Toll Brothers, Inc.

Good morning and welcome to the Toll Brothers fourth quarter fiscal year end 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 Douglas Yearley, Chairman and Chief Executive Officer. Please go ahead.

Thank you, Gary. Welcome and thank you for joining us. I hope you, your families, and colleagues are staying well. With me today are Marty Conner, Chief Financial Officer, Fred Cooper, Senior VP of Finance and Investor Relations, Wendy Marlett, Chief Marketing Officer, and Greg Ziegler, Senior VP and Treasurer. Before I start, 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 impact of the COVID-19 pandemic, and many other factors beyond our control that could significantly affect future results. Now let's begin. I will focus primarily on the current sales environment and then turn it over to Marty and Greg to address our financial results. and our guidance. In these challenging times, our team delivered on all fronts in our fourth quarter, exceeding our expectations for sales, revenues, margins, and earnings. I am tremendously proud of how we have adapted to a rapidly changing environment. We are currently experiencing the strongest housing market I've seen in my 30 years at Toll Brothers, and we continue to increase prices in nearly all of our communities as we focus on driving profitability and managing growth. The strong demand began for us in mid-May and has continued through today. In our fourth quarter, which ended October 31st, net signed contracts of 3,407 homes and $2.74 billion were the highest totals for any quarter in our history, up 68% in homes and 63% in dollars compared to one year ago. In the first six weeks of our quarter through December 6th, Our non-binding reservation deposits, which are a precursor to contracts, are up approximately 48% compared to one year ago. Demand has continued to be very strong in the first quarter. In fact, this Saturday, we will raise prices nationwide for the fifth time this calendar year. Layered on top of these national increases are many more frequent community-specific price increases. As we previously announced, midway through our fourth quarter, net signed contracts were up 110%. We strategically moderated the sales pace in the second half of the quarter by increasing prices in nearly all of our communities and limiting lot releases in about 15 to 20% of our communities. What this means is that for these communities, we put in place a monthly allocation of homes to sell. We employ this strategy in some of our hottest selling communities where there is a limited finish lot supply or extended delivery times due to prior strong sales. Of course, in these communities, we have some of the best pricing power around the country. We've continued this strategy into our first quarter of fiscal 2021. Our 10.8 contracts per community were our highest fourth quarter ever and the highest for any quarter in 15 years. Our cancellation rate for the fourth quarter, fourth quarter cancellations divided by fourth quarter contracts, dropped to 5.4% from 8.9% in last year's fourth quarter. Our buyers typically provide a non-refundable down payment of between 7% and 10% of the purchase price. which results in the lowest cancellation rate among the major builders. In fiscal year 2020's fourth quarter, our traffic to deposit ratio of 9.9% and our traffic to agreement ratio of 6.7% were our second highest conversion ratios ever. Customers who visited our communities, whether in person or online, were intent on buying. We see strength in every region. Even our city living urban high-rise division, which is focused on Metro New York City, is showing some signs of improvement. We attribute the strength in demand to a number of factors, some of which apply to the home building industry in general, and some of which are specific to Toll Brothers and our customers. We believe the market is on a solid foundation and has significant room to run. Historically low interest rates are driving the new home market at all price points. We expect low rates to continue for some time. Additionally, a very tight resale market is leading more people to the new home market. Currently, there is only 2.5 months supply of resale homes on the market, the lowest on record. Resale homes are moving quickly. According to Redfin, in October, a record high 35% of all resales nationwide sold above asking price. Also, there remains significant pent-up demand due in part to the underproduction of new homes over the past decade, as well as the impact of many millennials delaying homeownership decisions. We are finally seeing the millennial generation start to transition from renters to homeowners. Based on the annual average rate of new home production over the past 50 years and the growth in U.S. households, we estimate the industry has underproduced nearly 6 million single-family homes since the start of the housing recovery in 2008. That's 6 million fewer people that bought a home in the last decade who would have in prior decades. Even now, production is just reaching historic norms. In addition to these positive industry trends, there are tailwinds supporting Toll Brothers' upscale market segment and build-to-order strategy. Since most of our customers have a home to sell, the tight resale market gives them confidence they can sell their home quickly and at an appreciated value that can then be reinvested in their new home. The job picture for our customer base is solid and improving. The work-from-home phenomenon is driving demand as it allows more buyers to live where they want rather than where their job previously required. Due to this phenomenon, we are seeing an increase in relocation traffic. We also believe our more affluent customer will have greater flexibility to work remotely and is therefore out in the market looking for their ideal home. Our build-to-order model is particularly well-suited to this moment as Americans place more importance on their homes. Our expansive, flexible floor plans provide buyers with more space for living, learning, working, and entertaining. Whether it's home offices, fitness rooms, multi-generational living suites, or stunning indoor-outdoor living areas, we offer the features that customers desire as they personalize their homes to reflect their lifestyles. This quarter, our buyers added, on average, 22% of the delivered price, or $183,000, in upgrades to their homes. So, as we look to fiscal year 2021, we believe we are well positioned for growth. With our highest year-end backlog in 15 years and continued strong demand, we expect to deliver the most homes in our history in fiscal year 21. In addition, our longer land position is helping fuel growth. We ended fiscal year 2020 with 317 selling communities, and we expect to grow this by approximately 10% by the end of fiscal year 2021. We also expect our gross margin to improve over the course of the year, as the price increases and strong sales since May are reflected in homes we deliver in the last three quarters of the fiscal year. And we are very focused on improving ROA. Greg will speak more to this in a moment. In short, we are very pleased with our performance in 2020 and look forward to continued growth in fiscal 2021. Now let me turn it over to Marty.

Thanks, Doug. In fiscal year 2020's fourth quarter, we delivered 2,940 homes and generated revenues of $2.5 billion. which were up 10% in homes and 8.9% in dollars from one year ago. The average price of homes delivered was $849,000. Delivery total exceeded our guidance, thanks in large part to great execution by our team. In addition, our backlog cancellation rate was lower than anticipated. We delivered many more spec homes than projected, and buyers were more eager than ever to close as soon as possible and move into their new homes. Fourth quarter net income was $199.3 million, or $1.55 per share diluted, compared to $202.3 million and $1.41 per share diluted one year ago. Our fourth quarter adjusted gross margin was 24%, compared to 23.9% in both the fiscal 2020 third quarter and one year ago. Please note that both current and prior period gross margins and SG&A expense are higher due to a reclassification in sales commissions paid to third-party brokers, which were previously included in home building cost of sales and are now in SG&A. All historical periods and future projections presented reflect this reclassification. This new treatment is consistent with the way we treat sales commissions paid to our internal sales force and conforms our presentation to that of the majority of our homebuilder peers. We have filed an 8K with the SEC to detail the amount of the reclassification, but at a high level, it was approximately two percentage points of revenue in each of the last eight quarters. SG&A, as a percentage of revenues, was 9.9% in the quarter compared to 11.1% in the same quarter one year ago. Again, both of these amounts reflect the third-party broker fee reclassification I just discussed and are therefore about two percentage points higher than they otherwise would have been. The year-over-year reduction in SG&A is due to our efforts to streamline operations and become more efficient in ways we believe will result in permanent cost savings. We continue to focus on additional steps to further reduce SG&A. Joint venture, land sales, and other income was $11.2 million during the fourth quarter. compared to $48.4 million in the fourth quarter of fiscal year 2019. Impairments and write-offs totaled $33.9 million in the quarter. $6.8 million of these impairments were from pre-development costs on proposed projects we controlled through options that we chose not to purchase. And $18 million was associated with our strategic decision to exit two markets. Looking forward, we are projecting first quarter fiscal year 2021 deliveries of approximately 1,675 homes with an average price of between $780,000 and $800,000. First quarter 2021 delivery guidance reflects our team's delivery of about 450 more homes than projected in our fourth quarter of fiscal year 2020. In addition, with our build-to-order models, buyers contract for their customized homes, and we deliver those homes 9 to 12 months later. Therefore, deliveries in Q1 2021 will reflect the slow sales environment we experienced in March through mid-May of 2020. We expect adjusted home sales gross margin in fiscal year 2021's first quarter, with deliveries from this slow sales period to be approximately 22.4%. This first quarter adjusted gross margin is expected to be the low point of the year. We expect interest and cost of sales to be approximately 2.5%. We expect price increases from contracts signed in our third and fourth quarters of fiscal year 2020 to positively impact margins over the course of fiscal year 2021. And we expect adjusted home sales gross margin in fiscal year 2021 to grow steadily after the first quarter and be approximately 24.1% for the full fiscal year. We expect interest in cost of sales for the full year to be approximately 2.5%. We project first quarter SG&A as a percentage of home sales revenues to be approximately 15.8% versus 16.8% one year ago. Included in first quarter SG&A is about $11 million, or 80 basis points, of accelerated stock compensation expense that is not expected to recur in the remainder of the year. Again, all of these amounts reflect the reclassification of third-party broker fees from cost of sales to SG&A. First quarter other income, income from unconsolidated entities and land sales gross profit is expected to be approximately $25 million. We project a first quarter tax rate of approximately 26%. our first quarter weighted average share count is expected to be approximately 129.5 million shares. For the full fiscal year 2021, we are projecting new home deliveries of between 9,600 and 10,200 homes with an average price of between $790,000 and $810,000. We expect approximately 60% of our deliveries to occur in our second half of the year, and we expect average delivered price to dip in the second and third quarters due to mix. We project fiscal year 2021 SG&A as a percentage of home sales revenues to be approximately 12.2%. We believe there is significant unrealized profit embedded in our stabilized apartment project. We are choosing to defer sales of these assets until markets improve. As a result, fiscal year 2021, other income, income from unconsolidated entities, and land sales gross profit is expected to be approximately $65 million versus $51 million in fiscal year 2020, with this concentrated in the first and fourth quarters. We project a full-year fiscal 21 tax rate of approximately 26%. Our weighted average share count for the full year is expected to be approximately 129.5 million shares. Now let me turn it over to Greg.