Hovnanian Enterprises, Inc.

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 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 now like to send the call over to Jeff O'Keefe, Vice President of Resolutions. Jeff, please go ahead.

Thank you, Livia, and thank you all for participating in this morning's call to review the results for our first quarter. 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 and are suggested by such forward-looking statements are reasonable, we 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 different to predict or quantify. Therefore, actual results could differ materially and adversely from these 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 in our annual report on Form 10-K for the fiscal year ended October 31st, 2024, 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, Brett O'Connor, Chief Financial Officer, David Meiterson, Vice President, Corporate Controller, and Paul Eberle, Vice President, Finance 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. Brad will follow me with more details as usual, and of course, we'll open it up for Q&A afterwards. Let me begin on slide five. Here we show our first quarter guidance compared to our actual results. Starting on the top of the slide, revenues were $674 million, which was near the low end of our guidance. This was due to about 50 fewer wholly owned deliveries than we expected when we gave the guidance. As sales in December and January were a little lower than expected, after November had been a very strong month. Additionally, there were some delays due to a variety of factors, including utility hookups. We'll talk about month-to-month volatility shortly. Our adjusted gross margin was 18.3% for the quarter, which was near the high end of the guidance range that we gave. Our gross margins are typically lower in the first half of the year than the last half. Our SG&A ratio was 12.9%, which was better than the low end of the guidance that we gave. Our income from unconsolidated joint ventures was $9 million, which was below the guidance we gave. This was due primarily to 40 highly profitable deliveries in two joint venture communities that were expected to deliver in the first quarter, but are now delayed until the second quarter. One community was delayed because of utilities, the other delayed for a change in requirements from the town regarding building codes. Adjusted EBITDA was $72 million for the quarter, which is above the high end of the range that we gave. And finally, our adjusted pre-tax income was $41 million, which was also above the high end of the range that we gave. We're obviously pleased that our profitability for the quarter was above the high end of the guidance range. On slide six, we show how our first quarter results compared to last year's first quarter. Starting in the upper left-hand portion of the slide, you can see that our total revenues increased 13% to $674 million. Moving across the top to gross margin, Our gross margin was 18.3% in the first quarter of 25, which was near the high end of our guidance, but below last year as expected. The year over year decrease in gross margin was primarily due to increased use of incentives. The continued use of mortgage rate buy downs is the primary incentive being utilized by our buyers. It's also related to a greater focus on pace versus price which we discussed in our last conference call. Given the persistently high level of mortgage rates today, even though they've drifted down just a bit over the last few weeks, we expect to continue to use mortgage rate buy-downs to help with home buyer affordability. During this year's first quarter, incentives were 9.7% of the average sales price. This is up 160 basis points from a year ago and 670 basis points higher than fiscal 22, which was prior to the mortgage rate spike impacting deliveries. Because of the continued use of incentives and our increased land like position, we expect gross margins to be at similar levels in the second quarter as we provided in our guidance. Moving to the bottom left, you can see that our total SG&As, our percentage of total revenue, improved 160 basis points to 12.9% in this year's first quarter. This is partially due to the benefits of top-line growth. And in the bottom right-hand portion of the slide, we're excited about pre-tax income improvement over the prior year, up 30% to $41 million. As we explained last quarter, we believe the trade-off of PACE versus price, even with lower gross margins, can still result in higher profits. We continue to emphasize PACE over price, and we expect to report strong EBITDA ROI again going forward. As a side note, we utilize current incentives, current home prices, and current sales pace in new land acquisitions, and they must meet our IRR minimum hurdle rate of 20% after the cost of those incentives. You'll see momentarily that even with underwriting to these more difficult standards, we're still able to find plenty of land opportunities with solid ROIs to meet our future growth needs. If you turn to slide seven, you can see that contracts for the first quarter, including unconsolidated joint ventures, increased 9% year over year. However, as you can see on slide eight, there was not steady growth throughout the quarter. Here you can see that we started the quarter off with a bang. In the month of November, contracts increased 55% year over year. Contracts growth slowed to 3% positive year-over-year in December. And then in January, contracts were down 10% year-over-year. But that was a very tough comparison to last year's January when contracts were up 33% from the previous year. Turning to slide 9, while total contracts for the quarter were up compared to last year, As you can see, much of the year, in fact, much of the last couple of years, have been extremely volatile on a monthly basis, depending on world news, inflation, interest rates, consumer sentiment, and a variety of other factors. May and June contracts were down to varying degrees. July through December contracts were up between 3% and 82%. And then January was down 10%. As we have seen, one month does not a trend make, either good or bad. At the moment, sales activity is slower than last year. We've learned not to get too rattled or too excited over a month and feel confident about the long-term fundamentals for the new housing market. If you turn to slide 10, you can see contracts per community were the same in both this year's first quarter and last year at 9.6. Even though it was flat year over year, this is a very solid sales pace as it's significantly higher than our quarterly average for the first quarter since 97, and that average was eight contracts per community. Furthermore, if you exclude bill for rent contracts from both periods, this year's first quarter had a nice improvement from 9.2 to 9.6 contracts per community. On slide 11, we give more granularity and show the trend of monthly contracts per community compared to the same month a year ago. Once again, the only month with year-over-year increase is November, but each month of the quarter exceeds the monthly average since 2008. November at 3.1 compares favorably to the monthly average of 2.3. The same holds true for December at 2.9 compared to 2.4, and January at 3.5 also compares favorably to a monthly average of 3.0. This illustrates that one reason for contracts per community being down year over year is that these two most recent months is due to a tough comparison from a year ago. This year's contracts per community are strong compared to historical levels. Nonetheless, they were lower than our expectations. Turning to slide 12, we show contracts per community as if we had a December 31 quarter end. This way we can compare our results to our peers that report contracts per community on a calendar quarter end. At 9.7 contracts per community, our December quarterly sales page is the third highest among public home builders that reported at this time. On slide 13, you can see that our year over year growth in contracts per community for the same period was the highest among our peers. Again, this was as if our quarter ended in December so that we could compare to many other companies. What we're trying to illustrate in these last two slides is that we're still selling at an above average number of homes compared to our peers. On slide 14, you can see that for a sizable percentage of our deliveries, our homebuyers continue to utilize mortgage rate buydowns. The percentage of homebuyers using buydowns in this year's first quarter was 74%. The buydown usage in our deliveries indicates that buyers continue to rely on these mortgage rate buydowns to combat affordability at the current mortgage rates. Given the persistently high mortgage rate environment, we assume buydowns will remain at similar levels going forward. In order to meet homebuyers' desires to use cost-effective mortgage rate buy-downs, we're intentionally operating at an elevated level of quick movement homes, or QMI's as we call them, so that we can offer affordable mortgage rate buy-downs in the near term. On slide 15, we show that we had 9.3 QMI's per community at the end of the first quarter which is about one QMI per community higher than where it's been for the last few quarters now. We define QMIs as any unsold home where we have begun framing. In the first quarter of 25, QMI sales were 69% of our total sales. 69% of our QMI sales, that was the second highest quarter since we started reporting this number 10 quarters ago. Historically, that percentage was 40%. Obviously, the demand for QMIs remains high, so we're comfortable with the current level of QMIs. Due to slightly slower than expected sales pace, we had 319 finished QMIs at the end of the first quarter. On a per community basis, that puts us at 2.6 finished QMIs per community, And that's up from 1.8 finished QMI's per community at the end of last year. But we've made adjustments to start to make sure that we don't get too far ahead of ourselves. We targeted a slightly higher number of QMI's as we entered the spring selling season. Our goal with QMI's is obviously to sell them before completion. The focus on quick move-in homes results in more contracts that are signed and delivered in the same quarter, which leads to lower levels of backlog at quarter ends, but a higher backlog conversion. During the first quarter of 25, 34% of our homes delivered in the quarter were contracted in the same quarter. This resulted in a backlog conversion ratio of 76% This is the highest backlog conversion ratio we've had in the first quarter for the last 27 years. We'll continue to manage our QMI's at a community level and are highly focused to match our QMI starts pace with our QMI sales pace. We'll monitor the spring selling season and we'll adjust accordingly. If you move to slide 16, you can see that even with higher mortgage rates, we are still able to raise net prices in 40% of our communities during the first quarter. While we're focusing on pace versus price, we're still able to raise prices in a considerable percentage of our communities. Before I turn it over to Brad, I want to emphasize that land-like deliveries typically have lower gross margins than deliveries from wholly owned communities. Further, our QMI deliveries also typically have a lower gross margin than our to be built deliveries. I want to illustrate how we can achieve a solid ROI with lower gross margins given our continued focus on growth and inventory turnover. Beginning in the fourth quarter, we emphasized pace versus price and we continued that strategy into the first quarter of 25 and again now in the second quarter. On slide 17, we illustrate the impact a faster sales pace at a lower margin can have on our returns. Obviously, a reasonably solid sales pace is key. The first column is a hypothetical scenario where we use our historical normal gross margin and more wholly owned communities as opposed to land like communities. Some of the other assumptions we make here are that our total revenues, SG&A expenses, financial services income, and unconsolidated joint venture income are similar to what we achieved in fiscal 24. We also assume no contributions from land sales, which in reality have occurred often over the past few years. This scenario produces a 23% EBIT ROI. The column on the right shows an alternate hypothetical scenario with an 18.5% gross margin, which we believe could be our new normalized gross margin in the near term, due to our increased use of lot options as part of our land light strategy and more incentives to get the sales pace we desire. Given our increased lot count, we're well positioned to drive delivery growth in excess of 10% on an annual basis over the next few years. So for this example, we used a 14% increase in total revenues. We assume that we get some efficiencies with the growth in revenues and our SG&A expenses only increase by half of the total revenue growth or 7% increase, which could be conservative. We also assume that other revenues and profits from financial services and JVs grow in lockstep with our sales growth. This results in a slightly lower EBIT margin, but a modest increase in our pre-tax income dollars, and assuming the same amount of capital, our land-light strategy, which has increased our option lot position to an all-time high of 84%, should result in increased inventory turns. Under this scenario, we hold our average inventory levels flat, which drives inventory turns calculated using revenues to 2.5 from 2.2. This increase in inventory turns more than makes up for the lower gross margin and results in a slightly higher ROI at 25%. If you compare that to the current ROIs for our peers, we would remain well above the median. The current monthly volatility makes it very difficult to project out a full year. But the hypothetical model shows you what our strategy is and what is possible even with a lower margin. Our growth in communities should sustain the growth we are targeting in the coming years in spite of a slower sales environment, positioning us to deliver near industry-leading ROIs again. I'll now turn it over to Brad O'Connor, our Chief Financial Officer.