Toll Brothers, Inc.

Good day and welcome to the Toll Brothers first quarter conference call. All participants will be in a 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 touchtone phone. 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 Douglas Yearley, Chairman and CEO. Please go ahead.

Douglas Yearley Thank you, Alyssa. Welcome and thank you for joining us. With me today are Bob Toll, Chairman Emeritus, Marty Connor, Chief Financial Officer, Fred Cooper, Senior VP of Finance and Investor Relations, Wendy Marlett, Chief Marketing Officer, and Gregg Ziegler, Senior VP and Treasurer. Before I begin, I ask you to read the statement on forward-looking information in our earnings 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 future results. Those listening on the web can email questions to investorrelations at tollbrothers.com. Last night we reported first quarter 2020 home sales revenue of $1.3 billion with a 20.9% adjusted gross margin and net income of $56.9 million or 41 cents per share diluted. Our first quarter backlog of 6,461 units and $5.45 billion was up 9% in units and 2% in dollars versus last year. First quarter deliveries, revenue and earnings per share were lower than we had anticipated due to delayed closings in a few markets, principally Northern California where we missed 60 closings valued at $67 million. Most of these homes should deliver in our second quarter. With strong buyer demand, our first quarter contracts were up 31% in units and 28% in dollars. and our contracts per community were up 28% compared to one year ago. California, which is now part of our Pacific region, was up 32% in contracts and 10% in dollars in the first quarter. This was the first quarterly year-over-year growth in contracts in California since fiscal 2018's second quarter almost two years ago. Demand has remained strong through the start of our second quarter and we are experiencing pricing power in many of our markets. We continue to look for opportunities to expand our luxury brand to new product lines and price points. While we intend to maintain our leadership in the luxury segment, we are also strategically adding more affordable luxury communities to capitalize on demographic trends and to expand our footprint and customer base. Nearly 40% of our current communities offer a home with a base price of $500,000 or less. These communities should turn inventory quicker and be more capital efficient. We continue to expand our presence in new markets. We have completed three acquisitions in the past nine months in the southeastern United States. These acquisitions brought us into five dynamic new markets, Atlanta, Nashville, Charleston, Greensboro, and Myrtle Beach. We've added three more markets with expansion into Portland, Oregon, Tampa, and Salt Lake City within the past 18 months. Single family permits rose in January to the highest seasonally adjusted annual pace since June 2007. Even so, housing supply remains tight. Interest rates remain historically low, Consumer confidence is healthy, household formations are strong, and unemployment is at or near record lows. According to the January existing home sales report for the National Association of Realtors, the growth in existing home sales was strongest in the $500,000 to $750,000 price range. According to the just-released census report, new home sales were up 18.6% over last January, with sales of homes priced above $400,000 increasing more than 60% in the same period. With this positive macro backdrop, market fundamentals remain supportive as we continue to expand our luxury brand, the new price points, product lines, and geographies. Now let me turn it over to Marty.

Thanks, Doug. Before I address the specifics of this quarter, I 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 our earnings release. I also want to note that our guidance is subject to our normal caveats on forward-looking statements. Additionally, in the coming days, we will file an 8K detailing historical segment reporting for contracts, Settlements, and Backlog, based on our newly realigned reporting segments. Our results for revenue and gross margin came in below expectations, driven by a combination of delayed deliveries, unfavorable mix, and additional closeout costs related to certain older communities. These delayed deliveries, which Doug outlined and were concentrated in our higher dollar Northern California communities, are expected to settle in our second quarter. This lower delivery volume also impacted our SG&A leverage, but our SG&A in absolute dollars was generally in line with our expectations. As background for our margin guidance for the balance of the year, I want to remind you that orders declined for each quarter from October 31st, 18 to July 31st, 2019. Due to the rapid rise in interest rates in the summer and fall of 2018, this timeframe became a buyer's market where we had negative pricing power. While orders did increase in Q4 2019, pricing power was modest. In our newly formed Pacific region, which includes California, Portland, and Seattle, contracts and dollars did not turn positive until this first quarter of 2020. were up in the Pacific region 70% in units and 30% in dollars in this quarter. This region, driven by California and Seattle, carries above company average margins. From a mixed perspective, two-thirds of our projected margin change from fiscal 19 to fiscal 20 is driven by the combination of less volume and lower margins out of that Pacific region. It takes us 9 to 12 months to deliver our homes. So we do expect sales from the improving market that began in late 2019 to benefit adjusted home sales gross margin in our second half by approximately 100 basis points compared to the first half of fiscal 2020. Most of this recent strong demand environment, evidenced by our growth in contracts and absorption pace and our increase in pricing power, coupled with our projected 10% community account expansion should also contribute to margin and earnings improvement in fiscal 2021. With our focus on capital efficiency, we are committed to improving our return on equity. In the first quarter of fiscal year 2020, we repurchased $476 million of stock at an average price of $40.73 per share. This reduced our share count by 11.7 million shares, or 8%. We expect share repurchases to remain a significant component of our capital allocation strategy. Our balance sheet remains strong. We ended the first quarter with $520 million in cash and equivalents and had $1.59 billion available under our bank-revolving credit facilities. We have no public or bank debt maturities in the next 24 months, and our weighted average debt maturity is five and a half years. Our strong balance sheet, extended maturities, and available liquidity allows us to grow our business through land purchases and selective home builder acquisitions. We have increased our land owned and controlled by approximately 8,000 lots since a year ago. Our first quarter 2020 book value per share was $35.87 and our net debt to capital ratio was 42.3%. Looking forward, we are projecting second quarter deliveries of between 1,850 and 2,050 units with an average price of between $800,000 and $820,000. We are projecting full fiscal year deliveries of between 8,600 and 9,100 units with an average price of between that same $800,000 and $820,000. We expected adjusted home sales gross margin in our second quarter to be approximately 20.5%, with full fiscal year adjusted home sales gross margin of approximately 21.25%. This implies a 100 basis point improvement in the second half of fiscal 20 versus the first half. We project second quarter SG&A as a percentage of home sales revenues to be approximately 12.4% and full fiscal year SG&A as a percentage of home sales revenues to be approximately 11.4%. As we discussed on our fourth quarter conference call, our projected 10% growth in community count by fiscal year end 2020 involves investment in personnel and other costs in advance of revenue generation. In addition, we continue to implement our IT system upgrades. This is causing SG&A as a percentage of revenues to be higher this fiscal year. Second quarter other income, income from unconsolidated entities, and land sales gross profit is expected to be approximately $5 million. But we expect full fiscal year 2020 other income, income from unconsolidated entities, and land sales gross profit to be approximately $115 million. We project the second quarter tax rate of approximately 26% and fiscal year tax rate of approximately 25%. Our current Q1 fiscal year 2020 quarter tax rate was benefited by the reinstatement of the energy tax credit. Our second quarter weighted average share count is expected to be approximately $132 million with a weighted average diluted share count of $133 million for the year. Now let me turn it back to Doug.