Friday, October 06, 2006

Internal Hovnanian Memo...

This memo was released recently and has been circulated on the internet today. Apparently, its lagit and sheds quite a bit of light on the state of the homebuilder and the industry in general.

K. Hovnanian memo to employees

Sent: Tuesday, October 03, 2006 10:02 AM
To: DL HOV Associates
Importance: High


MEMORANDUM TO: All Associates
FROM: Ara K. Hovnanian
DATE: October 3, 2006

Fellow Associates,

A few months ago I wrote to you about the changing market conditions in our industry and our concerns about how long the downturn in homebuilding may last. Since that time, the market has slowed further still, representing one of the steepest declines in new home sales in our memory. Most of our markets have been affected, some severely. At this point, we are preparing for a long period of slower sales, at least through 2007 and perhaps beyond.

What does this mean for you and for our Company? These new market conditions have affected us in many ways and will continue to affect us in the months ahead. In the area of land acquisition we have been re-evaluating our current land positions and the contracts for new land in the light of these new conditions. Many of those contracts no longer make good financial sense when you factor in lower prices and a slower sales pace. In cases where we have been unable to renegotiate these contracts with more favorable terms, we are canceling them, at times forfeiting our deposit monies. It is important to state that in all cases where we have canceled contracts, we have acted legally and with integrity, adhering to the very specific terms of those contracts and exercising previously agreed-upon terms of cancellation. We continue to have an ample supply of land for our future growth, but we need to be sure that the communities we develop can be profitable.

Our local and national Purchasing teams have been pro-actively working with our service providers, material suppliers and trade partners to find ways to reduce our costs, through better pricing, defect reduction and product specification changes. We have been successful in many of our Business Units in finding significant cost reductions through cooperation with our business partners. We continue to work on ways to reduce costs.

We have also had to make adjustments to our pricing in order to make sales, either through added features, free options, waived premiums or outright base price reductions. In a market where our competitors are making dramatic pricing concessions, we must make similar adjustments in order to remain competitive. Obviously, this has a significant impact on our profits on those homes that we sell at a discount.

The most difficult adjustment we have had to make to the changing market is in the area of staffing. In many locations, including corporate headquarters, we have been forced to face the fact that we no longer have enough work for all of our Associates. We were hoping that normal attrition and a reduction in new hires would prevent us from needing to take further action. Those steps helped, but did not solve the problem of having too little work for our entire team. As a result, we have had to make staff reductions.

We consider this action to be a last resort, but business realities demand action in order for our Company to remain healthy and to maximize our performance in a difficult market environment. We know that this causes pain not only for the families of displaced Associates, but for our remaining Associates as well. In all cases, we are treating our displaced Associates fairly and with dignity. We are providing severance and outplacement services where they are available. There may need to be more adjustments if the market continues to slow. We will make those decisions with great care and sensitivity and we will try to keep you well informed of any changes.

What can you do to help us continue to prosper during these challenging times? First and foremost, you can continue to focus on delighting our customers. Companies with “raving fans” prosper during good times and bad. We have made great improvements in this area, but we have much room for continued improvement. Regardless of the market conditions, we will continue to invest resources and support to further our goal of being an industry leader in customer satisfaction. Don’t let a soft market deter you from doing everything you can to create a great customer experience.

Second, you can help us to eliminate waste and rework, which costs our Company literally millions of dollars each year, by focusing on process improvement and defect and error reduction. Help us to eliminate unnecessary costs by spending our money wisely. Here at Corporate headquarters, we launched a “great idea” program where Associates submitted nearly 200 ideas for cost savings, generating the potential for huge savings. In just one example, our new contract for overnight shipping services in switching to DHL will save us up to a million dollars annually! There are many such opportunities all around our Company and we need you to help us identify them.

Finally, you can continue to do the great work you do for our Company every day. Challenging times allow the best and the brightest to truly shine. We have a lot of work to do and thousands of homes to sell, build, close and service. We all need to keep our heads down and get the job done, every day.

As always, and for good reason, I remain highly optimistic about the future. Our Company is very strong financially. With $1.5 billion in our credit facility, a strong cash position and $2 billion in shareholder equity, we have the capital resources needed to weather the storm and to position ourselves to take full advantage of the opportunities that markets like these always present. The market will gain strength eventually, and we will be poised and ready to take full advantage of it. We will emerge from this market stronger and better.

Thanks to each and every one of you for all you do to help us become THE BEST homebuilder in the nation.