Toll Brothers, Inc.

Good morning, everyone, and welcome to the Toll Brothers first quarter fiscal year 2024 conference call. All participants will be in a listen-only mode. Should you need assistance, please email 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 on your telephone keypads. To withdraw your question, 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, please limit yourselves to one question and one follow-up. Please also note today's event is being recorded, and 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 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. I am very pleased with our strong first quarter results. We beat our guidance across the board and saw another quarter of solid sales, with contracts up 40% in units and 42% in dollars compared to last year. In addition, since the start of the spring selling season in mid-January, we have seen a meaningful uptick in demand that has continued through this past weekend. In our first quarter, we delivered 1,927 homes at an average price of approximately $1 million, generating record first quarter home sales of $1.93 billion, up 10.4% in dollars, compared to the first quarter of fiscal 2023. Our adjusted gross margin was 28.9 percent, 90 basis points better than guidance, and 140 basis points better than last year's first quarter. The outperformance versus our guidance was due to mix, driven by earlier than expected deliveries in certain of our higher margin Pacific and Mid-Atlantic communities, and fewer than expected deliveries in lower margin mountain communities. SG&A expense at 11.9 percent of home sales revenues was 20 basis points better than last year's first quarter and 50 basis points better than guidance. In addition to greater fixed cost leverage from higher revenues, we continue to benefit from cost reduction initiatives we've taken over the past several years. We continue to look for ways to operate more efficiently. Pre-tax income was $311.2 million, and earnings per share were $2.25 diluted, up 23 percent and 32 percent, respectively, compared to last year's first quarter. With the outperformance in our first quarter and a strong start to the spring selling season, we are raising our full-year guidance across all of our key home building metrics. At the midpoint of our guidance, we now expect full-year deliveries of 10,250 homes, an adjusted gross margin of 28%, and an SG&A margin of 9.8%. In addition, earlier this month we sold a parcel of land to a commercial developer for net cash proceeds of $180.7 million, which will result in a pre-tax land sale gain of approximately $175 million in our second quarter. We are raising our full-year joint venture and other income guidance from $125 million to $160 million. Factoring in both the increase in our home building guidance and the impact of this land sale, we now expect to earn between $13.25 and $13.75 per diluted share in fiscal 2024, up from the $12 to $12.50 we guided to last quarter. We now also expect our return on beginning equity to be approximately 21 percent in fiscal 2024, which would be our third year in a row above 20 percent. Turning to market conditions, demand in the first quarter was solid. We signed 2,042 net contracts at an average price of $1,011,000, up 40 percent in units and 42 percent in total dollars compared to the first quarter of 2023. Demand in our first quarter steadily improved as the quarter progressed, following the normal seasonal pattern. December was stronger than November, and January was significantly stronger than December. Based on both deposit and agreement activity, our January was better than normal seasonality. The strong demand has continued through the first three weeks of February. From a geographic standpoint, demand was broadly distributed across our footprint. We saw particular strength in our Pacific region, including all of California and Seattle, and also in Las Vegas, all of Texas, Denver, and from Atlanta up through Boston. Demand was solid across all product types as well. with affordable luxury accounting for 45% of our units and 34% of dollars, luxury 36% and 49%, and active adult 19% and 17%. Another indicator of healthy demand was our deposit to agreement conversion ratio, which at 76% in the first quarter was significantly higher than our five-year average of 67 percent. We are pleased that we have been able to continue taking advantage of healthy demand while managing our incentives. While mortgage rate buy downs are heavily marketed and offered nationwide, very few of our buyers use incentive dollars to buy down their rates. The vast majority of our customers can qualify for a market rate mortgage without a buy-down and they prefer to use any incentive offered on design studio upgrades or to reduce their closing costs. Additionally, consistent with the past several quarters, approximately 25% of our buyers paid all cash in the first quarter and the LTVs for buyers who took a mortgage dropped to approximately 67 percent, 200 basis points lower than our average over the prior four quarters. So, for the 75 percent of our buyers who took a mortgage, on average, they put down 33 percent. All of these factors highlight the financial strength of our more affluent customers. During the quarter, we once again benefited from our strategy of increasing our supply of spec homes, which represented approximately 50% of orders and 40% of deliveries in the first quarter. As we have discussed before, we sell our specs at various stages of construction, from foundation to finished home. This allows many of our spec buyers the opportunity to visit our design studios and personalize their homes with finishes that match their tastes. So choice, a pillar of Toll Brothers, is still part of our spec strategy. This benefits our margins as design studio upgrades tend to be highly accretive. We are also pleased that our cancellation rate in the first quarter remained consistent with recent quarters at 2.9% of beginning backlog. Our low cancellation rate speaks to the financial strength of our buyers, as well as the sizable deposits they make and how emotionally invested they become as they personalize their new Toll Brothers home. We continue to expect community account growth to help drive results in fiscal 2024 and beyond. In the first quarter, we were operating from 377 communities, two more than we guided to last quarter, and we remain on target to reach our year-end guidance of approximately 410 communities, which would be an approximate 10% increase from fiscal year-end 2023. Importantly, we control sufficient land for community cap growth beyond 2024. At first quarter end, we controlled approximately 70,400 lots, 49% of which were options. This land position allows us to be highly selective and disciplined as we assess new land opportunities. We believe we have a competitive advantage acquiring land at the corner of Maine and Maine, where very few of the big, well-capitalized publics and privates play. Our main competition for this land tends to be the smaller local and regional builders who are not as well-capitalized. Our balance sheet is very healthy with ample liquidity, low net debt, and no significant near-term debt maturities. We also continue to expect strong cash flow generation from operations this year. In addition, as I mentioned earlier, we received $181 million in cash from a land sale at the start of our second quarter. As a result, we are increasing the amount we are budgeting for fiscal 2024 share repurchases from $400 million to $500 million. Longer term, we continue to expect buybacks and dividends to remain an important part of our capital allocation priorities. With that, I will turn it over to Marty.

Thanks, Doug. We are very pleased with our first quarter results. we grew both our top and bottom lines and operated more efficiently compared to last year. First quarter net income was $239.6 million, or $2.25 per share diluted, up 25% and 32% respectively, compared to $191.5 million and $1.70 per share diluted a year ago. Our net income and earnings per share were both first quarter records. We delivered 1,927 homes and generated home building revenues of $1.93 billion. The average price of homes delivered in the quarter was $1,003,000. We signed 2,042 net agreements. for $2.06 billion in that first quarter, up 40% in units and 42% in dollars compared to the first quarter of fiscal year 2023. The average price of contracts signed in the quarter was approximately $1,011,000. This was up 1.6% year over year and 2.3% on a sequential basis. Our first quarter adjusted gross margin was 28.9 percent, up 140 basis points compared to 27.5 percent in the first quarter of 2023. As Doug mentioned, Q1 gross margin exceeded our guidance due primarily to more deliveries in our higher margin Pacific and Mid-Atlantic regions and less than expected deliveries in our lower margin mountain region. We expect the inverse to be true in our second quarter, and this is reflected in our second quarter adjusted gross margin guidance of 27.6 percent. Overall, we have increased our full year adjusted gross margin 10 basis points to 28.0 percent. Write-offs in our home sales gross margin totaled $1.5 million in the quarter and were all associated with pre-development costs on deals we are no longer pursuing. SG&A as a percentage of home building revenue was 11.9% in the first quarter compared to 12.1% in the same quarter one year ago. Note that our SG&A expense in that first quarter includes $14 million of accelerated employee stock-based comp expense that only hits in the first quarter. The year-over-year 20 basis point reduction in SG&A margin reflects leverage from increased revenues as well as benefits from tighter cost controls in the face of inflation. Joint venture Land sales and other income was $8.6 million during the first quarter compared to $16.8 million in the first quarter of fiscal year 23, and compared to our guidance of a $10 million loss. We exceeded our guidance due primarily to better-than-expected results in our mortgage unit and higher-than-projected interest income. Our tax rate in the first quarter was 23%. We're about 300 basis points lower than guidance due to the accounting benefit of stock compensation deductions, which we do not expect to repeat at the same level for the rest of the year. We ended the first quarter with over $2.5 billion of liquidity, including approximately $755 million of cash and $1.8 billion of availability under our revolving bank credit facility. Our facility has four years until maturity. Our net debt to capital ratio was 21.4% at first quarter end, down from 27.5% one year ago. We have no significant maturities of our long-term debt until fiscal 2026. when $350 million of notes come due in November of 2025. Our community count at quarter end was 377 compared to our guide of 375. Looking forward, our guidance is subject to the usual caveats regarding such forward-looking information. We are projecting fiscal 2024 second quarter deliveries of approximately 2,400 to 2,500 homes with an average delivered price of between $1 million and $1,010,000. For fiscal year 2024, we are increasing our projected deliveries to be between 10,000 and 10,500 homes with an average price between $940,000 and $960,000. As I noted earlier, we expect adjusted gross margin to be 27.6% in the second quarter and 28% for the full year, 10 basis points better than our previous full-year guidance. We expect interest in cost of sales to be approximately 1.3% in the second quarter and for the full year. This is also a 10 basis point improvement from our earlier guide. We project second quarter SG&A as a percentage of home sales revenues to be approximately 9.7 percent. For the full year, we expect it to be 9.8 percent, another improvement of 10 basis points compared to our previous guidance. Other income from unconsolidated entities and land sales gross profit in the second quarter is expected to be approximately $180 million, which reflects the impact of the commercial land sale Doug mentioned. We now expect it to be $260 million for the full year, which is up significantly from our prior guide of $125 million. Aside from the land sale, Much of this full-year other income is projected from sales of our interests in certain stabilized apartment communities developed by Toll Brothers Apartment Living in joint venture with various partners. We project the second quarter tax rate to be approximately 25.8% and the full-year rate to be approximately 25.5%. That's 50 basis points of improvement compared to our prior full-year guide. Our weighted average share count is expected to be approximately $106 million for the second quarter and $105 million for the full year. This assumes we repurchase approximately $166 million of common stock per quarter for the remainder of the year to reach the $500 million guide Doug referred to earlier. As Doug mentioned, with our updated guidance and the Q2 land sale gain, We now expect to earn between $13.25 and $13.75 per diluted share in fiscal 2024. This would result in a full-year return on beginning equity of approximately 21%, and would put our year-end book value per share at approximately $77 per share. Now let me turn it back to Doug.