Q4 2020 Hovnanian Enterprises Inc Earnings Call

December 9, 2020

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Good morning, and thank you for joining us today for non yen Enterprises' fiscal 2012 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 or rebroadcast and all participants are currently in a listen only mode management will.

Make some opening remarks about the fourth 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 Dot T. H O V dotcom, those listeners who would like to fall.

Flow along should now log onto the website I would like to turn the call over to Jeff O'keefe Vice President Investor Relations. Please go ahead.

Thank you Josh and thank you all from participating this morning's call to review the results for our fourth quarter and year, which ended October 31st 2020.

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.

Breast 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 or results and are subject to risks uncertainties and other 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 Mdna entitled <unk> Safe Harbor statement and our annual report on form 10-K for the fiscal year ended October 30, Onest 2019, and subsequent filings with the Securities and Exchange Commission, except as otherwise required.

Third 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.

Joining me today are Ara Hovnanian, Chairman, President and CEO, Larry Sorsby Executive Vice President and CFO, and Brad O'connor Senior Vice President Chief Accounting Officer, and Treasurer ill now turn the call over to our our go ahead. Thanks, Jeff.

Twentytwenty, it's been a challenging year from many perspectives and I hope all of you and your families remain safe and healthy.

In late March and early April I couldn't have imagined this scenario where demand for new homes would be as strong as it's been over the past seven months or that we'd be building and selling more homes than last year with roughly 50% of our associates across the country working from home.

Yes, that's exactly where we find ourselves today.

I'm going to review, our full year and fourth quarter results and then address the current market environment and as usual Larry Sorsby will follow me with more detail before the Q1 day.

As the number of covert cases rise across the country, we continue to keep the safety and well being of our associates customers and and trade partners a top priority. Our sales offices now have installed ultraviolet air filters and we accept the customers by appointment only.

Our construction associates are taking every possible per caution to remain safe and to keep our trade partners save.

Most of our associates that normally work in offices continue to work from home instead and those that are physically in the office have plenty of space to keep socially distance following the CDC guidelines.

Net this before but it bears repeating I can't say enough about the tremendous effort all of our associates around the country are putting in day after day to keep things running smoothly, it's truly been a remarkable feat under the current conditions.

Given the COVID-19 related challenges, we're particularly pleased with our fourth quarter results on slide four we compare our fourth quarter results to the guidance, we gave on our third quarter conference call.

Our total revenues adjusted gross margin adjusted EBITDA and adjusted pre tax income were all slightly better than the high end of the guidance that we gave.

Our fourth quarter would have been even stronger if not for the early impact of COVID-19, causing us to delay starts for several months in the middle of the first wave of the pandemic at that time, no. One knew what covance effect would be on the economy and housing this.

The starts that we delayed in March April and May are homes that we would have delivered in our fourth quarter.

Good news is that we still had a strong fourth quarter plus the demand for our homes became so strong after the early covert period that our backlog of to be built homes has grown significantly.

We expect to report strong year over year gains in deliveries and profit compared to last year in both the first and the second quarter of fiscal 2021 based on our existing backlog.

Based on the strong sales I just mentioned on slide five we show the solid backlog is 3402 homes under contract at the end of the fourth quarter.

The dollar value of this backlog was $1.42 billion. The number of homes in backlog was up 55 per cent and the dollar value was up 61%. This is the highest number of homes weve had in backlog in well over a decade.

It's the strength of this backlog, which sets us up nicely for strong results in the first half of 21.

Turning to slide six we show our full year results for fiscal 20 compared to fiscal 19 store.

Starting at the top of the table you can see that our revenues were up 16% to 2.3 billion compared to $2 billion last year.

Our adjusted gross margin also increased to 18.4% this year compared to 18.1% in the prior year, our total less junaid ratio improved 130 basis points from 11.6% last year to 10.3% this year and our adjusted EBITDA.

<unk> increased 35% year over year to $234 million.

Moving on to slide seven we show year over year comparisons for the fourth quarter.

We begin with total revenues in the upper left hand portion of the slide.

As per our guidance provided last quarter, our total revenues for the fourth quarter were $683 million this year compared with $713 million in last year's fourth quarter as I mentioned earlier, if not for delays in starts during the first wave of the pandemic.

We would have closed many more homes during the fourth quarter, which obviously would have resulted in higher revenue.

Moving to the upper right hand portion of the slide you can see that our adjusted gross margin increased 130 basis points year over year gross margin was 20.2 per cent this year compared to 18.9% in last year's fourth quarter. It was also up 200.

70 basis points on a sequential basis from 17.5% in the third quarter of fiscal 20.

The 20.2% that we reported in the fourth quarter of fiscal 20 was the highest quarterly gross margin since 2014.

As we said on our last call, we pivoted to increasing home prices back in June consciously trading off lower sales pace for improved margins.

We continue to believe that these home price increases should offset any potential material and labor cost increases.

A slower sales pace keeps us from selling out our communities too quickly. It also gives us time to open new communities and gives our land acquisition teams time to replenish our land pipeline. So we can stabilize and eventually grow our community count.

In the lower left hand quadrant of the slide you can see that our total SGN $8 were $66 million in this year's fourth quarter compared to $54 million a year ago, the $12 million increase year over year is primarily related to $8 million more in stock.

Station expenses.

Some of our stock compensation expenses are affected by changes in our stock price and obviously our stock price has gone up recently as our stock price increased and we exceeded our fiscal 20 performance targets, we incurred more stock compensation expense than we contemplated in both our guidance and.

In the prior year.

Secondly, while our construction quality continues to improve and we once again reduced our construction defect reserves a noncash item.

We did not have as large a reduction as last year's fourth quarter each.

Each year during the fourth quarter, we completed an annual actuarial study to update our construction defect reserves for 2019. This resulted in a $7 million reduction to SGT day in fiscal 20, while we were able to reduce our reserves once again the reduction was.

$3 million this variation in our construction defect reserves makes it difficult to compare year over year as gene a expenses.

If you adjust for both the increased stock compensation and the construction defect reserves. Our EPS you day expense would have been virtually identical in both years.

In the lower right hand quadrant of the slide we show that EBITDA increased 66% from $51 million in last year's fourth quarter to $84 million this year.

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In the upper left hand portion of slide eight you can see that our pre tax income for the fourth quarter increased.

$43 million from.

From a $1 million loss last year to a 42 million dollar profit in this years fourth quarter.

If you ignore land charges.

And gain or loss on extinguishment of debt. The adjusted pre tax income was about $45 million for both the fourth quarter of this year and last year.

In the lower left hand quadrant of the slide we show that for the full year pretax income improved $95 million year over year or up from a $40 million loss last year to a $55 million profit this year and in the lower right hand portion of the slide we.

We show that our adjusted pretax income was $51 million this year compared with $10 million last year at a five fold year over year increase and is the highest adjusted pre tax income Weve had since 2006.

On the left hand portion of slide nine we show that our quarterly contract increased 43% to 1918 homes from 1345 homes in last years fourth quarter the.

The picture is even better on a per community basis, which we show on the right hand portion of the slide here.

Here you can see that we had 16.5 contracts per community for the fourth quarter. This year and Thats compared to 9.5 from last year's fourth quarter, that's a 74% increase year over year.

Our fiscal 23rd quarter contracts per community were even higher at 19, interestingly, the 2023rd quarter and fourth quarter, where the highest number of contracts per community, we have ever recorded for any quarter.

To give complete transparency slide 10 shows the number of consolidated contracts on a monthly basis for each month from January through November compared to the same months a year ago.

You can see we began the calendar year with solid improvements in January and February then as COVID-19 became a reality for the United States. Our sales fell off for two consecutive months in March and April.

Contract then increased at least 50% year over year for each month from June through September.

No I'm certain you may be concerned that the percentage increases were less in October and November I want to.

Emphasize that we consciously focused on raising prices to slow down our sales pace.

We are not able to sell homes to start homes as fast as we are selling them and if we continue we would have been exposed to potential increases in construction costs without the ability to sell to increase home prices on homes that were already sold.

The record third quarter sales pace was just not sensible we're focused on return on investment and we believe a more sustainable sales pace sync up with our construction starts and combined with higher margins makes more sense for US you can see the positive impact on this top tactic.

In our higher gross margins during the fourth quarter, a trend that we expect to continue into the first quarter of 2021.

If you look at consolidated contracts per community on a monthly basis as we do on slide 11, the percentage increase in contracts per community were even greater.

They were up 80 per cent at least 80% year over year every month June through September.

As we continued to raise home prices starting in August our sales pace per community began to slow down.

However, in spite of the conscious slowing of our sales pace October contracts per community were up 38% and November was even stronger up 48% and finally December is started off very strongly as well.

If you turn to slide 12, you can see another view of contracts per community with longer term trends on slide seven we show we average 44 annual contracts per community from 97 to 2002 as we've mentioned before that was a period of neither boom or bust for her.

Housing.

In the middle of the slide.

You can see the steady growth in contracts per community per each of the past several years finally on the right hand side of the slide we show contracts per community for Twentytwenty increased 39% to 54.2 compared to 38.9 a year ago.

This is the first full year in well over a decade that we were above our historical normalized sales pace. However were still below the peak that we achieved in the last cycle somewhere near 60 homes per community.

In spite of raising prices with the intention of slowing down our sales pace. If you seasonally adjusted annualized November contracts per community. It was 60 contracts per community per year and represents a torrid sales pace.

I'm happy to report our land acquisition teams are making great progress on new land opportunities in our markets and were very optimistic and excited about the opportunities. We see ahead of us.

The demand for new homes continues to be strong and where and when appropriate we plan to continue raising home prices, even if it slows down our sales pace further we believe that creating margin per sales pace makes sense today.

By the way is worthy of noting that the last boom was fueled by speculative purchasers.

This boom is fueled by users millennials finally jumping into homeownership in every category of move up and move down housing is in full gear.

Before I turn it over to Larry I want to express my gratitude to lose Smith, who retired as our COO on November Thirtyth Lou has been with our company for the past 14 years and I'll certainly Miss his vast industry knowledge his insights and the great contributions he made to our company.

I wish him and his wife, all the best as they embark on this next stage of their lives.

I'll now turn it over to Larry Sorsby our CFO.

Thanks Sarah.

I'll start on slide 13.

This was another strong quarter for our financial services Division.

Given my historically low rates and strong home demand on financial services fourth quarter pretax earnings increased 34% year over year to $12 million.

If you turn to slide 14, you can see that our consolidated community count declined by 25 communities from 141 on October 30, Onest 2019 to 116 at the end of October this year.

The primary reason community Count has declined is that we're selling through communities much faster than we expected there.

There are two additional reasons for the decline.

First we had 15 community Grand openings that were expected to have occurred by October 30, Onest. This year, but were delayed given the general cobot environment second we contributed four wholly owned communities into unconsolidated joint ventures during the first quarter of fiscal 2012.

Bonnie.

As you can see on slide 15 sequentially community count was relatively flat from the third quarter to the fourth quarter.

During 2021, the community count is likely to vacillate from quarter to quarter throughout the remainder of fiscal 2021, we plan to replenish the communities, we sell out and close this year with new communities that opened.

We believe that our community count at the end of the year will be similar to current levels keep.

Keep in mind, our revenue growth today is not as directly tied to community count growth as it was in the past previously we thought the primary way we would achieve revenue growth would be through community count growth more recently, we have been achieving remarkable increases in our sales pace per.

Our community and that higher sales pace, rather than increase community count is fueling our anticipated revenue growth.

If the current sales pace was to slow down so with the speed at which we are closing out communities and as a result, our land acquisition efforts would result in community count growth rather than just replenishment.

Slide 16 shows we controlled 26049 lots or a 4.6 year lots supply at the end of the fourth quarter.

As of the end of the year, we controlled 100% of our expected 2021 delivery forecast, which was assumed which assumed growth over 2020.

Additionally, we already control almost 90% of the lots required to meet our 2022 delivery forecast because some analyst are saying that build over soon be running out a lot. Let me repeat what I just said we control all of the lots we need for our anticipated growth and 20.

21 deliveries and almost 90% of the lots we need for 2022 deliveries, we have sufficient time to find the remaining 10% of lots needed for 2022 deliveries further I can tell you that the number of land and lot opportunities being brought to corporate land Committee has picked up.

Recently, we remain disciplined in our underwriting approach using current home sales price current home sales pace and current construction costs.

To achieve our 20 plus percent Unlevered IR, our hurdle rate, if we find land opportunities that pencil under these self adjusting criteria, we will move forward to control them.

On slide 17, we show despite the adverse impact from COVID-19, we added 2022 newly controlled lots during the fourth quarter.

During the same quarter, we had 1700 21 deliveries and lot sales, resulting in a net increase of 301 controlled lots after temporarily slowing new land acquisitions earlier this year due to the onset of Kobin. Our land acquisition teams are back in the market sourcing new deals.

Turning to slide 18.

During the fourth quarter of fiscal 2020, our land the land development spend was $229 million, a 41% increase over the same quarter a year ago.

Despite that significant increase in land spend we ended the fourth quarter with $399 million the liquidity.

We have excess capital doing best and we're busy tying up new land parcels.

Turning to slide 19 compared.

Compared to our peers you can see that we had the third highest percentage of land controlled via options. We continue to use land optioned whenever possible in order to achieve high inventory turns enhance our returns on capital and reduce risks.

We are pleased to control, 63% of our land through options.

Looking at our consolidated communities in the aggregate, including mothballed communities and the $182 million of inventory not owned we have an inventory book value of $1.2 billion net of $183 million of impairments.

Turning now to slide 20.

Compared to our peers you can see that we had the second highest inventory turnover rate for the trailing 12 month period.

Our inventory turns are 46% higher than the next highest peer below us high inventory turns are a key component of our overall strategy.

We believe one of the key pure operating metrics for the homebuilding industry is EBIT to inventory.

On slide 21, we show the trailing 12 month EBIT to inventory for us and our peers.

This ROI metric measures pure operating performance before interest expense, we remain above median when compared to our peers on this metric, we and the entire industry are still not at normalized historical ROI levels, but given the recent increase and new home demand we believe ROI.

Hi returns will soon improve for all of US we continue to work hard to get further to the right on this chart.

On slide 22, another area of discussion as it related to our deferred tax asset.

From a tax asset is very significant and because it is fully reserved for by a valuation allowance. It is not currently reflected on our balance sheet.

We've taken numerous steps to protect this asset as of October 30, Onest 2020, our deferred tax asset in the aggregate was $578 million, we will not have to pay federal income taxes on approximately $1.8 billion of future pre tax earnings.

We show that we ended the fourth quarter with a shareholders deficit of $436 million.

If you add back our valuation allowance as we've done on this slide our shareholders' equity would be a positive $142 million.

Turning now to slide 23 on this slide we show our debt maturity ladder at the end of the fourth quarter.

As of today, the most likely scenario is that in July 2021, we expect to pay off in full one year prior to maturity our $111 million of second lien notes due in 2022.

Furthermore, considering that it sets at the very top of our secured capital structure. We believe we will be able to refinance and extend our revolver on or prior to its maturity in fiscal 2023.

As always we will continue to analyze and evaluate our capital structure and explore transactions to further strengthen our balance sheet and our financial performance.

Turning to slide 24.

I would now like to discuss our results and trends in the context of the multi year key metric targets that we originally provided two and a half years ago.

The targets, including the assumptions upon which their based and our accompanying remarks are integrally related and are intended to be presented and understood together given the forward looking nature of these targets you should keep in mind that the targets assume no changes in current market conditions and actual results may differ.

Significantly depending upon.

Actual market conditions and other factors, including those described on slide two and in the risk factor section of our most recent annual report on form 10-K, and subsequent quarterly reports on form 10-Q.

In June 2018.

Two and a half years ago, we provided illustrative multiyear key metric targets shown in the third column of this slide.

The first column shows the trailing 12 month results. When we initially provided these key metric targets.

The second column shows our results in fiscal 2020.

Our 2020 results clearly demonstrate the strong progress we have made towards achieving these targets metrics over the past couple of years, so long as market conditions remain unchanged as we begin fiscal 2021, we believe our fiscal 2020 results demonstrate.

We're trending toward and have an opportunity to achieve these multi year targets in fiscal 2021.

Turning to slide 25, you will clearly see the significant year over year improvements and strong progress, we expect to make towards achieving our multi year targets during the first quarter of fiscal 2021.

For the first quarter, assuming no adverse changes in current market conditions, we expect to report total revenues between 570 and $600 million.

From 494 million in the same period last year.

We also expect gross margins to be in the range of 19 to 20 per cent compared to 17.3% in last year's first quarter and SGN day as a percentage of total revenues to be between 11, and a half and 12.5%.

Excluding land related charges and gains or losses on extinguishing the debt.

We expect adjusted EBITDA to be between 45, and $60 million up between 50, and 100% compared to the same quarter last year fine.

Finally, we expect our adjusted pre tax profit for the first quarter of fiscal 2021 to grow to between five and $15 million compared to a $14 million loss in the same period last year.

That concludes our prepared remarks, and well now open it up for any questions you may have.

Thank you the company will now answer your questions. So that everyone has an opportunity to ask questions participants will be limited to one question and one follow up after which they will be they will have to get back into the queue to ask another question. We will open the call to questions. As a reminder is not good question you'll need.

Star one on your telephone to withdraw your question principally from Keith Please standby equal pollick unique roster.

Our first question comes from Alan Ratner with Zelman and Associates. Please proceed with your question.

Hey, guys. Good morning, first off great to hear you guys are doing well and then second congrats on the strong year end results.

I was hoping to Ah you, maybe first just drill in a little bit on the the whole price versus volume equation here and just I guess I have slide 11 up in front of me with the absorption trends by month, which is very helpful.

Clearly that the the rates you are running at in the summer were unsustainable and I think it makes a lot of sense to to try to push net margin higher as you've done I'm curious now just looking at that trend line. If you feel like you've kind of sound that equilibrium point, where you know for four and a half sales per month, you're you're kind of comfortable running at and maybe.

You pull back a little bit on the pricing side or do you still think there. There's a reason to bring that lower given kind of backlogs and constraints with within the industry of getting those homes built and I have a follow on on that after thanks sure well as I mentioned that if you just annualize November it's at a pace.

60 homes per year per community, that's historically, a super high pace.

Yeah, I'd say right now we still err on the side of raising prices. Even further we just need a little time for our new communities to open up. So there were some delays related to cove, it because of us and because of different governmental entities that were obviously also.

Effective and contractors et cetera, and we need time to get our land acquisition team to complete a lot of the acquisitions, we're about to make are and that way, we won't get in our community count we want to at least stabilize our community count.

So we're kind of looking at both of those things together, but I'd say at the moment, we probably err on the side of raising prices further.

EBIT anything like that loans the pace does just that.

Got it now that that's that's helpful. And you. This is somewhat related to that but you know I'm just kind of looking at the revenue guidance you provided for 21, which is up about 15% year over year at the midpoint. So very strong growth, but you know your backlog is up about 60% heading into the year. So you can you help us kind of just think through.

You know the various push and pulls there I mean, clearly there's probably some elongation of cycle times I would imagine that's factored into that so to the extent you could talk through that that would be helpful. But Dan you know where is that expectation you know at least for order activity as the year progresses. It would seem like you're implying a fairly meaningful drop off in year over year.

Growth or declines for that matter, but I just wanted makes from thinking through that correctly.

I'm not 100% sure I understood. The last part of the question, but I'll answer what I think I understood. You know as we mentioned I mean that torrid pace. We had earlier was just not sustainable so were not per and Thats, what built a huge back.

Backlog, we're not projecting to keep that pace, we want to keep pushing pricing and margins. Instead. So that's why we're being a little more conservative about our revenue targets.

Okay, and then just on cycle time, thank you for that but the cycle time zone or how do you or your cycle times look today versus say before cove. It how how much have they been extended if they happen and what are the biggest bottlenecks there are that you're seeing.

There has been a little bit of a extension and it varies quite a bit by market.

And the bottlenecks change, it's like Oh does that game with the bobbing heads or you know something primal [laughter] like a whole, yes, sometimes appliances are a problem and then a luxury vinyl planks are a problem a different things become a problem at different moments.

So and that can extend cycle time, but overall, it's just starting to stabilize a night and I think we'll make some progress.

Okay, great. Thanks, a lot for that good luck.

Thanks.

Thank you and as a reminder, that star One day you question. Our next question comes from Alex Barron with housing Research you May proceed with your question.

Yeah, Thanks, guys and great job on the quarter.

Thank you I guess I was kind.

Kind of working through your your guidance and.

It seems to me you know everything's working pretty well and I think you guys are taking the right steps in terms of trying to raise price and maybe you know non get ahead of yourself.

But is there any reason.

That we couldn't extrapolate that the profitability you guys had this quarter to the full year non sense because.

If you do the math you guys did 643 million.

Home sales it seems like that.

That sounds boring roughly the midpoint of your guidance for next year or so.

Is there anything that you think that could get in the way of basically not just assuming you might have seen the genes that similar.

The level of pre tax margin for the full year.

Well I I think our guidance is is pretty clear and we gave you a fairly tight range of what we expected to do and the ranges as well above what we achieved for the full year last year I mean, clearly the trend that you saw in the fourth quarter, we do expect.

To continue into.

Uh huh.

Fiscal 2020, or 21, and that's reflected in the guidance that we gave you.

I will just add typically our fourth quarter is a very large quarter. So it would be hard to take our largest quarter in and multiply by four or there is a little seasonality in our first quarter, while it's going to be up dramatically compared to last year.

It's typically a little lower volume. So it's you can't just take the big fourth quarter multiply by four.

Right right.

Okay, and then in terms of the corporate DNA. You know you guys had been and I guess in the 20 million of the past three quarters is one who jumped up to 26 was that something of a one time in nature or is that more of a run rate going forward.

As we were not as we mentioned in our remarks corporate DNA was greatly impacted by stock compensation expenses for the fourth quarter that relate to our improved performance for fiscal 20 compared to what we had anticipated previous in certainly compared to the prior year and.

So and the other thing we mentioned is that some of the stock compensation is based on.

And adjusted when the stock price adjusted of our stock price goes up the amount of expense increases as well and I thought I'd catch up basis. So.

There is something that will continue and as a run rate because if we are if our performance continues to show strength. Most recent charter stock compensation and higher stock price is presumably which would then drive the expensed, but some of it is more one time because it relates to one specific comp plan that completed this fiscal year and as measured.

And we'll be done so it's probably somewhere right in between.

Hello.

Okay great.

Thank you the frankness one more on the.

On your mom from land I think a lot of that used to be in California, I'm guessing there might have been in Sacramento and just wanted to come from is that correct.

And how much of that is still left on your books like I believe all California is pretty strong at the moment, yes.

Yes, it's very strong and you are correct. It are the largest part about 1600 homes or are in northern California in a great location outside of Sacramento.

And the only reason, it's still mothballed his words slightly modified modifying our entitlements that we think will yield even better approvals a better profits and performance.

We expect to be bringing that community online or sometime in the next 12 months to begin development Ah that ER is a solid solid property.

Okay, great well I'll get back into queue. Thank you.

Thank you and I'm not showing any further questions at this time I would now like to turn the call back over to.

I'm not asking for any further remarks.

Great well. Thank you very much a we're obviously pleased with.

With the results and are particularly with our most recent sales and the strength that we see.

Oh, it's an unusual time, it's a difficult time to provide guidance and outlook and a clarity on what's going on.

While we are giving you the most a reasonable assumptions that we know right now and I can only say, we just feel very good about book the sales environment in our ability to replenish a and hopefully soon grow our land pipeline of.

So we're bullish and we look forward to giving you a continued progress after our first quarter. Thank you.

Thank you.

This concludes our conference call for today. Thank you all for participating and have a nice day all parties may now disconnect.

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[noise] [noise].

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Good morning, and thank you for joining us today.

Non yen enterprises' fiscal 2024th quarter earnings Conference call, an archive of the webcast will be available after the completion of the call and run for 12 months.

<unk> is being recorded or rebroadcast and all participants are currently in listen only mode.

I will make some opening remarks about the fourth 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.

Slides are available on the investors page of the company's website at Www Dot <unk> HIV Dot com.

Listeners, who would like to follow along should now log onto the website I would like to turn the call over to Jeff O'keefe, Vice President Investor Relations. Jeff. Please go ahead.

Thank you Josh and thank you all from participating this morning's call to review the results for our fourth quarter and year, which ended October 31st 2020, 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 provision 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 from statements related to the company's goals and expectations.

And with respect to its financial results from 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 other assumptions that are difficult to per.

Direct 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 section entitled Risk factors and management discussion analysis, particularly the portion of Mdna inside of Safe Harbor statement and our annual report.

On form 10-K for the fiscal year ended October 31 2019.

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.

Joining me today are Ara Hovnanian, Chairman, President and CEO, Larry Sorsby Executive Vice President and CFO, and Brad O'connor Senior Vice President Chief Accounting Officer and Treasurer.

Ill now turn the call over to our alright. Thanks.

Thanks, Jeff.

Okay 20 has been a challenging year from many perspectives and I hope all of you and your families remain safe and healthy.

In late March and early April I Couldnt have imagined this scenario where demand for new homes would be as strong as it's been over the past seven months or that we'd be building and selling more homes than last year with roughly 50% of our associates across the country working from home.

Yes, thats exactly where we find ourselves today.

Im going to review, our full year and fourth quarter results and then address the current market environment and as usual Larry Sorsby will follow me with more detail before the Q1 day.

As the number of Covance cases rise across the country, we continue to keep the safety and well being of our associates customers and and trade partners a top priority.

Our sales offices now have installed ultraviolet air filters and we accept customers by appointment only.

Our construction associates are taking every possible per caution to remain safe and keep our trade partners.

I've said this before but it bears repeating I can't say enough about the tremendous effort all of our associates around the country are putting in day after day to keep things running smoothly.

It's truly been a remarkable feat under the current conditions.

Our total revenues adjusted gross margin adjusted EBITDA and adjusted pre tax income all slightly better than the high end of the guidance that we gave.

Starts that we delayed in March April and May are homes that we would have delivered in our fourth quarter. The good news is that we still had a strong fourth quarter plus the demand for our homes became so strong after the early covance period that our backlog of to be built.

<unk> has grown significantly weaker.

We expect to report strong year over year gains in deliveries have profit compared to last year in both the first and the second quarter of fiscal 2021 based on our existing backlog.

Based on the strong sales I just mentioned on slide five we show the solid backlog of 3402 homes under contract at the end of the fourth quarter. The dollar value of this backlog was $1.42 billion the number of.

Homes in backlog was up 55% and dollar value was up 61%.

This is the highest number of homes weve had in backlog in well over a decade.

It's the strength of this backlog, which sets us up nicely for strong results in the first half of 21.

Turning to slide six we show our full year results for fiscal 20 compared to fiscal 19.

Starting at the top of the table you can see that our revenues were up 16% to $2.3 billion compared to $2 billion last year.

Our adjusted gross margin also increased to 18.4% this year compared to 18.1% in the prior year. Our total EPS Junaid ratio improved 130 basis points from 11.6% last year to 10.3% this year and our adjusted EBITDA.

Increased 35% year over year to $234 million.

Moving on to slide seven we show year over year comparisons for the fourth quarter.

We begin with total revenues in the upper left hand portion of the slide.

As per our guidance provided last quarter, our total revenues for the fourth quarter were $683 million this year compared with $713 million in last year's fourth quarter as I mentioned earlier, if not per delays in starts during the first wave of the pandemic.

We would have closed many more homes during the fourth.

Fourth quarter, which obviously would have resulted in higher revenue moving.

70 basis points on a sequential basis from 17.5% in the third quarter of fiscal 20.

20.2 per cent that we reported in the fourth quarter of fiscal 20 with the highest quarterly gross margin since 2014.

As we said on our last call, we pivoted to increasing home prices back in June consciously trading off lower sales pace for improved margins.

We continue to believe that these home price increases should offset any potential material and labor cost increases.

Slower sales pace keeps us from selling out our communities too quickly. It also gives us time to open new communities and gives our land acquisition teams time to replenish our land pipeline. So we can stabilize and eventually grow our community count.

Station expenses.

Some of our stock compensation expenses are affected by changes in our stock price and obviously our stock price has gone up recently as our stock price increase and we exceeded our fiscal 20 performance targets, we incurred more stock compensation expense than we contemplated in both our guidance and.

In the prior year.

Secondly, while construction quality continues to improve and we once again reduced our construction defect reserves a noncash items.

We did not have as large a reduction as last year's fourth quarter each.

Each year during the fourth quarter, we completed an annual actuarial study to update our construction defect reserves for 2019. This resulted in a $7 million reduction to ESG day.

In fiscal 20, while we were able to reduce our reserves. Once again the reduction was $3 million. This variation in our construction defect reserves makes it difficult to compare year over year SG net expenses.

If you adjust for both the increased stock compensation and the construction defect reserves, our EPS gionee expense would have been virtually identical in both years.

In the lower right hand quadrant of the slide we show that EBITDA increased 66% from $51 million in last year's fourth quarter to $84 million this year.

Yeah.

In the upper left hand portion of slide eight you can see that our pre tax income for the fourth quarter increased.

$43 million.

From.

$1 million loss last year to a $42 million profit in this year's fourth quarter if.

If you ignore land charges.

And gain or loss on extinguishment of debt. The adjusted pre tax income was about $45 million for both the fourth quarter of this year and last year.

In the lower left hand quadrant of the slide we show that for the full year pre tax income improved $95 million year over year or from a $40 million loss last year to a $55 million profit this year and in the lower right hand portion of the slide we.

Show that our adjusted pre tax income was $51 million this year compared with $10 million last year.

A five fold year over year increase and it's the highest adjusted pre tax income Weve had since 2006.

On the left hand portion of slide nine we show that our quarterly contract increased 43% to 1918 homes from 1345 homes in last years fourth quarter the.

The picture is even better on a per community basis, which we show on the right hand portion of the slide here.

Here you can see that we had 16.5 contracts per community for the fourth quarter. This year and Thats compared to 9.5 from last year's fourth quarter, that's a 74% increase year over year.

Our fiscal 23rd quarter contracts per community were even higher at 90, interestingly that 2023rd quarter and fourth quarter, where the highest number of contracts per community, we have ever recorded for any quarter.

To get complete transparency slide 10 shows the number of consolidated contract on a monthly basis for each month from January through November compared to the same months a year ago.

Contract then increased at least 50% year over year for each month from June through September.

Now I'm certain you may be concerned that the percentage increases were less in October and November I want to emphasize that we consciously focused on raising prices to slow down our sales pace.

We are not able to sell homes to start homes as fast as we were selling them and if we continue we would have been exposed to potential increases in construction costs without the ability to sell to increase home prices on homes that were already sold.

In our higher gross margins during the fourth quarter, a trend that we expect to continue into the first quarter of 2021.

If you look at consolidated contracts per community on a monthly basis as we do on slide 11 per.

Seven net increase in contracts per community for even greater.

They were up 80 per cent at least 80% year over year every month June through September.

As we continue to raise home prices starting in August our sales pace per community began to slow down.

However, in spite of the consciously slowing of our sales pace October contracts per community were up 38% and November was even stronger up 48% and finally December as started off very strongly as well.

If you turn to slide 12, you can see another view of contracts per community with longer term trends on slide seven we show we average 44 annual contracts per community from 97 to 2002.

We've mentioned before that was a period of neither boom or bust for housing in the middle of the slide.

You can see the steady growth in contracts per community from each of the past several years finally on the right hand side of the slide we show contracts per community for Twentytwenty increased 39% to 54.2 compared to 38.9 a year ago.

This is the first full year in well over a decade that we were above our historical normalized sales pace.

However, we are still below the peak that we achieved in the last cycle somewhere near 60 homes per community.

I'm happy to report our land acquisition teams are making great progress on new land opportunities in our markets and were very optimistic and excited about the opportunities. We see ahead of us.

The demand for new homes continues to be strong and where and when appropriate we plan to continue raising home prices, even if it slows down our sales pace further we believe that trading margin per sales base makes sense today.

By the way is worthy of noting that the last boom was fueled by speculative purchasers.

Boom is fueled by users millennials finally jumping into homeownership in every category of move up and move down housing is in full year.

Before I turn it over to Larry I want to express my gratitude to lose Smith, who retired as our COO on November Thirtyth, New it's been with our company for the past 14 years and I'll certainly Miss his vast industry knowledge his insights and the great contributions he made to our company.

I wish him and his wife, all the best as they embark on this next stage of their lives I.

Ill now turn it over to Larry Sorsby our CFO.

Thanks Sarah.

I'll start on slide 13.

This was another strong quarter for our financial services Division.

Evan by historically low rates and strong home demand on financial services fourth quarter pretax earnings increased 34% year over year to $12 million.

If you turn to slide 14, you can see that our consolidated community count declined by 25 communities from 141 on October 30, Onest 2019 to 116 at the end of October this year.

The primary reason community Count has declined is that we are selling through communities much faster than we expected.

There are two additional reasons for the decline.

First we had 15 community Grand openings that were expected to have occurred by October 30, Onest. This year, but were delayed given the general covet environment.

We contributed four wholly owned communities into unconsolidated joint ventures during the first quarter of fiscal 2020.

As you can see on slide 15 sequentially community count was relatively flat from the third quarter to the fourth quarter.

We believe that our community count at the end of the year will be similar to current levels keep.

Our community and that higher sales pace, rather than increase community count is fueling our anticipated revenue growth.

If the current sales pace was to slow down so with the speed at which we are closing out of communities and as a result, our land acquisition efforts would result in community count growth rather than just replenishment.

Slide 16 shows we control 26049 lots or a 4.6 year lots supply at the end of the fourth quarter.

As of the end of the year, we controlled 100% of our expected 2021 delivery forecast, which was assumed which assumed growth over 2020.

Additionally, we already control almost 90% of the lots required to meet our 2022 delivery forecast because some of the analyst are saying that build over soon be running out a lot. Let me repeat what I just said we control all of the lots we need for our anticipated growth and 20.

Recently, we remain disciplined in our underwriting approach using current home sales price current home sales pace and current construction costs.

To achieve our 20 plus percent Unlevered IR, our hurdle rate, if we find land opportunities that tensile under the self adjusting criteria, we will move forward to control them.

On slide 17, we show despite the adverse impact of COVID-19, we added 2022 newly controlled lots during the fourth quarter.

During the same quarter, we had 1700 21 deliveries and lot sales, resulting in a net increase of 301 controlled lots after temporarily slowing new land acquisitions earlier this year due to the onset of Covance. Our land acquisition teams are back in the market sourcing new deals.

Turning to slide 18.

During the fourth quarter of fiscal 2020, our land the land development spend was $229 million, a 41% increase over the same quarter a year ago.

Despite that significant increase in land spend we ended the fourth quarter with $399 million of liquidity.

We have excess capital to invest and we're busy tying up new land parcels.

Turning to slide 19 compare.

Compared to our peers you can see that we had the third highest percentage of land controlled via options. We continue to use land options whenever possible in order to achieve high inventory turns enhance our returns on capital and reduce risk we.

We are pleased to control, 63% of our land through options.

Looking at our consolidated communities in the aggregate, including mothballed communities and the $182 million of inventory not owned we have an inventory book value of $1.2 billion net.

$183 million of impairments.

Turning now to slide 20.

Compared to our peers you can see that we had the second highest inventory turnover rate for the trailing 12 month period.

Our inventory turns are 46% higher than the next highest peer below us high inventory turns are a key component of our overall strategy.

We believe one of the key pure operating metrics for the homebuilding industry is EBIT to inventory.

On slide 21, we show the trailing 12 month EBIT to inventory for us and our peers.

ROI returns will soon improve for all of US we continue to work hard to get further to the right on this chart.

On slide 22, another area of discussion as it related to our deferred tax assets are the flow.

Third tax asset is very significant and because it is fully reserved for by a valuation allowance. It is not currently reflected on our balance sheet.

We show that we ended the fourth quarter with a shareholders deficit of $436 million.

If you add back our valuation allowance as we've done on this slide our shareholders' equity would be a positive $142 million.

Turning now to slide 23.

On this slide we show our debt maturity ladder at the end of the fourth quarter.

As of today, the most likely scenario is that in July 2021, we expect to pay off in full one year prior to maturity our $111 million of second lien notes due in 2022.

Furthermore, considering that it sets at the very top of our secured capital structure. We believe we will be able to refinance and extend our revolver on or prior to its maturity in fiscal 2023.

As always we will continue to analyze and evaluate our capital structure and explore transactions to further strengthen our balance sheet and our financial performance.

Turning to slide 24.

I would now like to discuss our results and trends in the context of the multi year key metric targets that we originally provided two and a half years ago.

Significantly depending upon act.

In June 2018.

Two and a half years ago, we provided illustrative multi year key metric targets shown in the third column of this slide.

First column shows the trailing 12 month results. When we initially provided these key metric targets.

The second column shows our results in fiscal 2020.

Our 2020 results clearly demonstrate the strong progress we have made towards achieving these targets metrics over the past couple of years. So.

So long as market conditions remain unchanged as we begin fiscal 2021, we believe our fiscal 2020 results demonstrate we're trending toward and have an opportunity to achieve these multi year targets in fiscal 2021.

For the first quarter, assuming no adverse changes in current market conditions, we expect to report total revenues between 570 and $600 million.

From $494 million in the same period last year.

Excluding land related charges and gains or losses on extinguishing the debt.

We expect adjusted EBITDA to be between 45 and $60 million up between 50, and 100 per cent compared to the same quarter last year fine.

Finally, we expect our adjusted pre tax profit for the first quarter of fiscal 2021 to grow to between five and $15 million compared to a $14 million loss in the same period last year.

That concludes our prepared remarks, and well now open it up for any questions you may have.

Star one on your telephone who is driving question Principality lease and lastly from Poly unit roster.

Our first question comes from Alan Ratner with Zelman and Associates. You May proceed with your question.

Hey, guys. Good morning, first off great to hear you guys are doing well and second congrats on the strong year end results.

I was hoping to maybe first just drill in a little bit on the whole price versus volume.

The equation here and just I guess I have slide 11 up in front of me with the absorption trends by month, which is very helpful.

Clearly that the the rates you are running at in the summer were unsustainable and I think it makes a lot of sense to to try to push that margin higher as you've done I'm curious now just looking at that trend line. If you feel like you've kind of sound that equilibrium point, where from four four and a half sales per month, you're kind of comfortable running at and maybe.

Sure well as I mentioned that if you just annualize November it's at a pace of 60 homes per year per community. That's historically, a super high pace.

I'd say right now we still err on the side of raising prices. Even further we just need a little time for our new communities to open up. So there were some delays related to cove. It goes above us and because of different governmental entities that were obvious.

We also affected and contractors et cetera, and we need time to get our land acquisition team to complete a lot of the acquisitions, we are about to make.

And that way, we won't dip in our community count we want to at least stabilize our community count.

Several kind of looking at both of those things together, but I'd say at the moment, we probably err on the side of raising prices for.

EBIT.

As the pace doses.

Got it now that that's that's helpful. And this is somewhat related to that but I'm just kind of looking at the revenue guidance you provided for 21, which is up about 15% year over year at the midpoint. So very strong growth, but your backlog is up about 60% heading into the year. So can you help us kind of just think through.

The various push and pulls there I mean, clearly there's probably some elongation of cycle times I would imagine that's factored into that so to the extent you could talk through that that would be helpful. But then where's that expectation at least for order activity as the year progresses. It would seem like you're implying a fairly meaningful drop off in year over year growth.

Declines for that matter, but I, just want to make sure I'm thinking through that correctly.

I'm not 100% share I understood. The last part of your question, but I'll answer what I think I understood.

As we mentioned.

I mean, the torrid pace. We had earlier was just not sustainable so were not per and Thats, what built a huge backlog, we're not projecting to keep that pace, we want to keep pushing pricing and margins instead.

So thats why were being a little more conservative about our revenue targets.

Okay, and then just on cycle time, Thank you for that the cycle time zone or how do you or your cycle times look today versus say before cove. It how how much have they been extended as they have and what are the biggest bottlenecks there that you're seeing.

There has been a little bit of extension and it varies quite a bit by market.

And the bottlenecks change it's like.

Or has that game with the bobbing heads so.

Total Bakken Paul Yes, sometimes appliances are a problem and then a luxury vinyl planks are a problem a different things become a problem at different moments.

And that can extend cycle time.

But overall, it's starting to stabilize.

And I think we'll make some progress.

Okay, great. Thanks, a lot for that good luck.

Thanks.

Thank you and as a reminder, that star one to ask a question. Our next question comes from Alex Barron with housing Research you May proceed with your question.

Yes, thanks, guys from great job on the quarter.

Thank you.

Hi, Ken.

Working through your.

Your guidance and.

It seems to me everything's working pretty well and I think you guys are taking the right steps in terms of trying to raise price and maybe non get ahead of yourselves, but.

But is there any reason.

That we couldn't extrapolate to the profitability you guys had this quarter to the full year non sense because.

If you do the math you guys did $643 million on sales it seems like that.

Thats non score is roughly the midpoint of your guidance for next year. So.

Is there anything that you think could.

Given the way of.

Not just assuming you might have seen achieved similar.

The level of pre tax margin for the full year.

Well I think our guidance is pretty clear and we.

We gave you a fairly tight range of what we expect to do and the ranges as well above what we achieved for the full year last year I mean, clearly the trend that you saw in the fourth quarter, we do expect to continue into.

Fiscal 2020, or 21, and Thats reflected in the guidance that we gave you.

I will just add typically our fourth quarter is a very large quarter. So it would be hard to take our largest quarter in and multiply by four there is a little seasonality in our first quarter, while it's going to be up dramatically compared to last year.

It's typically a little lower volume so.

You can't just take the big fourth quarter multiply by four.

Right right.

Okay.

And then in terms of the corporate DNA.

You guys had been I guess $15 million to $20 million of the past three quarters. This one day jumped up to 26 was that something of a onetime in nature or is that more of a run rate going forward.

As we mentioned in our remarks.

Corporate DNA was greatly impacted by stock compensation expenses for the fourth quarter that relate to our improved performance for fiscal 2000 and compared to what we had anticipated previous and certainly compared to the prior year.

And so and the other thing we mentioned is that some of the stock compensation is based on.

And adjusted when the stock price adjustment of our stock price goes up the amount of expense increases as well.

Catch up basis so.

There is something that will continue and as a run rate because if we are if our performance continues to show strength sales reached charter stock compensation and higher stock price is presumably which would then drive the expense.

But some of it is more one time because it relates to one specific comp plan that completed this fiscal year and as measured in and we'll be done so it's probably somewhere right in between.

Total equity.

Okay great.

Thank you the price this one more on the.

On your mothballed land I think a lot of that used to be in California, I'm guessing that might have been in Sacramento. Alan just wanted to confirm is that correct.

And how much of that is still left on your books like I believe all California is pretty strong at the moment, yes.

Yes, it's very strong and you are correct that the largest part about 1600 homes.

Our in northern California in a great location outside of Sacramento.

And the only reason, it's still mothballed his words slightly modified modifying our entitlements that we think will yield even better approvals better profits and performance.

We expect to be bringing that community online so.

Sometime in the next 12 months to begin development.

That.

The solid.

Solid property.

Okay, Great I will get back into queue. Thank you.

Okay.

Thank you and I'm not showing any further questions. At this time I would now like to turn the call back over to our and whatnot.

Moving further remarks.

Great well, thank you very much.

We're obviously pleased.

With the results and are particularly with our most recent sales and the strength that we see.

It's an unusual time, it's a difficult time to provide guidance and outlook and clarity on what's going on.

We are giving you the most reasonable assumptions that we know right now and I can only say, we just feel very good about.

Both the sales environment and our ability to replenish.

And hopefully soon grow our land pipeline of so we're bullish and we look forward to giving you a continued progress after our first quarter. Thank you.

Thank you.

This concludes our conference call for today. Thank you all for participating and have a nice day all parties may now disconnect.

Q4 2020 Hovnanian Enterprises Inc Earnings Call

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