Hovnanian Enterprises, Inc.

Good morning, and thank you for joining us today for Havnadian Enterprises' fiscal 2021 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 before we broadcast, and all participants are currently in a listen-only mode. Management will make some opening remarks about the second quarter results and then open the line for questions. The company will also be webcasting a slide presentation along with the opening comments 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 now log on to the website. I would like to turn the call over to Jeff O'Keefe, Vice President, Investor Relations. Jeff, please go ahead.

Thank you, Liz, and thank you all for participating in the call this morning to review the results for our second quarter. All statements in this conference call that are not historical facts should be considered as forward-looking statements within the meaning of safe harbor provisions 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 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 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. By their nature, forward-looking statements speak only as 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's 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 on the call are Ara Hovnanian, Chairman, President, and CEO, Larry Sorsby, Executive Vice President and CFO, and Brett O'Connor, Senior Vice President, Chief Accounting Officer, and Treasurer. I'll now turn the call over to Ara.

Ara, go ahead. Thanks, Jeff. I'm going to review our second quarter results and then address the current market environment. As usual, Larry Soresby, our CFO, will follow me with more details and we'll end with Q&A. On slide four, we compare our second quarter results to the guidance we gave on our first quarter conference call. Our total revenues, adjusted gross margin, adjusted EBITDA, and adjusted pre-tax income were all within the guidance range that we gave. However, SG&A was higher than anticipated. The SG&A miss was related to $17.5 million of incremental phantom stock expense related solely to our common stock price increasing from $51 at the end of the first quarter to $133 at the end of the second quarter. Only one time in our company's history during 2019, Phantom stock was issued for an equity grant and it was because our stock price was very low at the time and we were concerned about the negative impact that dilution could have on our shareholders. While we certainly have been bullish in our long-term stock price, we did not budget for the magnitude of the increase in one quarter. Larry will talk more about the Phantom stock expense in just a few moments. In the third column, we show what our results would have been without the incremental stock expense. The SG&A would have been better than the guidance we gave. Additionally, our results would have been above the high end of the range for adjusted EBITDA and adjusted pre-tax income. Moving on to slide five, we show year-over-year comparisons for the second quarter performance metrics. We begin with total revenues in the upper left-hand portion of the slide. Our total revenues for the second quarter increased 31% to $703 million. Moving to the upper right-hand portion of the slide, you can see that our adjusted gross margin increased 310 basis points year over year. Adjusted gross margin was 21.3% this year compared to 18.2% in last year's second quarter. As we've said on previous calls, in anticipation of cost increases and our desire to improve margins, we pivoted to increasing home prices back in June of 2020. During the first half of 21, housing demand remained strong and we saw both labor and material costs, especially lumber, continue to increase. As a result, we continued to both aggressively increase home prices and limit home sales to a pace similar to our home starts. These actions will help ensure that we stay ahead of future cost increases. We'll talk more about that and the impact of margins in a moment. In the lower left-hand quadrant of the slide, you can see that our SG&A was certainly impacted by the incremental phantom stock expense. If you were to ignore the incremental stock expense, the SG&A ratio would have improved to 9.3% as shown in the lower blue, in the lighter blue, excuse me, compared to the 10.4% in last year's second quarter. We're benefiting from the normal leverage of scale as we grow. In the lower right-hand quadrant of the slide, we show that adjusted EBITDA increased 47% from $52 million in last year's second quarter to $76 million this year. While we were within the guidance range for EBITDA, once again, if you ignore the incremental phantom stock expense, our adjusted EBITDA would have increased 80% to $94 million above the upper end of our guidance range. On slide six, our adjusted pre-tax income before land charges and gains or losses from the extinguishment of debt improved to a $31 million profit this year from a $5 million profit last year. Once again, ignoring the phantom stock expenses would have resulted in a higher profit of $49 million this year. On slide seven, we show that our net income for the second quarter of 21 was $489 million compared to $4 million in the same quarter last year. A huge portion of that year-over-year increase, or $469 million, was due to the reduction of our valuation allowance. The profit for the quarter combined with the reduction in our valuation allowance resulted in total shareholders' equity, increasing sequentially by $489 million. On the left-hand portion of the slide, we show that our quarterly contracts increased, excuse me, on the left-hand portion of slide eight, we show that our quarterly contracts increased 19% to 1,771 homes. Contracts during the second quarter last year were adversely impacted by the early stages of the COVID shutdown, making this year's second quarter comparisons much easier. We achieved a 62% increase to 18.3 contracts per community for the second quarter of this year compared to 11.3 contracts per community for last year's second quarter. The strength of the market has been widespread across product types and by geography. During the second quarter, Phoenix, Delaware, and Dallas-Fort Worth had the largest year-over-year increases in contracts per community. Each of these divisions posted year-over-year increases of more than 135%. Our other markets continue to do well also, but in many of those cases, we've been more focused on slowing down sales pace and increasing price. Slide nine shows the number of consolidated contracts on a monthly basis over the past year. As we discussed last quarter, we consciously raised prices significantly in February to slow the sales pace and improve our margins. While we held the sales pace to comparable numbers in the months of March and April with steady price adjustments, the contracts are still up over the prior year because the comparisons were much easier. Turning to slide 10, you can see the contracts per community for the past several months. This shows a similar pattern of significant increases compared to the same month last year, but even more significant, again, with particularly easy comparisons for last April and March. We spiked at seven contracts per community in January. Then we saw the intended impact from our aggressive home price increases and the restriction of sales in certain locations. In both February and March, contracts per community slowed to 6.1, and in April it came down further to 5.5 contracts per community. Even at these lower contract paces per community, our annualized paces are the highest they have been for over a decade. A sales pace of six to seven per month per community is difficult to match in production today, and we pivoted harder to a greater focus on margin. As I mentioned earlier, we'd like to control our sales pace to the point where it aligns more closely with starts. This strategy significantly reduces the risk of construction cost increases, reducing our margins. As we stated on our analyst call last quarter, we expected the year-over-year sales comparison for March and April to be much easier due to the COVID shutdown last year. We also stated that comparisons would be more difficult in May and over the summer months due to the surge in COVID housing demand last year. Further, over the past several quarters, we were particularly aggressive regarding raising sales prices to both increase margins and slow sales to a more rational pace. During the recent months, we've significantly metered sales and temporarily stopped sales in certain communities in order to better match our sales pace with our ability to start homes. As a result, compared to intrinsic demand, we believe our May sales pace is artificially low. You can see the start of these more difficult comparisons on slide 11. During the month of May, due to restricting sales, an especially difficult comparison to a very strong May last year, and a lower community count, our contracts per community declined 19% and our contract dollars decreased 23%, and total contracts declined by 266 homes year over year. However, we achieved our objectives, and our May contracts had the highest gross margin percentage at the point of contract for any month in over a decade. As we intended, the slowing of our sales pace has kicked in, The difficult comparison to last year's sales pace will continue over the summer months. This was a time last year when the market was absolutely on fire, and we and the home building industry had not begun to aggressively throttle back contract paces. However, like the month of May, we expect significantly higher gross margins in our new contracts compared to last summer's contracts. The broad strength in the housing market continues to be driven by the same factors that have been in place over the past year. Solid demographic trends, limited supply of new and existing homes, historically low mortgage rates, and an ever improving economy. The potential for an infrastructure bill can only improve the economic conditions. We plan to continue to raise prices in order to keep up with rising material and labor costs, align our sales pace with our ability to start homes, and improve our margins. All signs indicate that our 21 financial results are expected to be dramatically better than last year. I'll now turn it over to Larry Sorsby, our Chief Financial Officer.