Toll Brothers, Inc.

Good morning and welcome to the Toll Brothers fourth 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, Drew. Good morning. Welcome and thank you all for joining us. With me today are Marty Connor, Chief Financial Officer, Rob Parahouse, President and Chief Operating Officer, Chief Marketing Officer, and Gregg Ziegler, Senior VP, Treasurer, and 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. I am incredibly proud of our company's performance in fiscal 2024. We ended the year on a high note with a very strong fourth quarter. In the quarter, we delivered 3,431 homes and generated $3.3 billion of home sales revenues of 25% in units and 10% in dollars compared to the fourth quarter of 2023. Our adjusted gross margin of 27.9%, beating our guidance by 40 basis points and our SG&A was 8.3% of home sales revenues or 30 basis points better than guidance. Both top-line and margin-out performance contributed to earnings of $475 million, or $4.63 per diluted share, up 7% and 13% respectively compared to last year's fourth quarter. In addition, contracts were up over 30% in both dollars and units in the quarter. For the full year, We generated a record $10.6 billion of home sales revenue, over $2 billion of pre-tax income, and over $1.5 billion of net income, resulting in record earnings of $15.01 per diluted share and a return on beginning equity of 23.1%. The third year in a row, we've generated returns above 20%. We delivered 10,813 homes at an average price of approximately $977,000 and with an adjusted gross margin of 28.4%. Our SG&A expense was 9.3% of home sales revenues and our operating margin was 18.8%. In addition, We grew contracts by 27% in both units and dollars and increased community count by 10% to 408 communities at year end. These are exceptional full year and quarterly results demonstrating the power of our luxury brand and the financial strength of our more affluent buyers. Our strategies of increasing our spec production, widening our geographies, Price Points and Product Lines, and focusing on operational and capital efficiency are working. As I mentioned, we finished the year strong with fourth quarter contracts up over 30% in both dollars and units. We achieved this in the face of election uncertainty and mortgage rates that increased by nearly 100 basis points from mid-September to mid-November. Since the start of the first quarter of our fiscal 2025, six weeks ago, we have seen strong demand. With the uncertainty of the election behind us and mortgage rates trending in the right direction, we are encouraged by our traffic, deposits, and agreements and are optimistic for the start of the spring selling season in mid-January. Our positive outlook reflects the long-term fundamentals that continue to support the markets for new homes generally, and Toll Brothers in particular. These include favorable demographics driven by millennials, many of whom are buying their first home later in life when they have higher incomes and accumulated wealth, and baby boomers who are moving in retirement. Due primarily to the well-known affordability issues in this country, the average age and wealth of a home buyer has increased. According to data published by the National Association of Realtors last month, the median age of a first-time homebuyer is at an all-time high of 38 years old, and the median age of all buyers in the market is now 56 years old. In addition, first-time buyers comprise just 24% of the market over the past year, the lowest level in over 40 years. This means the vast majority of buyers in the market are move up or move down. These trends play right into our wheelhouse. Approximately 28% of our business is selling to older, more affluent, first-time buyers, and the balance is catering to move up and move down buyers who are financially secure and have significant equity in their existing homes. In fact, according to the Federal Reserve data, 73% of the value of existing homes today is equity. In addition, the resale market, our primary competition, continues to be locked up by persistently high rates with over half of outstanding mortgages under 4%. With limited inventory driving resale prices higher, the new home premium, which averaged just 3% this year, is the lowest premium it has been in decades. New homes are available and a great deal compared to resales. The median age of an existing home in the US is now over 40 years old, with well over half of them built before 1980, making new homes very attractive. They are built better, require less maintenance, are less expensive to insure, are more energy efficient, and most importantly are designed architecturally to appeal to today's buyer. Many are also part of communities that have sought after amenities. It is simply impossible or prohibitively expensive to remodel most existing homes with today's new home features, making the value proposition for buying new even more compelling. While we recognize that affordability is a broad market issue, our more affluent buyer is less impacted by it. In our fourth quarter, approximately 28% of our buyers paid all cash, consistent with the trend over recent quarters and significantly above our long-term average of approximately 20%. The loan-to-value ratio for our buyers who took a mortgage in the fourth quarter remained at approximately So, for the 72% of our buyers who took a mortgage, on average, they put down 31%. Our cancellation rate as a percentage of backlog remained low at 2.5% in the fourth quarter. Our industry low cancellation rate is due to the significant up-front down payments our buyers make, as well as the emotional attachment they form as they personalize their homes with us, In the fourth quarter, structural options, design studio finishes, and lot premiums averaged $203,000, or 25% of the average base sales price. For the year, our design studios generated over $1 billion in sales and provided a great source of accretive, high-margin revenue for us. Each of these metrics are high proportion of all cash buyers, low LTV ratios, low cancellation rates, and the substantial amount that our buyers spend on lot premiums and upgrades at our design studios highlight the financial strength of our customer base. I'd also point out that we are benefiting from the greatest generational wealth transfer in history, as many parents are looking to help their kids with down payments. Turning back to our fourth quarter, despite the sharp increase in rates in the second half of the quarter, we maintained a steady cadence of orders from month to month. Approximately 30% of sales occurred in August, with 35% of sales in each of September and October. On a per community basis, we sold at a pace of 2.2 homes per month, up meaningfully from the 1.9 pace we sold in last year's fourth quarter. With our business now split roughly 50-50 between build to order and spec homes, we are more focused than ever on ROE, turning inventory and appropriately balancing pace and price. As a result, when the markets softened a bit in September and October in response to the spike in mortgage rates and the uncertainty leading up to the election, We modestly lowered net price through incentive increases by an average of $12,000. As a result, our incentives in the fourth quarter were approximately 6.7% of the average sales price, slightly above our recent averages of between 5% and 6%. The small increase was primarily on finished spec homes, many of which are expected to be delivered In our first quarter. With the market improving, we have recently begun to decrease incentives, and we are optimistic that we will be able to further reduce incentives and also increase base prices with the start of the spring season in January. We are very comfortable with our inventory of spec homes per community and the gross margin spread between our spec and build-to-order homes. Our spec strategy has allowed us to grow EPS faster, increase our ROE, and increase our operating margin by leveraging overhead. We believe this is the right strategy to continue driving attractive returns well into the future. Turning to land, at fiscal year end, we owned or controlled approximately 74,700 lots, 55% of which were options. Excluding the 5,996 lots committed to homebuyers in our backlog, our optioned land represented 60% of lots. We continue to target an overall mix, including backlog, of 60% optioned and 40% owned over the longer term. We are pleased to have made solid progress towards this goal in this quarter. We are selective and disciplined in our approach to buying land. We assess all land deals, whether they involve new land opportunities or takedowns under existing options, using underwriting standards focused on both margins and returns. This approach and our overall focus on capital efficiency has helped drive our ROE over 20% for the past three years. In the fourth quarter, we purchased $201 million of our common stock, bringing our full-year repurchases to $628 million at an average price of $127.79 per share. During fiscal 2024, we repurchased nearly 5% of our shares outstanding at the beginning of the year. We have now bought back half the company since 2016. We also paid $93 million in dividends. Buybacks and dividends will remain an important part of our capital allocation priorities well into the future. For fiscal 2025, we have budgeted another $500 million of share repurchases, which we expect will be weighted to the back end of the year, consistent with our greater cash flow generation. With that, I'll turn it over to Marty.

Thanks, Doug. As Doug mentioned, we are very pleased with our fourth quarter and full year results. Our revenue, net income, and earnings per share were all full year records. In fiscal year 2024's fourth quarter, we delivered 3,431 homes and generated home sales revenues of $3.26 billion, up 24.5% in homes and 10.4% in dollars from one year ago. The average price of homes delivered was down 11.3% to approximately $950,000. These results are consistent with our multi-year strategy of widening our geographies and price points, expanding our product lines, and increasing our supply of spec homes. Fourth quarter net income was $475.4 million, were $4.63 per diluted share compared to $445.5 million and $4.11 per diluted share one year ago. For the full year, we delivered 10,813 homes, the most in our history, and generated record home sales revenues of $10.6 billion. Full year net income? was $1.57 billion and $15.01 per diluted share. As a reminder, net income includes approximately $124 million or $1.19 per share of gains related to a parcel of land that we sold in the second quarter. Excluding this gain, net income would have been $1.45 billion or $13.82. We signed 2,658 net contracts in the fourth quarter for $2.7 billion of approximately 30% in units and 32% in dollars. The average price of contracts signed in the quarter was approximately $1 million, which was roughly flat to last year's fourth quarter. At year end, our backlog stood at $6.5 billion and nearly 6,000 homes. As Doug mentioned, our cancellation rate as a percentage of backlog was just 2.5% in the fourth quarter, consistent with our long-term average of 2.3%. Our fourth quarter adjusted gross margin at 27.9% was 40 basis points better than guidance, which was due primarily to mix and cost control. We also benefited from reduced cycle times and greater stability in our building costs, which have been impacted by the high inflation of recent years. This past year, we were generally able to keep these building costs flat. SG&A, as a percentage of home sales revenues, was 8.3% in the quarter, which was essentially flat compared to 8.2% in the same quarter one year ago. And this was 30 basis points better than we had projected. The outperformance relative to guidance was primarily due to greater fixed cost leverage from higher than projected revenue. As we continue to focus on ways to become more efficient, we are seeing the benefits flow through our results. In fact, our G&A dollar spend grew only 1.7% year over year, despite inflation, 10% community account growth, and double-digit percentage growth in both deliveries and contracts. Joint venture, land sales and other income was $44 million in the fourth quarter compared to $36 million in the fourth quarter of fiscal year 2023 and our guidance of $47 million. Joint venture, land sales and other income in Q4 2024 primarily related to land sale gain as well as contributions from our title and mortgage business and included $6.6 million of write-offs related to apartment living joint ventures and another 2.2 associated with abandoned projects. Write-offs included in home sales cost of revenues totaled $24.1 million in the quarter compared to $8.3 million in the prior year period. There were no land sale write-offs in the fourth quarter of 2024 versus $12.9 million in Q4 2023. We continued to generate strong cash flow in fiscal 2024 with approximately $1 billion of cash flow from operations. We expect to generate a similar amount this year. We ended the fiscal year with over $3.1 billion of liquidity, including $1.3 billion of cash and $1.8 billion available under our revolving bank credit facility. In fiscal year 2024, we invested $2.8 billion in land acquisition and development. We also returned $716 million to shareholders through share repos and dividends. Our net debt to capital ratio was approximately 15% at fiscal year end and we have no significant debt maturities Our balance sheet is in great shape. Turning to our guidance, we are projecting first quarter deliveries of 1,900 to 2,100 homes with an average price between $925,000 and $945,000. Consistent with normal seasonal patterns, first quarter deliveries are expected to be the low point of the year. Deliveries for the full fiscal year weighted to the second half. For full year 2025, we are projecting new home deliveries of between 11,200 and 11,600 homes, with an average price between $945,000 and $965,000. We expect our adjusted gross margin in the first quarter of fiscal 2025 to be 26.25% of home sales revenues. and for the full year to be approximately 27.25%. Our projected gross margin for Q1 primarily reflects the impact of mix and the increased incentives offered in our fourth quarter to move finished spec inventory and to counter softness in the market resulting from election uncertainty and the spike in mortgage rates. We view our Q1 adjusted gross margin as a bit of an anomaly from both the mix and incentives perspectives and fully expect it will be the low point of the year. I wouldn't read too much into it. We are very comfortable with our full year guide of 27.25%, implying approximately 27.5% for the balance of the year. We expect interest and cost of sales to be approximately 1.2% of home sales revenues in the first quarter and for the full year. We project first quarter SG&A as a percentage of home sales revenues to be approximately 12.7%, reflecting lower fixed cost leverage as the first quarter tends to be our lowest revenue quarter. Also included in first quarter SG&A is about $15 million of our annual accelerated stock compensation expense that does not recur in the remainder of the year. For the full year, we project SG&A as a percentage of home sales revenues would be generally consistent with 2024 and in the range of 9.4% to 9.5%. Whether income from unconsolidated entities and land sales gross profit is expected to be $33 million in the first quarter and $110 million for the full year and includes the projected sale of several stabilized apartment communities. We project a first quarter and full year tax rate of approximately 22% and 25.5% respectively. We expect our first quarter tax rate to benefit from higher deductions related to previously granted equity awards that we do not project to recur the balance of the year. Our weighted average share cap is expected to be approximately $102 million for the first quarter and $100.5 million for the full year. This assumes We repurchased a targeted $500 million of common stock for the year, with most of that occurring later in the year, aligned with our anticipated higher cash flows. Based on land we currently own or control, we expect to grow community count by 8% to 10% by the end of fiscal 2025 and are targeting 440 to 450 communities. With that, I'll turn it back to Doug.