Toll Brothers, Inc.

Good morning and welcome to the Toll Brothers Second Quarter Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Doug Yearley, Chairman and Chief Executive Officer. Please go ahead.

Thank you, Chad. Welcome and thank you for joining us. I'm Doug Yearley, Chairman and CEO. With me today are Bob Toll, Chairman Emeritus, Rick Hartman, President COO, Marty Connor, Chief Financial Officer, Fred Cooper, Senior VP of Finance and Investor Relations, Kira Sterling, Chief Marketing Officer, Greg Ziegler, Senior VP and Treasurer, and Don Salmon, President of TBI Mortgage Company. Before I begin, I ask you to read the statement on forward-looking information in yesterday's release and on our website. I caution you that many statements on this call are forward-looking based on assumptions about the economy, world events, housing and financial markets, and many other factors beyond our control that could significantly affect our future results. Those listening on the web can email questions to investorrelations at tollbrothers.com. Fiscal year 2019 second quarter results were strong, with earnings per share of 87 cents up 21%, pre-tax earnings up 16%, and home sales revenue up 7%, and adjusted home sales gross margin improving 100 basis points compared to one year ago. Fiscal year 2019 second quarter net income and earnings per share were the highest second quarter in over a decade. Our second quarter contracts were down 16% in dollars and 9% in units. We attribute this decline in part to the industry-wide slowdown that began in the second half of 2018 and to a challenging year-over-year comparison. We are encouraged that demand improved as our second quarter progressed. April contracts were better than March, which were better than February. While February and March contracts were down versus 2018's same months, 2019's April contracts surpassed last year's April on both a gross and per community basis. Although the spring selling season bloomed late, It built momentum. In fact, it was the best April on a gross and per community basis for contracts since 2006. Traffic and deposits this May have also been encouraging. We view this as a positive sign for the overall health of the housing market. According to recent reports, builder sentiment in May rose to a seven-month high and single family housing starts in April were up 6.2% versus March. The industry is being buoyed by low interest rates, a strong employment picture and continued aging of the existing housing stock and a still limited supply of new homes in many markets. Last week we learned that we moved up 52 spots on the Fortune 500 to number 428. We continue to look for opportunities to grow and leverage our industry-leading brand as we expand our geographic footprint, product lines, and price points. On Monday, we announced our entry into the Metro Atlanta market with the acquisition of Sharp Residential. The acquisition of Sharp brings us into the largest US housing market where we did not operate. This quarter, we opened our first communities in Salt Lake City, and Portland, Oregon, where we are already seeing healthy buyer demand. We also acquired our first west coast city living urban condominium sites in Los Angeles and Seattle. We continue to look to broaden our product lines and price points beyond our traditional move up and baby boomer active adult buyers. About one third of our for sale communities now offer some homes with base prices under $500,000. This enables us to serve millennials and other customers who want our luxurious quality and our brand, but may seek a lower price point and a quicker, more streamlined home buying process. We are particularly proud of our crossings at Meridian Community in Phoenix, where we have sold 53 homes at an average price in the mid to upper $300,000s since opening just seven months ago. We are also serving urban and suburban renters. Through Toll Brothers Apartment Living, we currently have a pipeline of 18,600 units under development across the country. Recently, the National Multifamily Housing Council named us the fastest growing and 14th largest apartment developer in the country. We are excited with the growth and potential of this business. We are also investing in the single-family build-to-rent sector. This is another business we believe has great potential. This quarter we formed a joint venture with BB Living, an established build-to-rent developer, and a large financial partner in a $400 million joint venture to purpose-build and operate single-family rental communities. We are initially targeting the Phoenix, Denver, Las Vegas, Jacksonville, Dallas, Houston, and Boise Markets. While Toll Brothers has committed a relatively modest $60 million to this partnership, we believe this investment will produce strong returns over time. With a positive macroeconomic backdrop, record low unemployment, continued wage growth and solid consumer confidence, we are optimistic about the opportunities ahead. Now let me turn it over to Martin.

Thanks, Doug. Before I address the specifics of this quarter, I do want to note that a reconciliation of the non-GAAP measures referenced during today's discussion to their comparable GAAP measures can be found in the back of yesterday's release. Our home building operations teams had a great quarter. We exceeded our guidance and our pre-tax income rose 15% on a home sale revenue increase of just 7%. Adjusted home sale gross margin came in 100 basis points better than a year ago, driven primarily by solid operations and favorable mix and the positive impact from collection of a brownfield credit. Our cancellation rate during the quarter returned to historical norms versus the slightly elevated level of 2019's first quarter. We believe this reflects a more competent consumer and an improved market. Interest expense through cost of sales was 2.6% of home sales revenues, down 20 basis points compared to a year ago. In fiscal year 2019 second quarter, we had an SG&A margin of 10.4%, which is in line with fiscal year 2018's second quarter. This was better than our guidance due to our strong home sale revenues. We remain focused on maintaining our conservative balance sheet with ample liquidity, low leverage, and a long-dated debt maturity profile. We ended fiscal year 2019 second quarter with a debt-to-capital ratio of 42.5% on a gross basis and a net debt-to-capital ratio of 34.6% compared to 44.6% and 40.4% respectively at fiscal year 2018's second quarter end. We had more than $2 billion of untapped cash and available credit facilities at quarter end. has announced Monday we use some of this liquidity to acquire Sharp Residential. And we are well positioned and remain active in pursuit of additional attractive land and builder opportunities. We also remain committed to proven capital management. Share repurchases will continue to be part of our capital allocation strategy. Our weighted average debt maturity is five years. Our weighted average interest rate is 4.65%, and we only have $250 million of maturities due in the next 33 months. Last week, Standard & Poor's acknowledged the strength of our operations and balance sheet by moving our outlook from stable to positive. Our book value per share at fiscal year 2019 second quarter end was $33.84, our highest ever. and it's up from $33.04 last quarter. At almost $34 per share, we have grown our book value per share at a compound annual rate of 16% since our going public in 1986. Due to the lack of visibility into consumer demand the past few quarters, we had not previously provided second half and fiscal year 2019 guidance. Now, based on our backlog, and other factors, we are providing our initial forward-looking income statement guidance for the second half of fiscal year 2019. We expect third quarter deliveries of between 1,800 and 2,000 units with an average delivered price of between $855,000 and $880,000. We expect fiscal year 2019 deliveries of between 7,700 and 8,100 units. with an average delivered price of between $855,000 and $880,000, the same as the third quarter. We expect third quarter adjusted home sale gross margin of approximately 22.5%, and SG&A has a percentage of third quarter home sales revenues of approximately 10.7%. We expect fiscal year 2019 adjusted home sale gross margin of approximately 23% and SG&A has a percentage of fiscal year 2019 home sale revenues of approximately 10.4%. Our third quarter and fiscal year 2019 guidance are tempered slightly by the impact of weather that will delay some home closings in certain of our Northern California communities. including our high density metro crossing project in Fremont. Northern California had an unusually long rainy season this year that lasted from October until May, disrupting land development activity and home production. This is significant as our Northern California division, with projected margins higher than the company average, has 630 units in backlog representing $920 million of future revenue. Our guidance for adjusted home sales gross margin during the balance of the fiscal year also reflects the slower demand and rising incentives associated with the challenging sales environment of last fall and winter, as well as normal changes in mix. Additionally impacting our margin guidance is a 10 to 20 basis point impact from purchase accounting associated with our acquisition of Sharp Residential, and the fewer higher-priced units in New York City projected to close in the balance of the year at low margins. We expect third-quarter other income, income from unconsolidated entities, and land sales gross profit of approximately $13 million in total, and we expect a tax rate of approximately 27.5%. We expect fiscal year 2019 other income, income from unconsolidated entities, and land sales gross profit of approximately $100 million in total, and we expect a tax rate of approximately 27.5%. Lastly, we expect interest expense to cost of sales to be approximately 2.7% of home sales revenue for the balance of the year, and our weighted average share count to be approximately 148 million shares for the third quarter and year. We are pleased that our community count grew from 283 a year ago to 311 at the second quarter end. The SHARP acquisition will add 10 more communities to this total. Now, let me turn it back to Doug.