Hovnanian Enterprises, Inc.

Good morning and thank you for joining us today for Havnanian Enterprises fiscal 2023 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 for rebroadcast and all participants are currently in 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 investor page of the company's website at www.khov.com. Those listeners who would like to follow along should now log onto the website. I would now like to turn the call over to Jeff O'Keefe, Vice President with Investor Relations. Jeff, please go ahead.

Thank you, Livia, and thank you all for participating in this morning's call to review the results for our second quarter, which ended April 30th, 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 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, 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. Any 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 are Ara Hovnanian, Chairman, President, and CEO, Larry Sewersby, 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 second quarter results, and I'll comment on the current housing environment. Larry Sorsby, our CFO, will follow me with more details, and we'll open it up to Q&A after. On slide five, as usual, we compare our quarter results to our guidance. Considering the doubling of mortgage rates, the turmoil in the banking industry, concerns about inflation, federal debt ceiling caps, a war in Ukraine, and general economic uncertainty, we are pleased that we exceeded the high end of our guidance for all but one of the metrics we gave for the second quarter. Total revenues of $704 million, SG&A of 10.7%, and adjusted EBITDA of $87 million were all better than the high end of our guidance range. Adjusted pre-tax income of $46 million also exceeded the top end of our range, in this case by over 30%. We experienced strong demand for quick move-in homes, which resulted in higher deliveries, revenues, and profits for the second quarter, but it also resulted in a slightly lower adjusted gross margin than we projected earlier. particularly as the majority of our QMIs were in the West, which currently has lower margins. In sales recently, the spread between QMIs and to-be-built margins has narrowed, and we're working hard to narrow it further. Due to the slower housing sales environment last year, as mortgage rates rose rapidly, we increased our use of concessions, and we started more quick-moving homes last summer. These steps spurred demand and allowed us to achieve higher than anticipated home deliveries and profits during the quarter. On slide six, we compare our results for this year's second quarter to the same period last year. The comparisons are challenging given that last year's margins and profits were particularly good. Starting in the upper left-hand corner, Total revenues were basically flat year-over-year at $704 million. Moving to the upper right-hand portion of the slide, you can see that our adjusted gross margin was 20.9% this year compared to a very tough comparison to last year when our quarterly gross margin peaked at 26.6% for the quarter. Gross margins for the second quarter of 23 were adversely impacted by a 650 basis point increase in incentives and concessions compared to our second quarter of last year. We delivered more homes last quarter that were sold earlier in a more challenging time in the marketplace. Despite the increased use of concessions, our gross margin was still above 20%. which we consider to be a more normalized gross margin. The contracts we are currently signing for new homes have margins higher than what we just delivered and remain above 20%. You can see in the lower left-hand portion of the slide, our SG&A was 10.7% this year compared to 9.7% last year. Excluding some of the benefits from the phantom stock last year, our SG&A was essentially flat. In the lower right-hand portion of the slide, we show that adjusted EBITDA was $87 million compared to $124 million last year. On the left-hand portion of slide seven, you can see that our adjusted pre-tax income was $46 million in the quarter compared to $88 million last year. On the right-hand portion of the slide, you can see that our net income for the second quarter of 23 was $34 million compared to net income of 62 million in last year's second quarter. Turning to slide eight. On this slide, you can see that contracts per community for the second quarter were down 13% compared to the stronger than normal pace a year ago. but at 13 contracts per community, we're clearly above the levels that we've achieved during any second quarter in the many years before COVID. On the left-hand portion of the slide, you can see that we averaged 13.5 contracts per community during the second quarter from 97 through 02. So the second quarter of 23 approached levels approach the levels we achieved in more normal times. We've achieved significant increases in our sales pace since last summer when home demand fell quite a bit after the rate increases. Our contracts per community for the second quarter of 23 increased 100% sequentially from 6.5 in the first quarter to 13 in the second quarter. On slide nine, We show that the trend of monthly contracts per community sharply increased since the beginning of our fiscal year. We show contracts per community including and excluding BFR contracts. Either method of calculation shows our sales pace has improved significantly, far greater than the typical spring selling season would normally dictate. While there are still a few more days to go, we also show preliminary results for the month of May through Monday, May 29th. The total number of contracts for our preliminary May results increased 30% compared to all of May in 22. Contracts per community increased 18% from 3.3 in May of 22 to 3.9 for preliminary May 23 results. While lower than April, which would be typical for seasonality, it remains at a very high annualized pace and well beyond the pre-COVID sales pace. Another reason that May was a little lower sequentially is that there are only four Sundays in May while there were five Sundays in April. I'll also point out that while the month of May is not yet complete, our results are already higher than February and March of this year. And now on slide 10, we break out contracts per community by our geographic segments. Similar to what we reported in the fourth quarter of 22 and the first quarter of 23, contracts per community in the west segment were lower than our northeast or southeast segments. However, the sales pace in the West has improved and the sales pace gap between the West and the Northeast has significantly closed during the second quarter of 23. Turning to slide 11, you can see the month-by-month progression of our seasonally adjusted annualized contract pace per community. May of 22 started the rapid decline and we troughed in September with 21.2 contracts per community. The trajectory since September has been positive and now trending close to our normalized annual pace of 44 contracts per community. You can see the slowdown as the market reacted negatively to the sharp rise in mortgage rates. However, you can also see that customers eventually adjusted to the mortgage rate sticker shock and have since reentered the housing market in a meaningful way. Turning now to slide 12, on this slide we show annual contracts per community. On the far left-hand portion of the slide, you can see that our normalized pace of 44 that was achieved in 97 through 2002. In the middle of the slide, you can see our annual contracts per community for the past nine fiscal years. And on the right-hand portion of the slide, you can see that our recent seasonally adjusted contracts per community by month for the past several months. With the exception of the pace in March, all of these other bars exceed the previous nine years, other than the two years where we had the post-COVID spurred pace in 20 and 21. If you turn to slide 13, you can see our cancellation rate during the second quarter returned to a more normalized 18% rate. weekly traffic in our communities, and website visits are both continuing at healthy levels, indicating future demand for new homes should remain strong. I'm now going to shift gears and talk about our temporary pivot to start more quick move-in homes, or QMI's as we call them. The logic behind this pivot is that QMI's provide our customers with more certainty on what their mortgage payments would be at closing, considering a home to be, we consider a home to be a QMI the day we begin construction. If you turn to slide 14, you can see that after a significant shortage of QMIs during the COVID surge in demand, we've gone from 3.2 QMIs per community at the end of the third quarter of 22 to a high of 5.6 QMIs per community at the end of fiscal 22 to our current level of 4.8 at the end of the second quarter of 23. It's been challenging to grow our QMIs because of the pickup in our sales pace. Right now, our QMIs per community are still slightly higher than our historical average. Consumer demand for QMIs remains quite strong. Since the beginning of the year, we've seen our QMI sales increase to about 60% of our sales versus about 40% historically. This represents, obviously, a 50% increase, which is very significant. Our QMI target remains approximately seven QMIs per community, as we discussed last quarter, ideally with a few homes beginning construction and a few homes partly through construction at every community. Again, recent strong sales have made it difficult to get to our target of seven QMIs per community. Some investors fear that homebuilders will overproduce QMIs. We just do not see that in the field. Should we get to seven QMIs per community, we plan to match our start schedule with the then current sales pace at that local community. We think this approach will make certain that we don't start an excessive level of unsold homes. In the meantime, we'll continue to focus on selling these homes before they're completed. Given the strong current sales pace and the dearth of MLS listings, It's difficult to start enough QMIs to increase our supply. On slide 15, we show that the number of existing homes for sale around the country currently remains depressed at 910,000 homes. That's 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. Consumers have fewer existing homes to choose from, and as a result, are looking at new home construction. We talked about consumers wanting to know their mortgage rate and having the ability to lock in their mortgage rate as a reason to build more QMIs. Having QMIs available for sale is also important because, just like existing homes, homebuyers can close much sooner on a QMI than a to-be-built home. Moving to slide 16, due to the increasing strength of demand for our homes, we are able to raise net home prices in 30% of our communities during the first quarter and 69% of our communities during the second quarter. If demand remains strong, we expect to be able to continue increasing home prices moving forward. These net home price increases are after taking into account incentives, and concessions. One reason that margins continue to be high today, despite our higher use of incentives and concessions, is lower lumber costs that have returned to more historically normal levels. Additionally, we've been proactive in lowering our construction costs in other locations. On our last call, we mentioned a purchasing blitz. We worked with our trade partners and material and material providers, and then negotiated significant cost savings on an annual basis. The benefits of the purchasing blitz should positively impact our margins in the latter part of 23, as we deliver the homes that we're just starting now with the lower costs. Additionally, we took steps during the second quarter to further reduce our SG&A costs. First, we reduced our staffing levels by about 10% since the end of fiscal 22. Second, senior executives took a salary reduction. And third, we asked our associates to make cuts to outside service providers. The combined savings from all these steps resulted in significant annual savings in our overhead expenses. Given the relative strength of the housing market and the steps we took to reduce our costs, we are even more optimistic today about our future growth prospects. Furthermore, we believe that favorable demographics and persistently low supply of homes in the existing home market will support demand over the long term. I'll now turn it over to Larry Sorsby, our Chief Financial Officer.