Toll Brothers, Inc.

Good morning and welcome to the Toll Brothers third quarter fiscal year 2023 conference call. All participants will be in a 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 1 on your telephone keypad. To withdraw your question, please press star then 2. The company is planning to end the call at 9.30 when the market opens. During the Q&A session, please limit yourself to one question and one follow-up. Please note, this event is being recorded. I would now like to turn the conference over to Douglas Yearley, CEO. Please go ahead.

Thank you, Betsy. 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 had another terrific quarter and are very pleased with our fiscal third quarter results. We beat our guidance for home sales revenues, adjusted gross margin, SG&A margin, and earnings. Our quarter end backlog of 7,295 homes and $7.9 billion is strong, and our cancellations remain very low. The market for new homes is solid, and we are well positioned with the right strategy in place to take advantage of it. As a result, we are raising our full year guidance for all of our core home building metrics including deliveries, adjusted gross margin, and SJ&A margin. We now project earnings of between $11.50 and $12 per diluted share in fiscal 2023, and a return on beginning equity of approximately 22%. In the quarter, we delivered 2,524 homes at an average price of $1,006,000, leading to record third quarter home sales revenues of $2.7 billion. Adjusted gross margin was 29.3%, or 140 basis points above last year's third quarter, and our SG&A expense was 8.6% of home sales revenues, 170 basis points better than last year. Our margins continue to benefit from cost controls and greater leverage from higher revenues. With a significant beat on our top line and improved margin performance, we delivered earnings per share of $3.73, a third quarter record. We signed 2,245 net contracts for $2.2 billion in our third quarter, up 77% in units and 30% in dollars compared to last year's third quarter when mortgage rates were much lower in the 5% to 6% range. On a per-community basis, we sold at a pace of 2.2 homes per month compared to 1.3 last year and 2.3 last quarter. Demand was stronger than normal in our third quarter compared to the second, with contracts down only 4% sequentially versus the long-term average of down 15%. Remember, the second quarter is historically stronger than the third since it is in the heart of the spring selling season. So running almost flat Q3 to Q2 is very encouraging, particularly with rates higher in Q3 than Q2. Demand was also solid across both geography and product lines in our third quarter, and we raised price by an average of $20,000. We saw particular strength in the mountain and south regions where we tend to have lower average prices. Due to this shift in mix and notwithstanding the price increase, our average sales price was flat compared to the second quarter. In terms of cadence, we saw a relatively steady number of deposits and contracts each month of the third quarter. Actually, June was our strongest month, when normally July is strongest. Often that is influenced by a sales event, and this year we ran a national sales event in June rather than July. As we start our fourth quarter, demand remains solid. August deposits are usually down 25 to 30% versus July, based on long-term historical trends, as summer winds down and kids return to school. So far in August, deposits are only down 11%, and both physical and web traffic is up slightly compared to July. While it is only three weeks, this is encouraging considering the increase in mortgage rates that has occurred during this period. We attribute the solid demand for new homes, at least in part, to the well-publicized shortage of existing homes for sale. Existing homeowners are clearly reluctant to give up their low-rate mortgages. And while rising rates remain a challenge for the overall industry, they further cement the lock-in effect that has kept resale inventory at historically low levels. This has become a tailwind for homebuilders, and especially the larger, well-capitalized builders who build at lower costs and are better positioned to take advantage of spec building and buying down mortgage rates. The supply, demand, and balance created by low resale inventory compounds the impact of the persistent underbuilding of homes over the past 15 years. Even before resale inventory dropped, there was a structural shortage of anywhere between 3 and 6 million homes in this country. In addition, demographic and migration trends continue to provide long-term support support for the industry with millennials forming families and buying their first home later in life when they have higher incomes and accumulated wealth. Baby boomers who are either retiring or planning for it are also moving as they adjust to their new lifestyles. There also appears to be an increase in generational wealth transfer with parents helping their kids buy homes. All of these factors combined have kept demand for new homes solid in the face of higher rates, and we are benefiting. Our strategy of increasing our supply of spec homes, which we implemented several quarters ago, has helped us meet demand while also helping to improve our cycle times. Our spec homes represented approximately 40% of our orders in the third quarter, and we expect that to continue in the near term. Specs were 28% of deliveries in the third quarter. We define a spec as any home without a buyer that has a foundation poured. We sell our specs at various stages of construction with a preference to sell before we finish the home as many of our buyers want to personalize their homes. In this way, our buyers are able to select their fixtures, appliances, flooring, and other finishing options while we benefit from a faster and more efficient construction schedule. At third quarter end, our backlog stood at $7.9 billion and 7,295 homes. Our cancellation rate as a percentage of backlog was 3.2% in the third quarter down from 3.9% in the second quarter. Our industry low cancellation rate is due to the significant upfront down payments our buyers make, as well as the emotional attachment they form as they personalize their homes with us. Our buyers also tend to be more affluent. In the third quarter, 25% of our buyers paid all cash, up from 23% in the second quarter, and our long-term average of 20%. Buyers who do take a mortgage make higher down payments, with an average LTV of 68% in this past quarter. We are also seeing modest improvements in our cycle times as supply chains and labor constraints continue to ease and as we increase production of spec homes. We expect cycle times to continue to improve as we move forward, which should further benefit our already strong cash flows. Turning to land, at the end of our fiscal third quarter, we owned or controlled 70,200 lots, half of which were controlled and the other half owned. Excluding the 7,295 lots committed to homebuyers in our backlog, our controlled land represents 56% of total lots. Our lot count is down nearly 15% year over year, which reflects our selective approach to buying land and our focus on ROE and capital efficiency. Still, this land position provides us with sufficient land needed for growth in fiscal year 2024 and beyond, and allows us to continue being selective and disciplined in our approach to buying land. Since the start of the third quarter, we've repurchased $163 million of our common stock, bringing our year-to-date repurchase to $265 million at an average price of $68. We have also paid $69 million in dividends year to date. We expect buybacks and dividends to remain an important part of our capital allocation priorities well into the future. As a reminder, we have planned for $400 million of share repurchases in fiscal 2023. Assuming we buy back an additional $144 million at the current price, In the fourth quarter, which would get us to the $400 million for the year, we will have bought back about 5% of our diluted share count at the beginning of the year. With that, I'll turn it over to Marty.

Thanks, Doug. It was a great quarter. We grew earnings per share by 59% and net income by 52% over last year. Home building revenue of $2.7 billion was a third quarter record and increased 19% compared to one year ago. We delivered 2,524 homes in the quarter, up 5% year over year. With the outperformance in the third quarter, we are raising our full-year deliveries guidance. We now expect to deliver between 9,500 and 9,600 homes an increase of approximately 200 homes at the midpoint of our previous guidance. We are also increasing our guidance for full-year average delivered price to between $1,005,000 and $1,015,000. This translates to a home building revenue projection of approximately $9.65 billion at the midpoint for the full year. We signed 2,245 net contracts in the third quarter for $2.2 billion, up 77% in dollars and 30% in units over last year. The average price of contracts signed in the quarter was approximately $964,000, which was down 1.1% compared to our second quarter average price of $975,000. As Doug noted, we actually raised price by an average of $20,000 in the third quarter through base price increases and reduced incentives, which was offset by changes in mix. Turning back to the P&L, pre-tax income was $553 million compared to $366 million in the third quarter of fiscal 2022. Net income was $414.8 million, or $3.73 per share diluted, compared to $273.5 million and $2.35 per share diluted one year ago. Our third quarter adjusted gross margin was 29.3%, compared to 27.9% in the third quarter of 2022. and 160 basis points better than projected. The improvement was due primarily to better cost control and fixed cost leverage on higher-than-expected home sales revenues. We are raising our full-year adjusted gross margin guidance from 27.8% to 28.5%. This 28.5% is also what we expect in our fourth quarter. Note that our fourth quarter gross margin guidance includes the impact of homes that we sold a year ago in a softer sales environment. SG&A as a percentage of revenue was 8.6% in the third quarter compared to 10.3% in the third quarter of last year. And this is 170 basis points better than projected. In dollar terms, our SG&A expense was $4 million lower this quarter compared to the third quarter of fiscal year 22, despite over $400 million of additional home sales revenue and the impact of inflation. As we've pointed out before, we've been very focused on becoming more efficient, and we are now seeing the benefits flow through our results. We are projecting full-year SG&A costs to be approximately 9.4% of home sales revenues which represents a 60 basis point improvement from our prior guidance. For the fourth quarter of fiscal year 2023, we expect SG&A to be approximately 8.8% of home sales revenue. Third quarter JV, land sales, and other income was $39.4 million in the quarter, or $14.4 million above our guidance. We now expect our full-year joint venture land sales and other income to be approximately $105 million, down from the $125 million previously projected. This is due primarily to a challenge market for apartment building asset sales. Our new guidance assumes we close the sale of three stabilized apartment communities that we expect to sell in this fourth quarter. Our tax rate in the third quarter was 25%, 100 basis points better than our guidance. We expect our fourth quarter tax rate to be 26%, which would bring the full year rate to approximately 25.4%. We expect interest and cost of sales to be approximately 1.5% in the fourth quarter and for the full year as we continue to benefit from our reduced leverage. We expect community count to be approximately 375 by fiscal year end, with continued growth in fiscal year 2024. Our weighted average share count is expected to be approximately $111 million for the full year and $109.5 million for the fourth quarter. We reiterate our guidance for approximately $400 million of share repurchases this year, implying approximately $150 million of buybacks in the fourth quarter. Putting this all together, we expect to earn between $11.50 and $12 per share in fiscal year 2023. We expect to achieve a full-year return on beginning equity of approximately 22%. We expect to bring our book value to approximately $65 per share at year end. This would be the second year in a row we earned well over $1 billion, and this is in a period when mortgage rates doubled from slightly over 3% in November of 2021 to their current level around 7.5%. In addition, since 2020, we have generated an average of $1.1 billion of operating cash flow per year, and we expect 2023 to also exceed $1 billion. Turning to the balance sheet, we finished the quarter with a net debt-to-capital ratio of 20.5%, $1 billion in cash and cash equivalents, and $1.8 billion available under our $1.9 billion revolving bank credit facility, providing us with ample flexibility to both grow our business and return capital to stockholders. We also have no significant bank or senior debt maturities due until November 2025, which is fiscal year 26 for us. In recognition of our financial position, the solid demand for new homes, and strong fundamentals underpinning the market, as well as our favorable long-term prospects, Standard & Poor's upgraded our credit ratings to investment grade this quarter. We are now rated investment grade by all three major credit rating agencies. Now let me turn it back to Doug.