Good morning and thank you for joining us today for Hovnanian Enterprises Fiscal 2020 Second Quarter Earnings Conference Call. An archive of the webcast will be available after the completion of the call and run for 12 months. This conference is being recorded for rebroadcast and all participants are currently in a listen-only mode. Management will make some opening remarks about the second quarter results and then open the line for questions. The Company will also be webcasting a slide presentation along with the opening comments from management. The slides are available on the Investor's page of the Company's website at www.khov.com. Those listeners who would like to follow along should now log on to the website. I would like to turn the call over to Jeff O'Keefe, Vice President, Investor Relations. Jeff, please go ahead.

Thank you, Joelle, and thank you all for participating in this morning’s conference call to review the results for our second quarter, which ended April 30, 2020. 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 other factors are described in detail in the sections entitled Risk Factors in 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, 2019, and subsequent filings with the Securities and Exchange Commission. Except as otherwise required by applicable securities 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 are Ara Hovnanian, Chairman, President and CEO; Larry Sorsby, Executive Vice President and CFO; and Brad O'Connor, Senior Vice President, Chief Accounting Officer and Treasurer. I'll now turn the call over to Ara. Ara, please go ahead.

Thanks, Jeff. I hope that all of you and your families remain safe and healthy during these challenging times. To say the least, the COVID-19 events of the past several months have been unprecedented, and the impact the virus will have on the economy and the industry over the long-term is difficult to predict. I am going to address the current market environment, including the steps we have taken to navigate these unprecedented times and then review our second quarter results. As usual, Larry Sorsby will follow me with more detail, and we’ll have an opportunity for Q&A. COVID has changed the way we do almost everything. Our primary focus throughout the past several months of the pandemic and as we prepare for the future has first and always been the safety and well-being of our associates, customers, and trade partners. We have had four associates out of approximately 2,000 test positive for the virus. Three have fully recovered and the fourth is quite recent. I feel good that our safety protocols seem to have been effective and that we have better ratios than the country at large. From an operations perspective, homebuilding was deemed an essential business in virtually all of the markets where we operate. Our construction sites remained open and our sales offices were by appointment only. We implemented CDC and OSHA COVID-19 safety guidelines and protocols throughout the company. However, we asked all of our associates in our corporate, divisional mortgage, and title offices to work from home during the shutdown. I am pleased to say we were extremely well prepared from a systems perspective and the transition was relatively seamless. We’ve begun the gradual phased reopening of our offices in some states and we look forward to the remaining state guidelines for reopening. Warranty work…

Thank you, Ara. We don’t typically provide weekly data as it can be quite volatile, but as I walk you through the next four slides, you will see the impact COVID-19 had on various traffic and sales metrics on us on a weekly basis. On Slide 11, we show that the weekly traffic troughed at the end of March and the first couple weeks in April at roughly 600 units of traffic. Since that time, we’ve seen improvements to almost 1500 traffic units per week – last week. Even though it was good to see traffic rebound of the lows, we still have not returned to February’s average level of 1710 traffic units which we show on the far right-hand portion of the slide. However, the traffic we did see was very high quality. Further, our website traffic remains strong through the entire shutdown period. We also saw an increase in cancellation rates. Turning to Slide 12, there you can see a similar trend in weekly cancellation rates as a percentage of gross contracts. They peaked in the second full week of April at 46%, but have come back down to more normal levels in the high teens in recent weeks. Interestingly, there were four weeks when the weekly cancellation rates were much higher than normal for March 29 through April 19. But even in those weeks, the absolute number of cancellations didn’t change much compared to the period prior to COVID-19 shutdown. However, during those same four weeks, our gross contracts per week declined significantly and that is what caused our cancellation rates to increase. Slide 13 shows weekly cancellations as a percentage of beginning contract backlog. Here, you can see that while there are some minor weekly ups and downs, our backlog cancellation rate remained steady throughout the…

Thanks, Larry. Given the recent record unemployment levels and indicators of a possible recession, we decided to take the difficult measures to right-size our organization to prepare for a further – for further potential economic slowdown. This strategy has several components. First in April, our corporate leaders took a voluntary salary reduction. These pay cuts will remain until we got a better picture on how the economic recovery is unfolding. In May, we streamlined our organizational structure by transitioning from three homebuilding operating groups to two. Additionally, we are consolidating several business units resulting in the reduction of three divisional offices. Lastly, given the challenging conditions of the Chicago market for several years, we decided to gradually phase out of that market as we sell-through our existing Chicago communities. Considering these operational changes, Lou Smith, our Chief Operating Officer has decided to retire effective November 30, 2020. His responsibilities will be spread among the senior leaders of our company. Further, we took measures to reduce our overhead through a combination of furloughs and layoffs and other cost reduction measures. We expect these steps to reduce our annualized overhead expenses by approximately $20 million. As a result of these steps, we expect to take a charge of approximately $3 million for severance and other related expenses in our third quarter of fiscal 2020. As the market rebounds from the pandemic, we believe that this new organizational alignment will allow us to be even more cost-efficient and nimble in pursuing our long-term growth plans. It should also result in the more rapid repair of our balance sheet. I want to emphasize that once the adverse impacts of this pandemic are behind us, we are confident that even with our more streamlined organizational structure, we can continue to successfully grow. Before I wrap up, I just want to take a moment to thank all of our associates, whether they be in the field, in construction service, or sales or the office staff that supports them, they’ve all conducted themselves with the level of professionalism that’s absolutely beyond what we could have asked for, especially they their lives have been turned upside down at their own homes during these challenging times. That concludes our prepared comments and we’ll now open it up for questions.

[Operator Instructions] And our first question comes from Alan Ratner with Zelman & Associates.

Hey guys. Good morning. First off, glad to hear you are doing well and that your associates have recovered so far, and congratulations on the strong bounce back in results so far in May. I guess, my first question is, just thinking about that rebound that you and others have seen, it’s quite remarkable considering where we were six weeks ago. I am curious if you can kind of drill on a little bit on in terms of your different price points, different product types segments. Is that recovery that bounced back geared more towards the entry-level spec product that I think a lot of builders talked about recovering a bit sooner or have you seen that expanding throughout different segments thinking about active adults, thinking about more of your 2B built product? I am just curious if that portion of the business has shown the same type of improvement.

Sure. Alan, that’s a good question. First, in the beginning, our active adult 55 plus communities were slower to recover compared to our other business. As you might imagine it was a group that was more at risk. So, they were a little more hesitant to get out to the sales offices. I’ve got to say that they are – that group is really starting to pick up just recently. So, I think that will provide a little afterburner growth for us coming up as they also follow the same home buying inclination that the rest of the market has. Putting that aside, I’d say it’s been fairly consistent at price points; and regarding specs, I think approximately half of our sales over the last two months have been specs, homes that started without a sale and about half were to be built. So, that part is not dramatically different than what we’ve been seeing historically.

Perfect. That’s very helpful. Second question, recognizing this might be a little bit difficult to answer at this point given all the uncertainties, but when you made the decision, the difficult decision to undergo the restructuring there and right-size the overhead, obviously it was a much different sales environment than we are sitting at today and I think it’s obviously uncertain whether that will continue. But you mentioned being able to continue to kind of perform at the newer, more lean overhead structure. But assuming that the economy continues to bounce back and demand returns to the levels that we saw pre-COVID on a fairly sustainable basis going forward, how should we think about the growth opportunity of your business just thinking about all the various levers you are pulling, is 2021 going to be tougher to grow because of that even if the market continues to accelerate. Just thinking about your land book, your overhead, et cetera?

Alan, I would say, I do not feel our growth prospects are hampered whatsoever by the reorganization. I mean, we are now going to be a flatter, leaner organization. I think that makes us a little more nimble, and the divisions that were consolidated were divisions that were on the smaller side. So, consolidating just makes it more efficient to operate with less overhead. And the other thing I’ll mention is a large number of our reductions were furloughed. So, if we really felt that it was necessitated by rising demand, assuming they haven’t our associate – former associates didn’t take a job elsewhere, we’d have the ability to hire them back. But while it was a very painful experience, it always is to reduce staffing, I think we are going to be a leaner, more efficient company, and we’ll absolutely be able to grow in no way in my mind hampered by the reductions.

Great. I appreciate that. Thanks a lot. Good luck. Yes. Sorry, Larry.

[Multiple speakers] a little bit, because I agree with everything Ara said, 2021, the growth opportunities in no way do we believe will be adversely impacted by our restructuring decisions. But I do believe for us and the entire industry, the COVID-19 is going to have an adverse effect on the industry’s ability to grow as much as they would have otherwise grown, because during the COVID-19 environment, land developers weren’t doing land development, builders weren’t doing land development. Homebuilders delayed making land acquisitions. All of those delays will impact the availability of finished lots that we can complete homes on. So, I think there will be an impact from COVID-19. It’s just not going to be related to the restructuring that we or other builders have done.

That’s a very interesting point. Thank you. I appreciate that, Larry.

Thank you. [Operator Instructions] Our next question comes from Alex Barron with Housing Research. Your line is now open.

Yes. Thank you. Good morning guys. Hope you are all well. Thanks for taking my questions. I wanted to ask, I guess a number of things if you will allow me. The first thing is, we’ve obviously seen a pretty remarkable rebound in sales activity, and I am curious what kind of feedback your sales people are getting. Is it people who moved to the sidelines to see what happens and they are now just coming back or has there been some radical change in the mindset of the buyer, meaning like renters who had no thought of buying before, but now suddenly see an urgency in buying. What do you guys think is happening?

Yes, we are really speculating just as others have speculated in order to answer that question. But I think it’s all of the above. I think there were people that were on the cusp of buying right before the shutdown that we are pulled back, and now it’s come into the market. So I think that’s a portion of it. I think there is also people that have been couped up in small apartments, whether they be in urban areas or whether they been in suburban areas during the shutdown, let’s say, I really don't want to ever experience that again. So, I am looking to buying a home. I think it is also related to the lower availability of product - of used homes in the market, lower MLS listings that are available for sale out there. And therefore, people that are ready to buy can’t find what they want on the used side and it’s helping the new homebuilders who can provide products that they are interested in. And I also believe that it had a lot to do with respect to as different states started to be more optimistic about ending the shutdown and letting people gradually phase back into the new normal environment, that’s caused optimism and people willing to buy. And then lastly, I think, the uber low interest rates and affordability are encouraging people to buy. So, I think it’s a combination of all of those things that are causing better-than-expected demand.

I’ll add just a couple of other anecdotes. When you have people sheltering at home for a few months, when you have bundled households, either roommates or people living with their parents, there is an extra motivation to unbundle and have your own home. And then, as Larry mentioned, people have been couped up and if you are going to be in your nest for a long time, you really get a chance to look around and think about whether this is where you want to be or if you want to improve your nest, so to speak. So, I just think it got people to reflect and it really focused on their home and their desire of home ownership and the type of home they want.

Got it. So, in the last couple weeks, you guys have shown in your presentation you’ve seen like sales in the mid-170s. Is there any reason why that wouldn’t be sustainable you think? And just to confirm, have you guys increased your incentives or vice versa, if you haven’t increased them are you guys raising prices?

We have not increased our incentives in general at all and we are now exploring being a little more aggressive on price increases. And we gave you the data week-by-week through May. I’ll tell you that June is off to a phenomenal start, as well. So, we are definitely seeing the market actually gain momentum right here. And as Larry mentioned, the key thing we’ll just have to look at all homebuilders is, do we have enough improved lots on the ground to meet demand right now. As he mentioned, developers slowed downs, towns were slow in processing land development permits - so, during this pandemic. So, that will be more of the challenge. But I think that will be short-term and that we’ll be able to get through that.

I mentioned, I think we still have the overall economy be in kind of a dark cloud over us, right now. The stock market is doing brilliantly, which is a forward-looking vehicle typically. So, it’s anticipating the economy is going to bounce back. But we got to start seeing that unemployment number reduce. If that unemployment number doesn’t start reducing in the future at some point, I do believe that will have an adverse effect on the industry’s ability to sustain the current level of sales that we’ve been seeing recently and it’s just a cautious high that we have constantly in the marketplace. We've not seen it yet. But 41 million plus jobs being – people being unemployed, that has a huge trickle down negative effect in the economy if they don’t start getting that work again.

Yes, I agree on that. One last one if I could, on your DTA. So, what exactly is a criteria for you guys to be able to reverse it? I mean, you had positive pretax income for the last two years. You just positive income again this quarter. It would seem if the trends continue, you shouldn’t be at positive pretax income for the rest of the year. So, is there a real chance you could be reversing the DTA sometime in the not so distant future?

We have to be at – at a minimum, we have to be at a three year cumulative profit. That’s the first threshold. But it has to be a substantial profit. It can’t be small amount of profit that it can swing back and forth to a loss. So I would say it’s something that we are certainly monitoring unlikely something would happen in fiscal 2020, but if we are able to grow at fiscal 2021, maybe by the end of fiscal 2021, we’d be in a position to do that. This remains to be seen how we perform.

Got it. All right. Well, best of luck guys. Thanks and stay safe.

Thank you.

Thank you. I am not showing any further questions at this time. I would now like to turn the call back over to Ara Hovnanian for closing remarks.

Thank you very much. And needless to say as I stated at the outset, these are extraordinary times and it’s not completely clear what the impact is going to be long-term. At the moment, it feels very good in terms of home sales. People definitely want a nest. So, we are going to do our jobs to providing the home for people to shelter in and we’ll look forward to giving you an update in the next quarter. Thanks so much.

This concludes the conference call for today. Thank you for participating and have a nice day. All parties may now disconnect.