Hovnanian Enterprises, Inc.

Good morning and thank you for joining us for today's Hovnanian Enterprise's fiscal 2021 fourth 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 broadcast and all participants are currently in a listen-only mode. Manager will make some opening remarks about the fourth quarter results and then open the line for questions. The company will also have webcasting, a slide presentation, along with opening comments for management. The slides are available on the investor 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, Valerie, and thank you all for participating in this morning's call to review the results for our fourth quarter and fiscal year. 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 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 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 of the date they are made, are not guarantees of future performance 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 and uncertainties and other factors are described in detail in the sections 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 have undertaken 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 Soursby, 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. Ara, go ahead.

Thanks, Jeff. I'm going to review our fourth quarter results and I'll address the current market environment. Larry Sorsby, our CFO, will follow me with more details. I'll make a few closing comments and we'll open it up to Q&A. On slide five, we compare our results to our most recent guidance. Although we experienced supply chain delays, our amazing associates found ways to mitigate many of the issues. We managed to deliver a large number of quality homes in the final month and days of the quarter without spending the incremental costs that concerned us. This allowed us to achieve higher gross margins than we anticipated. While supply chain issues prevented us from closing more homes, we were able to report revenues above the midpoint of our guidance. During the quarter, we also achieved lower SG&A, and lower debt levels which resulted in lower interest expense. All of this allowed us to not only exceed our revised guidance, but also our original fourth quarter guidance for gross margin, EBITDA, and pre-tax income. During our second quarter conference call, we talked extensively about the impact of phantom stock expense on our SG&A. During the fourth quarter, our stock price declined, which resulted in a $5 million reduction in phantom stock expense. In the third column of this slide, we show what our results would have been without the benefit of the phantom stock expense reduction. As you can see, we still exceeded our original and revised guidance for EBITDA and pretax profit. Further, our SG&A ratio would have been within our guidance without the benefit. Moving on to slide six, we show year-over-year comparisons for our fourth quarter. Given the supply chain disruptions and labor shortages that have been plaguing many industries, including home building, we are pleased with our strong performance in the quarter. Starting in the upper left-hand portion of the slide, you can see that our total revenues for the fourth quarter increased 19% to $814 million. Moving to the upper right-hand portion of the slide, you can see that our adjusted gross margin increased 260 basis points to 22.8% this year compared to 20.2% in last year's fourth 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. Keep in mind that these deliveries did not get the benefit of lower lumber prices since they started near peak lumber pricing. We expect the lower lumber prices to positively impact gross margins beginning in the second quarter of fiscal 22, as we deliver homes that started after lumber prices receded. In the lower left-hand quadrant of the slide, you can see that our SG&A was 8.6% for the fourth quarter compared to 9.6% in last year's fourth quarter. If you ignore the benefit of the phantom stock expense, it still would have improved to 9.2% this year. In the lower right-hand quadrant of the slide, we show that adjusted EBITDA increased 39% from $87 million in last year's fourth quarter to $121 million this year. On slide seven, you can see that our adjusted pre-tax income improved 80% to $81 million compared to $45 million last year. Turning to slide eight, for the full year, our earnings per share, ignoring the benefit of the valuation allowance reduction, grew 210% from $7.03 in fiscal 21, excuse me, in fiscal 20, to $21.77 in fiscal 21. This is a significant year-over-year growth, and we expect to have continued significant improvement in fiscal 22. We already have the majority of our first two quarters contracts in backlog, about half of our third quarter, and we're beginning to fill our fourth quarter pipeline. Let me talk about the sales environment. On the right-hand portion of slide nine, we show contracts per community for the fourth quarter in each of the last three years. You can see that our contract pays jumped from 9.5 in the fourth quarter of fiscal 19 to a white hot pace of 16.5 in fiscal 20. That was a 74% year over year increase. For over a year now, we've been saying that the sales pace that we achieved in fiscal 20 was unsustainable and that year over year comparisons would be challenging. As we had anticipated, with significant home price increases and metered sales, the housing markets returned to a more normalized sales pace in fiscal 21. Our contracts per community of 10.2 in this year's fourth quarter were below fiscal 20's white hot fourth quarter, but up 7% compared to a more normalized fourth quarter in fiscal 19. Further to the left, we show that the average fourth quarter contract case from 97 through 2002 was 10.2. As we've said many times before, that was a time that was neither a boom nor a bust for the housing industry. While our sales pace in the fourth quarter of 21 slowed to a more typical historical pace, both home prices and gross margins on homes that we sold in the fourth quarter were much higher this year than they were a year ago. We expect this will lead to higher levels of profitability in future periods as we deliver those homes. On slide 10, we show contracts per community on a monthly basis from December through November. 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 in gray. For the past seven months, our contracts have been lower than last year's blazing pace. However, we compare favorably every month with 19's more historical typical contract pace. We believe our current sales pace is healthy and much more sustainable than the COVID demand surge pace during fiscal 20. Further, the most recent month of November shows that we're closing the gap on sales pace, notwithstanding significant price and margin increases this year. Our contract dollars in November of 21 actually increased 10% over last year. This is particularly noteworthy as we've raised prices considerably since last November when sales were white hot. Furthermore, this year's November only had four Sundays compared to five Sundays last year. The housing market definitely continues to remain really solid. On slide 11, we show what our community count was at the end of every quarter since the last fiscal year end. As you can see, primarily due to selling through communities at a significantly higher than normal pace as we discussed before. Our community count had been declining each quarter up until the end of the third quarter of 21 when we had a sequential quarterly increase. As we projected, the positive trend continued during the fourth quarter. We grew by 20 communities. to end fiscal 21 with 140 communities. Not only was this up from the end of the third quarter, but it was also an increase from the end of last year. We expect our community count is likely to experience up and down quarterly fluctuations during fiscal 22, including a decrease in the first quarter. However, given no material changes in market conditions, we expect to end the year with a community count at or slightly higher than we ended fiscal 21. Further, we expect to maintain a higher average community count for fiscal 22 compared to fiscal 21. On a daily basis, we all continue to see headlines about supply chain disruptions and labor shortages. These problems are not just impacting the home building industry, but they're wreaking havoc on just about every industry across the globe. At this point, we're not seeing any relief on construction cycle times, and we've therefore included the current extended cycle times in the guidance that we're going to give you toward the end of our call. As we have now begun our fiscal year, we have the headwinds of continued supply chain disruptions and a slower sales pace compared to the white hot levels that we achieved in fiscal 20. However, these negative influences should be more than offset by our increased community count, higher growth margins, and higher selling prices, which we expect should allow us to achieve revenue growth and significant profit growth in fiscal 22. I'll now turn it over to Larry Sorsby, our Chief Financial Officer.