Toll Brothers, Inc.

Good morning, everyone, and welcome to the Toll Brothers second quarter earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please send to 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 and then one using a telephone keypad. To withdraw your questions, you may press star and two. The company is planning to end the call at 9.30 when the market opens. During the Q&A, we do ask that you please limit yourselves to one question and one follow-up. Please note this event is being recorded. At this time, I'd like to turn the floor over to Douglas Yearley, CEO. Please go ahead.

Thank you, Jamie. Good morning. Welcome and thank you all for joining us. Before I begin, I ask you to read our 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 availability of labor and materials, inflation, and many other factors beyond our control that could significantly affect future results. With me today are Marty Conner, Chief Financial Officer, Rob Parrahouse, 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. We are very pleased with our second quarter results. As mortgage rates have stabilized and buyer confidence has improved, the increase in demand that began in January has continued through our second quarter and into the start of our third quarter. This improvement in demand, combined with our strategy of increasing our supply of spec homes into the spring selling season, and our focus on operational efficiency has resulted in second quarter performance that well exceeded our guidance. As a result, we are raising our full year guidance across most metrics. We delivered 2,492 homes in the second quarter at an average price of $1 million, generating home sales revenues of approximately $2.5 billion, each a second quarter record. Deliveries exceeded the midpoint of our guidance by nearly 400 units, primarily due to cycle time improvements and an increase in the number of spec homes we settled in the quarter. Adjusted gross margin of 28.3% in the second quarter improved 220 basis points compared to last year's second quarter and was 130 basis points better than guidance. Our home building gross margin benefited from cost controls and greater leverage on fixed costs from higher home building revenues. Our SG&A expense in the second quarter was $16 million lower than Q2 of last year. We are benefiting from approximately $50 million of cost reductions that we have taken over the past year, which we expect to be permanent savings. And we continue to target additional opportunities to become even more efficient. As a result of the significant beat on our top line and improved margin performance, we generated second quarter pre-tax income of $430.6 million and earnings per share of $2.85, up 46 percent and 54 percent, respectively, compared to last year's second quarter. Both second quarter records. At second quarter end, our backlog stood at $8.4 billion and 7,574 homes. Our cancellation rate as a percentage of backlog was an industry low 3.9 percent in the second quarter. As a reminder, our buyers are financially invested in their new homes as they make sizable non-refundable down payments that average approximately $85,000. They also become emotionally invested as they personalize their homes by selecting their home sites, adding structural options to match their lifestyles, and selecting finishes that reflect their tastes. In short, they stick. And the profile of our typical buyer is well suited for the current market. Our buyers are more affluent and tend to have significant equity built up in their existing homes which better insulates them from affordability concerns and makes it easier for them to move. In the second quarter, 23 percent of our buyers paid all cash, and those who took a mortgage averaged approximately 70 percent loan to value. In the second quarter, we signed 2,333 net contracts for $2.3 billion, down 19 percent in units and 26 percent in dollars compared to our very strong second quarter last year. Although our second quarter contracts were down on a year-over-year basis, demand has improved significantly compared to the previous three quarters. As I mentioned on our last call, we saw demand start to improve in January. I am pleased to report that these more favorable conditions have continued through our second quarter and into the start of our third quarter. Physical traffic, web activity, and deposits in the first three weeks of May have all been very encouraging. Overall, buyers appear to be adjusting to mortgage rates that have stabilized in the 6% to 7% range. The shock of last year's abrupt spike in rates appears to be wearing off, and buyers are moving on with their lives. As I pointed out in the past, there is a substantial shortage of homes for sale in the U.S. with housing starts failing to keep up with population growth for at least the past 15 years. Now, with 90 percent of outstanding mortgages under 5 percent, the market is seeing the further impact of a low interest rate lock-in effect. Existing homeowners are reluctant to give up their low-rate mortgages, which has led to historically tight resale inventories. In fact, according to recent reports, approximately 35% of homes currently for sale are new construction, compared to the historical norm of between 10% and 15%. This phenomenon has become a boon for home builders, and especially the larger, well-capitalized public builders who are more efficient and better positioned to take advantage of opportunities compared to smaller private builders. With such low levels of resale inventory on the market, buyers are gravitating to new homes. As they do, they benefit not just from the opportunity to buy new, but they can also take advantage of incentives like rate buy downs that are generally not available on resale homes. In addition to the underproduction of new homes in this country and the low level of resale inventory, there are many other factors that continue to support the housing market. These include favorable demographics with millions of millennials and baby boomers on the move. Millennials, in particular, are buying their first home later in life when they have higher incomes and accumulated wealth. Migration trends are driving the population south and west, which not only increases demand in these markets, but alleviates some of the affordability pressures as buyers move from high-cost to low-cost markets. More flexibility in the workplace also supports this migration and the housing market in general, as buyers place a greater emphasis on their homes. These trends have staying power that we believe will continue to support housing demand for years to come. A key part of our strategy heading into the spring selling season was to focus on increasing our supply of spec homes to support deliveries in the second half of fiscal 23 and throughout 2024. With demand better than expected this spring, this strategy is paying off. Demand for our spec homes in the second quarter remains strong, representing approximately 40% of our orders in the quarter. As a reminder, we define a spec home as any unsold home with at least a foundation in the ground. We sell our specs at various stages of construction, which still allows many of our buyers the opportunity to personalize their finishes. For those who prefer an even quicker move-in, When we do finish our homes, we include designer-appointed features that reflect the luxury toll brand. Specs also allow buyers to lock their mortgage rates at or near the time of contract. We believe that in this market, our spec strategy continues to make sense. With such limited resale inventory, specs fill a significant gap in supply. We expect that specs will continue to comprise between 30 and 40% of our sales for the foreseeable future. The more stable environment has allowed us to increase price in more than half of our communities. Factoring in base price increases and incentive reductions, we have increased price by an average of approximately $25,000 per home in the second quarter. We also saw modest improvements in our supply chain and some easing in labor constraints, especially at the front end of the construction process. As a result, we saw our cycle times improve by approximately two weeks on average across our communities during the second quarter. The improvement in cycle times combined with a stronger demand environment and our focus on increasing spec production has led us to increase our full-year deliveries guidance. We now expect to deliver between 8,900 and 9,500 homes, an increase of approximately 700 homes at the midpoint of our previous guidance. We are also increasing our guidance for our full year average delivered price to between 975 and $995,000. This translates to a home building revenue projection of approximately $9.2 billion for the full year. We are also increasing our full year adjusted gross margin guidance from 27 percent to 27.8 percent. As I mentioned earlier, we expect to benefit from greater fixed cost leverage on higher revenues. We are also benefiting from being a more efficient builder with a streamlined portfolio of floor plans and option selections. On the land front, we remain committed to our disciplined and capital-efficient land acquisition strategy, as well as our focus on returning capital to stakeholders. At the end of our fiscal second quarter, we owner-controlled 71,300 lots, of which 49% were controlled and 51% owned. Approximately 7,500 of these lots are already committed to buyers in our backlog Excluding these, our controlled land represents 55% of lots. This provides us with sufficient land needed for significant growth well into the future. Therefore, we will continue to be very selective on new land deals as we apply our more rigorous underwriting standards. Our financial position and liquidity remain very strong. In the second quarter, we retired $400 million of senior notes and extended our term loan and revolving credit facilities out five years. At quarter end, our net debt to capital ratio was 23.5%. We also purchased $84 million of our common stock at the average price of approximately $58 in the second quarter and paid $46 million in dividends year to date. In March, our Board approved a 5% increase in our quarterly dividend. These actions reflect our confidence in the business and our commitment to delivering returns to shareholders. With that, I'll turn it over to Marty. Thanks, Doug.

Good morning, everyone. As Doug mentioned, we had a terrific second quarter. We beat our guidance for home building revenues, adjusted gross margin, SG&A, and earnings. Our quarter-end backlog of 7,574 homes and $8.4 billion is strong, with high embedded gross margins, and our cancellations have remained low. And we believe we have the right strategy in place to replenish this backlog and support deliveries in the second half of fiscal year 23 and throughout fiscal year 24. Home building revenue of $2.5 billion on 2,492 delivered homes were both second quarter records, increasing 14 percent in dollars and 4 percent in units compared to one year ago. We signed 2,333 net contracts in the second quarter for $2.3 billion. The average price of contracts signed in the quarter was approximately $975,000, down about 2.1 percent compared to the first quarter of fiscal year 23. This decline was due to mix. As Doug mentioned, we actually raised price an average of $25,000 per home in the second quarter. Pre-tax income was $430.6 million compared to $295.8 million in the second quarter of fiscal 2022. Net income was $320.2 million, or $2.85 per share diluted, compared to $220.6 million and $1.85 per share diluted one year ago, leading to a book value per share of $58.67 at quarter end. Our second quarter adjusted gross margin was 28.3 percent compared to 26.1 percent in the second quarter of 2022. And that was 130 basis points better than projected. The improvement was due primarily to better cost control and fixed cost leverage on a higher than expected home building revenues. As Doug mentioned, we are raising our full year adjusted gross margin guidance from 27.0% to 27.8%. In our third quarter, we expect adjusted gross margin of 27.7%. During our most recent quarter, impairments and write-offs in home building cost of revenues were approximately $11 million. About $6 million of this related to sunk pre-development and walk-away costs, with the remainder related to three operating communities. SG&A, as a percentage of revenue, was 9.1% in the second quarter, compared to 11.1% in the second quarter of last year. And that was 210 basis points better than projected. SG&A expense was $16 million lower in Q2 of fiscal year 23 compared to last year's second quarter. $13 million of this improvement was from lower G&A costs with selling and market expenses $3 million lower. As we enter the second half of the year, we expect our G&A costs to remain relatively flat on the dollar basis as we continue to benefit from previous cost reductions with modest increases in selling and advertising costs, as the homes we sold in the slower second half of fiscal year 22 are being delivered over the next several quarters. Overall, we are projecting full-year SG&A costs to be approximately 10% of home building revenues, which would be about flat compared to fiscal year 2022, and which represents 100 basis point improvements from our prior guidance. For the third quarter of fiscal year 2023, we expect SG&A to be approximately 9.7 percent of home building revenue. Second quarter JV, land sale, and other income was approximately $1 million, in line with our break-even guidance. We are maintaining our full-year guidance for this item at $125 million. We expect third quarter joint venture, land sales, and other income to be approximately $25 million. With the balance in the fourth quarter coming primarily from several apartment projects, we are working to sell before year end. Our tax rate in the quarter was 25.6%, slightly better than guidance of 26%. We finished the quarter with a net debt to capital ratio of 23.5 percent, $762 million in cash and equivalents, and $1.8 billion available under our $1.9 billion revolving bank credit facility. During the quarter, we retired $400 million of four and three-eighths senior notes at maturity and extended the term loan and revolving bank credit facilities out five years. As a result, We have no significant bank or senior debt maturities until fiscal 2026. This financial position provides us with ample flexibility to both grow our business and return capital to our shareholders. We are projecting fiscal year 2023 third quarter deliveries of between 2,350 and 2,450 homes with an average price of $1 million As Doug noted, we expect full-year deliveries to be between $8,900 and $9,500. We have also increased our projected full-year average delivered price to be between $975,000 and $995,000, which is $10,000 above our prior guidance at the midpoint. We expect interest in cost of sales to be approximately 1.5 percent in the third quarter and for the full year as we continue to benefit from our reduced leverage. We expect community count to be approximately 360 at the end of the third quarter and approximately 385 by fiscal year end. We also expect continued community count growth in fiscal year 2024. We project a tax rate of approximately 26% for the third quarter and 25.7% for the full year. Our weighted average share count is expected to be $111 million for the full year and $110.5 million for the third quarter. Based on all these factors, we project earnings between $10 and $11 per diluted share for the full year, with the return on beginning equity approaching 20%. Now let me turn it back to Doug.