HOVNANIAN ENTERPRISES INC Q1 FY2024 earnings call

• Total revenues were toward the upper end of the guidance range. - Adjusted gross margin was 21.8% for the quarter, slightly lower than the range due to fluctuating mortgage rate buy down costs but no margin compression expected for Q2. - Contracts per community increased 48% year-over-year, with 9.6 contracts per community in Q1, 12% higher than the 1997-2002 average. - Website visits and internet leads were up significantly in January 2024. - QMI supply has increased, with QMI per community going from 1.4 at the end of Q2 2021 to 6.3 at the end of Q1 2024. - Net home prices were raised in 37% of communities in Q1 2024, with more increases expected in February and spring season.

Total revenues increased 15% to $594 million. Gross margin held steady year-over-year at 21.8%. EBITDA increased 30% to $65 million. Pretax profit increased 80% to $33 million. Contracts per community for the first quarter increased 48% year-over-year. QMI sales in Q1 2024 were about 63% of sales versus 40% historically. Total website visits in January 2024 were up more than 100,000 year-over-year, and internet leads per community were up 13% year-over-year.

• Total revenues for Q2 2024 expected to be between $675 million and $775 million. - Adjusted gross margin expected to be in the range of 21.5% to 23%. - SG&A as a percent of total revenue expected to be between 11% and 12%. - Adjusted EBITDA expected to be between $80 million and $90 million. - Adjusted pretax income for Q2 2024 expected to be between $45 million and $55 million. - Guidance excludes impact from phantom stock expense related to stock price movement from the end of Q1 2024.

• Fluctuating mortgage rates affecting margin projections. - Supply chain issues such as transformer shortages and weather-related delays (e.g., California rain) impacting land development and community openings. - Potential impact of the regional banking crisis on third-party developers affecting community count ramp. - Uncertainty in predicting community count due to communities selling out faster than expected.

Q: Could you remind us what percent of the business QMIs are and the margin differential?

A: QMI business for Q1 2024 was 63% of sales, historically around 40%. Not commenting on margin differential between QMI and to-be-built.

Q: What are the bottlenecks preventing cycle times from returning to pre-pandemic levels?

A: Early COVID challenges were material and labor, now labor is the main bottleneck; also, apartment construction demand affected labor availability.

Q: How has reliance on third-party developers impacted community count ramp and regional banking crisis?

A: Land development has challenges for everyone including third-party developers, like transformer issues. Regional banking crisis impact has settled but land development timing remains challenging.

Q: Which debt tranche was paid down?

A: The 10% senior secured 1.75 notes due November 2025, $114 million of book value was paid down.

Q: Margin outlook regarding incentives?

A: Balance between maintaining sales pace and tweaking pricing/concessions to improve margin without shutting off sales pace.

Q: About phantom stock expense?

A: Phantom stock expense is adjusted based on stock price on last day of quarter. Most recent grant has exposure over next few years, older grants are expiring.