Hovnanian Enterprises, Inc.

Good morning, and thank you for joining us today for the Huffmanian Enterprises Fiscal 2021 Third 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 third 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. These 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 on to the website. I'll 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 third quarter, which ended July 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 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 For many, future results, performance, or achievements expressed are 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 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 a 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 sections 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 31st, 2020, and subsequent filings with the Securities and Exchange Commission. Except as otherwise required by applicable security 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 Stewardsby, Executive Vice President and CFO, and Brad O'Connor, Senior Vice President, Chief Accounting Officer, and Treasurer. I'll now turn the call over to our CEO. Eric, go ahead.

Thanks, Jeff. I'm going to review our third quarter results and then address the current market environment. As usual, Larry Sorsby, our CFO, will follow me with more details and then we'll open it up for a little Q&A. On slide five, we compare our third quarter results to the guidance we gave on our last conference call. COVID-related supply chain disruption delayed the completion of some homes, resulting in slightly lower revenues. Nonetheless, our adjusted gross margin, SG&A ratio, adjusted EBITDA, and adjusted pre-tax income were all better than the guidance range that we gave. During our second quarter conference call, we talked extensively about the impact of phantom stock expense on our SG&A. During the third quarter, our stock price declined, which resulted in a $6.7 million reduction in phantom stock expense. In the third column, we show what our results would have been without the benefit from the phantom stock expense reduction. Without that benefit, we still beat our guidance for SG&A, adjusted EBITDA, and adjusted pre-tax profit. Gross margin was not affected. Moving on to slide six, we show year over year comparisons for our third quarter performance metrics. Given the supply chain disruptions and labor shortages we've all experienced as an industry, we're pleased with our strong performance in the third quarter. Starting in the upper left-hand portion of the slide, you can see that our total revenues for the third quarter increased 10% to $691 million. Moving to the upper right-hand portion of the slide, You can see that our adjusted gross margin increased 460 basis points to 22.1% this year compared to 17.5% in last year's third quarter. This clearly illustrates that we've been able to raise home prices more than enough to offset the higher labor and material costs that we've incurred. Lumber prices have recently declined from the all-time highs they hit a few months ago. Given the significant decline in random length contracts, we expect our price for lumber will continue to decrease further in future months. While these lower lumber prices will not benefit margins on homes we deliver this quarter, starting in our second quarter of 22, we expect our gross margins will see an additional benefit from the significant reduction in our lumber costs. In the lower left-hand quadrant of the slide, you can see that our SG&A was 8.7% for the third quarter compared to 9.5% last year. If you ignore the benefit of the phantom stock expense, it would have been 9.7% for this year. In the lower right-hand quadrant of the slide, we show that adjusted EBITDA increased 59% from $65 million in last year's third quarter to $103 million this year. On slide seven, you can see that our adjusted pre-tax income improved to $63 million compared to $15 million of profit last year. On slide eight, We show that our net income for the third quarter of 21 was $48 million compared to $15 million in the same quarter last year. Moving now to the sales environment. On the right-hand portion of slide nine, we show contracts per community for the third quarter in each of the last three years. You can see that our sales pays jumped 75 percent from a historically normal pace in 2019 to a white hot pace in 2020. Remember, this was just after the March and April low in sales because of COVID and before we started to increase prices aggressively and began to meet our sales. Our contracts in this year's third quarter were better than 2019, but far below 2020. The sales pace we achieved in the summer of 2020 was unsustainable. We've been saying for some time now that comparisons would be very difficult because of the white-hot sales pace that we saw last year. Further to the left, we show that the average for the third quarter from 1997 through 2002 was 11.4. That was a time that was neither a boom nor a bust for the housing industry. Our sales pace in the third quarter of 21 slowed to a more historically typical pace, but at significantly better margins than last year. This more typical pace is certainly more sustainable. As the industry sales pace returns to normal, it should also help contain labor and material cost pressures. On slide 10, we show contracts per community on a monthly basis from September through August. The most recent month is in dark green, the same month a year ago is in light blue, and the same month two years ago is shown in gray. For the past four months, our contracts have been lower than last year's unsustainable pace. However, we compare favorably every month with 2019's more typical contract pace. It would be easy to become preoccupied with the sales pace this year compared to the higher COVID demand surge levels that we experienced in 2020. On slide 11, we focus in on the increases in the most recent months compared to the same months in 2019, pre-COVID, when demand was closer to historical averages. It's clear from this trend that the COVID-19 sales frenzy has given way to a more rational sales pace. We think the new sales pace is healthy, slightly above average, and much more sustainable. Let me take a moment to talk about increases in home prices. On the left side of slide 12, you can see that our average sales price on deliveries was up 13% year over year to $443,000 in the third quarter. On the right-hand portion of the slide, you can see that our average sales price on new contracts increased 27%, from $396,000 last year to $503,000 in this year's third quarter. We believe these dramatically higher prices dampened the COVID sales frenzy that we experienced last year. And as I said a moment ago, we've transitioned to a more sustainable sales pace that's in line with historical averages. You saw that the higher home prices in our deliveries have already increased our gross margins. We expect these higher home prices in our new contracts to generate further increases in our gross margins. The combination of higher gross margins along with our expected growth in community count should have a positive impact on our bottom line more than offsetting the return to a more normal sales pace per community. On slide 13, we show what our community count was at the end of every quarter over the last year. As you can see, primarily due to selling through communities at a significantly higher than normal pace, our community count has been declining each quarter up until the most recent quarter. we ended the third quarter of July 21 with 120 communities. This was up slightly from last quarter and is the first time we had a sequential increase in community count since the fourth quarter of 2019. Given no material changes in current market conditions, we expect our community count to grow to approximately 135 communities at the end of the fiscal year. This was the same level of communities that we had at the beginning of this fiscal year. In fiscal 22, we expect further growth in our community count. Our community count is likely to fluctuate each quarter due to the opening of new communities and the timing of closing out of old communities. The combination of a return to a more rational sales pace per community with a reduction in community count certainly impacted our absolute level of contracts this quarter. Our upcoming community count growth should help that in the near future. Our contract dollars decreased to $609 million in the third quarter of fiscal 21 compared to $882 million in the same quarter last year. This was due to a number of factors. metering of sales in many of our communities, selling out of communities ahead of schedule, COVID-19 related delays for new community openings, and the unprecedented COVID-19 surge in demand last summer that make the comparisons very difficult. All of these you've heard many times before from us and many of our peers. Much of our decline is related to community count. We're making excellent progress in our land position but there's a lag between a land contract and the first home sales, and that certainly impacts our absolute level of contracts. As we'll discuss later in our presentation, we project a return to last year's community year end, our fiscal year end, and we've increased our lots control by 20 percent over the past year. We're pleased with our progress on land acquisition, and we plan to be able to grow our revenues in fiscal 22 and 23, even with today's more normalized sales pace per community. The supply chain disruptions, along with shortages of labor, have led to longer cycle times. These cycle time increases vary from market to market and product to product, but when you look at the average for the entire company, cycle times have increased about 30 to 45 days, The average house that should take four months to build is now taking five to five and a half months to build, but we've already built these new cycle times into our guidance. All signs indicate that fiscal 21 is expected to be an outstanding year for us, and fiscal 22 should improve further. I'll now turn it over to Larry Sorosby, our Chief Financial Officer.