Q1 2022 Hovnanian Enterprises Inc Earnings Call

Okay.

Good morning, and thank you for joining us today for Hovnanian enterprises fiscal 2021st quarter earnings Conference call.

The webcast will be available after the completion of the call and run for 12 months. This conference is being recorded for personnel. So currently in a listen only mode.

But we will make some opening remarks about the first quarter results and then open the line for questions.

Company will also be webcasting, a slide presentation, along with the opening comments from management.

Slides are available on the Investor page of the Companys web at Www Dot Dot <unk> dot com those listeners who would like to follow along should now log onto alright, I will now turn the call to Jeff O'keefe Vice President Investor Relations. Please go ahead.

Thank you Kevin and thank you all for participating in this morning's call to review the results for our first quarter, which ended January 31 2022.

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 1095, 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 achievement expressed.

Our 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.

Though 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 pre.

To quantify therefore actual results could differ materially and adversely from those forward looking statements as a result of a variety of factors such risks and uncertainties and other factors are described in detail and then sections entitled risk factors and management's discussion and analysis, particularly the portion of MD&A entitled Safe Harbor statement.

Our annual report on Form 10-K for the fiscal year ended October 31, 2021, and subsequent filings with the Securities and Exchange Commission.

As required by applicable securities 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 , Larry stores, the executive Vice President and CFO , and Brad O'connor Senior Vice President Chief Accounting Officer and Treasurer.

Now I'll turn the call over to our CEO . Erik go ahead, thanks, Jeff I'm going to review, our first quarter results and I will address the current market environment, Larry <unk>, Our CFO will follow me with more details and then we'll open it up to Q&A.

The omicron Covid variance certainly further exacerbated industry supply chain disruptions and labor shortages.

Across the country during the month of January in particular, we experienced trade partners being unable to work or working short staff due to COVID-19 infections among their teams.

Similarly, local building department and inspectors experienced widespread COVID-19 related absences finally, COVID-19 caused widespread issues among our suppliers.

Cabinets windows and garage doors were among the many problems due to COVID-19 impact on labor at their manufacturing and delivery facilities.

At the end of our first quarter many homes across our markets were virtually finished however, one or two back ordered items or the lack of a final inspection prevented us from closing the homes all around the country.

All of these issues combined resulted in longer construction cycle times and delays in home deliveries.

This pushed some of our expected first quarter deliveries into the second quarter and caused us to Miss our revenue guidance.

However, as we will describe more fully in a moment our outperformance in gross margin and several other areas allowed us to exceed the high end of our guidance for pretax profit.

On slide five we compare our first quarter results to our guidance.

Additionally, we added a third column to compare our results without the $5 $7 million of incremental Phantom stock expense that was due solely to the stock price increases in the quarter.

As you can see in the third column, we missed and revenues exceeded the top end of our guidance on gross margin.

Within our guidance range on SG&A and exceeded the top end of the range.

Before taxes.

Due to 60% of our Phantom stock being distributed in January 22, going forward fluctuations in stock price, we will have much less of an effect on our SG&A expense.

For every eight dollar movement in our stock price will have a corresponding $1 million impact on SG&A expense.

Moving on to slide six we show year over year comparisons for our first quarter.

Given the supply chain disruptions and labor shortages that have been plaguing many industry certainly including homebuilding. We're pleased with the strong profitability in the quarter starting in the upper left hand portion of the slide you can see that our total revenues for the first quarter were $565 million moving.

To the upper right hand portion of the slide you can see that our adjusted gross margin increased 170 basis points to 22, 4% this year compared to 27% in last year's first quarter.

Clearly illustrates that we've been able to raise home prices more than enough to offset the higher labor and material costs that we've incurred.

Keep in mind that these first quarter deliveries were started when lumber costs were much higher and therefore did not get the benefit of the lower lumber costs that we had in the fall of 'twenty one.

We expect the lower lumber prices from late summer and fall of 'twenty, one to positively impact gross margins beginning in the second quarter of fiscal 'twenty two as we deliver homes that started after the lumber prices receded.

This is reflected in the large increase in our guidance for second quarter gross margins lumber prices have moved up from levels that we saw in the fall, but those increased prices already factored into our full year guidance.

In the lower left hand quadrant of the slide you can see that our SG&A ratio was 12, 8% for the first quarter compared to 11, 1% in last year's first quarter.

If you exclude the incremental Phantom stock expense it would improve to 11, 8%. This year, if the COVID-19 related delays did not adversely affect our delivery count our SG&A ratio would have been lower yet.

In the lower right hand quadrant of the slide we show that adjusted EBITDA was flat year over year at $64 million.

<unk> incremental Phantom stock expenses, adjusted EBITDA would have increased 9% year over year to $70 million.

Turning to slide seven on this slide you can see the benefit of the $181 million reduction of debt that we completed last year, particularly the reduction of some of our higher cost debt.

Our percentage of interest expense to total revenues decreased 240 basis points from seven 2% in last year's first quarter to four 8% this year.

We anticipate lowering our interest costs further in the future.

Regardless, the future market conditions lower debt levels means lower interest expense in future periods.

On slide eight you can see that excluding incremental Phantom stock expenses, our adjusted pre tax income improved 92% to $41 million compared to $21 million last year.

Adjusted pretax income, including the Phantom stock expense still increased 65% to $36 million.

Last year, we did not expense federal income taxes in the first quarter since we had sufficient deferred tax reserves. We subsequently reversed our deferred tax reserve. Therefore, this year, we expensed federal income taxes in the quarter, causing our net income.

Increased 31%, while our pretax income increased 65%.

Regardless of the federal tax expense. This year, we do not have to actually pay federal income taxes for the next one $6 billion of pretax income as a result of our deferred tax asset.

Let me talk about our sales environment on the right hand portion of slide five we show contracts per community for the first quarter in each of the last three years.

You can see that our contract pace jumped from nine seven in the first quarter of fiscal <unk> to a white hot pace of $16 nine in fiscal 'twenty one.

That was a 74% year over year increase.

While not as strong as last year, our sales pace of 14 contracts per community in the first quarter of this year was still exceptionally strong.

Compared to the $9 seven contracts per community in the first quarter of 'twenty or contract paces up 44%.

Further to the left we show that the average first quarter contract pace from 97% <unk> was eight six and as we've said many times before that was the time that was neither a boom or bust for the housing industry.

Current pays a 14 contracts per community in this year's first quarter is incredibly strong compared to historical averages.

Due to our ability to raise prices more than construction costs. Our recent contracts are being written with very high gross margins we expect.

<unk> higher levels of profitability in future periods as we deliver these homes.

If mortgage rates rise further it's reasonable to expect the rate of home price increases will moderate at the same time, however material and labor cost increases should also moderate.

Despite the high impact of higher mortgage rates house home demand remains strong.

Entitled and improved lots remains a scarce commodity and today, we are still increasing home prices.

All of our markets.

On Slide 10, we show contracts per community monthly from March through February .

Recent months is in dark green the same month, a year ago is in light blue and the same month two years ago is in gray for the last nine months, our contracts have been lower than last year's blazing pace. However, we compare favorably every month with the same month.

Two years ago, which was a more historically typical contract base.

There is no doubt that our current sales pace reflects strong consumer demand for our homes.

Turning to slide 11, I want to focus on the month of February given everyone's focused on the current market conditions and you can't get more current than a month, which ended yesterday.

I want to begin by saying that February right through our sales yesterday was a very strong month I am sure. Many of you may have been wondering whether rising rates fears of inflation, where the problems of Ukraine have affected demand as you can see in this slide.

<unk> sales were rock solid and very much above normal.

On this slide we show the contracts per community for the month of February from fiscal 18 through fiscal 'twenty, two which ended yesterday.

For the first two years on this slide contracts per community had been steady at about three point to.

This was a historically typical pace.

The demand in February of 'twenty exploded to four eight contracts per community.

Was just before Covid hit then in February of 'twenty, One we had a white hot pace of $6 one contracts per community almost double the historical pace.

Yes.

This year the preliminary results for February put us at five contracts per community, which is a very strong month for the month of February and well above normal, but certainly not as good as it was in 'twenty one.

On the bottom of the slides, we show with the seasonally annualized sales pace based on the month of February for these themes years were to get another perspective.

As you can see the annualized pace for February 22 of $72 five contracts per community puts us well ahead of 2018 or 19 and was much higher than the non boom non bus sales pace of 44 that we averaged from 90.

Seven through 2002, so let me say it one more time sales right through our month end yesterday, we're rock solid and well above normal.

I want to take a few moments to talk about interest rates on slide 12, we show a long term perspective of where the 30 year fixed rate mortgages have been since the nineties.

Today's 4% 30 year fixed rate mortgage remains among the lowest levels that we've seen for the past three decades.

Turn to slide 13, we show that the rates since January one of this year.

Mortgage rates have increased almost 100 basis points.

Despite this recent run up in mortgage rates as you just saw demand for new homes has remained robust right through the end of February .

Any increase in mortgage rates is not helpful. As a portion of homebuyers will no longer be able to qualify for the same mortgage that they would have previously however.

However over the 60 plus years that we've been building homes, we've observed in numerous rising mortgage rate environment rates, certainly impact how large of a mortgage consumers can afford but time after time, we've seen homebuyers adjust their expectations.

Or how much they can afford to buy when mortgage rates increase consumers typically will either buy a smaller home or choose fewer options and upgrades.

To date, we have not seen much evidence of our customers taking those steps.

If mortgage rates continue to increase we expect that would occur.

Incidentally, we make our comparable gross margin ratio in our smaller homes in a community compared to our larger homes.

Now that's not to say interest rates do not affect housing demand.

Continued rapid increases could certainly caused sticker shock among homebuyers and caused delays in their home buying decision.

As recently as 2018, the housing markets suffered from sticker shock as mortgage rates increased 100 basis points in a short time, then and homebuyers delayed their home purchase decision.

However in 2018, the economy was not as strong and the outlook for inflation was nominal people did not believe mortgage rates would remain high nor is that home prices would remain high so some customers just waited before buying a new home.

After just a few months consumers jumped back into the housing market and a very strong way and that was even before the post pandemic surge.

If consumers need and desire new housing after adjusting their expectations for what they can afford it will eventually buy a home.

The increase in mortgage rates has had no impact on our cancellation rates.

For the first quarter of 'twenty, two our cancellation rate was 14% compared to 17% in last year's first quarter.

For the months of January and February when interest rates moved up by 100 basis points, our cancellation rates were 15% and 17%.

Both months are in line with our low cancellation rate trends and remain below our historical average cancellation rates in the low 20% area.

On slide 14, we show that our community count increased slightly year over year. The most relevant number to keep an eye on is our consolidated community count, which increased by six communities or 6% year over year to 111 at the end of the quarter.

We expect our community count is likely to be similar at the end of the second quarter and then increase in both the third and fourth quarter.

No material changes in market conditions, we expect to end the year with a community count at or slightly higher than 100 than the 140 communities that we had at the end of fiscal 'twenty one.

Further we expect to maintain a higher average community count for fiscal 'twenty, two compared to last year.

We already have 86% of the remainder of the year as deliveries and backlog and firmly believe we will be able to achieve this significant profit growth in our fiscal 'twenty two guidance.

Now I'll turn it over to Larry <unk>, our Chief Financial Officer.

Thanks, Sarah I'm going to start with the progress we've made in growing our lot position the raw material, we need to build our homes.

Turning to slide 15, we show that year over year, our lot count increased by approximately 5500 lots or by 21%. We now control over 32000 lots based on trailing 12 months deliveries. This equates to a five four years supply we've been steadily.

Increasing our lot position and we expect to see our lot count continues to rise.

In fiscal 'twenty to the.

The market for land acquisitions remains rational and we continue to feel extremely comfortable with all the acquisitions, we've made over the past year keep.

Keep in mind, there is a lag between when we place lots under our control and when those same lots will be fully developed and we can open a community for sale.

Most of the land, we put under control during our first quarter fiscal 'twenty two will not be opened for sale until late fiscal 'twenty three and beyond.

We now control, 100% of the land and communities necessary to achieve our significant growth in revenues and profits during fiscal 'twenty, two and control virtually all of the lots we need to achieve our expected additional growth in fiscal 'twenty threes revenues and profits.

Turning now to slide 16.

Further demonstrating we're investing the money needed to grow our community count.

During the first quarter of fiscal 'twenty, two our land and land development spend was $195 million.

That is 9% increase over the $179 million, we spent during the first quarter of fiscal 'twenty one.

Turning to slide 17, even with that increase in land spend and paying off $181 million of debt less late last year. We ended the first quarter with $271 million of liquidity.

We continue to have excess liquidity and today. Our land acquisition teams are primarily focused on obtaining control of land for home deliveries in fiscal 'twenty four and beyond.

Turning now to slide 18.

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

Our use of land options increased from 61% at the end of the first quarter of fiscal 'twenty, 1% to 64% at the end of the first quarter of 'twenty two.

Turning now to slide 19.

Paired to our peers, we continue to have the second highest inventory turnover rate.

High inventory turns are a key component of our overall strategy. We believe we have opportunities to continue to increase our use of land options and to further improve inventory turns and our returns on inventory in future years.

On slide 20, we show the dollar value of backlog, including domestic and unconsolidated joint ventures increased 13% year over year to $1 9 billion at the end of the first quarter.

Sequentially backlog dollars were up 15% from the end of the fourth quarter to the end of the first quarter.

The strength of this backlog, including a strong expected gross margin sets us up nicely to achieve our expected improvements in our fiscal 'twenty two financial performance.

Our financial guidance for the second quarter and the full year for fiscal 'twenty two assumes no adverse changes in current market conditions, including no further deterioration in the supply chain further it excludes any impact to our SG&A expense.

From Phantom stock expense is related solely to the stock price movement from the $96 88 stock price of <unk> at the end of the first quarter of 'twenty two.

Due to uncertainty surrounding ongoing supply chain issues persistent labor market tightness and lumber price fluctuations, we are reiterating rather than increasing our guidance for both the second quarter and the full fiscal 'twenty two year.

On slide 21, we provide guidance for the second quarter of fiscal 'twenty. Two we expect total revenues for the second quarter to be between 700 $750 million. We also expect gross margins to be in the range of 23% to 25% SG&A as a percent of total revenues.

<unk> to be between nine five and 10, 5%.

Finally, we expect our adjusted pre tax profit for the second quarter of fiscal 'twenty two to grow to between 60 and $75 million.

On slide 22, we provide guidance for our 'twenty two fiscal year.

We expect total revenues for the year to be between two eight and $3 billion.

We also expect gross margins to be in the range of $23 five to 25, 5% SG&A.

SG&A as a percent of total revenues expected to be between nine 3% and 10, 3% adjusted EBITDA is expected to be between 410 and $460 million we.

Our adjusted pre tax profit for fiscal 'twenty, two to be between 260 and $310 million. Finally, we expect earnings per share, assuming a 30% tax rate to be between $26 50 and $32 per share at.

At yesterday's closing stock price our stock is trading at an extremely low multiple of only three three times the midpoint of our fiscal 'twenty two EPS guidance.

Turning now to slide 23 on this slide we show our debt maturity ladder at the end of the first quarter last year, we paid off $181 million of debt and we are committed to reducing our debt by approximately $200 million in fiscal 'twenty two.

We believe that we should be able to refinance our currently undrawn revolving credit facility ahead of its maturity in the first quarter of fiscal 'twenty three.

After that we do not have any debt coming due until fiscal 'twenty six.

Given our $416 million deferred tax asset, we will not have to pay federal income taxes on approximately $1 $6 billion of future pre tax earnings. This tax benefit will significantly enhance our cash flow in years to come and we will accelerate our progress.

<unk> are rapidly improving our balance sheet.

In June 2019, we first introduced a set of multi year key metric targets to help you understand some of our longer term expectations by the middle of fiscal 'twenty, one we had exceeded those multiyear targets.

As we continue our efforts to repair our balance sheet and in light of recent performance. We felt now was the appropriate time to provide an updated set of illustrative multi year key metric targets, which are presented on slide 24.

These key metric targets, including the assumptions upon which theyre based in our accompanying remarks and comments are integrally related and intended to be presented and understood together.

Given the forward looking and longer term nature of these targets you should keep in mind that the information, we're showing you sets out our goals for future periods, but a wide range of outcomes are possible and our actual results may differ materially and adversely from our targeted results due to a variety of factors, including those described on slide.

And in the section entitled Risk factors in our most recent annual report on Form 10-K .

We undertake no obligation to update these targets <unk> provide this type of longer term forward looking information on a regular basis.

Unlike in 2018, when we assume no changes in market conditions. This time, we are taking a.

More conservative view of future market conditions.

Currently demand for home remains exceptionally strong and our recent sales are generating very strong margins. Although we are not experiencing nor are we forecasting a deterioration in current market conditions solely for the purpose of presenting these key metric targets, we assume that both adjusted.

<unk> gross margins and our sales pace declined to a more normalized historical levels. We believe our multi year key metric targets are achievable within the next few years provided that any adverse changes in market conditions are no worse than we already assumed.

We conservatively assume gross margins would decline by 400 basis points from the 24, 5% gross margin at the midpoint of our 2022 guidance.

Over the past two years, we've made progress in repairing our balance sheet and have materially improved our credit statistics, we expect to build on that progress going forward. We are increasing our focus on an asset light approach, which we believe will result in further increases in our inventory turns and revenues.

We expect this growth in revenue to allow us to achieve a leveraging of our SG&A expenses.

We believe that the combination of our anticipated growth and profitability and the fact that we do not have to pay cash federal taxes until we deplete our deferred tax asset will enable us to pay down debt and accelerate the repair of our balance sheet.

Turning to slide 25, all the bar charts on the next three slides are set up the same the first two gray bars show our actual results for fiscal 'twenty and fiscal 'twenty one.

Where applicable the midpoint of our guidance for fiscal 'twenty. Two is shown in light blue and our multi year key metric targets are shown in dark green.

Beginning with the adjusted gross margin in the upper left hand quadrant, we assume that our multi year target gross margin will decline by 400 basis points to a more normalized 25% compared to the 24, 5% gross margin and the midpoint of our fiscal 'twenty two guidance range.

Moving to the upper right hand portion of the slide.

Through an even more aggressive asset light approach, we intend to remain very focused on further increasing our inventory turns to reach our multi year target level of two one times.

Since fiscal 2015, we have grown our percentage of option lots from 46% to 64% and going forward, we're taking steps to increase our use of lot options even further.

In the bottom left hand portion of the slide we show that we plan to invest a portion of our future profits into growing our own inventory.

The lower right hand quadrant of the slide shows that at the midpoint of our fiscal 'twenty two guidance, we will have grown revenues by almost $600 million since fiscal 'twenty.

Given our planned growth in inventory and our expected higher inventory turns we are seeking revenue growth of about $1 billion from the midpoint of our 'twenty two guidance range, which will allow us to achieve our $395 billion multi year revenue target.

Turning now to slide 26, the upper left hand portion illustrates that achieving our anticipated revenue growth will provide sufficient operating leverage reduce our SG&A SG&A as a percent of revenues to 9% as you can see from the upper right hand portion of the slide we are targeting to achieve a relatively stable.

<unk> multi year adjusted EBITDA target at just over $450 million.

However, we continue to focus on lowering our leverage levels and are seeking to achieve debt reduction by about $525 million from the $1 $1 7 billion projected at the end of 'twenty $2 million to $650 million of debt and our key metric target.

When coupled with the $181 million debt that we reduced last year and the additional $200 million, we plan to reduce in this fiscal year. This goal would reflect almost $1 billion of debt reduction from the $1 $6 billion. We had at the end of fiscal 'twenty.

In the lower right hand portion of this slide we show the roughly $70 million of savings are multiyear targeted debt reduction goal would have on our interest expense, we continue to evaluate our capital structure and explore transactions to simplify our capital structure and strengthened our backs on our balance sheet.

Including those that we would refinance our debt at lower rates, which would add to the savings in interest expense that are $82 million multiyear target assumes.

Turning to slide 27, we showed the effort in the upper left hand portion of the slide our goal of achieving an adjusted pre tax earnings of about $372 million up from $197 million in fiscal 'twenty one.

On the upper right hand quadrant, you see the multi year growth target for shareholders' equity to $838 million up 379% compared to a 175 million equity at the end of fiscal 'twenty one.

In the bottom left hand portion of the slide we show that if we were to achieve our multi year key metric targets that result would lead to dramatically improving our debt to cap ratio to about 44% it would mark substantial progress towards achieving our longer term mid 30% debt to cap target.

Lastly, we are looking to achieve a multi year adjusted EBITDA to interest incurred target of five five times, which would mark a dramatic improvement from two three times in fiscal 'twenty one.

I'll now turn it back.

Over to Ara for some brief closing comments.

Thanks, Larry in closing I'd, just like to step back and give a bit of a macro perspective on the state of the housing industry.

On the one hand, it's easy to assume that we're at the very top of the housing cycle. We're all aware of the home price increases over the last year.

We're also aware of the single family housing start increases since the bottom of the great recession.

However, if you look at slide 28, which shows single family housing starts over the last 50 years, you'll note that we're very far below historic market peaks and for the first time in 13 years single family.

Housing starts in 'twenty, one, we're just slightly above the long term average.

Entitled Land is in short supply and supply chain disruption and Covid delays will keep housing production moderated for some time.

In spite of the Ukraine crisis, and rising mortgage rates housing demand has stayed extraordinarily strong right up through our sales results.

Yeah.

The prospect of inflation or future mortgage rate increases only seems to strengthen that conviction and resolve of our future homebuyers.

In 2005.

One 7 million single family homes were built compared to about 1.1 million last year.

It's nowhere near the old peak.

The average FICO score of our homebuyers was 712.

Five compared to 743 in fiscal 'twenty one.

Just a different time.

Many are concerned not just with the recent mortgage rate move, but the absolute level of mortgage rates.

To remind you that we built as a country a lot more homes and 93.

Between 93, and 2006 than we're currently building and during that timeframe mortgage rates were between 5% and 9%.

Given the low level of single family starts today and as you can see on the graph. It follows a decade plus of Super low housing starts by historical perspectives. It gives us the confidence that we can achieve our multi year key.

Eric targets that Larry just reviewed.

Particularly given some of the more conservative assumptions.

Assumptions regarding our gross margin declines.

We're taking advantage of the strong housing market today to strengthen our balance sheet, while achieving growth through more aggressive inventory turns and regaining the economies of scale regarding SG&A that we've achieved in the past.

We look forward to sharing our progress over the next several years and we have <unk>.

Strive to achieve these key metrics soon.

That concludes our formal comments and we will happily turn it over to Q&A.

The company will now answer questions. So that everyone has an opportunity to ask questions participants will be limited to one question to follow up after which they will have to get back into queue. Another question. We will open the call to questions, ladies and gentlemen, if you have a question or a comment I'm. Please.

The one key on your Touchtone telephone.

Question has been answered or you wish to move yourself from the queue. Please press the pound key.

First question comes from.

Jesse Letterman with Zelman Zelman and associates.

Hi, Thanks for taking my question.

So your order results were stronger than we were expecting and while down year over year. They were ahead of your delivery pace. You mentioned last quarter you. We're metering sales in many of your communities with the supply chain worsening do you have plans to more aggressively limit sales as the spring selling season kicks into high gear.

Well first of all we are still continuing to meet our sales in many communities throughout the country.

That's a phenomenon that we and many of our peers have been doing.

Nonetheless.

We are looking forward to a very strong spring selling season. It will be also helped by the fact that we plan.

By the end of the third and fourth quarter to have more communities open as well and that should give us an additional boost.

Got it. Thank you just a quick follow up on that.

Does the percentage of communities limiting sales and now compared to last quarter.

But just don't have that number on the top of my tongue.

Not something we track religiously I just know that.

We're carefully looking at our ability to start homes and complete homes and we use that as guidance on a case by case basis for metering sales.

Got it thanks.

And then secondly, youre prioritizing cash flow generation doing a great job paying down debt, thus far doesn't intensifying it doesn't intensifying supply chain environment and lengthening cycle times imply you might need to slow the pace of sales to avoid tying up additional capital in the ground and allow your backlog 21.

No not at all.

It's important to really digest, all comments about inventory turns.

We think there's still a lot of inventory.

Opportunity for inventory turns we've been a leader the second highest performer on inventory turns but we still think there's a lot of opportunity and that allows us to do more volume using less capital and less inventory.

Got it thank you very much.

Our next question comes from Alex Barron with housing Research Center.

Okay.

Yes, thanks, guys.

Good job on the quarter I wanted to start with the deliveries I think.

You implied that there was a lot of impact from Covid. So.

Should we assume that any missed closings this quarter should be caught up fairly soon or do you think it's going to take the rest of the year.

Those up.

The ones that we just missed in January certainly we expect to close in February .

And the Omicron Varian is causing a little less problem among labour crews, but I can't say the supply chain disruption portion has been solved and while it's probably going to be less they're still delays out there. So.

I would suspect and we tried to forecast some of the delays into our second quarter guidance in third and fourth but.

It's hard to be very precise in this environment.

Alex if it wouldn't have been for the increasing cycle times that we saw in the in the first quarter elongated cycle times.

With the strong demand that we had for new sales I think it's a safe bet that we would have increased our guidance for the full year.

Kind of held back on increasing our guidance for the full year and frankly for the second quarter just because we.

We've experienced this elongated cycle time and are assuming that it's going to continue for the remainder of the year if things get better.

And the cycle times shorten.

Potentially do better.

Okay, Great and then on the.

On the debt.

Reduction efforts I think you guys had talked about a potential.

Transaction I'm wondering if you could comment further on that.

Whether it had that happens or doesn't happen you have the ability to meet that.

$200 million every year or is there some risk in that.

What prevents you from doing that.

There is no restriction in the amount of debt, we can pay off.

So.

There are certain.

Covenants in our bonds that that point to having to pay them off and lien priority, but no restrictions on the amount of debt that we can pay off.

So that was your second part of your question what was the first part.

Yeah.

Was there any update you can provide on time.

Yes, Matt timing the timing of a potential refinance we continue to closely monitor the debt markets.

Overall high yield market, probably had a little bit of a headwind.

With interest rates going up and the fed talking about it now with Ukraine. So the timing hasn't been perfect to do a transaction, but we continue to closely monitor the capital markets for opportunities to improve our balance sheet.

And I think as you.

And our maturity ladder. The next big maturity is out in fiscal 'twenty six so we have plenty of time to.

Survey the market and figure out a good time to launch.

Yes.

I think you guys have the cash generation potential to maybe then not need to do a deal and still pay off your debt in the next.

For years, but I think if you did get something done and were certainly boost your earnings.

In the short term.

We agree yes, we can't disagree with that statement.

Hi.

On the other end.

I know you guys were not projecting margins to go down 400 basis points Youre, just kind of saying if things were to go back to normal, but what what would be a reason that you guys would expect that to happen just cost versus losing pricing power. What is the scenario that you guys.

Thank you.

Yes.

Thank you Shannon just didn't happen.

Sure I mean.

Been around obviously for 60 plus years and we've lived through cycles, good and bad.

This is certainly a good cycle and at the moment, we see no evidence that there's good cycle is coming to an end, but over time, we are in a cyclical industry. So we think it's smartest to use normal historical.

Bridges.

In projecting our multiyear target at some point apparently not now from what we can see but at some point the markets will return to more rational levels of pricing cost and our pace and therefore, we used our historical average.

Gross margin of just a little over 20% again, we're not projecting that at the moment, but we think that's a good and conservative basis in which to set multiyear targets yes.

I would say the other thing Alex is there is some investors out there.

That didn't don't understand and we're trying to.

Joe them, clearly that even in that kind of a very significant 400 basis point cut in margins slow intended pace.

That we can still.

Mike Gargantuan improvements to our balance sheet.

And.

Our earnings are still extremely strong and better than what we're achieving now some didn't believe that was possible in a rising interest rate environment that might have an adverse effect on margins. So we really show how we can do all of that even if.

Margins decline in sales pace flows.

Right now you guys said.

Other builders have said there hasn't been any.

Evidence that the recent rate increases this year has affected demand.

Let's pretend, let's assume that rates keep going higher from here and at some point it does impact demand.

Do you think would be the most likely scenario to play out that you guys would maintain price to try to defend.

Margins in that volumes would take the hit or would it be the other way around that you try to defend the <unk>.

Sales pace and the volume even if the margin take the hit what do you foresee would happen in that scenario.

Well I think you saw in our multiyear targets we assume.

Gross margins of 20%, that's 400 basis points below our midpoint of our guidance for this year. So.

To some extent that tells you what we think.

We do I think we'd be okay with.

Margins getting to historical norms, and we think we.

We have so many other factors that would lead to great results even in that environment.

I think the first thing the industry would do and certainly we would too.

The industry did it as some kind of.

Return to normalized incentives and concessions, which really the industry is not doing much of if any.

Today that'd be the first step.

To kind of.

It would.

I have an adverse effect on margins, but modest.

Ultimately spur activity and I think it would be done community by community market by market.

And we will be monitoring what our peers were doing.

And competing communities and just keep pace, but I just think it would follow normal historical patterns, which builders try to keep pace up by offering value to the consumer.

I want to emphasize that at the moment given the last two months with rising rates. The opposite has been happening we've been raising home prices in 80% of our community. So we're doing just the opposite right now.

Right, Okay, well best of luck guys. Thanks.

Thank you.

Again, ladies and gentlemen, if you have a question or comment at this time. Please press. The Star then the one key on your Touchtone telephone.

Question comes from Jordan.

Philadelphia financial.

Alright, Thanks, guys first of all I just want to understand a couple of things behind what's in your presentation, the multiyear metrics or what year is that two years away three years away I mean, what's the ballpark timing.

Yes.

Yeah.

We purposely didn't put a precise.

Fine point on it.

We did the same thing in 2008.

<unk> and <unk>.

We have achieved that.

What I have you here.

So your two to three year.

And a guesstimate.

Yes.

Certainly within the ballpark of a few.

Alright second question is in the assumptions for the end of this year are you assuming $200 million in debt pay down, but not a global refinance.

Yes hard to project global refinance always projected as that plays out.

Okay and.

Is that $200 million, because you already have 200 million more on the balance sheet the needed and you're projecting.

$500 million in cash flow, so couldnt be more than $200 million this year.

We're not projecting more than $200 million.

I don't think your math is wrong.

Okay. So let's just go through some numbers here because you guys don't pay taxes so assuming.

Your numbers and who knows if they're right or wrong in 2025 and the <unk>.

The time period here, if you take the net income and just divided by $6. Three it's 45 $46 per share, but you don't pay any taxes. So it's really in cash earnings over $60 a share. So in effect. Your stock is trading at one five times the 2025 numbers.

If you hit them, which projects of 20% slowdown again, I just want to make sure thats, what youre projecting here, maybe it maybe it doesn't come through.

I think ignoring taxes Brad.

All of the 100% of the math, but I think.

That's in the ballpark.

You don't pay taxes.

Cash earning.

<unk> hundred $65, it's burdened.

Not sure the market looks at it that way, but if they did I think your assumptions are in the ballpark bread and to come out.

Mass sounds invest.

Investors care about cash earnings versus GAAP earnings.

Yeah.

I care about cash.

Thanks, Liana is guided by cash earnings.

We're.

We love your perspective.

But as Brad O'connor, Chief Accounting officer to just said.

He believes your math is correct.

Okay.

Yeah.

My final question here is I mean.

Russia is invade Ukraine.

Yes.

An awful thing for humanity and society, but he is very good for interest rates and your ability to refinance debt I mean, if you look at where the tenure is today.

No.

Ed one, 7%, which is down 35 basis points in a week and a half for this spur you to be more aggressive in looking at things and make it a more likelihood that you could get something done.

Well without speaking to likelihood of getting it done rest assured that we are monitoring the market extremely closely and.

If we thought.

There is a transaction we could get done that really made sense, we would pursue it.

And.

Yeah.

I don't know a better way to answer that question.

Alright.

I realize things are the 26% to 32, you're protecting its also not a cash earnings number because it does it include taxes, which is really closer to 37 to 40.

On a cash earnings basis, and Thats before you do any refinancing of that if that occurs.

Yeah.

Brad I'll, let you answer that correct.

Yes.

What was it.

Thank you.

Right.

Our next question comes from Farquhar broke Hong with Goldman Sachs.

Hi, guys and congrats on the quarter.

A quick question on the supply chain delays can you help us understand like how the nature of these delays are changing are manifesting over the past couple of quarters.

It used to be more COVID-19 related now it seems to be lack of available.

Inventory at different stages could you just help us understand like how is it transformed over the past two to three quarters or is it the same thing last quarter on a quarter before.

In terms of materials, it's pretty much the same.

Except that the omicron variant was so widespread particularly in January .

It definitely we heard about it from logistics warehouses of our distributors that they had absenteeism that delayed things.

Delivery drivers had COVID-19 and that delayed things.

So on that side of the material.

Materials. It definitely was a little more pronounced we really felt it on the labor side.

As we'd be expecting.

Crew six carpenters to show up at our house and two showed up because four of them were home with Covid.

It was so widespread.

But that problem seems to have dissipated quite a bit since January .

Longer term there are certainly still delays in materials and that happens hasn't solved itself other than the ones that I. Just described there are materials that are coming from overseas parts coming from overseas and.

Everything is just.

Supply chain disruptions.

We think they'll eventually get there, but I can't say that that's turned around dramatically over the last few quarters.

Understood I appreciate that but but generally you believe that there was a spurt in January and that has come off as we've entered we entered or exited February and potentially.

It's tough to forecast how things improve over the year, but that's a potential.

For improvement over the year.

That's fair.

I think that's fair.

Okay now moving on to the debt and I think it was briefly touched on the $200 million you intend on paying down this year.

Can you help us understand in the context of the.

<unk> priority like pushed plants, you would look to target or have you thought about that at all.

Yeah, we have to pay down the debt and lien priority order. So we would have to start with the one in eights and work our way.

Up or down the priority ladder, depending on how much debt, we paid down so the $200 million, we're referring to would have to be the one in eight clean notes understood perfect.

And.

Is there is there sort of from.

I guess moving on ought to be to be more precise on your longer term.

Priority pay down I think it's about $550 million, how should we think about it in the context of your <unk>.

Desire to refi the capital structure is it a case of it.

I'll stop there and kind of get your question on a follow up.

Well I think.

Regardless of refinance we're showing.

Our desire to get to make progress towards our mid 30% debt to cap.

<unk>.

So.

That's where we think we can be in a few years in terms of debt pay down we would certainly factor that into.

Any kind of refinance decisions and certainly with respect to call provisions on any debt that we refinanced.

Got it that's what I was trying to get at it is it the case would you leave tranches outstanding to pay down or would you.

Consider refining refinancing everything and then utilizing call provisions to to get to the goal.

Not really.

We would we would take everything into account and make the best possible business.

Understood I appreciate the time guys.

Best of luck.

Thank you.

Yeah.

And I'm not showing any further questions at this time I'd like to turn the call back over to Sarah for the.

The closing remarks.

Great well, thank you very much.

Needless to say, our hearts are pouring out for Ukraine, and all of the citizens there.

And we're going to continue to do our part in the housing industry here. Thank you so much and we look forward to giving you our great results in the future quarters.

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

[music].

Yeah.

[music].

[music].

Good morning, and thank you for joining us today for Hovnanian enterprises fiscal 2021st quarter earnings Conference call.

The webcast will be available after the completion of the call and run for 12 months. This conference is being recorded for personnel. So currently in a listen only mode.

I will make some opening remarks about the first quarter results and then open the line for questions. The.

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 Companys web at Www Dot H O K H O P. Dot com those listeners who would like to follow along should now log onto alright, I will now turn the call are Jeff O'keefe, Vice President Investor Relations. Please go ahead.

Thank you Kevin and thank you all for participating in this morning's call to review the results for our first quarter, which ended January 31 2022.

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 1095, 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 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 and uncertainties and other factors are described in detail and then sections entitled risk factors and management's discussion and analysis, particularly the portion of MD&A entitled Safe Harbor statement.

And our annual report on Form 10-K for the fiscal year ended October 31, 2021, and subsequent filings with the Securities and Exchange Commission, except as required by applicable securities 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 , Larry <unk> Executive Vice President and CFO , and Brad O'connor, Senior Vice President and Chief Accounting Officer, and Treasurer, I will now I'll turn the call over to our.

Ara go ahead, thanks, Jeff I'm going.

To review, our first quarter results and I will address the current market environment, Larry <unk>, Our CFO will follow me with more details and then we'll open it up to Q&A.

The omicron Covid variance certainly further exacerbated industry supply chain disruptions and labor shortages across the country. During the month of January in particular, we experienced trade partners being unable to work or working short staff due to co.

<unk> infections among their teams.

Similarly, local building department and inspectors experienced widespread COVID-19 related absences finally, COVID-19 caused widespread issues among our suppliers.

Cabinets windows and garage doors were among the many problems due to COVID-19 impact on labor at their manufacturing and delivery facilities.

At the end of our first quarter many homes across our markets were virtually finished however, one or two back ordered items or the lack of a final inspection prevented us from closing homes all around the country.

All of these issues combined resulted in longer construction cycle times and delays in home deliveries.

<unk> pushed some of our expected first quarter deliveries into the second quarter and caused us to Miss our revenue guidance. However, as we will describe more fully in a moment our outperformance in gross margin and several other areas allowed us to exceed the high end of our guidance.

For pre tax profit.

On slide five we compare our first quarter results to our guidance. Additionally, we added a third column to compare our results without the $5 $7 million of incremental Phantom stock expense that was due solely to the stock price increases in the quarter.

As you can see in the third column, we missed and revenues exceeded the top end of our guidance on gross margin.

Within our guidance range on SG&A and exceeded the top end of the range and income before taxes.

Due to 60% of our Phantom stock being distributed in January 22, going forward fluctuations in stock price, we will have much less of an effect on our SG&A expense.

For every eight dollar movement in our stock price will have a corresponding $1 million impact on SG&A expense.

Moving on to slide six we show year over year comparisons for our first quarter.

Given the supply chain disruptions and labor shortages that have been plaguing many industry certainly including homebuilding. We're pleased with the strong profitability in the quarter starting in the upper left hand portion of the slide you can see that our total revenues for the first quarter were $565 million moved.

To the upper right hand portion of the slide you can see that our adjusted gross margin increased 170 basis points to 22, 4% this year compared to 27% in last year's first quarter.

This clearly illustrates that we've been able to raise home prices more than enough to offset the higher labor and material costs that we've incurred.

Keep in mind that these first quarter deliveries were started when lumber costs were much higher and therefore did not get the benefit of the lower lumber costs that we had in the fall of 'twenty one we.

We expect the lower lumber prices from late summer and fall of 'twenty, one to positively impact gross margins beginning in the second quarter of fiscal 'twenty two as we deliver homes that started after the lumber prices receded.

This is reflected in the large increase in our guidance for our second quarter gross margins lumber prices have moved up from levels that we saw in the fall, but those increased prices are already factored into our full year guidance.

In the lower left hand quadrant of the slide you can see that our SG&A ratio was 12, 8% for the first quarter compared to 11, 1% in last year's first quarter.

If you exclude the incremental Phantom stock expense it would improve to 11, 8%. This year, if the COVID-19 related delays did not adversely affect our delivery count our SG&A ratio would have been lower yet.

In the lower right hand quadrant of the slide we show that adjusted EBITDA was flat year over year at $64 million.

Excluding the incremental Phantom stock expenses, adjusted EBITDA would have increased 9% year over year to $70 million.

Turning to slide seven on this slide you can see the benefit of the $181 million reduction of debt that we completed last year, particularly the reduction of some of our higher cost debt.

Our percentage of interest expense to total revenues decreased 240 basis points from seven 2% in last year's first quarter to four 8% this year.

We anticipate lowering our interest costs further in the future.

Regardless, the future market conditions lower debt levels means lower interest expense in future periods.

On slide eight you can see that excluding incremental anthem stock expenses, our adjusted pre tax income improved 92% to $41 million compared to $21 million last year adjust.

Adjusted pretax income, including the Phantom stock expense still increased 65% to $36 million.

Last year, we did not expense federal income taxes in the first quarter since we had sufficient deferred tax reserves. We subsequently reversed our deferred tax reserve. Therefore, this year, we expensed federal income taxes in the quarter, causing our net income.

Increased 31%, while our pretax income increased 65%.

Regardless of the federal tax expense. This year, we do not have to actually pay federal income taxes for the next one $6 billion of pretax income as a result of our deferred tax asset.

Let me talk about our sales environment.

On the right hand portion of slide five we show contracts per community for the first quarter in each of the last three years.

You can see that our contract pays jumped from nine seven in the first quarter of fiscal <unk> to a white hot pace up 16 nine in fiscal 'twenty one.

That was a 74% year over year increase while not as strong as last year, our sales pace of 14 contracts per community in the first quarter of this year was still exceptionally strong compared.

Compared to the $9 seven contracts per community in the first quarter of 'twenty or contract paces up 44%.

Further to the left we show that the average first quarter contract pace from 97% <unk> was eight six and as we've said many times before that was a time that was neither a boom.

Whom or bust for the housing industry.

The current pace of 14 contracts per community in this year's first quarter is incredibly strong compared to historical averages.

Due to our ability to raise prices more than construction costs. Our recent contracts are being written with very high gross margins, we expect higher levels of profitability in future periods as we deliver these homes.

If mortgage rates rise further it's reasonable to expect the rate of home price increases will moderate at the same time, however material and labor cost increases should also moderate.

Despite the high impact of higher mortgage rates house home demand remains strong.

Entitled and improved lots remains a scarce commodity and today, we are still increasing home prices and all of our markets.

On Slide 10, we show contracts per community monthly from March through February . The most recent month is in dark Green the same month, a year ago is in light blue and the same month two years ago is in gray for the last nine months our contracts have been low.

Other than last year's blazing pace. However, we compare favorably every month with the same month two years ago, which was a more historically typical contract pays.

There is no doubt that our current sales pace reflects strong consumer demand for our homes.

Turning to slide 11, I want to focus on the month of February given everyone's focused on the current market conditions and you can't get more current than a month, which ended yesterday.

I want to begin by saying that February right through our sales yesterday was a very strong month I am sure. Many of you may have been wondering whether rising rates fears of inflation, where the problems of Ukraine have affected demand as you can see in this slide.

<unk> sales were rock solid and very much above normal.

On this slide we show the contracts per community for the month of February from fiscal 18 through fiscal 'twenty, two which ended yesterday.

For the first two years on this slide contracts per community had been steady at about three point to.

This was a historically typical pace.

Then the demand in February of 'twenty exploded to four eight contracts per community. This was just before Covid hit then in February of 'twenty, One we had a white hot pace of $6 one contracts per community almost double.

The historical pace.

This year the preliminary results for February put us at five contracts per community, which is a very strong month for the month of February and well above normal, but certainly not as good as it was in 'twenty one.

On the bottom of the slides, we show with the seasonally annualized sales pace based on the month of February for these seems years were to give another perspective.

As you can see the annualized pace for February 22 of $72 five contracts per community puts us well ahead of 2018 or 19 and was much higher than the non boom non bus sales pace of 44 that we averaged from 90%.

Seven through 2002, so let me say it one more time sales right through our month end yesterday, we're rock solid and well above normal.

I want to take a few moments to talk about interest rates on slide 12, we show a long term perspective of where the 30 year fixed rate mortgages have been since the nineties.

<unk>, 4% 30 year fixed rate mortgage remains among the lowest levels that we've seen for the past three decades.

Turn to slide 13, we show that the rates since January one of this year.

Mortgage rates have increased almost 100 basis points. Despite this recent run up in mortgage rates as you just saw demand for new homes has remained robust right through the end of February .

Any increase in mortgage rates is not helpful. As a portion of homebuyers will no longer be able to qualify for the same mortgage that they would have previously.

However over the 60 plus years that we've been building homes, we've observed and numerous rising mortgage rate environment rates, certainly impact how large of a mortgage consumers can afford but time after time, we've seen homebuyers adjust their expectations.

For how much they can afford to buy when mortgage rates increase consumers typically will either buy a smaller home or choose fewer options and upgrades to date, we have not seen much evidence of our customers taking those steps if mortgage rates continue to increase.

We expect that would occur.

Incidentally, we make a comparable gross margin ratio and our smaller homes in a community compared to our larger homes.

Now that's not to say interest rates do not affect housing demand.

Continued rapid increases could certainly caused sticker shock among homebuyers and caused delays in their home buying decision.

As recently as 2018, the housing markets suffered from sticker shock as mortgage rates increased 100 basis points in a short time, then and homebuyers delayed their home purchase decision.

However in 2018, the economy was not as strong and the outlook for inflation was nominal people did not believe mortgage rates would remain high nor that home prices would remain high so some customers just waited before buying a new home.

After just a few months consumers jumped back into the housing market and a very strong way and that was even before the post pandemic surge.

If consumers need and desire of new housing after adjusting their expectations for what they can afford it will eventually buy a home.

The increase in mortgage rates has had no impact on our cancellation rates.

For the first quarter of 2002, our cancellation rate was 14% compared to 17% in last year's first quarter.

For the months of January and February when interest rates moved up by 100 basis points, our cancellation rates were 15% and 17%.

Both months are in line with our low cancellation rate trends and remain below our historical average cancellation rates in the low 20% area.

On slide 14, we show that our community count increased slightly year over year. The most relevant number to keep an eye on is our consolidated community count, which increased by six communities or 6% year over year to 111 at the end of the quarter.

We expect our community count is likely to be similar at the end of the second quarter and then increase in both the third and fourth quarter.

No material changes in market conditions, we expect to end the year with a community count at or slightly higher than 100 than the 140 communities that we had at the end of fiscal 'twenty one.

Further we expect to maintain a higher average community count in fiscal 'twenty, two compared to last year.

We already have 86% of the remainder of the year as deliveries and backlog and firmly believe we will be able to achieve this significant profit growth in our fiscal 'twenty two guidance I'll now turn it over to Larry <unk>, Our Chief Financial Officer.

Thanks Dara.

To start with the progress we've made in growing our lot position the raw material, we need to build our horlicks.

Turning to slide 15, we show that year over year, our lot count increased by approximately 5500 lots or by 21%. We now control over 32000 lots based on trailing 12 month deliveries. This equates to a five four years supply we've been steadily.

Increasing our lot position and we expect to see our lot count continues to rise.

In fiscal 'twenty to the.

The market for land acquisitions remains rational and we continue to feel extremely comfortable with all the acquisitions, we've made over the past year keep.

Keep in mind, there is a lag between when we place lots under our control and when those same lots will be fully developed and we can open a community for sale.

Most of the land, we put under control during our first quarter of fiscal 'twenty two will not be opened for sale until late fiscal 'twenty three and beyond.

We now control, 100% of the land and communities necessary to achieve our significant growth in revenues and profits during fiscal 'twenty, two and control virtually all of the lots we need to achieve our expected additional growth in fiscal 'twenty threes revenues and profits.

Turning now to slide 16.

Further demonstrating we're investing the money needed to grow our community count during the first quarter of fiscal 'twenty, two our land and land development spend was $195 million.

That is 9% increase over the $179 million, we spent during the first quarter of fiscal 'twenty one.

Turning to slide 17.

Even with that increase in land spend and paying off $181 million of debt less late last year. We ended the first quarter with $271 million of liquidity, we continue to have excess liquidity and today. Our land acquisition teams are primarily focused on obtaining controlling.

We'll have land for home deliveries in fiscal 'twenty four and beyond.

Turning now to slide 18.

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

Our use of land options increased from 61% at the end of the first quarter of fiscal 'twenty, 1% to 64% at the end of the first quarter of 'twenty two.

Turning now to slide 19, compared to our peers. We continue to have the second highest inventory turnover rate.

Inventory turns are a key component of our overall strategy. We believe we have opportunities to continue to increase our use of land options and to further improve inventory turns and our returns on inventory in future years.

On slide 20, we show the dollar value of backlog, including domestic and unconsolidated joint ventures increased 13% year over year to $1 9 billion at the end of the first quarter.

Sequentially backlog dollars were up 15% from the end of the fourth quarter to the end of the first quarter.

The strength of this backlog, including a strong expected gross margin.

It's just us nicely to achieve our expected improvements in our fiscal 'twenty two financial performance.

Our financial guidance for the second quarter and the full year for fiscal 'twenty two assumes no adverse changes in current market conditions, including no further deterioration in the supply chain further it excludes any impact to our SG&A expense.

From Phantom stock expense is related solely to the stock price movement from the $96 88 stock price of <unk> at the end of the first quarter of 'twenty two.

Okay.

Due to uncertainty surrounding ongoing supply chain issues persistent labor market tightness and lumber price fluctuations, we are reiterating rather than increasing our guidance for both the second quarter and the full fiscal 'twenty two year.

On slide 21, we provide guidance for the second quarter of fiscal 'twenty. Two we expect total revenues for the second quarter to be between 700 $750 million. We also expect gross margins to be in the range of 23% to 25% SG&A as a percent of total revenues.

<unk> to be between nine five and 10, 5%.

Finally, we expect our adjusted pre tax profit for the second quarter of fiscal 'twenty two to grow to between 60 and $75 million.

On slide 22, we provide guidance for our 'twenty two fiscal year.

We expect total revenues for the year to be between two eight and $3 billion.

We also expect gross margins to be in the range of $23 five to 25, 5% SG&A as a percent of total revenues expected to be between nine 3% and 10, 3% adjusted EBITDA is expected to be between 410 and $460 million, we expect our adjusted pretax prop.

For fiscal 'twenty, two to be between 260 and $310 million. Finally, we expect earnings per share, assuming a 30% tax rate to be between $26 50 and $32 per share at.

At yesterday's closing stock price our stock is trading at an extremely low multiple of only three three times the midpoint of our fiscal 'twenty two EPS guidance.

Turning now to slide 23 on this slide we show our debt maturity ladder at the end of the first quarter last year, we paid off $181 million of debt and we are committed to reducing our debt by approximately $200 million in fiscal 'twenty two.

We believe that we should be able to refinance our currently undrawn revolving credit facility ahead of its maturity in the first quarter of fiscal 'twenty three.

After that we do not have any debt coming due until fiscal 'twenty six.

Given our $416 million deferred tax asset, we will not have to pay federal income taxes on approximately $1 $6 billion of future pre tax earnings. This tax benefit will significantly enhance our cash flow in years to come and we will accelerate our progress.

Aggress a rapidly improving our balance sheet.

In June 2019, we first introduced a set of multi year key metric targets to help you understand some of our longer term expectations by the middle of fiscal 'twenty, one we had exceeded those multiyear targets.

As we continue our efforts to repair our balance sheet and in light of recent performance. We felt now was the appropriate time to provide an updated set of illustrative multi year key metric targets, which are presented on slide 24.

These key metric targets, including the assumptions upon which they are based and our accompanying remarks and comments are integrally related and intended to be presented and understood together.

Given the forward looking and longer term nature of these targets you should keep in mind that the information, we're showing you sets out our goals for future periods, but a wide range of outcomes are possible and our actual results may differ materially and adversely from our targeted results due to a variety of factors, including those described on slide.

Two and in the section entitled Risk factors in our most recent annual report on Form 10-K .

We undertake no obligation to update these targets <unk> provide this type of longer term forward looking information on a regular basis.

Unlike in 2018, when we assume no changes in market conditions. This time, we are taking a.

More conservative view of future market conditions.

Currently demand for our homes remains exceptionally strong and our recent sales are generating very strong margins. Although we are not experiencing nor are we forecasting a deterioration in current market conditions solely for the purpose of presenting these key metric targets, we assume that both adjusted.

<unk> gross margins and our sales pace decline to a more normalized historical levels. We believe our multi year key metric targets are achievable within the next few years provided that any adverse changes in market conditions are no worse than we already assumed we conservatively assume.

Margins will decline by 400 basis points from the 24, 5% gross margin at the midpoint of our 2022 guidance.

Over the past two years, we've made progress in repairing our balance sheet and have materially improved our credit statistics, we expect to build on that progress going forward. We are increasing our focus on an asset light approach, which we believe will result in further increases in our inventory turns and revenues.

We expect this growth in revenue to allow us to achieve a leveraging of our SG&A expenses.

We believe that the combination of our anticipated growth and profitability and the fact that we do not have to pay cash federal taxes until we deplete our deferred tax asset will enable us to pay down debt and accelerate the repair of our balance sheet.

Turning to slide 25.

The bar charts on the next three slides are set up the same.

First to gray bars show, our actual results for fiscal 'twenty and fiscal 'twenty, one where applicable the midpoint of our guidance for fiscal 'twenty. Two is shown in light blue and our multi year key metric targets are shown in dark green.

Beginning with the adjusted gross margin in the upper left hand quadrant, we assume that our multiyear target gross margin will decline by 400 basis points to a more normalized 25% compared to the 24, 5% gross margin and the midpoint of our fiscal 'twenty two guidance range.

Moving to the upper right hand portion of the slide.

Through an even more aggressive asset light approach, we intend to remain very focused on further increasing our inventory turns to reach our multiyear target level of two one times.

In fiscal 2015, we have grown our percentage of option lots from 46% to 64% and going forward, we're taking steps to increase our use of lot options even further.

In the bottom left hand portion of the slide we show that we plan to invest a portion of our future profits in the growing our own inventory.

The lower right hand quadrant of the slide shows that at the midpoint of our fiscal 'twenty two guidance, we will have grown revenues by almost $600 million since fiscal 'twenty.

Given our planned growth in inventory and our expected higher inventory turns we're seeking revenue growth of about $1 billion from the midpoint of our 'twenty two guidance range, which will allow us to achieve our $3 $95 billion multi year revenue target.

Turning now to slide 26, the upper left hand portion illustrates that achieving our anticipated revenue growth will provide sufficient operating leverage reduce our SG&A SG&A as a percent of revenues to 9% as you can see from the upper right hand portion of the slide we are targeting to achieve a relatively stable.

Multi year adjusted EBITDA target at just over $450 million.

However, we continue to focus on lowering our leverage levels and are seeking to achieve debt reduction by about $525 million from the one $1 7 billion projected at the end of 'twenty two.

$650 million of debt and our key metric target.

When coupled with the $181 million debt that we reduced last year and the additional $200 million, we plan to reduce and this fiscal year. This goal would reflect almost $1 billion of debt reduction from the $1 $6 billion. We had at the end of fiscal 'twenty.

In the lower right hand portion of this slide we show the roughly $70 million of savings are multiyear targeted debt reduction goal would have on our interest expense, we continue to evaluate our capital structure and explore transactions to simplify our capital structure and strengthened our balance sheet.

Including those that we would refinance our debt at lower rates, which would add to the savings in interest expense that are $82 million multiyear target assumes.

Turning to slide 27, we showed the effort in the upper left hand portion of the slide our goal of achieving adjusted pretax earnings of about $372 million up from $197 million in fiscal 'twenty one.

On the upper right hand quadrant, you see the multi year growth target for shareholders' equity to $838 million up 379% compared to our 175 million equity at the end of fiscal 'twenty one.

In the bottom left hand portion of the slide we show that if we were to achieve our multi year key metric targets that result would lead to dramatically improving our debt to cap ratio to about 44% it would mark substantial progress towards achieving our longer term mid 30% debt to cap target.

Lastly, we are looking to achieve a multi year adjusted EBITDA to interest incurred target of five five times, which would mark a dramatic improvement from two three times in fiscal 'twenty one.

I'll now turn it back.

Over to Ara for some brief closing comments.

Thanks, Larry in closing I'd, just like to step back and give a bit of a macro perspective on the state of the housing industry.

On the one hand, it's easy to assume that we're at the very top of the housing cycle. We're all aware of the home price increases over the last year.

We're also aware of the single family housing start increases since the bottom of the great recession.

However, if you look at slide 28, which shows single family housing starts over the last 50 years.

You'll note that we're very far below historic market peaks and for the first time in 13 years single family housing starts in 'twenty. One we're just slightly above the long term average.

And title land is in short supply and supply chain disruption and Covid delays will keep housing production moderated for some time.

In spite of the Ukraine crisis, and rising mortgage rates housing demand has stayed extraordinarily strong right up through our sales results. This week.

The prospect of inflation or future mortgage rate increases only seems to strengthen the conviction and resolve of our future homebuyers.

In 2005.

One 7 million single family homes were built compared to about $1 1 million last year.

It's nowhere near the old peak.

Average FICO score of our homebuyers was 712, <unk> five compared to 743 in fiscal 'twenty one.

It's just a different time.

Many are concerned not just with the recent mortgage rate move, but the absolute level of mortgage rates.

I want to remind you that we built as a country a lot more homes and 93 between 93 and 2006 than we're currently building and during that timeframe mortgage rates were between 5% and 9%.

Given the low level of single family starts today.

And as you can see on the graph. It follows a decade plus of Super low housing starts by historical perspectives. It gives us the confidence that we can achieve our multi year key metric targets that Larry just reviewed.

<unk> given some of the more conservative.

Assumptions regarding our gross margin declines.

We're taking advantage of the strong housing market today to strengthen our balance sheet, while achieving growth through more aggressive inventory turns and regaining the economies of scale regarding SG&A that we've achieved in the past.

We look forward to sharing our progress over the next several years and we have <unk>.

Strive to achieve these key metrics soon.

That concludes our formal comments and we will happily turn it over to Q&A.

The company will now answer questions. So that everyone has an opportunity to ask a question participants will be limited to one question to follow up after which they will have to get back in the queue for other questions. We will open the call to questions, ladies and gentlemen, if you have a question or a comment.

And the one key on your Touchtone telephone.

Question has been answered or you wish to move yourself from the queue. Please press the pound key.

First question comes from.

Jesse Letterman with Zelman Zelman and associates.

Hi, Thanks for taking my question.

So your order results were stronger than we were expecting and while down year over year. They were ahead of your delivery pace. You mentioned last quarter you. We're metering sales in many of your communities with the supply chain worsening do you have plans to more aggressively limit sales as the spring selling season kicks into high gear.

Well first of all we are still continuing to meet our sales in many communities throughout the country.

Thats a phenomenon that we and many of our peers have been doing.

Nonetheless.

We are looking forward to a very strong spring selling season. It will be also helped by the fact that we plan.

By the end of the third and fourth quarter to have more communities open as well and that should give us an additional boost.

Got it. Thank you just a quick follow up on that.

Does the percentage of communities you are limiting sales are now compared to last quarter.

Just don't have that number on top of my tongue.

Not something we track religiously I just know that.

We're carefully looking at our ability to start homes and complete homes and we use that as guidance on a case by case basis for our metering sales.

Got it thanks.

And then secondly, youre prioritizing cash flow generation doing a great job paying down debt, thus far doesn't intensifying doesn't intensifying supply chain environment and the lengthening cycle times imply you might need to slow the pace of sales to avoid tying up additional capital in the ground and allow your backlog to unwind.

No not at all.

It's important to really digest, all comments about inventory turns.

We think there's still a lot of inventory.

Opportunity for inventory turns we've been a leader the second highest performer on inventory turns but we still think there is a lot of opportunity and that allows us to do more volume using less capital and less inventory.

Got it thank you very much.

Our next question comes from Alex Barron with housing Research Center.

Okay.

Yes, thanks, guys.

Good job on the quarter I wanted to start with the deliveries I think.

You implied that there was a lot of impact from Covid. So.

Should we assume that any mis closings this quarter should be caught up fairly soon or do you think it's going to take the rest of the year.

Those up.

The ones that we just missed in January certainly we expect to close in February .

And the Omicron Varian is causing a little less problem among labour crews, but I can't say the supply chain disruption portion has been solved and while it's probably going to be less still delays out there. So.

I'd suspect and we've tried to forecast some of the delays into our second quarter guidance and third and fourth but.

It's hard to be very precise in this environment.

Yes, Alex if it wouldn't have been for the increasing cycle times that we saw in the in the first quarter elongated cycle times.

With the strong demand that we had for new sales I think it is a safe bet that we would have increased our guidance for the full year.

Kind of held back on increasing our guidance for the full year and frankly for the second quarter, just because we have experienced this elongated cycle time and are assuming that it's going to continue for the remainder of the year if things get better.

And the cycle times shorten.

Potentially do better.

Okay, Great and then on the.

On the debt.

That's an effort I think you guys talked about a potential.

Transaction I'm wondering if you could comment further on that.

Whether it had that happens or doesn't happen you have the ability to compete.

The 100 million every year or is there some risk that would prevent you from doing that.

There is no restriction in the amount of debt, we can pay off.

So.

There are certain.

Covenants.

And our bonds that that point to having to pay them off and lien priority, but no restrictions on the amount of debt that we can pay off.

So that was your second part of your question what was the first part.

Was there any update you can provide on time.

What.

Yes, yes, yes.

Matt timing the timing of a potential refinance we continue to closely monitor the debt markets.

Overall high yield market, probably had a little bit of a headwind.

With interest rates going up and the fed is talking about it now with Ukraine. So the timing hasn't been perfect to do a transaction, but we continue to closely monitor the capital markets for opportunities to improve our balance sheet.

I think.

As you saw in our maturity ladder.

Next big maturity is out in fiscal 2006, so we have plenty.

Lenny of time too.

Survey the market and figure out a good time to launch.

Yes.

I think you guys have the cash generation potential to maybe then not not need to do a deal and still pay off your debt in the next.

For years, but I think if you did get something done and what certainly boost your earnings.

In the short term.

Yes, we can't disagree with that statement.

Hi.

On the other end.

I know you guys were not projecting margins to go down 400 basis points or just kind of thing.

If things were to go back to normal, but what what would be a reason that you guys would expect that to happen.

Cost versus losing pricing power what is the scenario that you guys.

Yes.

Shannon just didn't happen.

Sure.

Been around obviously for 60 plus years and we've lived through cycles, good and bad.

This is certainly a good cycle and at the moment, we see no evidence that.

Good cycle is coming to an end, but over time, we are in a cyclical industry. So we think it's smartest to use normal historical averages.

In projecting a multiyear target at some point apparently not now from what we can see but at some point the markets will return to more rational levels of pricing and of course in a pace and therefore, we used our historical average.

Gross margin of just a little over 20% again, we're not projecting that at the moment, but we think thats, a good and conservative basis in which to set multiyear targets yes.

Yes, I would say the other thing Alex is there is some investors out there.

That didnt don't understand and we're trying to.

Joe them, clearly that even in that kind of a very significant 400 basis point cut in margin flow intended pace.

That we can still.

Meg gargantuan improvements to our balance sheet.

And.

Our earnings are still extremely strong and better than what we are achieving now some didn't believe that was possible in a rising interest rate environment that might have an adverse effect on margin. So we really show how we can do all of that even yes.

Margins decline in sales by flows.

Right now you guys said.

Other builders have said there hasn't been any.

Evidence that the recent rate increases this year has affected demand.

But let's pretend, let's assume that rates keep going higher from here and at some point it does impact demand.

Do you think would be the most likely scenario to play out that you guys would maintain price.

To try to defend.

Margins in that volumes would take the hit or would it be the other way around that you try to defend the <unk>.

Sales pace and the volume even if the margin take the hit what do you foresee would happen in that scenario.

Well I think you saw on our multiyear targets we assume.

Gross margins of 20%, that's 400 basis points below our midpoint of our guidance for this year. So.

To some extent that tells you what we think.

We do I think we'd be okay with <unk>.

Margins getting to historical norms, and we think.

We have so many other factors that would lead to great results even in that environment.

I think I think the first thing the industry would do and certainly we went to the <unk>.

We did it.

Is some kind of return to normalized incentives and concessions, which really the industry is.

Not doing much of the binney today that'd be the first step.

I think to kind of.

<unk>.

I have an adverse effect on margins, but modest.

And ultimately spur activity and I think.

It would be done community by community market by market.

And we will be monitoring what our peers were doing.

And competing communities and just keep pace, but I just think it would follow normal historical patterns, which builders try to keep pace.

By offering value to the consumer.

Wanted to emphasize that at the moment given the last two months with rising rates. The opposite has been happening we've been raising home prices in 80% of our community. So we're doing just the opposite right now.

Right, Okay, well best of luck guys. Thanks. Thank.

Thank you.

Again, ladies and gentlemen, if you have a question or a comment at this time. Please press. The Star then the one key on your Touchtone telephone.

Question comes from Jordan.

Philadelphia financial.

Alright, Thanks, guys first of all I just want to understand a couple of things behind what is in your presentation, the multiyear metrics or what year is that two years away three years away I mean, what's the ballpark timing.

Yes.

Yeah.

We purposely didn't put a precise.

Fine point on it.

We did the same thing in 2008.

<unk> and <unk>.

Yeah.

<unk>.

Two and a half you here.

So your two to three year.

Guesstimate.

Yes.

Certainly within the ballpark of few.

Alright second question is in the assumptions for the end of this year are you assuming $200 million in debt pay down, but not a global refinance.

Yes, we are.

Project Global refinance always projected as the debt paydown.

Okay and.

Is that $200 million, because you have already have $200 million more on the balance sheet the needed and youre projecting.

$500 million in cash flow, so couldn't be more than 200 million this year.

We're not projecting more than $200 million.

I don't think your math is wrong.

Okay now, let's just go through some numbers here because you guys don't pay taxes so assuming.

Your numbers and who knows if they're right or wrong in 2025 and the <unk>.

The time period here, if you take the net income and just divide it by $6. Three it's 45 $46 per share, but you don't pay any taxes. So it's really in cash earnings over $60.

Sure. So in effect your stock is trading at one five times 2025 numbers, if you hit them, which projects of 20% slowdown again I just want to make sure thats, where youre projecting here, maybe it maybe it doesn't come through.

I think ignoring taxes Brad.

All of the 100% of the math, but I think.

That's in the ballpark.

You don't pay taxes.

As your earnings.

Projects under $65, it's burdened.

I'm not sure the market looks at it that way, but if they did I think your assumptions are in the ballpark Brad into Continental Europe .

<unk> right.

Investors care about cash earnings versus GAAP earnings.

Okay.

I'm, an investor I care about cash.

Thanks, Leann is guided by cash earnings.

Sure.

We love your perspective.

But as Brad O'connor.

Counting offices just said.

Believes your math is correct.

Okay.

My final question here is I mean.

Russia Ukraine.

Which is an awful thing for humanity and society, but it's very good for interest rates and your ability to refinance the debt I mean, if you look at where the tenure is today.

No.

At one 7%, which is down 35 basis points, we can have.

This spur you to be more aggressive in looking at things and make it a more likelihood that you could get something done.

Well without speaking to likelihood of getting it done rest assured that we are monitoring the market extremely closely and if.

If we thought.

There is a transaction we could get done.

It made sense, we would pursue it.

And.

Yes.

I don't know.

Other way to answer that question.

Alright.

So the 26 to 32, you're protecting its also not a cash earnings number because it does it include taxes, which is really closer to 37 the <unk>.

40 tap for on a cash earnings basis, and Thats before you do any refinancing of that if that occurs.

Brad I'll, let you answer that correct yes.

All right.

Thank you.

All right.

Our next question comes from truckload broker with Goldman Sachs.

Hi, guys and congrats on the quarter.

A quick question on the supply chain delays can you help us understand like how the nature of these delays are changing or manifesting over the past couple of quarters.

It used to be more COVID-19 related now it seems to be lack of available.

Inventory at different stages can you just help us understand like how is it transformed over the past two to three quarters or is it the same thing last quarter on a quarter before.

In terms of materials.

Pretty much the same except that the AMA Kang variant was so widespread particularly in January .

But it definitely we heard about it from logistics warehouses of our distributors that they had absenteeism that delayed things.

The delivery drivers had COVID-19 and that delayed things.

So on that side of the material materials. It definitely was a little more pronounced we really felt it on the labor side.

As we'd be expecting.

Accrue six carpenters to show up at a house and two showed up because four of them were home with Covid.

It was so widespread.

But that problem seems to have dissipated quite a bit since January .

Longer term there are certainly still delays in materials and that havent hasn't solved itself other than the ones that I. Just described there are materials that are coming from overseas parts coming from overseas and.

Everything is just.

Supply chain disruptions.

We think they'll eventually get there, but I can't say that that's turned around dramatically over the last few quarters.

Understood I appreciate that but but generally you believe that there was a spurt in January and that has come off as we've entered we entered or exited February and potentially.

It's tough to forecast how things improve over the year, but this is a potential.

For improvement over the year.

That's fair.

I think Thats fair.

Okay now moving on to the debt, but I think it was briefly touched on the $200 million you intend on paying down this year.

Can you help us understand in the context of the lien priority, which plants you would look to target or have you thought about that at all.

Yes, we have to pay down the debt and lien priority order. So we would have to start with the 108 and work our way.

Up or down the priority ladder, depending on how much debt, we paid down so the $200 million referred to would have to be the one in eight clean notes understood perfect.

And.

Is there is there sort of from.

I guess moving on ought to be to be more precise on your longer term.

Priority pay down I think it's about $550 million, how should we think about in the context of your <unk>.

Desire to refi the capital structure is it a case of.

I'll stop there and kind of get your question on a follow up.

Well I think.

Regardless of refinance we're showing.

Our desire to get to make progress towards our mid 30% debt to cap goal.

So.

That's where we think we can be in a few years in terms of debt pay down we would certainly factor that into.

Any kind of refinance decisions and certainly with respect to call provisions on any debt.

Demand.

Got it that's what I was trying to get out is it. The case would you leave tranches outstanding to pay down or would you.

Consider refining refinancing everything and then utilizing call provisions to to get.

Get to the goal.

Okay.

We would we would take everything into account and make the best possible business.

Understood I appreciate the time guys.

Best of luck.

Yes.

And I'm not showing any further questions at this time I'd like to turn the call back over to <unk> for any closing remarks.

Great well, thank you very much.

To say, our hearts are pouring out for Ukraine, and all of the citizens there.

And we're going to continue to do our part.

And the housing industry here. Thank you so much and we look forward to giving you great results in the future quarters.

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