Good morning and thank you for joining us today for Hovnanian Enterprises Fiscal 2019 First 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 first quarter results, and then open up the line for questions. The company will also be webcasting a slide presentation along with opening comments from management. The slides are available on the Investor page of the company's website at www.KHOV.com. Those listeners who would like to follow along should log on to the website at this time. Before we begin, I would now like to turn the call over to Jeff O'Keefe, Vice President Investor Relations. Jeff, please go ahead.

Thank you, Gigi, and thank you all for participating in this morning's call to review the results for our first quarter, which ended January 31, 2019. 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 these 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, 2018, 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 on the call 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. I'm going to review our operating results for the first quarter and also talk about the current sales environment. As usual, Larry will follow me in more detail. Our overall first quarter results were in line with our guidance, met our expectations and exceeded consensus estimates for pre-tax profits. Because we realized sales are an issue that are on top of mind for the industry and for Hovnanian, I'd like to begin by talking about sales starting with Slide 4. At first blush, contracts per community for the quarter look weak, declining from 7.6 last year to 7 this year. However, as you look closer into the monthly data on Slide 5, you see a slightly different picture. The slide shows monthly contracts per community for each of the past 12 months. The most recent month is in blue and the same month a year ago is in grey. The quarter clearly began with a very weak November compared to last year. We reported that during our year-end call. Fortunately, you can also see that December and January reversed that trend with contracts per community similar to last year. While I'm happy to say that the most recent month of February, the first month of our second quarter, strengthened further. February sales results were slightly ahead of last year's strong results. Our February sales pace increased from 3.3 contracts per community last year to 3.4 this year. We're especially pleased to report that the absolute number of contracts in February were also slightly better than last year's February contracts at 503 contracts compared to 528 contracts a year ago. This is a combination of a good sales pace and slight year-over-year growth in community count. We're optimistic that the improved February results as well as the growing community…

Thanks, Ara. Ara began with a granular monthly view of sales. If you turn to Slide 11, you can see another view of contracts per community with longer term trends. On the far left hand side of the slide, we show our annual contracts per community from 1997 to 2002. We average 44 contracts per community during a time period that was neither a boom, nor a bust for the housing industry. On the center portion of the slide, you can clearly see the steady growth in contracts per community for each of the past several years. On the far right hand portion of the slide, we show that net contracts per community for the trailing 12 months ended January 31, 2019 were 35.7 compared to 35.1 for the trailing 12 months ended January 2018. We are gradually migrating back to normal absorption levels. During the first quarter, our contract cancellation rate, including cancellations from joint venture communities increased to 23% from 20% in the same period last year. On Slide 12, you can see in gray, the 30 year mortgage rate trends over the past year, and in blue our monthly cancellation rate trends over that same period. In February of 2018, the 30 year mortgage rate was about 4.4%, an increase to around 4.6% by April of 2018. Mortgage rates then stayed relatively steady until September when they spiked up and peaked at close to 5% in November of 2018. By February 2019, rates had fallen back to about 4.35%, the lowest level in the past 12 months. During the past year, we believe there is a correlation between mortgage rate trends and our monthly cancellation rates. As mortgage rates started to increase in March last year, we saw our cancellation rates begin to modestly increase as well.…

Thanks, Larry. On our call last quarter I spoke about our efforts to increase our first time product through offering Aspire communities. We are glad that we've increased our presence with this low priced offering because that end of the market seems to be holding up better in most geographies. We continue to believe that offering a broad product offering is the right path for us, but throughout the cycles of course, there are times when you wish you had more of one product type than another. Right now our Aspire communities are good place to have a little more exposure. We've had good success in our active adult communities as well, which is another strategic focus I've discussed on prior calls. The early stages of the spring selling season are off to a good start. We're pleased with our positioning and we look forward to getting more communities open, and soon after, delivering more homes. We're confident that top-line growth will leverage our SG&A and interest costs and improve our bottom-line performance in the future. That concludes our formal remarks and we're happy to open it up for questions now.

The company will now answer questions. [Operator Instructions] At this time, we will open the call to questions. [Operator Instructions] And our first question comes from Thomas Maguire from Zelman. Your line is now open.

Hey guys, nice job on the quarter. Just wanted to quickly touch-base on the order trend, you talked about the relative improvement through the quarter and then absorption activity up year-over-year in February. I guess just in your view, what's driving that? Is it just mortgage rates, is that the only piece, and just more broadly, can you talk a little bit more about today's sales environment relative to a few months ago?

Sure. I think mortgage rates clearly are a big driver. I'd also say there is with a little less fear about big trade wars coming up, that gives a little more confidence, and in spite of this morning's drop in the Dow, in general, there's been just a little less volatility in the stock market. So I think when you combine all of those together, that's been helpful overall environment. And, in general, obviously we just ended February, so that's pretty current. We are 7 days into March, and I'd say, we continue to feel encouraged with the result so far. It's very early, but so far so good.

Okay. That's really good to hear. And then, you just talked about the higher-end activity in California still being weak. I mean, have you seen any improvement there at all on a relative basis, understanding it's still more depressed? And then, maybe if we just move out of California, would you say those comments hold for the high-end in other markets or how would you think about high-end trends outside of California?

Sure. I'd say Southern California we have one higher-end community. And that has improved a bit. But it's improved because there have been more concessions and incentives. In Northern California, it's improving a little bit, but we only have one community really of the higher-end in Northern. But we haven't been as aggressive with incentives. In Northern New Jersey, we have some higher-end communities. And interestingly, there it's held quite well. So it's without doing much in incentives. And in fact, in some of them, we've actually been able to adjust prices upward a little bit. So it's definitely been a mixed bag. But in general, I'd say, the performance of our lower priced communities and active adults have done a little better than the higher-priced communities.

Got it. Thanks. Have a good day.

Okay.

Thank you. Our next question is from Arjun Chandar from JP Morgan. Your line is now open.

Good morning, thank you. Can you talk a little bit more on a consolidated basis about the evolution of incentives in the quarter? You just mentioned that in Southern California you had to increase concessions and incentives a little bit during the quarter. But I wanted to get a sense from November versus December, January, February, how that incentive offering has evolved over the course of the last four months?

Yeah, so I'd say we were less aggressive in November. And I think you saw the corresponding slow sales in November. And then, I'd say we got a little more aggressive after that. There hasn't been a big change between January, December and February anecdotally. I don't have the exact numbers, but really it hasn't changed dramatically. It just feels like the combination of some of the incentives we did adjust and many in the market adjusted in December, combined with lower rates and just a little more enthusiasm in the market and confidence is what really spurred sales after November.

Yeah, Arjun, I would also add that, I mean, I don't want anybody getting off this call and thinking that we are across the board doing incentives and concessions. It's a very community specific and market specific, where we have communities that are fallen behind our expected sales pace and the problem isn't presentation or sales associates. We just think it's market driven. We will add incentives. We also closely monitor what our peers are doing. And as I mentioned on the call, the incentives, the extra incentives have been more focused on started and unsold homes rather than to-be-built.

Thanks. And just a follow up on the balance sheet, you had a nice sequential improvement in owned inventory from the October quarter to the January quarter. You clearly deployed some of your cash to spend on land in the quarter, but when I look at the old secured groups adjust to collateral ratio, it was down sequentially. How can we reconcile the two, two numbers both the consolidated inventory number with what we see in the adjusted collateral ratio for the old secured group?

So a few things that impact the collateral ratio you are seeing is in the quarter, we pay - the first and third quarters are the larger quarters for our interest payments. So you see the cash go down as a result of interest payments as opposed to being spent into inventory. The other big item is some of the inventory spend in the quarter as we talked about our optioned lots going up, we put down deposits and there are some predevelopment dollars that are spent on lots that are under option. That property can't be mortgage and is not in the inventory numbers and collateral. It will eventually become collateral when we take down those properties, but in the interim it's not. So there was about - an increase of about $21 million in that spend so you don't see that yet reflected in the collateral, but it will be in the future. And then the last item is if you look at the liabilities, accounts payable on our liabilities are down $38 million from October and that comes out of cash without a corresponding increase in inventory, it would already been in the inventory at the time that the accounts payable was created. In the first quarter, we typically have a lot of account payable spend because we build up accounts payable in the fourth. The other big item is that the annual bonuses are accrued at year end and they are paid during the first quarter so you see the cash go out there. So those are the items that you are seeing decrease in the collateral ratio in the first quarter.

It's very helpful. Thank you.

Thank you. Our next question is from Megan McGrath from Buckingham Research. Your line is now open.

Great, thank you. Good morning. Just wanted to follow up a little bit on your February comments and looking out over the next couple of months. How are you feeling about that compares in March and April looking at your monthly chart, they look pretty tough, but maybe given some historical perspective there?

I'm not so sure I heard how our margins, is that what you asked, I'm not sure.

No, no. The order compare, it looks like the compare in March and April looks pretty difficult this year.

Yeah, well - all indications from my perspective at this point when we start with February being above last year's difficult comparison, so we are very encouraged, the spring selling season is off to a strong start and time will tell, but we're hopeful that will be around the same level we were in March and April of last year based on our recent February results.

Okay

Megan, I understand where the comment is coming from. We certainly had a great March last year. It was at 3.8 sales per community, but February of this year was 3.4 and March is typically a little bit better than February, so hopefully we will see a similar seasonal climb that we see every year in March. So it's a big number, but it's usually is a big number, March and April and May are big months in the season.

Okay, thanks. That's helpful. And Larry, a little follow up on your commentary on the lumber prices versus incentives. Obviously, hard to call with all the volatility in lumber, but the reason move down in lumber, do you think that's fully incorporated into your margin or should there be continued incremental benefit going forward as those lumber prices gets passed along to you?

I mean, clearly there is going to be incremental lower cost of lumber reflected in our margins, we just think that that lower cost rather than having a net increase in margins is just going to offset some of the incentives that we've offered up there. So we are just not expecting - what we would have hoped was that it would accrue to a benefit in margins, but because we tweak incentives upward, I think it's going to push from a margin perspective.

Got you. And then if I could take one more. In terms of the West Coast, you talked about the high end in the West Coast, but can you give us any commentary on the general California market?

Yes, I'd say the low end on the West Coast, both northern and Southern California is doing quite nicely, particularly our Aspire lines are doing very nicely in California.

Better than they have been in 4Q?

Well, it's hard to say because we've been growing our Aspire line, but I can't say I honestly looked specifically at the 4Q, but I would guess, but just my gut feeling is yes. I'd say the pace is a little bit better now than it was in general in the 4Q in California.

Okay, let me answer it this way Megan. I would say that we saw some of our Northern California communities get behind their expected pace in November and December. And we saw them call that negative budget variance to a positive variance by the end of February. So it just feels like it's bouncing back overall pretty nicely.

Great, thanks so much.

Thank you. Our next question is from Mary Gilbert from Imperial Capital. Your line is now open.

Yes, good morning. Thank you. So I have a question with regard to the time line to achieve your targets, for example, $275 million of EBITDA. What kind of time horizon can it take to get there? And then number two following up on the question regarding the collateral coverage with regard to the old group. Is there an idea of how we could - given that there is seasonality negatively impacting that coverage ratio in the first quarter, how we can look at it on an average basis, kind of going forward just so that we're kind of evening out the seasonality impact, especially since the Q1 is lower and with the draw down first in purchases that you made in the accounts payable et cetera. That would be super helpful. Thank you.

So let me start. I think what you're referring to is our key metric targets that we talked about last summer. I think at that point in time, we said it would be a few years to achieve them. We didn't get uber specific. I think that as we're seeing the market bounce back, that we still think we are on target to achieve that over the next few years. Maybe just a few months of set back with the market level we had, but assuming the market is returning, which certainly our results seem to indicate that it is, I think we're still on target to achieving those key metric targets in the future. With respect to the collateral coverage, I may differ to Brad O'Connor who was speaking earlier, but I think it's very difficult number for us to project. As we look at individual communities, it depends on whether we put them in the new group or the old group that's determined by which group has more excess liquidity. We don't make a determination to put one type of product into one group and another type of product into the other group. We do have seasonal interest rates. I don't think there's an interest payment on the old group this next quarter so there shouldn't be a deterioration from an interest rate perspective, but if you compare it to the new group, I mean, it's just more leverage in the old group and there is new group and it does have an impact over time. I don't know, Brad whether you have...

The recommendation to try to adjust for the seasonality or the quarterly impact, my recommendation will be to look at last year and the trends that occur within there each quarter, that would be the best marker, because the debt payments I talked about the accounts payables. I talked about our seasonal type thing that should reflect themselves the same way in fiscal 2019. That would be my best recommendation.

Okay, that's very helpful. And then, also as you weigh the opportunities in continuing to increase your control of land and making those investments and achieving your ROI, I just wondered how you weigh any potential opportunity in looking at the debt, particularly in the Old Group that has traded off to a fairly low level with the big coupon if that kind of weighs into how you're looking at any source of capitalizing on that sales return? Thank you.

Yeah, I mean historically, we've certainly from time to time when the yields start getting attractive as compared to new land purchase, we've demonstrated historically that we do look at buying back debt and actually do buy some debt back. Certainly the yields on the old group are approaching those kinds of levels. We have to balance that with - when we by a new land parcel it absorbs some overheads. So that's another thing that goes into our decision making factor, but safe to say if yields continue to fall, we will - or excuse me - rise, it will be a more interesting alternative investment for us to give serious thought to it.

Great. Thank you very much.

Thank you. [Operator Instructions] And our next question is from Alex Barron from Housing Research Center. Your line is now open.

Yes, good morning. Thank you. I'm not sure if I heard it or wondering if you can provide any comments or guidance on where you think the margins are going to go next quarter and the remainder of the year?

I don't think we gave anything specific as a projection there. But I think our comments that the margins were similar in the first quarter, we don't expect any real benefit from the lower lumber cost, the thing that offset incentives, so kind of put that into your calculus as you try to run your model. But we just didn't give any specific guidance. I don't think it's going to move a lot one way or the other. I'll put it that way.

Got it. And with regards to the SG&A, so you guys had a kind of lower numbers towards the end of the back half of last year, do you think this year is going to be closer to what this quarter look like or more…

No, no. We often, we almost always have lower SG&A percentages at the end of the year and it's not so much of the spend, it varies dramatically, but our revenues typically go up in the last half of the year. So when you apply more consistent SG&A dollars with higher top-line revenues in the later quarters, that brings our ratios down at the later parts of the year. So we'd absolutely intend on having lower SG&A than what we just reported as a percent.

Right. But I'm saying you think the dollars will be similar closer to what this quarter was or closer to the dollars reported in the back half of last year?

Yeah, there was a onetime event or an unusual event in the fourth quarter. In terms of the dollars, we had a benefit from reversing our lowering our reserves on insurance. So if you look at our fourth quarter call, on the slide we show exactly how much it is. I don't remember; it's $10 million, $12 million. I don't remember exactly what it was. But you should not assume that that is a benefit that we're going to get every quarter or even for the year, next year that the $10 million or $12 million benefit that we got from lowering our insurance reserves for construction defects.

Got it, okay. That's helpful. Thank you so much and best of luck.

Thank you.

Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to Ara for closing remarks.

Thanks very much. We feel very good about a number of things in our call, but certainly, first and foremost, the uptick in sales and the better pretax performance compared to last year. We look forward to giving you more positive results as the year unfolds. Thank you.

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