Toll Brothers, Inc.

Good morning and welcome to the Toll Brothers second quarter fiscal year 2024 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, today's event is being recorded. I would now like to turn the conference over to Douglas Yearley, CEO. Please go ahead, sir.

Thank you, Rocco. Good morning. Welcome and thank you all for joining us. As usual, 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. Please read our statement on forward-looking information in our earnings release of last night and on our website to better understand the risks associated with our forward-looking statements. 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. Before I begin, I would like to take a moment to acknowledge the passing of Don Horton, Chairman and Founder of D.R. Horton. Like our founder, Bob Toll, DR was a pioneer and an icon of the industry who helped shape how we all do business today. We extend our deepest sympathies to the Horton family and the entire DR Horton organization. Turning to our second quarter results, I'm very pleased with our strong performance in the quarter. We delivered 2,641 homes at an average price of approximately $1 million. generating record second quarter home sales revenues of $2.65 billion, up 6% compared to last year, and $185 million better than the midpoint of our guidance. We also signed 3,041 net agreements for $2.94 billion, up 30% in units and 29% in total dollars, compared to last year. Solid demand has continued into the start of our third quarter. We have had a really good first three weeks of May. Our adjusted gross margin was 28.2% in the second quarter, 60 basis points better than guidance, and SG&A expense as a percentage of home sales revenues was 9.0%, 70 basis points better than guidance. both benefited from strong cost controls and greater leverage of fixed costs on higher home sales revenues. Joint venture, land sales, and other income was approximately $204 million in the quarter, most of which was generated by the land sale we discussed last quarter. As a reminder, in February, we sold a parcel of land in Northern Virginia to a data center developer That transaction generated $181 million of net cash and $175 million in pre-tax land sale gains. All of this resulted in pre-tax income of approximately $650 million in the second quarter and record earnings of $4.55 per diluted share, a 60% increase over the $2.85 per share we earned last year. Adjusting for the land sale benefit, we earned $3.38 per diluted share, up 19% from last year. With continued strong demand for our homes and better than projected second quarter results, we are raising our full year 2024 revenue and earnings guidance. At the midpoint of our guidance, we now expect to deliver 10,600 homes at an average price of approximately $965,000, which would result in $10.23 billion of revenue, nearly $500 million, or 5% better than our previous guidance. We continue to expect a full year adjusted gross margin of 28.0 percent, which translates to an additional $137 million of gross profit on our increased revenue guide. And we expect an SG&A margin of 9.6 percent, 20 basis points better than our previous guidance. This guidance would result in an operating margin of over 18%, earnings per share of approximately $14, and a return on beginning equity of approximately 22%. Our outstanding results in the first half of the fiscal year and the increase in our guidance for the full year are being driven by execution of the strategies that we've outlined on recent calls. To take advantage of the healthy demand and persistent lack of inventory, that characterizes this market, we have both widened our price points to include more affordable luxury homes and increased our supply of spec homes, which has helped us grow market share. This also enables us to reduce cycle times, improve inventory turns, and leverage our fixed costs, driving revenue growth and higher operating margins. With these strategies firmly in place and producing results, and with our more capital-efficient land strategy, we are confident that we can continue to generate attractive returns well into the future. Turning to market conditions, demand has proven resilient, even as rates increased from 6.75% to 7.5% through the quarter. Sales were evenly spread across the second quarter with about 1,000 net signed contracts each month. As I mentioned earlier, we have seen strong demand continue through the first three weeks of May, which is encouraging, and it's nice to see rates dropping over the past week. Geographically, we saw broad-based and healthy demand across our entire footprint. We saw solid demand from Boston through Atlanta Texas, California, Boise, Idaho, and Colorado were also strong performers. Demand was also solid across all of our product lines. Sales of our luxury homes were a little bit stronger compared to the first quarter with approximately 37% of units and 53% of dollars. Affordable luxury was 44% of units and 31% of dollars in active adult was 19% and 16%, respectively. We raised net price after incentives in about 60% of our communities, leading to an approximate $10,000 net price increase across the company. 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 mortgage without a buy-down, and they prefer to use any incentives offered on design studio upgrades or to reduce their closing costs. We continue to be very pleased with our luxury focus as we are benefiting from a financially healthy consumer, strong demand, and limited competition. With the widening of our product lines, approximately 30% of our customers are first-time homebuyers. Most of these buyers are millennials, many of whom have waited later in life to form families and have accumulated greater wealth when they buy their first home. Some are benefiting from the greatest wealth transfer in U.S. history from boomer parents who want to see their kids enjoy the fruits of their success and help them financially. Approximately 27% of our buyers paid all cash in the second quarter, up from 25% in the first quarter and our long-term average of approximately 20%. The LTVs for buyers who took a mortgage was approximately 69% in the quarter. So, For the 73 percent of our buyers who took a mortgage, on average, they put down 31 percent. These metrics include the 30 percent of our customers who were first-time buyers and highlight the financial strength and affluence of our entire customer base. In fact, in the second quarter, 20 percent of our affordable luxury buyers, many of whom are first-time buyers, paid all cash. with an LTV of 74% for those who did get a mortgage. We are pleased that our cancellation rate in the second quarter remained low at 2.8% of beginning backlogs. We are also benefiting from the growing difference in quality between new and resale homes. The median age of an existing home in the U.S. is now over 40 years old. Approximately 60% of existing homes Homes were built before 1980, and 35% were built before 1970, making new homes even more attractive. They are built better, require less maintenance, are less expensive to insure, are more energy efficient, and include features that today's buyer wants. Many are also part of communities that have spectacular amenities. All of these factors are helping to fuel a flight to new homes that we believe will continue even if rates come down and the resale market unlocks. As good as our business is now, we look forward to and will welcome lower rates. During the quarter, we continue to execute on our spec strategy. Specs represented approximately 54% of orders and 46% of deliveries in the second quarter, allowing us to meet the strong demand from buyers who choose a quicker move-in. As a reminder, we sell our specs at various stages of construction, from foundation to finished home. This allows some of our spec buyers the opportunity to visit our design studios and personalize their homes with finishes that match their taste. So choice, a very important pillar of Toll Brothers, is still part of our SPEC strategy. Looking forward, we continue to expect community count growth to help drive results in fiscal 2024 and beyond. At second quarter end, we were operating from 386 communities, one more than the 385 we got into last quarter. We remain on target. to reach our year-end guidance of approximately 410 communities, which would be an approximate 10% increase versus fiscal year-end 2023. We control all the land we need to support continued growth in fiscal 2025 and 2026. At second quarter end, we controlled approximately 72,000 lots, 48% of which were optioned and 42% of which were contracted for prior to 2021. This land position allows us to be highly selective and disciplined as we assess new land opportunities. We continue to be pleased with the quantity and quality of land deals we review each week. We are seeing a healthy flow of deals that meet our rigorous underwriting standards, which are focused on both margins and returns. And we continue to structure terms in more capital-efficient ways in order to enhance returns. Turning to the balance sheet, at quarter end, we held approximately $1 billion of cash and cash equivalents, and our net debt-to-capital ratio was 18.7%. with no significant near-term debt maturities. We have also been generating strong operating cash flows, which we expect to continue well into the future. This provides us plenty of opportunity to both grow our business and return capital to shareholders. During the quarter, we repurchased $181 million of common stock and increased our quarterly dividend by 10%. Returning cash to stockholders will continue to be a very important part of our strategy well into the future. With that, let me turn it over to Marty. Thanks, Doug.

We had a terrific second quarter, beating our guidance for deliveries, home building revenue, adjusted gross margin, SG&A, and earnings. Our strategy is playing out nicely in this environment. and we are raising our full-year revenue and earnings guidance. In the quarter, we delivered 2,641 homes and generated home-building revenues of $2.65 billion, both up by approximately 6% compared to last year and both second-quarter records. The average price of homes delivered in the quarter was approximately $1 million. At the midpoint, we delivered 191 more homes than our guidance for $185 million of home sales revenue. We signed 3,041 net agreements for $2.94 billion in the quarter, up 30% units and 29% in dollars compared to the second quarter of fiscal year 2023. Both agreements and dollars were up over last year in every one of our geographic regions. The average price of contracts signed in the quarter was approximately $967,000, down about 1 percent compared to last year and down 4.4 percent sequentially. This decline was due to product and geographic mix changes driven by our strategy of expanding our price points and building more spec homes. which we expect will lead to a continued modest drop in price over the next few quarters, but also revenue and earnings growth. Our second quarter adjusted gross margin was 28.2% compared to 28.3% in the second quarter of 2023, and 60 basis points better than guidance. Our Q2 gross margin exceeded our guidance primarily due to strong cost control and increased leverage from higher-than-projected revenues. Positive mix versus projection also played a role, but to a smaller extent. While we continued to project a full-year adjusted gross margin of 28%, we have increased our revenue guidance by approximately $500 million at the midpoint and improved our SG&A guidance by 20 basis points. For the third quarter, we project an adjusted gross margin of 27.7%, implying a fourth quarter gross margin of 27.4%. As Doug mentioned, 54% of homes sold in the second quarter were specs, and we now expect more than half our deliveries in our second half to be specs. Having more spec homes available for delivery in the late summer and early fall, we expect will allow us to meet the demand from many of our buyers who want to move in when schools open. Our spec homes generally carry a lower margin compared to our build-to-order homes. In the second quarter, the adjusted gross margin for our spec homes delivered was 26.1%, compared to 29.8% for build-to-order homes delivered. We typically build spec homes on lower premium home sites, saving higher premium sites for our build-to-order customers, who place a higher value on them, and will also spend more on upgrades. We also tend to offer higher incentives on completed spec homes. But the advantage to our spec business is that we can build faster, with margins that are still strong and we were able to meet the demand from buyers who want to move in sooner. We believe this is the right strategy and that we can achieve overall gross margins in the high 20% range. While we grow the business faster, improve operating margin, generate strong cash flow, and achieve consistently high returns on equity. Turning back to the P&L statement, write-offs in our home sales gross margin totaled $28.4 million in the quarter as compared to $11.1 million in the second quarter of 2023. SG&A, as a percentage of revenue, was 9.0% in the second quarter compared to 9.1% in the same quarter one year ago. And this was 70 basis points better than guidance, again reflecting our focus on cost controls and leverage from higher-than-expected home sales revenue. Year-over-year total G&A dollars were essentially flat despite healthy increases in community count, settlements and agreements, and the impact of overall cost inflation. We continue to focus intently on ways to increase productivity and operate more efficiently. Second quarter JV land sales and other income was $204 million versus approximately $1 million in the same quarter last year As Doug mentioned, approximately $175 million of this was attributable to the gain we recognized on the sale of land to a data center developer. The remaining approximately $30 million was primarily attributable to increased interest income and a $21 million gain on the sale of an apartment living asset. JV land sales and other income also included $5 million of pre-development write-offs in the apartment living business as we decided not to pursue certain deals in the current capital-constrained environment for multifamily. Our tax rate in the second quarter was approximately 25.9 percent, basically in line with our guidance of 25.8 percent. We ended the second quarter with over $2.7 billion of liquidity, including approximately $1 billion of cash and $1.7 billion of availability under our revolving bank credit facility. Our net debt-to-capital ratio was 18.7% at second quarter end. We have no significant maturities of our long-term debt until fiscal 2026, when $350 million of notes come due in November 2025. Our community account A quarter end was 386 compared to our guide of 385. We expect 400 at the end of the third quarter and reaffirm 410 by the end of the fiscal year. We are projecting fiscal 2024 third quarter deliveries of 2,750 to 2,850 homes with an average delivered price between 950 and 960,000 dollars. For full fiscal year 2024, we are increasing our projected deliveries to be between 10,400 and 10,800 homes, with an average price between $960,000 and $970,000. These are increases of 350 homes and $15,000 per home at the midpoint, representing approximately $500 million in additional revenue. We expect interest and cost of sales to be approximately 1.3 percent in the third quarter and for the full year. Third quarter SG&A as a percentage of home sales revenues is expected to be approximately 9.2 percent. For the full year, we expect it to be 9.6 percent, an improvement of 20 basis points compared to our previous guidance. Further income, income from unconsolidated entities and land sales gross profit in the third quarter is expected to break even. We continue to project $260 million for the full year. Much of the remaining $48 million of full-year joint venture land sale and other income is projected to come from sales of our interest in certain stabilized apartment communities developed by Tall Brothers Apartment Living in joint venture with various partners. We project the third quarter tax rate to be approximately 26%, and the full year rate to be approximately 25.5%. Our weighted average share count is expected to be approximately $105 million for the third quarter and for the full year. This assumes we repurchase $500 million of common stock in the year, or another $320 million in the second half of the year, on top of the $180 million we repurchased in the first half. As Doug mentioned, with our updated guidance, we now expect to earn approximately $14 per diluted share in fiscal 2024, with an operating margin over 18%. This would result in a full-year return on beginning equity of approximately 22%, and would put our year-end book value per share at approximately $76.50. Now let me turn it back to Doug.