Good morning and thank you for joining us today on the Hovnanian Enterprises Fiscal 2018 Second Quarter Earnings Conference Call. An archive of this webcast will be available after the completion of the call and run for 12 months. This conference is being recorded for a rebroadcast and all participants are currently in a listen-only mode. [Operator Instructions] Management will make some opening remarks about the second quarter results, and then open it up for questions. The company will also be webcasting a slide presentation along with the opening comments from management. The slides are available on the Investors Page of the company's website at www.khov.com. Those listeners who would like to follow along should log on to the Web site at this time. Before we begin, I would like to turn the call over to Jeff O'Keefe, Vice President, Investor Relations. Jeff, please go ahead.

Thank you, Kevin, and thank you all for participating in this morning's call to review the results for our second quarter, which ended April 30, 2018. All statements in this conference call that are not historical facts should be considered as forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of the company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Such forward-looking statements include, but are not limited to, statements related to the company's goals and expectations with respect to its financial results for future financial periods. Although, we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, we can give no assurance that such plans, intentions or expectations will be achieved. By their nature, forward-looking statements speak only as of the date they are made, are not guarantees of future performance or results and are subject to risks, uncertainties and assumptions that are difficult to predict or quantify. Therefore, actual results could differ materially and adversely from those forward-looking statements as a result of a variety of factors. Such risks, uncertainties and others are described in detail in the sections, entitled Risk Factors and Management's Discussion and Analysis, particularly the portion of MD&A entitled Safe Harbor statement in our annual report on Form 10-K for the fiscal year ended October 31, 2017, and subsequent filings with the Securities and Exchange Commission. Except as otherwise required by applicable security laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason. Joining me today from the company are Ara Hovnanian, Chairman, President and CEO; Larry Sorsby, Executive Vice President and CFO; Brad O'Connor, Vice President, Chief Accounting Officer and Controller; and David Bachstetter, Vice President, Finance and Treasurer. I'll now turn the call over to Ara. Ara, go ahead.

Thanks Jeff. As is typical, I'm going to review the operating results for the second quarter. Larry will follow me with more detail on our progress in land acquisitions and discuss a few other items including our liquidity position and some multi-year targets on key metrics. At the risk of sounding like a broken record, I want to take a moment to remind you about the impact from our debt that matured from October 15 through May 16 because the high yield markets rapidly closed to all Triple C issuers back then we had to use $320 million of liquidity to retire this debt instead of investing in land for our future communities which had previously been our plan. The land we should have been controlling at that point in time would have resulted in communities that would be opening and delivering today. After working our way through those debt maturities we began to re-enter the land market again in the latter part of fiscal '16, but unfortunately it's not something we can just kick start right away. It takes time. We are however making progress on growing our land supply. The second quarter of 2018 was the second consecutive quarter that we had year-over-year increases in the consolidated lots that we control. However, because there is a lag effect between controlling land and opening a community for sale, our second quarter financial performance was still hampered by our lower community count, which caused the number of deliveries and our year-over-year revenues to decline. Turning to Slide 4, here you can see that our total revenues decreased during the second quarter of 2018 from $586 million last year. The improved sales per community slightly offset the drop in our community count. Now turning to Slide 5, in the top left-hand…

Thanks Ara. I'll start by updating you on our efforts to control more land which foreshadows an increase in our community count. The first step is increasing our land control position year-over-year which we accomplished during both the first and second quarters of 2018. After we have the land under control except for cases -- for the cases where we control finished lots, we have to develop the raw land and build an open model homes for sale. So there's a normal lag time between contracting for a parcel land and opening a community for sale. We continue to believe the sustainable community count grow should begin to occur in the first half of 2019. Our land acquisition teams have been very busy throughout the country as we continue to work hard to replenish and grow our land supply. During the second quarter we spent $126 million on land and land development which is higher than the $100 million that we spent during the same quarter one year ago. On Slide 10, you can see that for the first half of fiscal 2018 we added 3637 newly controlled lots and delivered 2429 homes and lots resulting in an increase of 1208 controlled lots, further demonstrating the significance of our growing land position. Year-to-date our newly controlled lots equaled 150% of our year-to-date home deliveries. Throughout fiscal 2018, we've made good progress in rebuilding our land supply. We remain disciplined to our underwriting standards, underwriting assumptions use current home sales price, current sales pace, current cost. Historically during periods of a recovering housing market home sale prices increased more than cost. While we continue to believe that they occur further this cycle our budgets don't assume that benefit. There is a significant lag from the initial contract to the time when…

Thanks Larry. I just want to point out that these multi-year key metric targets are non-aggressive assumptions. The revenue growth from the trailing 12 months to the target is about 20% compared to about 50% growth in revenue from 13 to 16. Likewise, the gross margin percentage in total SG&A ratio targets or levels that we have hit in recent years. Furthermore, the inventory churn levels are lower than levels that we've been hitting. We're going to work hard to beat these targets, but we believe that these targets are achievable over the next several years. There's no question this has been a long hard road particularly due to our higher leverage position. We've lagged our peers in recovering from the great housing recession. However, the housing markets are still recovering and we believe our performance can substantially improve in the coming years including a solidly profitable fourth quarter this year. The combination of improving sales per community with more communities, normal gross margin and normal SG&A levels can be very powerful. We've worked hard to minimize any dilution for our shareholders. We believe everybody's patience will be rewarded in the near future. That concludes our formal remarks and we'd be happy to open it up for questions.

The company will now open for questions and answers. [Operator Instructions] Our first question comes from Megan McGrath with MKM Partners.

Good morning. Maybe one long- term question, one short- term question. Thanks for the long-term guidance, in terms of the margin expectations there, you made clear that you're not assuming any difference in market deterioration. So I assume that's also around pricing and input cost. So can you talk a little bit about that, it looks like roughly 200 basis point anticipated improvement in margin. How much of that is just volume leverage and what else is driving that?

Sure. I'll take that Megan. Well, first of all, just a reminder, 20% margin was the level we hit in both 13 and 14. Part of it is the fact that we are comfortable with the market pricing that's been going on. Part of it is the mix in our new land acquisitions. Our older acquisitions were affected by the increasing construction costs. As we purchased new properties, we factored in the then current construction costs and those would generally average about a 20% gross margin. Now, in theory construction costs could increase that would erode it, however, we feel like our home price increases should easily offset whatever construction cost increases we see in the future. That wasn't the case for a few years. Clearly from the bottom of the marketplace when we saw as an industry a big increase in activity there weren't enough vendors, they weren't able to handle those increases in volume. So prices really rose rapidly. We think the big price in cost increases are behind us and we think now it should be more in line with what we've seen historically. So we're comfortable looking forward and setting 20% as a target. And PS, just as a reminder, and this is far -- definitely not in our budgets, but during the peaks of the marketplace and happened in the last peak we had gross margins of 25% to 26%. So we certainly think a 20% is a reasonable target.

Okay. Thanks. That's helpful. And then, a little follow-up on the quarter in terms of the absorption pace. You had a pretty meaningful difference between the absorption pace on a fully consolidated basis and including the JV. So, I just wanted to get a little bit of color there, was that a regional difference, is there some thing specific happening with the JVs that is pushing that absorption pace a little higher. What about a little bit more color there?

I think Megan that's just a mix issue. We certainly don't put particular product types or particular geographies in JVs one way or the other, it's just a mix of where they are geographically and product type wise that led to that. I don't think there's anything you can -- any conclusion you can draw from it.

Okay. Thanks.

Our next question comes from Thomas Maguire with Zelman Associates.

Hey guys, nice job on incremental improvement in the quarter. On the land side, good to see a lot pipeline ramping and totally understand the eventual flow to the community count. But just wanted to square that with kind of a commitment to maintaining underwriting and recent increases in land costs. Have you guys found it challenging at all kind of to replenish that pipeline and just what you're seeing in terms of competition on the land side. And more broadly how you think about the ability to continue ramping your spend going forward?

It's a good question Tom. We have been staying strong to our discipline and the key underwriting metric for us is IRR. We choir to an unlevered 20% IRR. And frankly that discipline is part of the reason why we've been ending up with excess liquidity over the last many quarters. But generally speaking, while the market is competitive it's always competitive and we definitely have been seeing opportunities to replenish land at prices that absolutely make sense at the current market. So I think we demonstrated that over the last few quarters, certainly year-to-date when we required more than we've delivered. So we hope to continue to make progress that way and at this point we don't see obstacles in that happening.

Got it. Really good to hear. And then, just two quick ones on the corporate cost side. We saw sequential step down in the absolute level of spend this quarter. Was there anything in there with the litigation activity during the quarter or last quarter that we should expect to drop off moving forward with that behind us? And then, also I know there's a proposed transaction with the headquarters in the back half of last year, any thoughts on how that kind of flowing through, is it affecting the cost structure this year anything to keep in mind going forward on savings?

In the first quarter there were additional costs associated with preparing for the GSO transaction. So the first quarter was a higher run rate than to be expected. I think the second quarter is more, we'd expect to go going forward. Also in the first quarter as you mentioned we with the corporate building change we had rent on a sale leaseback of the building we were there in the first quarter that was more expensive than the go forward run rate. So those two things had the first quarter higher than what we'd expect going forward the second quarter is more typical.

Got it. That's really helpful. Have a great day guys.

Thank you.

Our next question comes from Arjun Chandar with JPMorgan.

Good morning guys. Just following up the community count cadence, if we look at the second half of '18 because you mentioned in the first half of '19 is when you expect to return to sustainable growth. What kind of expectations should we have around what that the trough community count could be -- could look like in the back half of '18? And what I'm kind of getting at there, do we expect a similar amount of decline in the third quarter to what we saw in the second quarter. Or should we expect that decline to taper a little bit as we head into the end of the year?

Community count is just a difficult number to give you a precise projections on because you can -- community pace continues to improve, we could sell-through communities faster than we would otherwise have done which is actually a good thing, but it would result in temporarily having less communities. You can have delays and opening and so on. So we're just not prepared to give you guidance on what's going to happen other than we expect to begin to see sequential improvements in the first half of '19 and continue thereafter. And then, you see for yourself what we're saying is possible over the next few years with the key metric targets in terms of the revenue growth. Obviously, you can't get to those kinds of revenue growth without having significant community count increases. So we're confident that we'll be able to achieve that.

Got you. That's great. And then, on gross margin again very good improvement year-over-year, as has been alluded to in previous questions and you mentioned the long-term targets as well getting back up to 20% gross margins. With some of the recent rhetoric around lumber inflation and rising materials costs and the potential pressure on pricing or as we move forward in the event that rates continue. Do you feel like there could be a little bit more of a longer time frame to realizing that that level of growth in gross margins and year-over-year increases on [indiscernible] sustainable into the back half of the year given your current base of inventory and factored toward the second half of the year?

I would say, one of the things you got to keep in mind is, some of the reasons that our margins are below normalized now, there was a time period over the prior two years give or take that labor material cost outstripped home price increases more recently and therefore land that we acquired prior to that. Obviously has to now absorb cost increases that are more than home price increases and results in lower margins. More recently, we've been underwriting our land deals at higher then current construction cost both on the labor and material front and on average that kind of equates for us even though we underwrite to an unleveraged IRR, and also happens to coincidentally average for us roughly a 20% gross margin. So a lot of the land that we have kind of in our backlog yet to be open, yet to be delivered we think is that the 20% number or better. And it's just kind of naturally migrate back towards that 20% level. Now, yes, going forward from today, home prices outstrip which is typical in a recovery period. Construction cost increases. Yes, we can get to that 20% level even faster and maybe even further than 20% as Ara talked about in his response. If on the other hand lumber prices and other construction cost outstrip our ability to raise prices. It makes it harder to get back to that 20% gross margin. So I can't predict the future. I don't think you can either. So our assumptions when we get there is just no change in current market conditions. But what we're really saying is that we believe that future home prices will at least equal any future construction cost increases.

Okay. I'll just add that the big material cost increase that we had was in lumber and that was driven by a sudden tariff on imports and that was very significant and definitely a while back quickly drove up lumber prices. Lumber prices have been moving a little more gradually recently and more in line with normal expectations. So we're feeling fairly comfortable that the numbers we have in our budgets are reasonable and any home -- any cost increases material or labor should be at least offset by home price increases. Remember that construction costs are somewhere from 30% to 50% of the home price. So if construction costs go up 3% all you need is a 1.5% increase in home prices to offset that. So we think that's reasonable and in the cards. And if we go back to many cycles in our 60-year history, typically at this stage in the cycle, margins are less under pressure and more likely to go in the other direction. I already mentioned what happened in the last couple of up cycles. We saw gross margins much higher than 20%. And there were construction cost increases that we had to bear at the same time.

Thank you. And then, finally, with regards to your balance sheet and future debt reduction strategies, what are your current expectations around the timeframe to focus on growth and continuing to build that lot count versus now that you have a little bit more of an extended runway. When would you potentially be looking at being more aggressive in terms of debt reduction with your current balance sheet and how does that play in when thinking about whether or not to reapproach the holders of the [10's of 22] [ph] about a consent to increase flexibility to repurchase unsecured debt in the future.

I'll take a shot at that one. I think that we need to return to substantial profitability kind of implied by our key metric targets so that we can generate profitability that would allow us to actually begin to self repair our balance sheet. We think that's a few years out. But at that point in time, I think it'd be appropriate to contemplate that that we would focus more on repairing the balance sheet rather than future growth. Yes, it's a little bit different question with respect to the 10's. Yes, I don't -- we don't have any current plans to go back to the 10's again and ask for relief on that covenant that restricts us to a $50 million basket of buyback any of our unsecured debt. I think it's more likely that as our performance continues to improve we're hopeful that those bonds will trade along with the 10.5 bonds will trade at more favorable yields and that will have a chance to refinance them that become available to refinance the summer of next year on the 10's and a year later on the 10.5. And we think that would be something that they were trading at favorable enough levels that's something we would consider doing.

Just from the broader level, we just want to comment on where we think we are in the cycle. If you look at single family home production and you compare it to averages over the last several decades. And by the way in spite of the big boom in '04 and '05, the decade average was about the same as the previous few decades incredibly close actually. We're well underneath that typical decade averages. Forget about the peaks. I'm not even talking about that. I'm talking about a full decade averages. So we think that we can remain aggressive right now. And just purely based on demographics and production that we're not under any immediate threat of market correction. I know there are some that say gee, it's been a long period but the prior growth cycle prior to this downturn was about a 15-year growth cycle and it ended with a years -- many years way above the averages for single family homes, we're way below the average. So we're comfortable maintaining our current strategy growing our land pipeline and with the growth in revenues self repairing the balance sheet. We'll play that out as the future unfolds. But at the moment we think we've got a good plan for self repairing the balance sheet over the next few years.

Great. Thank you for the answers. Appreciate it.

[Operator Instructions] Our next question comes from Sam McGovern with Credit Suisse.

Hi, guys. With regard to the reinvestment in the land strategy, can you talk about the specific markets or price points that you're targeting? Would there be any change or increase in your [indiscernible] strategy?

I'd say, first of all, we're really focused on virtually every market and a variety of price points and product types. Certainly one of our niches has been in the active adult arena with our Four Seasons brand. I'd say in general, we're working hard to increase that. It's an area that not every public builder is particularly proficient at. So we think it gives us a little bit of a competitive edge. We've been successful in the active adults throughout the country and we are planning to expand and are in fact expanding that footprint. The other end of it is very, very affordable basic entry level home. We've been doing entry level housing for a long part of our history. The new trend is being going extremely affordable and going furthest out to get to the lower rungs of household incomes. We have been doing that in Southern California and Northern California and Arizona recently with a product line that we call the Aspire. We've had good success with it and we're now planning to expand that part of the product line as well in a variety of areas. But the last thing, I'll mention is just a generic trend we're seeing and that is in non-age restricted communities. We're definitely seeing demand for single storey residences and master down residences. So in all of our normal acquisitions, we're striving to make certain that we have product in our lineup that some of the older baby boom buyers can gravitate to if they don't want an age restricted community but want a home that's more conducive to their current family or household situation than their two-storey four bedroom up center hall colonial. So we're working hard in that area as well.

Okay. And then, I think you also mentioned that part of the financing of this would be through an increase in land banking. Can you talk about current conditions for land banking; I believe there's been some new entrants there. Can you talk about any changes you guys are finding in terms of terms now versus a few years ago?

Yes. I think there are new entrants in land banking and some of the old entrants are having to respond to that competition in general as I mentioned in my prepared remarks. We're seeing more favorable terms on the land banking side of the equation. We just haven't had a need to use it because we had excess liquidity going forward especially as we find larger parcels. I think it's something that we're open to using again and planning to use again for our larger parcels. And the rates have come down a couple of percent give or take and some of the other terms have been somewhat more favorable as well. So it's moving in our direction.

Great. Thank you guys.

And I'm not showing any further questions at this time. I'd like to turn the call back over to Ara.

Great. Thank you very much. We'll continue to keep you updated. And again, we look forward to finishing the year with a strong fourth quarter. Thank you very much.