Hovnanian Enterprises, Inc.

Good morning and thank you for joining us today for the Half-Name and End Prices Fiscal 2021 First 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 first quarter results and then open the line for questions. The company will also be web... casting a slide presentation along with the opening comments from management. The slides are available on the investors' page on the company's website at www.khov.com. Those listeners who would like to follow along should now log into the website. I will now turn the call over to Jeff O'Keefe, Vice President, Investor Relations. Jeff, please go ahead.

Thank you, Jonathan, and thank you all for participating in this morning's call to review the results for our first quarter, which ended January 31st, 2021. 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 provisions of the Private Security Mitigation Reform Act of 1995. Such statements involve known and unknown risks, uncertainties, and other factors that may cause actual results, performance, or achievements of the company to be materially different from any future results performance, or achievements expressed or implied by the forward-looking statements. Such forward-looking statements include but are not limited to statements related to the company's goals and expectations with respect to its financial results for future financial periods. Although we believe that our plans, intentions, and expectations reflected and are suggested by such forward-looking statements are reasonable, we can give no assurance that such plans, intentions, or expectations will be achieved. By their nature, forward-looking statements speak only as of the date they are made, are not guarantees of future performance or results, and are subject to risks, uncertainties, and assumptions that are difficult to predict or quantify. Therefore, actual results could differ materially and adversely from those forward-looking statements as a result of a variety of factors. Such risks, uncertainties, and other factors are described in detail in the section entitled Risk Factors in Management Discussion and Analysis, particularly the portion of MD&A entitled Safe Harbor Statement in our annual report on Form 10-K for the fiscal year ended October 31, 2020. 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 are Ara Hovnanian, Chairman, President, and CEO, Larry Soursby, Executive Vice President and CFO, and Brad O'Connor, Senior Vice President, Chief Accounting Officer, and Director. I'll now turn the call over to Ara. Ara, go ahead.

Thanks, Jeff. COVID-19 continues to present challenges from both a business and personal perspective, and I certainly hope all of you and your families remain safe and healthy. I'm going to review our first quarter results and then address the current market environment. As usual, Larry Sorsby, our CFO, will follow me with more details. I'll then make a few closing comments, and we'll follow with Q&As. On slide four, we compare our first quarter results to the guidance we gave on our fourth quarter conference call. Our total revenues were within the range that we gave. However, the adjusted gross margin, SG&A ratio, adjusted EBITDA, and adjusted pre-tax income were all better than the high end of the range. Fiscal 21 is off to a good start. On slide five, we show that our backlog at the end of the first quarter increased 71% to 3,795 homes, excluding unconsolidated joint ventures. You can also see that the dollar value of this backlog increased 85% to $1.67 billion, again, excluding joint ventures. The strength of this backlog sets us up nicely for strong results over the remainder of the fiscal year. Moving on to slide six, we show year-over-year comparisons for the first quarter performance metrics. We begin with total revenues in the upper left-hand portion of the slide. Our total revenues for the first quarter increased 16 percent to $575 million this year. compared to 494 million in last year's first quarter. Moving to the upper right-hand portion of the slide, you can see that our adjusted gross margin increased 340 basis points year over year. Adjusted gross margin was 20.7% this year compared to 17.3% in last year's first quarter. As we have said on previous calls, we pivoted to increasing home prices back in June. We've intensified our focus in the month of February. During the first quarter, we had some headwinds on lumber and cement costs, as well as some labor costs creeping up. But home price increases more than offset those headwinds, as evidenced by our increased margins in the first quarter. With housing demand remaining very strong, we believe that it's likely that the industry will see additional labor and material costs as well as longer cycle times. We continue to increase home prices to offset potentially higher material and labor costs to slow our sales pace as well as to improve our gross margins. In the lower left-hand quadrant of the slide, you can see that our total SG&A ratio improved by 110 basis points to 11.1 this year compared to 12.2% last year. As our revenues grow, we are leveraging our fixed SG&A and expect to see our SG&A expense ratio trend lower. In the lower right-hand quadrant of the slide, we show that adjusted EBITDA increased 111% from $30 million in last year's first quarter to $64 million this year. In the left-hand portion of slide 7, you can see there are pre-tax income in the first quarter increased $27 million from a $7 million loss last year to a $20 million profit in this year's first quarter. If you ignore land charges and the gain or loss from the extinguishment of debt, the adjusted pre-tax income improved $36 million to a $21 million profit this year from a $14 million loss in the first quarter of the previous year. The first quarter is typically our weakest, and we expect that this year will follow that pattern. Having said that, the strong improvement in this year's first quarter sets the stage for a very profitable full year. On the left-hand portion of slide eight, we show that our quarterly contracts increased 34% to 1,778 homes from 1,322 homes in last year's first quarter. The picture is even better on a contracts per community basis, which we show on the right-hand portion of the slide. We achieved a 74% increase to 16.9 contracts per community for the first quarter of this year, compared to 9.7 for last year's first quarter. The strength of the market has been widespread across product types and by geography. During the first quarter, Southeast Florida, Southern California, Northern California, and Dallas-Fort Worth had the largest year-over-year increases. Each of these divisions posted year-over-year increases in contracts per community of more than 175%. Having said that, every geography is rock solid right now. So far, our traffic Website visits and sales trends indicate that demand remains very strong early into this year's spring selling season. We have taken steps to slow the pace with much more substantial price increases, which I'll describe in a moment. To give further transparency, slide nine shows the number of consolidated contracts on a monthly basis for each month since January of 2020, just before the full impact of the pandemic took hold in the United States. Each month is compared to the same month a year before. As you can see on the slide, the housing market was extremely strong before the pandemic. Our contracts were up 44% in the month of February 2020, compared to the prior year, and again, this was before the pandemic shutdown. As the pandemic unfolded in the U.S., contracts in March and April dropped dramatically. Then, Americans' mindset regarding home purchases shifted significantly in May. Demand for housing gained further momentum in June. Through the end of our fiscal 21 first quarter, we reported year-over-year increases for each of the past nine months, including a very strong 52% increase in January. The same pattern followed in terms of contracts per community, only the increases were even more significant, with January contracts per community rising 100%. During our analyst call, we described our pivot in June to price and margin increases instead of volume. Since then, we continued that approach. From November 1st to the middle of January, we increased our average home prices by 3%. However, as evidenced by January's 100% increase in sales per community, Our price increases since June were not enough to slow our sales pace to a more manageable level. The higher pace causes several issues. First, it was a pace that was not aligned with our production pace and caused longer cycle times to both start and construct our homes. Second, it was a pace that would sell out of our existing communities too quickly. And finally, it could potentially put our margins at risk if construction costs increased further on homes that were sold and not yet started. Starting in the middle of January to the third week in February, on average, we raised prices an additional 5%, with some communities as high as 15% increases. This much more aggressive approach to price increases was consciously designed to slow our sales pace, further improve our margins, and reduce our exposure to potential construction cost increases. As you can see on slide 11, which shows the results for the month of February, our efforts to slow our sales pace have been successful. While February was still a very strong month, even compared to a very strong February last year, The year-over-year increases in contracts per community were up only 27%, compared to 100% year-over-year increases in the month of January. The absolute number of contracts were down 5%, but the dollar amount of contracts for the month of February were up 9%, primarily due to increases in home prices. We believe our margins from contracts sold during this recent period will prove to be among the best margins we've had in over a decade. I'll add that higher sales prices were not the only issue that slowed our February sales. Both our Houston and Dallas markets were certainly affected by the unusually bad winter storms in February. Most of our Texas sales offices were closed for one to two weeks, which negatively impacted our February sales results. Looking forward, we'll have the benefit of two easy months of comparisons in March and April when home sales were adversely impacted by the initial COVID shutdown last year. Housing demand rebounded in May of last year, so starting in May this year, sales comparisons will be a little more challenging. The fundamentals that are driving the housing market remain the same. One, extremely low mortgage rates, and I'll elaborate a little more on that later. Two, a significantly lower than normal supply of existing homes. Three, strong demographic trends, including a surge of millennials buying their first home and a desire by all demographic groups to upgrade or enlarge their homes. And four, there's a low supply of lots to construct new home construction. The combination of these factors has resulted in a supply and demand imbalance for the housing industry. Similar to trends in online shopping that accelerated after COVID-19, Many of these home buying trends existed before COVID-19 but accelerated after COVID-19. I think we've demonstrated that with a very strong result in February and January of last year, again before the COVID shutdown. We've now entered the spring buying season and we continue to see very strong traffic and contract trends throughout our markets. Additionally, slide 12 shows our website visits per day this year in blue compared to the same day last year in gray. As you can see, website visits continue to show significant increases compared to last year. In the month of January, we surpassed one million monthly website visits for the first time in our history. The strong website traffic trend continues through February. Further, slide 13 shows internet leads per day compared to last year. An internet lead is a potential customer that gives us their phone number or email information and has requested that we contact them about a particular community. Those leads also remain extremely high. We believe visits to the website and internet leads are both a leading indicator of demand for our homes, and both of these indicators remain very strong. Whether it's website traffic, internet leads, sales pace, or backlog margin, all indicate that our 2021 financial results are expected to be dramatically better than last year. I'll now turn it over to Larry Sorsby, our CFO.