Hovnanian Enterprises, Inc.

Good morning, and thank you for joining us today for Amanian Enterprises Fiscal 2024 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 rebroadcast, and all participants are currently in a listen-only mode. Management will make some opening remarks about the fourth quarter results and the open 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's 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'd like to turn the call over to Jeff O'Keefe, Vice President, Investor Relations. Jeff, please go ahead.

Thank you, Marvin, and thank you all for participating in this morning's call to review the results for our fourth quarter and year end. 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 and 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 and are 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 and Management's Discussion 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, 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 are Ara Havnanian, Chairman, President, and CEO, Brad O'Connor, CFO and Treasurer, and David Mikerson, Vice President, Corporate Controller. I'll now turn the call over to Ara.

Thanks, Jeff. I'm going to review our fourth quarter and year-end results, and I'll also comment on the current housing environment. Brad will follow me with more details, and of course, we'll open it up for Q&A afterwards. Let me begin on slide five. Here, we show full-year guidance compared to our actual results. Starting on the top of the slide, revenues were $3 billion, which was slightly better than the midpoint of our guidance. Our adjusted gross margin was 22% for the year, which was exactly at the midpoint of the guidance we gave. Our SG&A ratio was 11.4%, which was very near the midpoint of the guidance that we gave. Our income from unconsolidated joint ventures was $52 million, which was slightly below the guidance we gave due to delayed deliveries in three communities related to utility connections. Adjusted EBITDA was $456 million for the year, which is above the high end of the range that we gave. And finally, our adjusted pre-tax income was $327 million, which was also above the high end of the guidance range that we gave. We're obviously pleased that our profitability for the full year was above the high end of the guidance range. On slide six, we show how our full year results compared to last year. Starting in the upper left-hand portion of the slide, you can see that our total revenues increased 9%, to just over $3 billion. Moving across the top to gross margin, our gross margin was 22% in fiscal year 24, which was slightly below the prior year's gross margin. Moving to the bottom left, you can see that adjusted EBITDA increased 7% for the year to $456 million. And in the bottom right-hand portion of the slide, We're excited about the adjusted pre-tax income improvement over the prior year, up 16% to $327 million. If you go to slide seven, here we show our results compared to last year's fourth quarter. Keep in mind that last year's fourth quarter was one of the strongest fourth quarters that we've had in a very long time, particularly for gross margin and pre-tax income. It makes the year-over-year comparisons for the quarter much more difficult. Starting in the upper left-hand quadrant of the slide, you can see our total revenues increased 10% to just under a billion dollars. In the upper right-hand portion of the slide, you can see that our gross margin was a healthy 21.7%, but down compared to a particularly strong margin the previous year. On a sequential basis, we decreased slightly from 22.1% in the third quarter of 24. Gross margins declined year over year as per our guidance, despite a 1% decrease in construction costs over the same period. The lower gross margin is primarily due to the continued use of mortgage rate buy downs, which have been stubbornly high due to the elevated levels of mortgage rates, as well as some other incentives. It's also related to a greater conscious focus on pace versus price, which we will discuss more fully in a moment. Going forward, we expect to continue to use mortgage rate buy-downs to help with buyer affordability. During this year's fourth quarters, Incentives were 8.5% of the average sales price. This is up 120 basis points from a year ago and up 500 basis points higher than fiscal 22, which was prior to the mortgage rate spike impacting deliveries. Because of the continued use of incentives and increased land life position, We expect gross margins to decrease further in the first quarter as we provided in our guidance. We continue to emphasize pace over price, and we expect to report strong EBIT ROI again going forward. As a side note, we utilize a comparable level of incentives in new land acquisitions, and they must meet our IRR minimum hurdle rate of 20% even after the cost of these incentives. Moving to the bottom left-hand portion of the slide, as a result of the lower gross margin percentage, you can see that our adjusted EBITDA decreased a bit to $159 million in this year's fourth quarter. Finally, in the bottom right-hand portion of the slide, correspondingly adjusted pre-tax profits also decreased a bit to $126 million. While the fourth quarter met our expectations and guidance, it would have been better if not for the hurricanes right toward the end of our fiscal year. We ended up missing deliveries primarily due to a lack of meters installed in homes and a scarcity of subcontractor crews due to the shift toward rebuilding. Our current communities were spared major damage, but there was a tornado that touched down recently in one of our completed communities in Florida's east coast, causing some damage to about a dozen homes. I know that new orders and current levels of demand are very much in focus by investors and analysts, so I'm now going to discuss contracts from several different perspectives. If you turn to slide eight, while the year was choppy from quarter to quarter, we ended the year with fourth quarter contracts increasing 48% year over year. I'm going to repeat that statistic because it's pretty significant. Our fourth quarter contracts increased 48% year over year. The contract pace continued in the month of November following the fourth quarter with our contracts up 55% year over year as demand for our homes remained robust. Regardless of one's politics, there does seem to have been a little post-election enthusiasm regarding the outlook, the economic outlook at least for our home buyers. If you turn to slide nine, you can see contracts per community for the fourth quarter increased to 10.4, a 25% year-over-year increase, and more than double the sales pace of Q4 22. This was a solid fourth quarter sales pace, setting us up for a great fiscal 25. We're pleased with these results, especially given all the uncertainty with the presidential election, the impact of hurricanes, the volatility in mortgage rates, and the general economic and geopolitical uncertainty. If you turn to slide 10, we show mortgage rate trends. The gray line on this slide shows what happened to mortgage rates last year between July of 22 and November of 23. The blue line shows what happened with mortgage rates this past year between July of 23 and November of 24. For most of the time shown, they coincidentally followed a very similar pattern of monthly increases and decreases just at slightly higher rates this year. However, beginning in July of this year, mortgage rates fell below the levels of the prior year for the same months and continue to decline until the end of September. Mortgage rates have increased since the beginning of October, but they still remain lower now than they were last year. In addition, web traffic continues to be very strong. For the last month of the quarter, as well as the month of November, weekly visits to our website were only surpassed by the COVID surge of 22 and 21. This trend makes me particularly optimistic about future demand. On slide 11, we give even more granularity and show the trend of monthly contracts per community compared to the same month a year ago. Other than the month of September when our sales pace was flat compared to the previous year, our contracts per community were up significantly compared to the same month the previous year. As you can also see on the slide, VFRs were not very impactful in any of the months shown. We continue to believe that many of the fundamentals that led to our outperformance remain intact, such as the low supply of existing homes for sale and the good jobs report. Furthermore, the overall health of the economy and positive demographic trends remain solid. Turning to slide 12, we show contracts per community as if we had a September 30th quarter end. That way we can compare our results to our peers that report contracts per community on a calendar quarter end. At 10.7 contracts per community, Our September quarterly sales pace is the third highest among public homebuilders that reported at this time. This occurred despite September being one of the slower months in the quarter as I showed you on the previous slide. On slide 13, you can see that our year-over-year growth in contracts per community for the same period was the second highest among our peers. Again, this was as if our quarter ended in September so we could compare to many other companies. The following two months were dramatically stronger in sales for us. What we're trying to illustrate on these last two slides is that we are still selling an above number of homes compared to our peers, above average number of homes, excuse me. On the top of slide 14, You can see that for a sizable percentage of our deliveries, our home buyers continue to utilize mortgage rate buy-downs. The percentage of customers that use buy-downs in this year's fourth quarter was 72%. The buy-down usage in our deliveries indicates that buyers have been consistently relying on these mortgage rate buy-downs to combat affordability at the current mortgage rate levels. Given the persistently high mortgage rate environment, we assume buy downs will remain at similar levels going forward. We are budgeting the cost of these same buy downs to remain constant. As I said earlier, this includes the analysis of any new land acquisitions. We continue to find land opportunities for growth even with these high levels of incentives. In order to meet homebuyers' desires to use mortgage rate buydowns, we're intentionally operating with an elevated level of quick move-in homes, or QMI's as we call them, so that we can offer affordable mortgage rate buydowns in the near term. On slide 15, we show that we had 7.9 QMI's per community at the end of the fourth quarter, which is consistent with where it was at the end of the third quarter. We define QMIs, by the way, as a home once we start the building. In the fourth quarter of 24, QMI sales were 72% of our total sales, an increase from 67% in the third quarter of 24. Historically, that percentage was about 40%. Obviously, demand for these QMIs remains high. So we're very comfortable with the current level of QMIs per community. Due to the increase in community count in the quarter, it's not surprising that our finished QMIs increased to 233 finished homes. On a per community basis, that puts us at 1.8 finished QMIs per community. That's up slightly from 1.5 finished QMIs per community at the end of the third quarter, but it's lower than the 1.9 QMIs at our first quarter. Our goal with QMIs is obviously to sell them before completion. During the fourth quarter, we emphasized pace versus price. We're pleased with the significant increase in sales pace and the effect on ROIs. This did result in a lower gross margin for the fourth quarter and an even lower margin in our guidance for the first quarter of 25. But again, the trade-off of pace versus price resulting in lower margin is producing great returns on inventory for us. The decrease in gross margin is primarily due to increased use of incentives, particularly in the West. The focus on quick move-in homes results in more contracts that are signed and delivered in the same quarter, which leads to higher backlog conversion. Our fourth quarter is an extreme example of this increase, as 31% of our homes delivered in the fourth quarter were contracted in the same quarter. This resulted in a backlog conversion ratio of 86%. This is the highest backlog conversion ratio we've had for the past 14 years. We'll continue to manage our QMIs at a community level. We track our start schedule at a community level, and we make sure that there is a match with our current sales pace per community so that we don't get too far ahead of ourselves. If you move to slide 16, you can see that even with the economic and political uncertainty, as well as the higher mortgage rates, we are still able to raise net prices in 34% of our communities during the fourth quarter. While we are focusing on pace versus price, we are still able to raise prices in about a third of our communities. Turning to slide 17. I'll add that in addition to the use of our incentives and the increased level of QMIs, we also attribute part of our performance metrics to the introduction of our new national portfolio of home designs that we refer to as looks. The new designs feature curated interiors with simple and honest pricing that reduced the complexity of the selection process for the home buyers and the building process for us. There are significant other advantages to our LOOKS programs, but we'll discuss that at some point in the future. The current high levels of demand should support the growth that we're focused on achieving over the next several years. I'll now turn it over to Brad O'Connor, our Chief Financial Officer.