Hovnanian Enterprises(HOV) - 2023 Q1 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Total revenues for the first quarter were $515 million, reflecting a 9% decline compared to the previous year [102] - Adjusted gross margin was 21.8%, down from 22.4% year-over-year, impacted by a 470 basis point increase in incentives and concessions [70] - Adjusted pre-tax income was$ 19 million, compared to $36 million last year, with net income also decreasing from$ 25 million to $19 million [77] Business Line Data and Key Metrics Changes - The cancellation rate improved to 30% of gross contracts in the first quarter, down from 41% in the previous quarter [6] - The number of Quick Move-In (QMI) homes sold increased to about 60% of total sales, up from 40% historically, indicating a shift in consumer preference [110] - The company ended the quarter with 132 communities open for sale, with a lot count of 29,123 lots, a decrease from previous periods [11][12] Market Data and Key Metrics Changes - The number of existing homes for sale in the U.S. is currently 870,000, less than half of the historical average of over 2 million homes [8] - Monthly contracts per community showed a positive trend, increasing from 1.2 in November to 3.4 by February [78] - The company has a five-and-a-half-year supply of controlled land, with 73% controlled in fiscal 2021 or earlier [15] Company Strategy and Development Direction - The company is focusing on increasing inventory turnover and mitigating land risk by controlling lots primarily through option contracts [13] - A strategy to enhance affordability includes offering various customer incentives, such as below-market mortgage rates and discounts on options [9] - The management team is optimistic about the current sales environment and expects better financial performance for the remainder of the year [21][36] Management Comments on Operating Environment and Future Outlook - Management noted that despite rising mortgage rates, consumer demand appears to be stabilizing, with buyers adjusting their expectations [22][27] - The company plans to continue monitoring mortgage rate movements and the actions of the Federal Reserve, while maintaining a focus on long-term housing market fundamentals [36] - Financial guidance for the second quarter anticipates total revenues between$ 525 million and $625 million, with adjusted gross margins of 21% to 22.5% [32] Other Important Information - The company repurchased approximately 7% of its outstanding shares for$ 17 million, indicating confidence in its stock valuation [14][28] - The SG&A ratio is expected to increase due to higher wages and advertising spend, with an anticipated range of 13% to 14% of total revenue [94] - The company has retired $394 million of debt since fiscal 2019 and extended its revolving credit facility maturity to June 30, 2024 [16] Q&A Session Summary Question: Inquiry about buyer enthusiasm and incentives - Management noted that fewer existing homes available for sale and adjusted buyer expectations have contributed to increased sales momentum, despite rising rates [27] Question: Clarification on stock buyback - The company confirmed a$ 17 million stock buyback over the last two quarters, with plans to monitor market conditions for potential future repurchases [28][30] Question: Land market pricing adjustments - Management indicated that land sellers are becoming more realistic about pricing, leading to increased transactions as the market improves [43][44] Question: Demand for build-to-order products - Demand for both build-to-order and Quick Move-In homes has increased, with a noted shift towards more QMI sales [46][47] Question: Pricing power differences between product types - Management highlighted that build-to-order products currently have better margins compared to Quick Move-In homes, which tend to have more incentives [58]