benefit or expense on the income statement. Now that we've reversed the portion of the valuation

allowance, income tax benefit or expense is reflected in the income statement consistent with how we've reported taxes

prior to having a valuation allowance.

At the end of the second of fiscal 2015, our valuation allowance in the aggregate was $643 million. The remaining

valuation allowance is a very significant asset currently reflected on our balance sheet and we're taking numerous steps

to protect it. We will not have to pay cash federal income taxes on approximately $2 billion of pre-tax earnings.

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Date: 2015-06-09


Market Cap: 407.73

Current PX: 2.785





Current Year: 0.045




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On slide 19, we show that we ended the second quarter with a total shareholders' deficit of $146 million. If you add

back the remaining valuation allowance, as we've done on the slide, then our shareholders' equity would be a positive

$497 million. Over time, we believe that we can repair our balance sheet by returning to higher levels of profitabilityand have no intentions of issuing equity any time soon.

As seen on slide 20, after spending $108 million on land and land development during the second quarter, we still

ended the second quarter with $312 million of liquidity, which includes $259 million of homebuilding cash and $53

million undrawn under our $75 million unsecured revolving line of credit. We once again ended the quarter in excess of

our targeted liquidity range of $170 million to $245 million.

Now turning to our debt maturity ladder which can be found on slide 21. The red bars on the slide represent unsecured

debt. We continue to believe that we have the ability today to refinance all of our unsecured debt that matures between

2015 and 2017. However, in order to reduce the high costs associated with the make-whole provisions, we have waited

to refinance those bonds until we were closer to the maturity dates.

I expect that we will likely refinance the 2015 and at least the early-dated 2016 sometimes this summer. Because of the

financial constraints that we had earlier in the cycle, we have less capital spend on land and therefore, we're lessaggressive on investing lands than some of our peers. But as you could see on slide 22, over the past 12 quarters, we

have gained control of about 10,000 lots than we actually delivered homes on and our land acquisition teams across the

country continue to work hard to identify new land parcels to purchase today.

We know the general timing of when these investments are going to come on line as active selling communities. We're

finally at the point where we will be opening up a lot of communities which gives us confidence in our ability to grow

revenues and profitability in 2016. With respect to the walk-away shown on the slide, our option deposits are typically

fully refundable during the due diligence period. The walk-aways from the second quarter of 2015 resulted in only

modest charges primarily consisting of investigated expense incurred during the due diligence period.

We feel good about our liquidity position and we'll continue with land purchases that meet our 25-plus percent

unlevered underwriting hurdle rates based on today's construction cost, today's home prices and today's absorption

rates.

Turning to slide 23, I would now like to discuss our expectations for the remainder of fiscal 2015. Assuming no change

in market conditions, we expect to report total revenues between $2.2 billion and $2.3 billion for all of fiscal 2015. We

expect our full-year gross margin for all of fiscal 2015 to be between 17.4% and 17.8%.

We expect total SG&A as a percentage of our total revenues for all of fiscal 2015 to be between 12.1% and 12.4%.

While we still feel good about our ability to grow the top line during fiscal 2015 and still expect to generate a solid

profit during the fourth quarter, we do not expect it to be sufficient to offset the losses in the beginning of the year,

including a loss in the third quarter.

We expect the pre-tax loss for the full year to be between $15 million and $30 million. This is due to this year's decline

in gross margin and a relatively high level of SG&A related to preparing for greater top line growth.

I will now turn it back to Ara for some closing comments.

Ara K. Hovnanian

We're not happy about the step backwards we've taken in 2015. As much as I'm disappointed in our results in 2015 thus

far, we are expecting dramatically better results in our fourth quarter, which begins in August and continuing through

2016, which begins in less than five months.

We're planning some aggressive growth for 2016. We believe we are well positioned for this growth based on our land

position. We are growing our community count. Additionally, we're taking steps to improve the operating results of

some of our weaker divisions. These steps include recent management changes, whittling down some of our older

communities and new communities coming on line with better financial metrics.

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Date: 2015-06-09


Market Cap: 407.73

Current PX: 2.785





Current Year: 0.045




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We believe the seeds we have been planting are going to pay off for us in 2016, which is why we're calling for a

breakout year in deliveries, revenues and profitability. Any benefits we get from an improvement in the housing market

will only accelerate our top- and bottom-line growth.

That concludes or formal remarks, and I'm happy to [ph] turn it (26:07) open for questions.

Q&A

Operator

The company will now answer questions. [Operator Instructions] And our first question comes from the line of Susan

Maklari from UBS. Your line is open. Please go ahead.

: Good morning.

: Good morning.

: In terms of the spec level, I know that you commented that you expect it's already started to

come down and you expect that to further come down. Can you just give us some sense of how we should be thinking

about a normalized level in terms of the number of homes per community?

: Yes. Well, yes, we don't expect it to come down much further from where we are right now. The issue was not so

much the absolute level of specs per community but our distribution. Normally, in markets like Houston, we ran higher

specs per community, but that market has been quite strong and we've been selling the homes early so we have actually

fewer specs there. I think some of the mistakes we made, we had spec homes that would be markets like Virginia or

Maryland or New Jersey. And there, the market was not used to as many spec.

The market is not particularly strong and that's where we have to take some [indiscernible] (27:53) discounts to adjust

it. So it's a long winded way to say that the issue is not the number of specs in absolute sense, but this balance in

distribution between geographies and product lines. We also started a few specs more than we should have in retrospecton some of our higher end communities as well. So, we think the key is more bringing in balance then reducing the

number further.

: Okay, that's helpful. Thanks. And then my second question is you noted that in Houston, things

continue to be strong, but that you have had disclosed sales down where lots of deliveries have been delayed. Given the

recent weather down there with the flooding and that situation, could that potentially get pushed further out and have

further impact for that market?

: Sure. I mean, at an extremely wet spring and then they have the flooding that occurred and still fairly rainy.

That's not helpful when you're trying to sell lots. So, the lots were already delayed and certainly the weather has caused

further delays for developers across Houston as well.

: Obviously, we're hoping the weather gets a little bit better, so the developers can catch up and get our land

developed and deliver to us. In Houston, we are primarily a buyer of finished developed lots.

: Okay. Thank you.

Operator

Thank you. Our next question comes from the line of Megan McGrath from MKM Partners. Your line is open.

: Good morning. Thanks for taking my question. So, a follow-up on the gross margin. Just

want to make sure that – when I looked at your guidance for the full year, it looks like that implies, if I'm doing correct

math, about 200 basis points in improvement by the end of the year. Do you – is that about right, and do you expect to

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Market Cap: 407.73

Current PX: 2.785





Current Year: 0.045




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come gradually or are we going to see sort of a big bump in the 4Q gross margin?

: I think you're in the ballpark...

: Yeah.

: ...in terms of your math. Certainly, the fourth quarter is going to be stronger than the third quarter. You'll see

sequential increases in the margin, and that's going to occur.

: Okay. Great. And then I wanted to follow up on your detail on the to-be-built margin

differential that you broke out. Well, we heard from a lot of other builders, their commentary was that this was a

reflection of the weak market at the end of 2014 rather than a commentary on the existing market. Would you agree

with that, and are you expecting to see that margin improve as we go through the end of the year?

: To-be-built, is that correct?

: Yes, on to-be-built.

: Yeah. I would say that to-be-built margins did decline in the latter half of 2014. That was a – kind of result of theslower sales pace that us and the whole industry was experiencing as compared to the better sales pace for community

that we experienced in 2013. So builders were trying to get a disproportionate share, and the way they did that was

offer incentives and concessions. I'd say that's been mitigated for the most part this year as the market is showing some

strength. So, I think most of the decline in margins related to to-be-built homes is probably either in backlog or already

been delivered and that we're seeing slightly stronger to-be-built margins as we move forward.

: Okay. Thanks very much.

Operator

Our next question comes from the line of Michael Rehaut from JPMorgan. Your line is open.

: Hi. Good morning. It's actually Jason Marcus in for Mike. First question, I was hoping youcould talk a little bit more about the overall demand environment. I know you talked about gross margins being below

your expectations, but in terms of sales pace, obviously it declined about 4%, 5% during the quarter, and I just wanted

to see how that compared to your expectations as you look across the different regions throughout the company. And

then, furthermore, as you look into 3Q, can you just talk about how you're balanced on price versus pace?

: I think, again, as I tried to explain, talked in the script about sales pacing, it's partially impacted by tougher

comparison we created for our self last year when we did our national sales promotion. So, that's part of the answer.

But in terms of expectations, I think the candid answer is we really thought kind of leading into January, sales all the

way through January, monthly year-over-year net contracts per community had shown a positive trend for four or five

months in a row, and that gave us great optimism that the spring selling season would continue that kind of pattern.

So we were disappointed when February showed a decline. I think we talked about that a little bit during last quarter's

conference call. March, that decline didn't surprise us quite as much, but our expectations, being optimists, probably

were still that even March would show at least even, if not a slight improvement, year-over-year.

So, I know if that is responsive enough to your question but kind of a macro view of it.

: Yeah. Just overall, adding to that, in the first quarter, the actual first quarter month November, December and

January, as you may recall back on slide 12, our contracts per community were up every single month but we did report

the first month of next quarter February which was down. We – as it turns out, as you know, now it's in the results,

February and March were down. But the good news is unlike last quarter were we began with a negative month, this

time we ended the quarter in April positively and we began with a very strong May.

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Current PX: 2.785





Current Year: 0.045




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So we're optimistic that this is more of a trend in the positive direction. However, as you can obviously see, for us, we

see in the market being choppy overall in our markets. We're hoping some of that choppiness ends but it's hard to tell.

We didn't expect it in February and March to the extent that we have the downward comparisons but we're pleased thatApril and May are up strongly. As we mentioned in dollar amount of net contracts in May, it was particularly strong

with $213 million compared to last year's $179 million. So our recent results we're very pleased with.

: Okay. Great. And then just next question, quickly on the land market. If you could just talk

about what you're seeing there in terms of the competition and pricing from a regional perspective and if you had to

adjust your underwriting criteria?

: No. The underwriting criteria is about the same and I can't say there's been any great change in competitiveness

on the land deals. As you could see, we really have to do our due diligence, you saw on one of the slides many of our

initial options don't withstand the due diligence process. You have to be extremely careful in this environment.

And we're remaining true to our discipline in trying to be very analytical in our new acquisitions which are critical. But

on the whole, I'd say the market is balanced. We're finding opportunities as we need them. 2016 is basically all

purchased or at least auctioned and controlled and in contract. So we're today just working to build our 2017 and thatincludes counting on significant growth for 2016.

: Okay. Thanks.

Operator

Our next question comes from Nishu Sood from Deutsche Bank. Your line is open.

: Hi, good morning. This is actually [indiscernible] (36:33) on for Nishu. My first question is regarding gross

margin. Can you shed some light on why you consider 20% to be a normalized gross margin and do you need pricing

power to get there?

: I mean, the reason we consider 20% to be a normalized gross margin is we showed some longer-term history of

our gross margin. I'm not sure exactly which slide it is. Jeff will look it up as I'm speaking. Between 1997 and 2002,

when it wasn't kind of a boom market or a bust market, we averaged just around that 20%, 21% gross margin. We

consider that a normalized gross margin. We actually achieved that gross margin in 2013 and 2014, so we don't really

need pricing power per se. We just need our communities, our new communities coming on line should be averaging in

that regard. We need the market to hold up to where builders aren't offering as much incentives and concessions as they

did in 2014. So I think we'll get back to that 20% over time.

: Well, that's obviously during the stronger markets. We have registered gross margins far in excess of that. In fact,

I think, in 2004 and 2005, we had 25% and 26% gross margin. So, certainly, it's capable of exceeding 20% which is

about where we can sort of normalize. Right now, we're just anxious to get back to our normal levels.

: Okay. Thank you. And then my next question is, can you shed some more light on your backlog and why you're

confident that you'll see higher margin in the back half of the year? What factors are going to drive this?

: We can see the numbers as we sell each house, what the margin is, and we can see what our margin is actually in

backlog across the country. And we know what month those are expected to close in. So, we have pretty good visibility

and transparency, and that's what gives us confidence to make the statement. We did about margins improvement

throughout the rest of this year.

: Yeah. Now, the one caveat is that we do sell typically about 25% of each quarter's deliveries during that quarter.

Those are specs. And last quarter as we had announced, we are planning to discount the specs and ended up we

discounted more than we plan, so we came in a little lower in our gross margin than we had anticipated. At this time,

we are seeing the spread narrow on our spec. So we're feeling better about that trend. Still we haven't sold all of the

specs that we typically don't for the quarter deliveries, but we just don't anticipate any negative surprises this time

based on the current environment.

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Date: 2015-06-09


Market Cap: 407.73

Current PX: 2.785





Current Year: 0.045




Page 10 of 12

: Ara, thanks.

Operator

Thank you. [Operator Instructions] Our next question comes from Alan Ratner from Zelman & Associates. Your line is

open.

: Hey. Good morning. Thanks for taking my questions. Ara, as I kind of listen to your commentary,

I definitely hear the frustration in your voice just about the recent performance. And I think while all builders agree the

recovery hasn't been as robust as we would have expected a few years ago, I think it is fair to say the market's in a

materially better position today than back in, say, 2012. Yet your metrics are pretty similar now versus what they were

back then.

So I guess my bigger-picture question to you as you sit here today and you think about Hovnanian's outlook, I was

curious if there's any consideration being paid by management and the boards to a more material strategy shake-up. I

know you mentioned the recent management changes at the local level, but I was curious is there any consideration to

exit weaker performing markets, sell off some land to shrink the balance sheet, even bringing in an outside consultant

to kind of help out craft that longer term vision of the company as some other builders have done over the last few

years?

: I appreciate the comment and, yes, you do correctly hear frustration in my voice. But we think

we see the path to improvement and we think it's upon us. If we don't meet the positive fourth quarter that we believe

we've got with dramatically better results and if we don't kick off 2016 with positive results, and I think we'd look at

something more significant.

But really we're employing the same strategies, in general, in how we manage that led us to industry-leading

performance in the last up-cycle in 2004 and 2005, with largely the same senior management team in place. We not

only outperformed almost every single public builder in those two years, but we actually were number two on the

Fortune 500 performance in terms of return on equity in growth and profit.

So we think we know what we need to do, and we don't think the fundamentals have changed that much. Obviously, we

were hampered by the mistakes that were made before the downturn, and we've been saddled with some of those

mistakes that haven't given us the same flexibility that some of our competitors have had, but we've gone through that.

We weren't able to quite do the land purchases we would have liked that some of our competitors did, but we have

made some great progress. We've got a lot of communities opening, and we think that performance should be turning

around shortly. We look forward to reporting much better results, particularly beginning in the fourth quarter and going

on from there. It's only a few months away.

: Great. I appreciate it. Thanks very much.

OperatorOur next question comes from Susan Berliner from JPMorgan. Your line is open.

: Hi. Good morning.

: Good morning.

: Good morning.

: I want to start, I guess, with land spend. I was wondering in light of the upcoming debt

maturities if you may be looking to reduce land spend. I know if you go back to 2011 and 2012, you guys were closer

to $400 million and said about $600 million last year?

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Date: 2015-06-09


Market Cap: 407.73

Current PX: 2.785





Current Year: 0.045




Page 11 of 12

: Sue, if you'll recall, on the last quarter's call when we discussed after raising $250 million of debt in the first

quarter, that we took some near term steps in order to more fully deploy that cash. Those steps allowed us to avoid that

negative arbitrage of paying interest both on our new debt and interest on items such as non-recourse mortgages, modelsale leasebacks and banking arrangements, et cetera. And we also said that we would reactivate those programs when

we decide to increase our liquidity or deploy additional cash to grow our land position even further.

And actually, in the second quarter, towards the end of the second quarter, we reactivated some of those programs, so

that $108 million land spend is artificially low. And the land spend that we had in the first quarter, I don't recall exactly

what it was, it was probably a little bit high. So if you average our spend over the – those two quarters, that's kind of

what our quarterly spend has been without the white noise of the – some of those actions we took to reduce the interest

cost. So we'd really been steady on our land spend, I guess, is what I'm really trying to convey.

: Okay. And then if I could just turn to market, because I guess I'm still a little confused on the

slowdown and absorption phase, and I know you had some in Houston. And I was wondering if you could talk about

some of your other large markets, whether it be D.C., New Jersey, Chicago, et cetera?

: Sure. Well, the strong markets overall for us continue to be up. In addition to Texas, the Northern California,

Silicon Valley suburbs where we've got communities there, eight particular communities, a large one with two product

lines where we have people camp out and we literally sell out the morning we release the homes. That market has been

particularly strong, and we're about to open another new and large community there as well. So we think that's going to

be beneficial.

The DC market, overall, has been sluggish compared to where we'd expect it to be at this time in the cycle. Clearly,

sequestering is taking its toll, and employment has not been as vigorous as it used to be. So that is not giving us the

punch that we normally have. In the Northeast, that market has just not recovered as vigorously as other markets have.

However, some of our newer communities that we're able to purchase at a solid basis have performed very well.

So we're anxious as we continue to open new communities to get a bigger mix of our new communities compared to

the old legacy ones in the Northeast, and we think that alone will improve our performance. And finally in Florida, in

Southeast and Orlando in particular, they're very strong markets. We've got several communities under way with landdevelopment. We're just anxious to get the models open and open for sale there. We think that will be very helpful.

We've got some good properties at a good basis, and we're just anxious to get the land development done and models

built to open up.

: Okay. Thanks very much.

Operator

At this time, I'd like to turn the call back over to Mr. Hovnanian for any closing remarks.

Ara K. Hovnanian

Thanks very much. We understand disappointment in the results. We're disappointed, but we look forward to reporting

better results in the very near future. Thank you.

Operator

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

disconnect.

8/8/2019 Hovnanian

12/12



Date: 2015-06-09


Market Cap: 407.73

Current PX: 2.785





Current Year: 0.045




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