Hovnanian Enterprises, Inc.

Good morning and thank you for joining us today for Hovnanian Enterprises' fiscal 2024 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 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.khof.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, Carmen, and thank you all for participating in this morning's call to review the results for our second quarter. All statements on 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 Discussion and Analysis, particularly the portion of MD&A entitled Safe Harbor Statement and our annual report on Form 10-K for the fiscal year ended October 31, 2023. 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, Brad O'Connor, CFO and Treasurer, and David Michelson, Vice President, Corporate Controller. I'll now turn the call over to Ara.

Thanks, Jeff. I'm going to review our second quarter results and I'll also comment on the current housing environment. Brad will follow me with more details and, of course, we'll follow up with Q&A. Let me begin by saying what I just said at John Burns' housing conference in California last week. I feel like we're in a Goldilocks environment. The market is not too hot and it's not too cold. A hot market would challenge construction costs. It would create challenges with labor shortages and material shortages and would certainly make it even more difficult to purchase land. The challenges of a cold market are obvious, but the current environment feels balanced and more sustainable, with higher rates keeping the resale supply limited and demand in check, yet sufficient to have a good supply-demand balance. We are assuming a higher for longer scenario for our strategies. If mortgage rates go up meaningfully, our budgets may be aggressive. If mortgage rates come down meaningfully, our budgets might be too conservative. I've got to add a comment that it feels like a lot of attention this morning went to existing home sales and listings. Existing home sales are low because there's no inventory of existing home sales. And there was a lot of attention with listings going up, but they're up from record lows and people are losing sight of that and getting caught up in the headlines. Existing home listings are 1.2 million listings. That's up from the record lows, but normal is 2 million listings. The market is very jittery and overreacting, in my view, towards skewed headlines right now. Let me start on slide five. We show our second quarter guidance compared to our actual results. Starting on the top of the slide, revenues were $708 million, which was within the range of guidance we gave. Our adjusted gross margin was 22.6% for the quarter, which was at the upper end of the range that we gave. We're pleased to deliver such a strong gross margin given that mortgage rates climbed through the end of our second quarter. I'll add that we've been very focused on construction costs. Among many of our current initiatives, we have a multi-year effort to minimize and unify our SKUs across the country. This gives us the ability to truly hone in on costs by limiting the items that we negotiate with our suppliers and trades and buy in larger quantities. I'm proud to say that was one of my son's suggestions. Like the Goldilocks scenario, we are big enough to have clout with our suppliers, but small and nimble enough to rally all of our divisions around a smaller number of SKUs across the country and unifying them. Believe me, that's not an easy task. Base construction costs per square foot in the second quarter of 24 were down 6% year over year. The cost savings helped offset the cost of mortgage rate buy downs. We think there's a huge opportunity for much further cost reduction going forward and that we just scratched the surface. Our shift to more QMI's is certainly helping construction costs as well. And finally, our turbocharged focus on delivery growth and community count growth for the future will absolutely help with the additional volume. Our SG&A ratio was 11.2%. This was near the low end of the range that we gave. We anticipate growing the top line, and we plan to leverage our current infrastructure without much in the way of additional headcount. and we hope to make a lot of progress in lowering this ratio. As you'll see in a moment, from our lots controlled and our record land spend over the past several quarters, where their balance sheet improved, we're very focused on growth and scale. Adjusted EBITDA was $102 million for the quarter, which is significantly above the high end of the range that we gave. Finally, our adjusted pre-tax income was $70 million, which is significantly better than the high end of the range that we gave. Given the rising mortgage rate environment, we're pleased that our profitability was higher than guidance. It's always challenging to give guidance in a market with fluctuating mortgage rates. We try to give ranges that we can meet or beat. On slide six, we show how our results compared to last year's second quarter. Starting in the upper left-hand quadrant of the slide, you can see that our total revenue is relatively flat at just over $700 million. In the upper right-hand portion of the slide, you can see that our gross margin increased 170 basis points year over year to 22.6%. On a sequential basis, we also increased from 21.8% in the first quarter of 24. Moving to the bottom left-hand portion of the slide, you can see that our adjusted EBITDA increased 18% to $102 million in this year's second quarter. Finally, in the bottom right-hand portion of the slide, adjusted pre-tax profit increased 51% to $70 million. You turn to slide seven. On this slide, you can see contracts per community for the second quarter increased 7% year over year to 13.9. This is not an easy comparison because last year's second quarter was also quite strong. When you compare this to the historical averages, the 24 second quarter compares very well. We show average contracts per community from 97 to 24 in dark blue, and it was 11.4, so we're 22% better than our historical averages over that entire period. If you only look at the period between 97 and 02, it's a time that we often use because it was neither a bust nor a boom. That average was 13.5. We show that far off to the left in green. We're better than that average as well. If you turn to slide U8, we show interest rate trends. The gray line on this slide shows what happened to interest rates last year between July and May. During this period, Whenever rates declined, we eventually saw a pickup in sales after a little delayed reaction. The blue line shows what happened with mortgage rates between July of 23 and this May. Interesting that they followed a very similar pattern just at slightly higher rates. The good news is that rates are drifting down a little bit over the last several weeks. which typically gives an uptick in demand a little later. In general, what we've observed over the past few years is when there's an increase in rates or instability in international events or inflation numbers being volatile or about to be released by the Fed, homebuyers typically step to the sideline for a short period to see how things settle down. As their expectations and outlook adjust, they eventually reenter the market. On slide nine, we give more granularity and show the trend of monthly contracts per community compared to the same month a year ago. What jumps out at you on this slide is the spring selling season has been strong for each of these two years. Underpinning this strength has been a low supply of existing homes for sale, a strong jobs market, and the overall health of the economy. When you layer in positive demographic trends, you get a very favorable environment for new home sales. While bill for rent can create some fluctuations month to month, core consumer sales have been steady and solid compared to last year. Contracts per community in April were strong, though not quite as strong as they were in March of 24 or April of 23, but both of these months had an advantage of five Sundays compared to this year's April, which only had four Sundays, and that certainly makes a difference. Turning to slide 10, we show our contracts per community as if the quarter ended on March 31 of 24 so that We can compare our results to our peers that report contracts per community on a March quarter end. At 13.9 contracts per community, our sales pace per community is the fourth highest among the public home builders that reported for this time period and well above the median. We recently introduced a new design concept in our home designs we refer to as looks. 50% of our new community openings this year feature our new looks designs. Suffice it to say they're being well received with good margins. Want to give credit where credit is due. I'll mention the looks design was also one of my son's strategy suggestions. On slide 12, you can see that our year-over-year growth in contracts per community for that same period and ours was the third highest among peers and again, well above the median. The last two slides illustrate that we're not only competitive, but we continue to get more than our fair share of contracts. Turning to slide 13, website visits and foot traffic at our communities remain extremely strong which should lead to sustained healthy levels of demand going forward. Total website visits in April of 24 were 936,000. This is one of the highest months we have had in over five years, even higher than any April, even including the COVID surge in demand. Potential homebuyers are definitely out in the market and looking. Given stretched affordability, we continue to utilize a high percentage of rate buy downs on homes that we're closing. On the top of slide 14, you can see that the percentage of customers that use buy downs was 73% in the second quarter compared to 79% in the first quarter. On the bottom, to give more granularity, we show monthly trends over the same period. For the last four months, the usage on our deliveries has been around 72%, which seems to indicate homebuyers have reached a comfort level with these higher levels of mortgage rates. We assume buy-downs will remain at similar levels going forward, and the cost of buy-downs will not be decreasing. In order to meet strong demand for new homes, Elevated levels of quick move-in homes, or QMIs as we call them, remain part of our operating philosophy. On slide 15, we show that we had 7.2 QMIs per community at the end of the second quarter. Once again, our level of QMIs are, of finished QMIs are low at 144 finished homes or 1.3 per community and that's down sequentially from 219 finished QMIs at the end of the first quarter. We continue to hone our skills at selling QMIs before completion. In the second quarter of 24, QMI sales were about 65% of our sales versus 40% historically. It's obviously a very significant increase for us. We'll continue to manage our QMIs at the community level. We track our start schedule per community with our current sales pace per community. At the present time, we're very comfortable with our current level of 7.2 QMIs per community. Customers have fewer existing homes to choose from, and as a result, homebuyers are turning more to new construction than they have in the past. Additionally, the ability to buy down mortgage rates gives homebuilders like ourselves an advantage over existing homes. And finally, our looks designs are significantly different than the homes that are typically listed as a resale. If you move to slide 16, you can see that due to the strength of demand for our homes, we are still able to raise net prices in 59% of our communities during the second quarter of 24. Given the fact that rates have continued to rise throughout the second quarter, this is still a healthy percentage of communities where we are able to raise prices. All in all, The current level of demand should support the growth that we hope to achieve over the next several years. I'll now turn it over to Brad, our Chief Financial Officer.