Toll Brothers, Inc.

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

Thank you, Dave. 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 of Wendy Marlette, Chief Marketing Officer, and Greg Ziegler, Senior VP, Treasurer, and our Head of Investor Relations. 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. We had another terrific quarter and are very pleased with our fiscal third quarter results. We delivered 2,814 homes at an average price of $968,000, generating record third quarter home sale revenues of $2.72 billion. Our adjusted gross margin of 28.8% exceeded guidance by 110 basis points, primarily due to greater efficiencies in our home building operations, as well as favorable mix. Our SG&A expense was 9.0% of home sale revenues, or 20 basis points better than guidance. Outperformance in both the top line and then our margin drove earnings of $3.60 per diluted share, keeping us on track to deliver another great year for Toll Brothers. In the third quarter, we signed 2,490 net contracts for $2.4 billion, up approximately 11% in both units and dollars compared to last year's third quarter. On a per-community basis, we sold at a pace of 2.1 homes per month, down slightly versus the 2.2 pace we sold in last year's third quarter. Demand in our third quarter was uneven. May started out strong but slowed into and through June. July was the strongest month in the quarter, especially in the latter half of the month. we have seen this strength continue into the first three weeks of August. With mortgage rates at their lowest point in a year and trending lower, favorable demographics, and continued imbalance in the supply and demand of homes for sale, we are optimistic that demand for new homes will remain solid through the end of fiscal 24 and into 2025. We are encouraged by demand trends we are seeing across the country and also across our buyer segments. Demand where we, excuse me, markets where we saw particular strength in the quarter included New Jersey, Pennsylvania, Metro DC, South Carolina, Atlanta, Boise, Las Vegas, and all of California. Price adjustments in the quarter were community and market dependent. We raised prices in some communities and lowered it in others. Overall, pricing was flat compared to the second quarter, and incentives continued to run approximately 5.5 percent of our average sales price. As I noted earlier, we are optimistic that market conditions will remain positive for homebuilders into the foreseeable future. The underlying drivers of demand remain firmly in place, including favorable demographics driven by millennials, many of whom are buying their first home later in life when they have higher incomes and accumulated wealth. Older millennials are now hitting their 40s, which should provide a tailwind for our luxury move-up business over the next decade. In addition, Baby boomers are moving into new homes as they retire and adjust their lifestyles. There also continues to be an underbuilt and aging stock of homes for sale, with the undersupply exacerbated by the lock-in effect of higher rates, which is keeping resale inventory at historically low levels. But even as interest rates move lower, we believe the supply of homes will remain challenged due to nearly 15 years of underproduction. Lower rates alone will not fully address the chronic undersupply of housing. The past several years have proven how impactful these fundamentals are, with demand for new homes remaining solid in the face of a sharp rise in mortgage rates and a prolonged period in which rates have remained elevated. As a large, well-capitalized homebuilder, we have benefited from and performed very well in this environment with sales up 25% year-to-date. We would clearly welcome lower rates and are excited by the prospect of a normalizing housing market. Our strategy of widening our geographies and price points to include more affordable homes and increasing our supply of spec homes has helped us meet demand while becoming a more efficient, As we have expanded and come down in price, we now have the widest variety of product and the widest range of price of any of the builders, which presents us with a great opportunity to grow our core home building business in our 60 markets across the country. Our spec homes represented approximately 54% of orders and 49% of deliveries in the third quarter. We continue to target about 50 percent of our business as spec, with continued strong demand from buyers who are looking for quicker move-ins. As a reminder, we define a spec as any home without a buyer that has a foundation port. We sell our specs at various stages of construction, which provides many of our buyers the opportunity to personalize their homes at one of our 40 design studios nationwide. This offers our spec buyers a degree of choice, which is a key pillar in the Toll Brothers' buying experience, while providing us with a faster and more efficient construction schedule. At third quarter end, our backlog stood at $7.1 billion and 6,769 homes. Our cancellation rate as a percentage of backlog was 2.4% in the third quarter, down from 2.8% in our second quarter, and consistent with our long-term average of 2.3%. 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. Approximately 28% of our buyers paid all cash in the third quarter. consistent with our second quarter, and significantly above our long-term average of approximately 20%. The loan-to-value ratio for buyers who took a mortgage was approximately 69%. So, for the 72% of our buyers who took a mortgage, on average, they put down 31%. These metrics highlight the financial strength and affluence of our entire customer base. We continue to see modest improvement in our construction cycle times consistent with our focus on product and process optimization and our increase in faster-turned spec homes. We remain hyper-focused on continuing to improve our construction times as we move forward, which should further benefit our already strong cash flows. We are on target to reach our goal of operating from 410 communities by fiscal year end, which would represent 11% growth compared to the 370 communities we are operating from at the start of the year. We plan to continue growing community count next year, and we have sufficient land under control to do it. At quarter end, we owned or controlled 72,700 lots, half of which were controlled and the other half owned, excluding the 6,000 769 lots in our backlog. Our controlled land represents 55% of our lots. This land position provides us with sufficient lots needed for growth in fiscal 2025 and beyond and allows us to continue to be selective, disciplined, and focused on efficiency when we assess new land opportunities. Our underwriting standards for new land continues to incorporate stringent thresholds for both margins and returns, and we continue to seek out land acquisition and development opportunities that allow us to be more capital efficient, including through increased use of option arrangements, land banks, joint ventures, and similar structures that allow us to defer payments and lot takedowns. This focus on capital efficiency and returns extends beyond our land and other operations. It also includes our efforts to more programmatically return capital to our stockholders. Since the start of our third quarter, we've repurchased $246 million of our common stock, bringing our year-to-date repurchases to $427 million at an average price of approximately $119 per share. We also paid over $70 million in dividends year-to-date. So far this year, we've repurchased approximately 3% of our year-end diluted share count, and since 2016, we've bought back approximately one-half of the company. Given our outstanding year-to-date financial performance, including strong operating cash flows, we are raising our buyback expectations for the full year from $500 to $600 million. Dividends and buybacks will continue to be an important part of our capital allocation strategy and a key factor in maintaining an attractive return on equity. We now expect our return on beginning equity to be approximately 22.5% this year. This will be the third year in a row that we generate an ROE over 20%. With that, I will turn it over to Marty.

Thanks, Doug. Good morning, everyone. Thanks for being with us. It was a great quarter. We earned $504 million before taxes and $375 million after, or $3.60 of earnings per diluted share, well above the earnings we guided to last quarter. Home sale revenues were $2.72 billion in the quarter, a third quarter record, and an increase of 2% compared to one year ago. We delivered 2,814 homes in the quarter, up 11.5% year over year. This unit growth is a direct outcome of our strategies of broadening our price points and increasing our supply of spec homes. Based on our third quarter results and our expectations for the fourth quarter, we are raising our full-year deliveries guidance. We now expect to deliver between 10,650 and 10,750 homes, an increase of 100 homes at the midpoint of our previous guidance. We are also increasing our guidance for full-year average delivered price by $10,000 to $975,000. This translates to a home-building revenue projection of between $10.4 and $10.5 billion for the full year, or over $200 million of additional revenue compared to the midpoint of our previous guidance. We signed 2,490 net contracts in the third quarter for $2.4 billion, up approximately 11% in dollars and units. The average price of contracts signed in the quarter was approximately $967,000, which was about flat compared to both the third quarter of last year and the second quarter of this year. Our third quarter adjusted gross margin was 28.8% compared to 29.3% in the third quarter of 2023, and this was 110 basis points better than we had projected. The outperformance to guide was due primarily to greater efficiency in our home building operations, as well as favorable mix. With the outperformance in our third quarter, we are raising our full year adjusted gross margin guidance from 28.0% to 28.3%. We are now projecting a fourth quarter adjusted gross margin of 27.5%, a 10 basis point increase compared to our previous implied guidance. SG&A, as a percentage of revenue, was 9.0% in the third quarter, compared to 8.6% in the third quarter of last year. And this was 20 basis points better than we had projected for this quarter. Year over year, we modestly reduced G&A expenses in terms of total dollars. But this reduction was offset by higher selling expenses due in part to increased community openings. As we've pointed out before, we've been very focused on becoming more efficient, and we are seeing the benefits of that efficiency continue to flow through our results. For the fourth quarter, we expect SG&A expense to be 8.6% of home sales revenues. And for the full year, we now expect it to be 9.4%. This represents a 20 basis point improvement over our previous guidance. Third quarter joint venture, land sales, and other income was $1 million, which was consistent with our breakeven guidance. We continue to expect our full year joint venture, land sales, and other income to be approximately $260 million, implying approximately $47 million in the fourth quarter. tax rate in the quarter was 25.6%. 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 1.3% in the fourth quarter and for the full year as we continue to benefit from our reduced leverage. As Doug mentioned, we are maintaining our community account guidance of approximately 410 communities open for sale by fiscal year end. This would represent approximately 11% growth from the 370 communities we began the year with. We plan to continue growing community account in fiscal year 2025 and have the land to do it. Turning to the balance sheet, we finished the quarter with a net debt-to-capital ratio of 19.6%. $893 million in cash and equivalents, and $1.8 billion available under our $1.96 billion revolving bank credit facility. We have no significant bank or senior debt maturities until November 2025. All of this provides us with ample flexibility to both grow our business and return capitalist stockholders as we continue to focus on generating attractive returns. Our weighted average share count is expected to be approximately $104.75 million for the full year and $102.5 million for the fourth quarter. As Doug noted, we've increased our share repurchase guidance to approximately $600 million of repurchases this year, implying approximately $175 million of buybacks in the fourth quarter. Putting this all together, we now expect to earn between $14.50 and $14.75 per diluted share in fiscal 2024. We expect to achieve a full-year return on beginning equity of approximately 22.5%, and we expect our book value at year-end to be over $76.50. This would cap off another great year for Toll Brothers. Now let me turn it back to Doug.