Hovnanian Enterprises, Inc.

Good morning and thank you for joining us at today for Albanian Enterprise fiscal 2025 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 remarks 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 will now log on to the website. I'll now turn the call over to Jeff O'Keefe, Vice President of Investment 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 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 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 and management 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 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 review any forward-looking statements, whether as a result of new information, future events, changed circumstances, or any other reasons. Joining me today are Ara Hovnanian, Chairman, President, and CEO, Brad O'Connor, CFO, David Meiterson, Vice President, Corporate Controller, and Paul Eberle, Vice President, Finance and Treasurer. Ara, I'll turn the call over to you now.

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 as usual, and of course, we'll open it up to Q&A afterwards. Let me begin on slide five. Here we show our second quarter guidance compared to our actual results. Overall, we are satisfied that everything except gross margin was within or better than the guidance range that we provided. Needless to say, there was a lot of political and economic uncertainty during the quarter. Starting at the top of the slide, revenues were $686 million, which was closer to the low end of our guidance. This was primarily due to the mix of deliveries with some higher price home deliveries slipping into future quarters. Our adjusted gross margin was 17.3% for the quarter, which was just below the low end of the guidance range that we gave. If incentives had remained at the then current levels, which averaged 9.7% in the first quarter, then we would have been around the midpoint of the guidance range. However, as the quarter went on, we had to increase incentives. For the second quarter, incentives increased 80 basis points sequentially to 10.5%. Our SG&A ratio was 11.7%, which was near the midpoint of the guidance we gave. Our income from unconsolidated joint ventures was $9 million, which was at the high end of the guidance that we gave. Adjusted EBITDA was $61 million for the quarter, which is slightly above the high end of the guidance range that we gave. And finally, our adjusted pre-tax income was $29 million, which was near the high end of the range that we gave. Again, given the challenging operating environment, we're satisfied with these results. On slide six, we show our second quarter results compared to last year's second quarter. Keep in mind that last year was a very strong second quarter from both a profitability and sales-based perspective. In today's operating environment, it's no surprise that all of these metrics experience year-over-year declines. Starting in the upper left-hand portion of the slide, you can see that our total revenues were down year-over-year despite flat deliveries. Year-over-year decline in revenues was primarily due to lower average sales prices. Moving across the top to gross margin, our gross margin was down year-over-year mainly due to increased incentives, which is somewhat related to the greater focus on pace versus price. I'll elaborate more on that shortly. During this year's second quarter, incentives were 10.5% of the average sales price. This is up 240 basis points from a year ago, 80 basis points from the first quarter of 2025, and 750 basis points higher than fiscal 22, which was prior to the mortgage rate spike impacting deliveries. Other than the extraordinary cost to buy down mortgages to make our homes affordable, our gross margins would have been very healthy. Moving to the bottom left, you can see that our total SG&A as a percentage of total revenue increased slightly. This was primarily due to the growth in our community count. And in the bottom right-hand portion of the slide, you can see the negative impact that all of these metrics had on our year-over-year profitability. If you turn to slide seven, you can see that contracts for the second quarter, including domestic unconsolidated joint ventures, decreased 7% year over year. Once again, there were considerable differences in monthly sales, which you can see on slide eight. Contracts were down 17% in February, then bounced back with a 3% increase in March And this was followed by a 9% decline in April. On slide 9, you can see that the most recent three months continued a trend of choppiness. And frankly, this volatility is not unique to this year as we've discussed before. If you turn to slide 10, you can see that contracts per community were lower this year compared to the second quarters of the past several years. but at 11.2 contracts per community, our contract pace compares well to pre-COVID levels and is higher than our quarterly average of 10.3 for the second quarter since 2008. On slide 11, we give more granularity and show the trend of monthly contracts per community compared to the same month a year ago. Here, you can see that this year's sales pace was lower than last year However, you can also see the current sales pace in March and April was higher than the average pace for those months since 08. And even February was not that far off from the monthly average pace since 08. Turning to slide 12, we show contracts per community as if we had a March 31 quarter end. This way we can compare our results to our peers that report contracts per community on a calendar quarter end. At 10.8 contracts per community, our sales pace is the third highest among the public builders. On slide 13, you can see that year-over-year contracts per community declined for all but one of our peers shown on this slide. We are right around the median. Again, this was as if our quarter ended in March so that we could compare our results to these other companies. What we're trying to illustrate in these last two slides is that even though the spring selling season has not played out the way everyone had hoped, our focus on pace over price resulted in an above average number of contracts per community compared to our peers. Given the monthly volatility we've experienced, we don't get overly excited or concerned about the performance in any one month. We continue to monitor our sales on a community-by-community basis and make adjustments in real time based on current sales data. We remain confident in both our strategy and the long-term fundamentals of the new home market. On slide 14, you can see that for a considerable percentage of our deliveries, our homebuyers continue to utilize mortgage rate buydowns. The percentage of homebuyers using buy-downs in this year's second quarter was 75%. The buy-down usage in our deliveries indicate that buyers continue to rely on these rate buy-downs to combat affordability at the current mortgage rates. Given the persistently high mortgage rate environment, we assume buy-downs 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 move-in homes, or QMI's as we call them, so that we can offer affordable mortgage rate buy-downs in the near term and give more certainty in an uncertain market. On slide 15, we show that we had 8.6 QMIs per community at the end of the second quarter, which is down sequentially from 9.3 in the first quarter of 25. We define QMIs as any unsold home where we've begun framing. In the second quarter of 25, QMI sales were 79% of our total sales. This was the highest quarter since we started reporting this number 11 quarters ago and significantly higher than the previous highest quarter, which was 72% in the fourth quarter of 24. Historically, that percentage was 40%, about half. Obviously, the demand for QMIs remains high, so we're comfortable with the current level of QMIs. We ended the second quarter with 304 finished QMIs on a per community basis. That puts us at 2.4 finished QMIs per community. That's down from 2.6 finished QMIs at the end of the first quarter. We've cut back on the number of homes we've started to match the current sales pace. Sequentially, when compared to the first quarter of 25, The total number of QMIs decreased by 8%, similar to the drop in our sales pace, and the number of our finished QMIs decreased by 5%. The focus on quick move-in homes results in more contracts that are signed and delivered in the same quarter. That leads to lower levels of backlog at quarter ends, but a higher backlog conversion. During the second quarter of 25, 39% of our homes delivered in the quarter were contracted in the same quarter. This obviously makes it more challenging when providing guidance for the next quarter. It also resulted in a high backlog conversion ratio of 80%, which is significantly higher than the second quarter average backlog conversion ratio of 58% since 1998. will continue to manage our QMI's on a community level and are highly focused on matching our QMI start space with our QMI sales space. If you move to slide 16, you can see that even with higher mortgage rates and a slower sales space, we're still able to raise net prices in 31% of our communities during the second quarter. 63% of the communities with price increases were in Delaware, Maryland, New Jersey, North Carolina, Virginia, and West Virginia, which are our better performing markets. While the sales environment has been difficult, we've been focusing on pace versus price, but we're still raising prices and lowering incentives when our sales pace warrants it. Economic uncertainty, high mortgage rates, affordability, and low consumer confidence have caused many consumers to delay purchasing a new home. To increase our sales pace and make our homes affordable, we continue to offer mortgage rate buy downs. While our contract pace per community is consistent with historical averages, it remains lower than in the recent months. Further, our gross margins, ignoring the mortgage rate incentives, are actually quite strong. However, offering mortgage rate buy downs is expensive and it certainly has impacted our gross margins in the current quarters. We've reviewed all land transactions to ensure that they remain economically viable. This did result in walking away from a few land option positions during due diligence that no longer met our return hurdles. Slide 17 illustrates the vintage of our land position. The percentage above each bar shows the percentage of lots controlled in each year compared to the total. The percentage below the bar shows the incentives for closing that year. On this slide, you can see that 74% of the land was originally controlled when we were using an elevated level of incentives to underwrite the land. These lots are typically performing near our pro forma metrics. As time has gone on, particularly in regard with land that was controlled in fiscal 25, we and the rest of the industry have been using more and more incentives, and the lots controlled then underwrote with a higher percentage of incentives. As far as underperformance goes, it's our 22 vintage that is the most impacted as land prices had increased but incentives had not yet fully kicked in. Some of the 21 vintage land primarily on the West Coast can also be margin challenged, but we're burning through the difficult vintages and replacing them with more current vintages with better returns. In this more challenging environment, we are working with some of our land sellers currently under option agreements to find win-win solutions in a difficult market where we both share a bit of the pain in the slow market. We've made a strategic decision to burn through the less profitable land parcels at lower gross margins to clear the way for recent land acquisitions, which meet our target return metrics. Fortunately, we're finding plenty of new land opportunities that meet our return hurdles, even with the current level of incentives and sales pace. While we're satisfied with our performance given the difficult environment, we expect that we will return to more favorable performance metrics as we replace certain land positions with newer land positions that we're finding today. Finally, as an update to our Saudi Arabian joint venture, last week we signed a memorandum of understanding with the Ministry of Housing in Saudi Arabia. This will expand our activities and our partnership in Saudi Arabia increasing housing for a growing population of young middle-class families. I'll now turn it over to Brad O'Connor, our Chief Financial Officer.