Toll Brothers, Inc.

Good morning and welcome to the Toll Brothers first 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 note this event is being recorded. I'd now like to turn the conference over to Douglas Yearley, CEO. Please go ahead.

Thank you, Jason. Good morning. Welcome and thank you for joining us. With me today are Marty Conner, Chief Financial Officer, Rob Parahouse, President and Chief Operating 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 material, inflation, and many other factors beyond our control that could significantly affect future results. I will begin by sharing some thoughts on current market conditions and sales, along with the challenges we are seeing on the production side and how we are addressing them. I will then turn it over to Marty to discuss the numbers and guidance in more detail. Our first quarter results were solid. Net income and earnings per share rose 57 percent and 63 percent respectively, and home sales revenues grew 20% in dollars and 9% in units compared to last year's first quarter. Our adjusted gross margin of 25.6% in the quarter was 270 basis points, better than last year's first quarter, and our SG&A expense as a percentage of home sales revenue improved 150 basis points over last year. At first quarter end, our backlog stood at a record $10.8 billion and 11,302 homes. Due to the strong demand we continue to see in the market and the good visibility that our backlog provides, we are reaffirming all of our full year guidance. We are pleased with our sales results in the first quarter as we saw broad strength across all of our buyer segments and geographies. We signed 2,929 net contracts for approximately $3 billion, up 2 percent in units and 19 percent in dollars over last year's extremely strong first quarter when orders were up 59 percent in units compared to fiscal Q1 of 2020. Our contracts per community at 8.8 for the quarter remained well above historical averages. This was our best first quarter sales ever. The average selling price of signed contracts in the quarter once again exceeded $1 million and was up approximately $149,000 compared to last year's first quarter. Favorable demand dynamics allowed us to continue raising prices in nearly all of our communities throughout the first quarter. While demand has remained strong, we continue to face challenges on the production side from supply chain disruptions labor shortages, and municipal delays. These challenges were compounded by additional pressure from the Omicron wave as it spread across the country, especially in January when it peaked. It is taking us approximately two months longer to deliver a home today versus one year ago. It's important to point out that these delayed deliveries are not lost. We continue to enjoy historically low cancellation rates and our contracts are supported by an average non-refundable down payment of $71,000. It is simply a timing issue. With demand and pricing as strong as they have been, and with construction schedules that continue to extend due to supply chain, labor, and similar issues, we believe the right strategy for us at this time is to limit sales and continue to focus on production. Over the past six weeks, we increased the number of communities on allocation from 25 percent to today over 50 percent. In many communities, we are using the traditional resale process of best and final sealed bid to maximize price. In addition, we are starting more specs in the second quarter than we typically would to replenish inventory sold last year. As a reminder, spec homes normally represent about 20% of our settlements. It is important to note that this increase in spec starts and purposefully metering sales should not impact the timing of future revenues, as we expect the spec homes started in Q2 to be sold later in the construction process and still be delivered in the first half of 2023. So we expect to start more homes than we sell in Q2, and we expect our sales pace in the second quarter to be similar to the 8.8 contracts per community that we booked in the first quarter. Our non-binding deposits in the first three weeks of February were consistent with the pace of the past nine months, which was approximately 325 deposits per week. We could have taken more deposits these past three weeks, but we chose not to in order to focus on production and manage build times. In order to further streamline our operations and mitigate potential production bottlenecks, we also continue to optimize the number of available floor plans and options we make available in a given community, offering buyers better choices by focusing on those that are most popular and more readily available. and we continue to work closely with our subcontractors and national suppliers so we can anticipate supply chain issues and labor delays and make any necessary adjustments. While we do not anticipate any meaningful improvement in supply chain and labor shortages in the near term, we are encouraged by the recent steep drop in COVID cases and the relaxing of many pandemic restrictions. Turning back to the demand side of the equation, The housing market and demand for our homes in particular is being propelled by strong demographics from both the millennial and boomer generations, the substantial imbalance between the tight supply of homes and continued pent-up demand, the wealth effect of rising existing home equity, migration trends, and the greater appreciation for home. We believe these long-term tailwinds will continue to support demand for our homes well into the future. We continue to see people move from states where home values, taxes, and cost of living are higher to less expensive regions. This dynamic is spurring demand in markets across the country, and particularly in the Sunbelt and Mountain states, where we have expanded in recent years. For these buyers, affordability is less of an issue. We have also not seen an impact on demand from the recent increase in mortgage rates. I remind you that our customers are generally better insulated from affordability concerns compared to buyers in the entry-level market. Our buyers tend to have higher incomes, and they benefited from multiple years of appreciation in their investment portfolios and their existing homes. They also understand that when they contract with us today, their interest rate will not lock until they are much closer to settlement. So we don't believe that demand for our homes is being pulled forward by buyers who are focused on beating a rise in rates. Also keep in mind that rates have no impact on monthly payments for about 15% to 20% of our customers who pay all cash, and that another approximately 30% of our buyers borrow at jumbo rates. which are currently five eighths of a point lower than conforming for our clients. And overall, our customers average less than 70% loan to value in their mortgages. In fact, we've analyzed our backlog and estimate that rates would have to increase to approximately five and one quarter percent before just 10% of our backlog would need to consider an arm, a higher down payment, or other alternative mortgage. This speaks to the credit worthiness and healthy balance sheets of our customers. As I mentioned earlier, we are reaffirming all of our guidance, including a return on beginning equity for fiscal 2022 of approximately 23%. We also expect to generate substantial cash flows in 2022. Our highest capital allocation priority continues to be investment in the growth of the business, including through disciplined and capital-efficient land buying. Of the approximately 86,500 lots we owned and controlled at January 31, 54% were optioned and 46% were owned, compared to 46% optioned one year ago. Our shift to more optioned lots is an important part of our capital efficiency strategy and our focus on returns. This lot position also provides us with all the land we need for our projected community count growth in fiscal year 2022 and beyond. We continue to expect approximately 10% community count growth by the end of fiscal 22 from the 340 communities we were operating at the end of fiscal 2021. We continue to use excess cash to further reduce leverage and return capital to shareholders. In the first quarter, we repaid $410 million of our senior notes. We also repurchased $185 million of our stock, which reduced our outstanding share count by approximately 2.5 percent, and we paid dividends of approximately $21 million. Our balance sheet remains strong. with ample liquidity, strong expected cash flow generation, and declining leverage. These factors, along with the positive fundamentals underlying our business, contributed to Moody's upgrading us to an investment grade credit rating last month. With that, I'll turn it over to Martin.

Thanks, Doug. In our first quarter, we delivered 1,929 homes at an average price of approximately $875,000, generating home building revenues of $1.69 billion, which was up 9% in units and 20% in dollars from one year ago. Settlements came in 71 units below our expectation due to the supply chain disruptions, labor shortages, and municipal delays that Doug mentioned. We felt the greatest impact in January, the last month of our quarter, as the effects of the spread of Omicron were most acute. Fortunately, Omicron and the pandemic now seems to be waning. Our first quarter pre-tax and net income were $200.8 million and $151.9 million, respectively, both up approximately 57% compared to 127.4% and $96.5 million, respectively, in the first quarter of 2021. Earnings per share in the first quarter were $1.24 per share diluted, up 63 percent compared to the 76 cents per share diluted that we earned one year ago. The net income and earnings per share growth percentages were approximately triple our revenue growth percentage growth. Our first quarter adjusted gross margin was 25.6% compared to 22.9% in the first quarter of 2021. The 270 basis point improvement reflects the strong pricing environment over the last year. It also includes the impact of elevated lumber prices from last spring in this quarter's closings. We continue to project an adjusted gross margin of approximately 27.5% for the full year. We expect adjusted gross margin of 25.5% for the second quarter of fiscal year 22 as the impact of elevated lumber prices from last spring continues. This will be followed by a ramp up in our gross margin in the third quarter and a greater ramp in our fourth quarter. SG&A, as a percentage of revenue was 13.4% in the first quarter, compared to 14.9% in Q1 of last year, and 70 basis points better than projected. Joint venture, land sales, and other income met our guidance at approximately $30 million in the first quarter. Impairments and write-offs were $2.2 million in the quarter. Our tax rate in the quarter was 24.4% compared to guidance of 26%. Turning to future guidance, we are projecting fiscal year 2022 second quarter deliveries of 2,350 homes with an average price between $865,000 and $885,000. We are maintaining our full year delivery guidance of between 11,250 and 12,000 homes with an average price between $875,000 and $895,000. Deliveries will be back half-weighted and will be consistent with seasonal patterns. We expect interest and cost of sales to be approximately 2.1% in the second quarter. We project second quarter SG&A as a percentage of home sales revenues to be approximately 11.9%. For the full year, we continue to project SG&A as a percentage of home sales revenues to be approximately 10.5%. We expect community count to be approximately 330 at the end of the second quarter and 375 by fiscal year end. Other income, income from unconsolidated entities and land sales gross profit is expected to be approximately $5 million in the second quarter and $100 million for the full year. We project a tax rate of approximately 26% for the second quarter and 25.8% for the year. Our weighted average share count is expected to be $121.5 million for the full year and $122 million for the second quarter. Based on all these factors, We continue to project approximately $10 per share in full year earnings per share and a return on beginning equity of approximately 23%. Now let me hand it back to Doug.