HOVNANIAN ENTERPRISES INC Q1 FY2025 earnings call

• Revenues were $674 million, near low end of guidance due to fewer deliveries and lower sales in December/January despite strong November.
• Adjusted gross margin 18.3% was near high end of guidance. SG&A rate 12.9% was better than low end of guidance.
• Income from unconsolidated joint ventures $9M was below guidance due to delayed profitable deliveries.
• Contracts increased 9% year over year, but monthly growth was volatile (November up 55%, December up 3%, January down 10%).
• 74% of homebuyers used mortgage rate buy downs, with 9.3 QMIs per community and QMI sales at 69% of total sales.
• Land-light deliveries and QMI deliveries typically have lower gross margins, but ROI discussion shows potential with focus on growth and inventory turnover.
• Hypothetical scenarios show land-light strategy could lead to increased inventory turns and slightly higher ROI even with lower gross margins.

Revenues for the first quarter were $674 million, near the low end of guidance due to fifty fewer wholly-owned deliveries than expected, with sales in December and January lower than anticipated despite November being strong. Adjusted gross margin was 18.3%, near the high end of guidance. SG&A rate was 12.9%, better than the low end of guidance. Income from unconsolidated joint ventures was $9 million, below guidance due to delayed profitable deliveries. Adjusted EBITDA was $72 million, above the high end of guidance. Adjusted pretax income was $41 million, above the high end of guidance. Contracts for the first quarter, including unconsolidated joint ventures, increased 9% year over year, but monthly growth was volatile: November up 55%, December up 3%, January down 10%. Contracts per community were 9.6 in both first quarter 2025 and last year, but monthly comparisons showed variability. 74% of homebuyers used mortgage rate buy downs in the first quarter, with 9.3 QMIs per community at quarter end, and QMI sales were 69% of total sales.

Second quarter fiscal 2025 guidance: Total revenues expected between $675 million and $775 million. Adjusted gross margin expected 17.5% to 18.5%. SG&A as percent of total revenues expected 11% to 12%. Adjusted pretax income expected $20 million to $30 million. Income from unconsolidated joint ventures expected $5 million to $10 million. Adjusted EBITDA expected $50 million to $60 million. Guidance assumes no adverse changes in market conditions, continued extended construction cycle times, continued reliance on QMI sales, and continued use of mortgage rate buy downs and other incentives.

• Volatility in sales due to factors like world views, inflation, interest rates, consumer sentiment.
• Delays in deliveries due to utility hookups, permitting, etc.
• Potential adverse changes in market conditions, mortgage rates, supply chain issues, material costs, cancellation rates.
• Impact of hurricanes, fires, and other natural disasters on labor pool and construction.

Q: What's the attribution for recent choppiness in demand despite rates moving down?

A: It's the 'flavor of the month' concern with various factors like tariffs, interest rates, world war possibilities causing month-to-month variation.

Q: Thoughts on DC market, especially impact of federal government layoffs?

A: Delaware market strong (retiree, active adult, second home), Virginia market tech/defense-oriented strong, Maryland/Baltimore area could be affected by government layoffs, website traffic solid but foot traffic a bit lower than expected.

Q: Level of incentives compared to past?

A: In first quarter, incentives were 9.7% of average sales price, up 160 basis points from year ago and 670 basis points from 2022.

Q: What does incentive level translate to in terms of interest rates offered?

A: Varies by market/community, primarily geared toward QMIs, with rates like 4.9% for older QMIs and 5.75% for others potentially offered.

Q: How long expect adjusted gross margins to sit at 18.5%?

A: Volatile, crystal ball foggy due to month-to-month sales volatility, but long-term fundamentals bullish.

Q: Geographic color on price increases?

A: Stronger markets like Mid-Atlantic, Delaware, Southeast, Gulfville, Carolinas see more price increases than western markets.

Q: Impact of fires out west on volume/gross margin?

A: Limited pool of labor drawn to fire recovery, hurting new home construction temporarily, but eventually stabilizes.