Forget about profitability and reasonable margins in 2008. This will be the year of generating cash flow. That was the message given Friday to investors by Ara K. Hovnanian, president and CEO of Red Bank, N.J.-based Hovnanian Enterprises.
"Clearly, profitability is difficult to attain and reasonable margins are virtually impossible to attain," Hovnanian said at the Wachovia Third Annual Home Building and Building Products Conference in Las Vegas. "2008 will be the year of generating significant cash flow." By the end of the fiscal year, he predicted the company's cash flow would be in excess of $100 million.
Having been through several downturns since the company was founded in 1959, it's taking similar steps now to weather the storm, Hovnanian said, including renegotiating and walking away from land options, dramatically reducing land purchases, "right-pricing" its products, quickly turning its standing inventory, and cutting overhead, including a significant number of jobs.
"We're correcting in every location every month," Hovnanian said.
Calling the current housing correction as dramatic and rapid as those of the mid-1970s and the early1980s, Hovnanian said each of those downturns shared an important similarity-a rebound that was as sharp and as fast as the fall-off, with sales and prices rising significantly within 12 to 24 months.
One notable difference between the earlier downturns and the current one, Hovnanian said, is the interest rate. In the early 1980s, they peaked above 18 percent. Today, they're below 6 percent and predicted to go even lower. That will work in the industry's favor as the market begins to turn around.
Asked by a conference attendee about cancellations from last September's "Deal of the Century," a three-day national event that netted more than 2,100 gross sales, Hovnanian said the cancellation was in line with its normal cancellation rates of plus or minus 38 percent. The sales event did result in very slow sales for October and November, but that was followed by a strong December. The company hasn't yet decided if it will offer the promotion again in 2008. "We're not certain it's necessary," he said.
Hovnanian drew laughs from the audience when he was asked by an attendee to summarize any lessons the company learned from the current downturn.
"After a whole bunch of good years, buy a big boat, go sailing, and don't let anyone buy any land until you get back," he said. "Actually, all our subs were the ones with the yachts in the Mediterranean. We had to call them all back to renegotiate."
On a more serious note, he said he had learned the importance of lowering the company's leverage targets. By the end of 2007, the company had reduced its debt-to-capital ratio from 60 percent to 50 percent, according to its annual report. "Even that's not conservative enough to give you ample breathing room and make it less challenging," Hovnanian said. Going forward, he said, the company would work to reduce those numbers to 30 percent to 40 percent.