Toll Brothers, Inc.

Good morning and welcome to Toll Brothers' second quarter earnings conference call. All participants will be in listen-only mode. If 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. Please note this event is being recorded. Now I'd like to turn the conference over to Mr. Douglas Yearley. Sherman, and CEO. Please go ahead.

Hi, Nick. This is Doug. Are we ready to go? Thank you very much. Welcome and thank you for joining us today. I hope you, your families, and colleagues are staying safe and healthy. With me today are 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, the current and long-term impact of the COVID-19 pandemic, and many other factors beyond our control that could significantly affect future results. As noted in our May 6 press release, Due to the uncertainty surrounding COVID-19 and its impact, we have withdrawn our second quarter and fiscal year 2020 guidance. Now let's begin. We are pleased with our performance in the second quarter. Under complex and challenging circumstances, our teams delivered 1,923 homes and produced revenues of $1.52 billion. Our second quarter adjusted gross margin of 21%, and our net income of $75.7 million or 59 cents per share diluted. Our second quarter and backlog of 6,428 units and $5.49 billion was down just 1% in units and 3% in dollars and our net signed contracts of $1.55 billion and 1,886 units were down 22% each Our second quarter was essentially bifurcated by the impact of COVID-19. Fueled by strong demand, a healthy economy, low mortgage rates, and a limited supply of new and existing homes nationwide, our net signed contracts were up 43% through the six weeks ended March 15 compared to the prior year's same period. With approximately 40% of our selling communities and 50% Thank you for joining us. Most of our sales centers were required to be physically closed and operating virtually or open by appointment only. As a result, from March 16 through April 30, our net signed contracts declined 64% year over year. Net signed contracts declined 79% in these highly impacted markets over the same period versus 52% in our other markets. Fortunately, government restrictions have eased and sales and construction operations have resumed in almost all of our markets. While net signed contracts in the first four weeks of May were down 37% year over year, we are very encouraged by recent deposit activity. Our deposits, which represent a leading indicator of current market demand, were up 13% over the past three weeks versus the same three-week period last year. Year-over-year deposits from last week were the highest since 2005 on both a same-store and gross basis. As a reminder, our customers first post a refundable deposit that reserves a home site and affords them time to make final decisions on architectural design and structural options to personalize their home before signing a binding contract. This process from deposit to contract typically takes about three weeks. Importantly, our recent deposit to contract conversion ratio has remained consistent with pre-COVID-19 levels. Web traffic has also steadily improved from the lows we experienced in mid-March and has returned to the same strong level of activity we enjoyed pre-COVID-19, with web traffic in this most recent week actually exceeding Pre-COVID levels for each week of February and March. Foot traffic through our sales centers has also increased significantly. These early trends suggest the housing market may be more resilient than anticipated just two months ago. During the lockdown, our teams quickly adapted to new operating environment and transitioned to a combination of remote ways of working, virtual communications with our customers, and safe construction practices. Our focus was on keeping our employees, trade partners, and customers safe and our business running. The online and community sales teams engaged home shoppers in person, by phone, and online. Design studio appointments moved forward in person and virtually. Closings continue to occur, often by remote and paperless practices, for customers eager to move into their new Toll Brothers homes. Through creativity and virtual tools, we were able to continue to provide the high quality home buying experience that defines our trusted brand. As we prepare for a further reopening of the economy, we continue to develop new ways of running our business to meet the many challenges presented by the pandemic and its impact on the economy. We have learned to operate more efficiently, which will make us better now and in the future. We also intend to continue pursuing our strategy of diversifying our product mix and geographic presence with a focus on more affordable luxury home communities and expansion into higher growth southern and western markets. We believe this strategy will enable us to reach a larger segment of the affluent home buying market. Now let me turn it over to Marty. Thanks, Doug.

Our adjusted gross margin of 21%, Thank you for joining us. and delays in deliveries in higher price markets such as California that were heavily impacted by shutdowns. Our balance sheet remains strong. We ended our second quarter with $2 billion of liquidity, including $741 million of cash and $1.3 billion available under our $1.9 billion revolving bank credit facility, which does not mature until November of 2024. The weighted average maturity of our debt is more than five years, and we have no significant debt maturities until 2022. During the quarter, we paid 11 cents in dividends and repurchased 4.3 million shares of our common stock for $157.5 million. These repurchases all occurred prior to the onset of the pandemic in mid-March. At the end of our first... At the end of our fiscal second quarter, book value per share was $36.34. During the second quarter, we took a number of actions to reduce spending, maximize liquidity, and maintain financial flexibility in order to deal with current challenges and be prepared for potential opportunities that may arise during the recovery. One of our initial steps in mid-March was a sizable draw on our bank revolving credit facility, Due to initial concerns regarding potential bank liquidity and capital market accessibility. All of this draw has been repaid as those concerns have abated and the capital markets have been open for home builders and many other sectors. We are very focused on converting our backlog, which should generate significant cash. Our backlog at the end of April stood at 6428 homes and $5.5 billion. providing us with good visibility on cash inflows for the next few quarters as cancellations have remained low. Another major step that we took to preserve liquidity was to significantly reduce spending on new land acquisitions and land development. We evaluated all pending land deals in our pipeline and requested additional time on deals with near-term cash outlays. Most of our sellers were receptive, although we did have one sizable deal in Virginia where we could not come to terms with the seller. We therefore wrote off $10.7 million in sunk costs which constituted most of our second quarter impairment charge. Land acquisition spend dropped from February to March and was essentially zero in April. Land development spend was also significantly curtailed. With 37,100 owned lots, of which 17,200 are already improved, we can and will choose to selectively invest in new land acquisitions based on local market conditions. We believe that our attractively located land pipeline in the most desirable markets will position us for growth as the economy recovers. With our strong balance sheet, we will continue to be opportunistic as land and other growth opportunities become available. In light of the uncertainties presented by the pandemic, we also acted quickly to accelerate our efforts to improve efficiencies and rationalize overhead expenses by reducing G&A spend. These actions included, among other things, a hiring freeze and reductions to payroll through a combination of job eliminations and employee furloughs. While these decisions were difficult to make, We believe they will help our business in the near term and make us more efficient over the long term. We anticipate that these actions will decrease overhead expenses by approximately $50 million on an annualized basis going forward, and we expect to realize approximately $25 million of savings over the remainder of fiscal 2020. Included in our second quarter SG&A is approximately $8 million in severance costs offset by the reversal of an $8 million accrual for discretionary benefit plan contributions that will not be made. We will continue to review our cost structure as we further refine operating efficiencies and as market conditions evolve. As we look to the third quarter, we expect some delivery times to remain challenged due to the several weeks of lost or limited construction activity and certain shutdown markets in our second quarter as well as evolving construction practices. We also expect our JV land sales and other income in the next few quarters to be lower due to market conditions. We will delay selling several of our completed apartment communities and other assets until the market for those sales improve. Nonetheless, during the second quarter we did complete the previously contracted sale of our golf course operations, which generated approximately $13 million in gains in other income. Now let me turn it over to Gregg Ziegler.