Release Date: May 22, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Hovnanian Enterprises Inc (HOVNP.PFD, Financial) reported revenues of $708 million, which was within their guidance range.
- The adjusted gross margin for the quarter was 22.6%, at the upper end of their guidance range.
- Adjusted EBITDA was $102 million, significantly above the high end of their guidance range.
- The company achieved a 51% increase in adjusted pretax profit to $70 million year-over-year.
- Hovnanian Enterprises Inc (HOVNP.PFD) has a strong focus on cost reduction, with a 6% year-over-year decrease in average base construction costs per square foot.
Negative Points
- The company faces challenges with fluctuating mortgage rates, which makes forecasting difficult.
- There are delays in utility hookups affecting the community count growth.
- A significant percentage of homebuyers (73%) are using mortgage rate buydowns, indicating affordability issues.
- The company’s stock is trading at a significant discount compared to peers, despite strong financial performance.
- Hovnanian Enterprises Inc (HOVNP.PFD) has a higher net debt to capital ratio (55%) compared to some peers, which may affect investor perception.
Q & A Highlights
Q: Could you maybe talk a little bit about how May is doing so far in terms of absorptions, month to date compared to April?
A: Ara Hovnanian, Chairman, President, and CEO: It's a bit early to give much color on May as we only have two full weeks so far, one of which included Mother's Day. However, our website traffic remains outstanding, which is a positive indicator for future sales.
Q: Is there an overarching theme on the 40% of communities where you did not raise pricing? Are they in similar price points or markets?
A: Ara Hovnanian, Chairman, President, and CEO: The trend is fairly uniform in terms of price increases. The lowest price homes, or Aspire homes, face more challenges with qualification and tend to have more mortgage rate buydowns, affecting net pricing.
Q: What would drive the lower range of your margin guidance, given that you are halfway into the quarter?
A: Ara Hovnanian, Chairman, President, and CEO: Given the volatility in mortgage rates, we reserve costs for closing and qualification challenges, making it difficult to predict until the end of the quarter. We provide a wider spread in our guidance to ensure we can meet or beat it consistently.
Q: Can you give your thoughts on share buybacks going forward?
A: Brad O'Connor, CFO: We felt it was a good time to buy back shares when the stock price dropped to around $140. We will continue to monitor for opportunistic times to take shares out of the market, with approximately $10 million to $15 million remaining on an approval for buybacks.
Q: How are you managing the impact of fluctuating mortgage rates on your business?
A: Ara Hovnanian, Chairman, President, and CEO: We are assuming a higher for longer scenario for our strategies. If mortgage rates go up meaningfully, our budgets may be aggressive. If they come down, our budgets might be too conservative. We also offer mortgage rate buydowns to our customers to mitigate the impact.
Q: What are your expectations for community count growth?
A: Brad O'Connor, CFO: We expect our total community count to increase by about 5% to 10% by the end of the third quarter of '24 and then grow at least another 5% by the end of fiscal '24. We also expect community count to continue to grow in fiscal '25.
Q: How are you addressing construction cost challenges?
A: Ara Hovnanian, Chairman, President, and CEO: We have a multi-year effort to minimize and unify our SKUs across the country, allowing us to negotiate better with suppliers and trades. Our average base construction cost per square foot in the second quarter of '24 was down 6% year over year.
Q: What is your outlook on the current housing market environment?
A: Ara Hovnanian, Chairman, President, and CEO: We are in a balanced and sustainable market with higher rates keeping resale supply limited and demand in check. The market is not too hot to challenge construction costs and not too cold to affect demand significantly.
Q: How are you leveraging your balance sheet improvements?
A: Brad O'Connor, CFO: We have reduced our debt by $741 million since the beginning of fiscal '20 and our net debt to net cap is now 55%. We aim to achieve a mid-30% level and will continue to use our improved balance sheet to accelerate growth and pay down debt.
Q: What are your plans for future profitability and growth?
A: Ara Hovnanian, Chairman, President, and CEO: We are focused on growing our top and bottom lines for the long term. Our growth in Lots Controlled will lead to community count growth, which will drive revenue growth, greater SG&A efficiency, and higher profitability.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
