Toll Brothers, Inc.

Good morning and welcome to the Toll Brothers fourth 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. The company is planning to end the call at 9.30 when the market opens. During the Q&A, please limit yourself to one question and one follow-up. Please also note, this event is being recorded. I would now like to turn the conference over to Douglas Yearley, CEO. Please go ahead.

Thank you, Tom. Good morning. Welcome and thank you for joining us. With me today are Marty Conner, Chief Financial Officer, Fred Cooper, Senior VP of Finance and Investor Relations, Wendy Marlette, Chief Marketing Officer, and Greg Ziegler, Senior VP and Treasurer. Before I begin, I ask you to read the statement on forward-looking information in our earnings release of last night 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, interest rates, the impact of the pandemic, the availability of labor and materials, inflation, and many other factors beyond our control that could significantly affect future results. I'm incredibly proud of our company's performance this year as we executed on our strategic goals of driving growth, increasing profitability, and improving capital efficiency. In fiscal 2021, we delivered nearly 10,000 homes, the most in our history, and we grew home building revenue by 20% to a record $8.4 billion. We continue to expand our margins. Our full fiscal year 2021 adjusted gross margin was 25%, a 150 basis point improvement over fiscal 2020, and we reduced our SG&A expense as a percentage of revenue by 160 basis points year over year to 10.9%. We nearly doubled our pre-tax income to $1.1 billion, achieved our highest net income ever of $833.6 million, and we grew earnings per share from $3.40 last year to $6.63 in fiscal 2021. And we delivered on our strategy of improving returns. with an increase in return on beginning equity of 830 basis points to 17.1 percent for the full year. These results reflect the strength of the housing market, the benefits we are realizing from our strategic expansion into new product lines, price points, and geographies, and our focus on driving operating efficiencies and improving the capital efficiency of our land acquisition strategy. At fourth quarter end, option lots represented 55% of our total lots, up from 43% one year ago. And while we were pleased with our performance in fiscal 2021, we expect even better results in 2022. At fiscal year end, our backlog stood at a record $9.5 billion and 10,302 homes. It is supported by substantial non-refundable deposits and our cancellation rate as a percentage of beginning quarter backlog was a very low 1.3% in the fourth quarter. Based on this solid backlog, we expect to grow home building revenues by an additional 20% in fiscal year 2022. We also expect to increase our full year adjusted gross margin by 250 basis points due primarily to the strong pricing in our backlog, which reflects the significant price increases that we've implemented over the past year, plus the operating efficiencies that we continue to gain through optimized floor plans, curated options in our design studios, and streamlined operations. And we project a return on beginning equity well above 20% in fiscal year 2022 driven by our permanent pivot to a more capital-efficient land strategy and our improved profitability. In the fourth quarter, demand for our homes remained very strong. We signed 2,957 net contracts for approximately $3 billion, up 18% in dollars due to a 26% increase in the average selling price of our homes year over year. As we start fiscal 2022, demand continues to be very healthy. We have averaged over 300 non-binding reservation deposits per week in the first five weeks of our fiscal first quarter, the same pace we have run at for many months now. On a per community basis, this pace is also consistent with the pace that we saw over the comparable five-week period last year. We are very encouraged by this, considering how strong the first quarter of fiscal 2021 was. Demand strength is broad-based across both geographies and product types. We are benefiting from the wide variety of homes and price points that we now offer in more than 60 markets in 24 states. In the fourth quarter, we raised prices in nearly all markets and limited lot releases in about 20% of our communities. This has allowed us to capture price appreciation and also to manage production schedules. As discussed last quarter, in certain markets, more normal seasonal demand patterns have returned. Our ability to continue raising prices illustrates the deep strength of this housing market, as well as the advantages we enjoy as America's luxury homebuilder. This week, we raised prices again in all of our markets nationwide. The housing market is being driven by solid fundamentals, including favorable demographics, pent-up demand from over a decade of underproduction of new homes, low mortgage rates, and a tight resale market. According to a Redfin report from last week, in the last full week of November, The number of homes for sale nationwide hit an all-time low, and a third of homes sold in one week or less during the month of November. Additionally, many Americans have fundamentally shifted their lifestyles and re-evaluated where and how they want to work and live. This is driving migration patterns to the Sun Belt and Mountain States, where we have significantly expanded our presence in recent years. Our build-to-order model appeals to an affluent customer base that is placing more importance on their homes and gravitating to the personalization we offer in designing and finishing homes. They are not maxing out their mortgages, and they are less susceptible to affordability issues. They have enjoyed years of price appreciation in their current homes and in the stock market. Since most of our move-on and active adult customers have a home to sell, the tight resale market gives them confidence that they can sell their home quickly and at an appreciated value that can be reinvested in their new home. And we continue to realize the benefits of our strategic expansion into the affordable luxury segment. In the fourth quarter, approximately 42% of our new contracts were in this segment. Over the past two years, Nearly half of the lots we placed under contract were for our affordable luxury communities. We believe all of these factors will continue to contribute to strong and sustained demand for our homes in the years to come. While the environment for home builders remains healthy, this market is not without its challenges. Consistent with other builders and nearly every other company in the broader economy, we continue to face supply chain disruptions, and labor constraints. These issues extend beyond just construction cycle times and impact land development and municipal approvals and inspections as well. While we have been able to more than offset cost pressures with price increases, these production constraints continue to extend cycle times and put pressure on deliveries. In our fourth quarter, we saw average cycle times increased by about two weeks compared to the third quarter. On average, it is now taking us about six to eight weeks longer to deliver a home than it took one year ago. We do not anticipate these labor and supply chain conditions will improve in the near term. Our delivery projections for full fiscal 2022 are based on production schedules that reflect current labor and supply chain conditions. They are not based on any assumption that labor or supply chain conditions improve. Similarly, our projected 250 basis point increase in adjusted gross margin does not assume any improvement in labor or material markets. Given the high degree of uncertainty, regarding when supply chain and the labor markets will normalize, we believe these assumptions are prudent. Our land strategy continues to serve us well on this market. We are poised for significant growth in 2022 and beyond with a pipeline of owned and controlled land that will feed our projected 10% community count growth by the end of fiscal 2022. This projection is based solely on land we own or control today. We also have land under control today for meaningful further community cap growth in fiscal year 2023. We continue to generate strong cash flow and have a healthy balance sheet with ample liquidity. This gives us the flexibility to continue to invest in the growth of our business while returning capital to our shareholders and reducing debt. In fiscal 2021, we returned approximately $455 million to shareholders through dividends and buybacks and reduced debt by approximately $400 million. We intend to continue to prioritize growth with a balanced approach to capital return and leverage. We are targeting buybacks of approximately $100 million per quarter in fiscal year 2022. With that, let me turn it over to Marty.

Thanks, Doug. In fiscal year 2021's fourth quarter, we delivered 3,341 homes and generated revenues of $2.95 billion, which were up 13.6% in homes and 18% in dollars from one year ago. The average price of homes delivered was $883,000, benefiting from more city living and Pacific deliveries than had been anticipated. Fourth quarter net income was $374.3 million, or $3.02 per share diluted, compared to $199.3 million and $1.55 per share diluted one year ago. Our fourth quarter adjusted gross margin was 25.9%, compared to 24% in the fourth quarter of 2019. This 190 basis point increase in our adjusted gross margin was due primarily to our ability to raise prices, as well as favorable mix coming a quarter earlier than expected from the Pacific region and city living noted above. SG&A as a percentage of revenues was 8.8% in the quarter, compared to 9.9% in the same quarter one year ago. This year-over-year reduction in SG&A is due to both the leverage from increased revenues and tighter cost controls on items such as headcount, advertising, model home expenses, and broker commissions. Joint venture, land sales, and other income was $63.5 million during the fourth quarter compared to $11.2 million in the fourth quarter of fiscal year 2020. and approximately $20 million better than projected. The outperformance was primarily due to an asset sale in our apartment living business that occurred sooner and at a better cap rate than expected, as well as better than expected performance in our mortgage and title operations. Our apartment living business had an active and productive year in fiscal year 2021. In addition to starting about a dozen new projects across the country, We sold five projects during the year with a total of 1,420 units that generated cash to Toll Brothers of approximately $106 million and resulted in $75 million of income from unconsolidated entities. We expect a steady flow of projects reaching stabilization and being sold each year going forward. Last quarter, we announced a strategic partnership between our apartment living unit and EQR, Under this arrangement, we expect to be able to improve the capital efficiency of our apartment living business. We continue to explore similar programmatic relationships for markets that are not covered by our joint venture with EQR. Impairments and write-offs total $10.5 million in the quarter concentrated in our north segment. We continue to generate strong cash flow, with $1.3 billion of cash flows from operations this year. We ended the fiscal year with approximately $3.45 billion of liquidity, including $1.64 billion of cash and $1.81 billion available under our revolving bank credit facility. During the year, we invested $1.9 billion in land acquisition and development, returned $455 million to shareholders through shareholder purchases and dividends, and reduced debt by approximately $400 million, lowering our net debt-to-capital ratio to 25.1% at fiscal year-end. Last month, we repaid all $410 million of 5 and 7-8 notes that were due in February of 2022 at FARC. At fiscal year end, we also extended the maturity of both our $1.9 billion revolving credit facility and our $650 million term loan. Each of these facilities is now scheduled to mature on November 1, 2026, five years out. Our next significant public debt maturity is not until April 2023, when $400 million of senior notes comes due, and after that, another $350 million of notes are due in November of 2025. Looking forward, we are projecting fiscal year 22 first quarter deliveries of approximately 2,000 homes with an average price of between $865,000 and $885,000, consistent with normal seasonal patterns First quarter deliveries are expected to be the low point of the year, with deliveries for the full fiscal year weighted to the second half, also consistent with seasonal patterns. For full fiscal year 2022, we are projecting new home deliveries of between 11,250 and 12,000 homes. with an average price between $875,000 and $895,000. In light of the challenges caused by labor shortages, supply chain disruptions, and related issues with municipalities, it is important to note that our delivery projections for the first quarter and full year are based on lower backlog conversion ratios than historical trends would suggest. We hope the construction environment improves in fiscal year 2022, but we are not factoring improvement into our guidance. We expect adjusted home sales gross margin in fiscal year 2022 to be approximately 27.5% for the full fiscal year. This is 250 basis points higher than 2021. We steadily increase prices over the course of fiscal 2021. We expect those price increases to flow through our gross margin over the course of fiscal year 2022. In addition, we expect peak lumber prices from last year to be reflected in our first half deliveries. Therefore, we expect adjusted gross margin in the first quarter to be the low point of the year at approximately 25.5%, with a modest increase in Q2, followed by significant growth in margin in the second half of the year. We expect interest and cost of sales to be approximately 2.2% in the first quarter and 2.1% for the full year. The lower expected interest expense in our cost of sales is due in large part to the debt reduction actions that we have taken over the past 12 months. We project first quarter SG&A as a percentage of home sales revenues to be approximately 14.1% versus 14.9% one year ago. Included in first quarter SG&A is about $11 million, or 63 basis points, of our normal annual accelerated stock compensation expense that will not recur in the remainder of the year. For the full year, we project SG&A as a percentage of home sales revenues to be approximately 10.5%. Doug mentioned that we project community account growth of 10% by fiscal year end 2022. Based on the high number of community closeouts that we project for the first quarter and the typical seasonality of fewer community openings in November and December, we expect community account to dip to 325 at the end of the first quarter before steadily rising over the remaining course of the year Again, this projection is based on land we already own or control. Other income from unconsolidated entities and land sales gross profit is expected to be approximately $30 million in the first quarter and $100 million for the full year. We project a first quarter and full year tax rate of approximately 26%. Our weighted average share count is expected to be approximately 123 million shares for the first quarter and 121.5 million for the full year. Put this all together using our midpoints, and we are guiding to fiscal year 2022 earnings per share of approximately $10. This represents a 50% increase in earnings per share over 2021. Now let me turn it back to Doug.