Hovnanian FY 2Q17 Earnings Call Notes

Ara Hovnanian – Chairman, President and Chief Executive Officer

Construction costs going up but labor costs moderated. Materials prices going up especially lumber

“Construction costs are the area that continued to negatively impact our gross margin. On the positive side and totally the rate at which labor prices have increased has abated somewhat in the last 6 months in many markets. The supply of labor definitely remains tight and there is still some cost pressure and not quite as great. However, we are now beginning to feel the impact of rising material costs. The biggest impact is coming from lumber – framing lumber and OSB, which I am sure you have read about and unfortunately happens to be one of the raw materials that has the biggest impact on our costs.”

Lumber prices affected when trade agreement with Canada expired

“you can see the spike in January of ‘17 when the previous trade agreement with Canada expired. This put upward pressure on lumber prices as the potential impact from tariffs was assumed. To put these increases into perspective, over the past year, the average costs for lumber increased roughly $2,000 for a 2,500 square foot home”

Hovnanian FY 1Q17 Earnings Call Notes

Ara K. Hovnanian – Chairman of the Board, President & CEO

Land and labor are headwinds to gross margin

” Three factors continue to be a headwind for more meaningful gross margin improvements. Rising labor costs, increased use of incentives in certain communities and higher land costs”

Definitely feeling strengthening

“Sure. Just overall the macro perspective, we definitely are feeling a little strengthening in the marketplace and I think our sales per community, our contracts per community are certainly an indication of that. If I look around the country, I’d say we’re feeling some strengthening, certainly in Northern California in the Sacramento area that has been strong. We’re continuing to see a strong Texas market, the Arizona market in Bromley in Phoenix that has been strengthening as well. On the other side, we’re seeing a little more challenge in the Chicago market, which has historically done very well for us and our southeast coastal markets have had more of a headwind in terms of incentives that would include the Hilton, primarily the Hilton Head in Savannah markets in south.”

Hovnanian FY 1Q16 Earnings Call Notes

Hovnanian Enterprises’ (HOV) CEO Ara Hovnanian on Q1 2016 Results

Exiting bay area because of frothy market conditions

“Furthermore, given the frothy market conditions in the San Francisco Bay area, which are resulting in lofty, almost speculative land prices and given that we are a relatively small player in that market and we prefer to be a larger player in some of our other markets, we’ve decided to focus our efforts in Northern California to the Sacramento market area where we already have a larger presence. We’ll wind down our operations in the Bay area in Northern California by selling and delivering the homes in our existing communities.”

Planned on accessing high yield markets for refinancing, but markets have become challenging

“In September of 2015 we shared various illustrative models and these models showed that we could grow our revenue significantly through 2018 and then level off our revenues at that point and shift our focus to harvesting cash and repairing our balance sheet. The scenarios assumed we refinanced our near term debt maturities, which to date have not occurred. Unfortunately, the high yield market changed and continues to be extremely challenging. Therefore, we utilized land banking and various other liquidity levers that we’ve described during prior analyst calls and we paid off $61 million of our notes that matured in October of 2015 and $173 million of notes that matured in January of 2016.”

Bay area so hot that it’s causing building delays

“Up in Northern California as I’ve mentioned the Bay area is just white hot, but that’s not necessarily a good thing in two ways. One, the new land market got very frothy. Number two, it’s so hot that it’s really difficult to build there right now. There have been delays, expanded construction cycles, a lot of cost pressures.”

Hovnanian FY 2Q15 Earnings Call Notes

Gross margin pressure from spec homes

“However, we’ve taken a step back in 2015. On the right-hand side of the slide, you can see that we reported a 16.1% gross margin for the second quarter, 410 basis points less than last year’s second quarter. As we discussed last quarter, we expected the second quarter gross margin to be weak because of offering more incentives and concessions on started, unsold homes, commonly referred to as spec homes.”

We’re not the only ones who felt pressure

“We’re not the only homebuilder that recently felt pressure on its gross margin. On slide five, we show all nine of the public builders that reported March quarter end results, all of them had year-over-year declines in gross margin. Five of them had margin declines in excess of 200 basis points and one was similar to our decline. ”

We were too aggressive with specs

“As we explained during our analyst call last quarter, we believe we were too aggressive in our spec starts, especially in certain geographies and communities. We took action to reduce our specs with special incentives and concessions. Unfortunately, as you would expect, that took a toll on our margins. However, we made progress on our goal of reduction.”

Unmothballing communities

“Assuming current market conditions remain steady, we continue to anticipate un-mothballing approximately 900 lots in fiscal 2015 in two locations, one in Natomas, California, and the other along the Hudson River Waterfront in New Jersey. As the housing market improves, additional communities will be un-mothballed in future periods.”

A little disappointed with demand trends

” we really thought kind of leading into January, sales all the way through January, monthly year-over-year net contracts per community had shown a positive trend for four or five months in a row, and that gave us great optimism that the spring selling season would continue that kind of a pattern. So we were disappointed when February showed a decline. I think we talked about that a little bit during last quarter’s conference call. March, that decline didn’t surprise us quite as much, but our expectations, being optimists, probably were still that even March would show at least even if not a slight improvement year-over-year. So, I don’t know if that is responsive enough to your question but that’s kind of my macro view of it.”

April and May are better

“the good news is unlike last quarter where we began with a negative month, this time we ended the quarter in April positively and we began with a very strong May.

So, we’re optimistic that this is more of a trend in the positive direction. However, as you can obviously see, for us, we’ve seen the market being choppy overall in our markets. We’re hoping some of that choppiness ends, but it’s hard to tell. We didn’t expect it in February and March to the extent that we have the downward comparisons, but we’re pleased that April and May are up strongly’

Hasn’t been much change in competitiveness of land deals

“I can’t say there’s been any great change in competitiveness on the land deals. As you could see, we really have to do our due diligence, you saw on one of the slides many of our initial options don’t withstand the due diligence process. You have to be extremely careful in this environment.

And we’re remaining true to our discipline and trying to be very analytical in our new acquisitions, which are critical. But on the whole, I’d say the market is balanced. We’re finding opportunities as we need them. 2016 is basically all purchased or at least optioned and controlled and in contract.”

DC and Northeast haven’t recovered as quickly as other markets have

“The D.C. market, overall, has been sluggish compared to where we’d expect it to be at this time in the cycle. Clearly, sequestering is taking its toll and employment has not been as vigorous as it used to be. So that is not giving us the punch that we normally have. In the Northeast, that market has just not recovered as vigorously as other markets have.’

Hovnanian Enterprises 2Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

Sales pace has been choppy this year

“At the beginning of this year, we expected to continue to see improvements in sales pace and overall housing activity, similar to what we saw in 2013. The housing market has certainly improved dramatically, compared to where it was in the trough of the market in 2009, but this year sales pace has been choppy. ”

Current level of household formation not consistent with demographics

” The current low level of housing formations is not consistent with the population growth or the demographics of our country. Given the low levels of total U.S. housing starts, we are convinced that we are in the early stages of the housing industry recovery, and as such, we are laser focused on identifying new land parcels and growing our community count and our top line.”

Millenials will buy home, boomers will trade down

“millennials are going to the point where they too will become homeowners, and there are a lot of them. At the same time, the baby boomers are looking for that move down home, since they are becoming empty nesters with different needs.”

A lot more activity going on in the 65+ group still

“I would still say that when you look at demographics, and you compare the growth in the 25 to 35 year olds versus the growth in the 65 or 55 plus, its definitely more action in the 65 plus. So while we agree there should be a focus on urban redevelopment, we are also keeping the other eye on how to meet the needs of the aging population.”

Third party mortgage originators have been hungry for deals

“the third party mortgage companies are hungry for deals, and they have been very competitive on rates, and that’s causing some competition. But if our mortgage company, for whatever reason, is unable to approve a prospect, we immediately try to send it to a third party lender who may be — will do a high or lower FICO score than our mortgage company or do something in order to attempt to qualify that customer.”