Hovnanian Enterprises, Inc.

Good morning, and thank you for joining us for the Hovnanian Enterprises Fiscal 2023 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 webcasting a slide presentation along with the opening comments from management. The slides are available on the investor page at 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 now like to 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, 2023. 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 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 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's Discussion and Analysis, particularly the portion of MDMA entitled Safe Harbor Statement in our annual report on Form 10-K for the fiscal year ended October 31, 2022. 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 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 Ara.

Thanks, Jeff. I'm going to review our first quarter results, and I'll also comment on the current housing environment. Larry Shoresby, our CFO, will follow me with more details, and as usual, we'll open it up to Q&A. On slide five, we compare our first quarter results to our guidance. Total revenues of $515 million, adjusted gross margin of 21.8%, Adjusted EBITDA of $50 million and adjusted pre-tax income of $19 million were all within our guidance range. Our SG&A ratio is slightly above our guidance. High inflation, sharp year-over-year increases in mortgage rates, and significant economic uncertainty adversely impacted housing demand throughout the second half of calendar 22. As you can see on slide six, starting in the upper left-hand corner, this led to a 9% decline in revenues in the first quarter of fiscal 23 compared to 22. Our first quarter has traditionally been our slowest quarter, and this year is certainly no exception. However, because of the strength of our backlog, recent improvements in home sales pay us and above average gross margins on both new contracts and in backlog, we expect better financial performance for the remainder of the year, and we'll get some more specific guidance on our next quarter toward the end of the call. Moving to the upper right-hand portion of the slide, you can see that our adjusted gross margin was 21.8% this year compared to 22.4% last year. To enhance affordability of our homes and to find the market clearing home prices, gross margins were adversely impacted by a 470 basis point increase in incentives and concessions compared to our first quarter last year. This was partially offset by the positive impact of lower construction costs, including lumber. Primarily as a result of declining revenues, You can see on the lower left-hand portion of the slide that our SG&A was 14.2% this year compared to 12.8% last year. In the lower right-hand portion of the slide, we show that adjusted EBITDA was $50 million compared to $64 million last year. On the left-hand portion of slide seven, you can see that our adjusted pre-tax income was $19 million in the quarter compared to $36 million last year. On the right-hand portion of the slide, you can see that our net income for the first quarter of 23 was $19 million, which included a $6 million tax benefit from energy-efficient home credits compared to $25 million in net income in last year's first quarter. Turning to slide eight, on the left-hand portion of the slide, you can see that contracts per community for the first quarter are down significantly compared to a year ago, but are close to the level we achieved in the first quarter of fiscal 19 before COVID. Although quarterly contracts show a low number, the monthly trend is a much more positive picture. Here on the right, we show monthly contracts per community including and excluding 107 Build for Rent contracts in fiscal 23. I'm going to focus on the monthly contracts per community, excluding the positive impact of the Build for Rent contracts. From November's low point of 1.2 contracts per community, we increased to 1.8 in December and ended the quarter with 3.0 in January. This positive trend continued through February 26 with contracts per community increasing to 3.4, which is above our February 19 pace before the COVID surge in demand occurred. We believe this positive sales trend certainly bodes well for a strong spring selling season. We still have two days remaining in February, but we wanted to give you the up-to-the-moment transparency. Given the recent increase in home demand, we modestly raised prices in approximately one-third of our communities around the country over the last month. Just one additional insight into the market. Last week, mortgage rates climbed to almost 7%. Despite this uncertain environment, our sales this past week were the best week in sales we have had in months. As you can see on the graph, our sales of BFR homes built for rent have boosted our sales a little further. And now on slide nine, we break out contracts per community for the first quarter by our three geographic segments. Similar to what we reported in the fourth quarter of 22, and similar to what many of our home building peers have reported, it's clear that contracts per community in this west segment were lower than our northeast or southeast segments. On slide 10, we show annual contracts per community for the past several years. You can see that for the full year of 22, Contracts per community, excluding bill for rent contracts, retreated to 38.9, the same level we had for the full year of 2019 before the pandemic. The bar on the far right portion of the slide shows the seasonally adjusted and annualized contracts per community for preliminary February to date results, excluding VFR contracts. At 35.2, it is improving, still below the normalized contract pace of 44 shown on the far left. Our pace, including VFR sales, gets us closer to the normalized pace with a result of 39.4. Turning to slide 11, you can see the month-by-month progression of our seasonally adjusted and annualized contract pace per community. May started the rapid decline, and it appears that we troughed in September with 21.2 contracts per community. Since September, every month has shown an improvement with our preliminary February to date results coming in at 39.4. Clearly a dramatic improvement. If you turn to slide 12, you can see our cancellation rate as the percentage of gross contracts during the first quarter of 30% was still above our normal cancellation rates. However, it is an improvement sequentially from the 41% rate we showed in the fourth quarter. If you turn to slide 13, here you can see that the trend in monthly gross cancellation rates improved greatly. On a monthly basis, cancellation rates seem to have peaked in October at 45% and have been steadily coming down each month since then. The preliminary February results of 16% are back down to our typical average cancellation rates, similar to the beginning of February of 22. Another positive trend is our website visits continue to be strong. We show our daily website activity over the past several years on slide 14. As we've said in the past, we think this is a leading indicator of future demand. Here, we show daily website visits per community with the blue line near the bottom of the graph representing fiscal year 20's pre-COVID website visits. The dark green line is in fiscal year 21, and the gray line is fiscal 22. Both of these recent years have elevated website visits during the time of extremely high demand for new homes during the COVID surge. On slide 15, we've added fiscal year 23 daily visits per community, shown with a bright yellow line. Over the past several months, our website visits have been much closer to the high levels that we experienced in the COVID surge. The recent website visits are clearly better than the normal pre-COVID levels we experienced. This continuation of high levels of website activity is encouraging and has translated to higher levels of contracts during the past few months. I'll now update you on several steps that we have been taking to address the current market. To begin with, we continue to see that consumers are seeking homes that they can close quickly. On our last conference call, we talked about a temporary pivot to have more quick-moving homes, or Q&Is as we call them, in order to provide our customers with more certainty on what their mortgage payments would be at closing. We consider a home to be a QMI the day we begin construction. If you turn to slide 16, you can see that our QMIs per community are consciously on the rise, and we discussed that last quarter. After a significant shortage of QMIs during the COVID surge in demand, we've gone from 3.2 QMIs per community in the third quarter of 22 to 5.5 in the end of the first quarter of 23. This level of QMI is higher than our historical average, but similar to the levels we had just before the COVID surge in demand. Consumer demand for QMI certainly remains quite strong. Since the beginning of the fiscal year, we've seen our QMI sales increase to about 60% of our sales versus about 40% historically, representing a 50% increase. I'd venture to say that if we had more QMIs available in all of our communities, our sales would have been even stronger. Our temporary QMI target remains approximately seven QMIs per community, as we discussed last quarter, with just a few homes beginning construction and a few homes partly through construction. Recent sales have made it difficult to keep up at that level. Once we get to seven QMIs per community, we plan to match our start schedules with the then current sales pace. We think this approach will make certain that we don't start an excessive level of unsold homes. Furthermore, we're continuing to focus on selling these homes before completion. The competition for new homes are other new homes and existing homes for sale. On slide 17, we show that the number of existing homes for sale around the country currently stands at 870,000 homes. That is less than half of the historical average, which is over 2 million homes. The lower level of existing homes for sale certainly helps our sales. Another impactful step we've taken is with respect to incentives and concessions. We closely monitor our competitors' use of incentives and concessions on a community-by-community basis. After our fiscal 22 year ended, we became more aggressive with our use of concessions on new contracts. Our improving trend in contracts per community I just walked you through indicates that these steps worked and that we found the right market clearing price to sell homes. We continue to offer customers incentive choices, such as paying for permanent or temporary below-market mortgage rates, paying for closing costs, offering discounts on options or upgrades, or discounting home prices on select Q&Is. there's not a one size fits all for all consumers. So we typically offer consumers a choice on what incentives would meet their needs the best. In general, the highest levels of incentives are reserved for our more challenging home sites in our more challenging communities. Even after increasing our use of incentives, the average margin on the new homes that we are selling today remain in the low 20% range, slightly above our historical average adjusted gross margin of 20%. When we, or other home builders for that matter, open new communities, we're generally starting with lower market-driven base prices rather than using large incentives and concessions on new communities. One reason that margins continue to be high today despite our higher use of incentives and concessions is lower lumber costs. Additionally, we held a purchasing blitz where we pitted our divisions against each other in friendly competition to see who could achieve the most savings per home. We spoke with our trade partners and our material providers to seek lower costs and our efforts have been successful thus far lowering our construction costs for future starts. Even after taking into account the recent housing rebound, the housing industry has slowed down from the red-hot pace of the COVID surge. Our trade partners increased our construction costs during the COVID surge. We and the industry today are successfully clawing back some of those increases now that the market is slowing. The benefits of the purchasing blitz should begin to positively impact our margins in the latter part of 23 and beyond as we deliver the homes that we are just starting now. Additionally, we're reviewing our staffing needs on a division by division basis and plan to finalize decisions shortly. This is obviously an evolving situation and we'll continue to reassess the steps that we're taking to make sure we are appropriate in our actions in light of changing market conditions. I'll now turn it over to Larry Sorsby, our Chief Financial Officer.