HOVNANIAN ENTERPRISES INC Q2 FY2024 earnings call

• Ara Hovnanian described the housing environment as Goldilocks, balanced with higher rates limiting resale supply and demand. - Focus on construction costs, with average base construction cost per square foot down 6% year-over-year. - Introduced 'Looks' design concept, with 50% of new community openings featuring it. - Ended second quarter with 132 open for sale communities, 109 wholly owned; 36,841 controlled lots, 7.3 year supply. - Land and land development spend was $231 million, highest since 2010. - Debt exchange reduced debt, lowered interest expense. - Return on equity was 39.5%, highest among peers, and EBIT return on investment was 33.5%, top quartile among midsized peers.

Revenues for the second quarter were $708 million, within the guidance range. Adjusted gross margin was 22.6%, at the upper end of the range. Adjusted EBITDA was $102 million, significantly above the high end of guidance. Adjusted pre-tax income was $70 million, significantly better than the high end of guidance. Contracts per community increased 7% year-over-year to 13.9, the fourth highest among public homebuilders with a March quarter-end, and well above the median. Land and land development spend was $231 million in the second quarter, the highest quarterly spend since 2010.

• Third quarter 2024: Total revenues $675M-$775M, adjusted gross margin 21.5%-23.5%, SG&A 11%-12%, adjusted EBITDA $97M-$107M, adjusted pre-tax $65M-$75M. - Full year 2024: Total revenues $2.75B-$3B, adjusted gross margin 21.5%-23%, SG&A 11%-12%, adjusted EBITDA $395M-$430M, adjusted pre-tax $265M-$300M. Guidance assumes no adverse market changes, continued construction cycle times, and mortgage rate buy downs similar to recent months.

• Volatility in mortgage rates which can affect budgets. - Supply chain challenges and material shortages. - Inflation and cancellation rate fluctuations. - Construction cycle times averaging 5-6 months instead of pre-COVID 4 months, complicating forecasting.

Q: How is May doing so far in terms of absorptions month-to-date compared to April?

A: It's early, website traffic is outstanding but hard to tell due to market volatility. Website visits in May are very high.

Q: What's the overarching theme for the 40% of communities that didn't raise price?

A: Fairly uniform, more challenge in lowest price homes with more mortgage rate buy downs affecting net pricing.

Q: What drives the lower range of margin guidance halfway into the quarter?

A: Volatility in mortgage rates, reserving costs for closing and qualification challenges, especially with more QMI sales making forecasting difficult.

Q: Thoughts on share buybacks going forward?

A: Monitor stock price, will consider buybacks when opportunistic, with ~$10M-$15M remaining on approval.