Toll Brothers, Inc. Q1 FY2025 earnings call

• Demand: Signed 2,307 net contracts in Q1, up 13% in units and 12% in dollars y-o-y. Strong demand in North and Mid-Atlantic regions, as well as Houston, Dallas, Boise, Denver, Las Vegas, and California.
• Mixed spring selling season: Affordability constraints and growing inventories pressuring sales, especially at lower end, but encouraged by recent sales activity.
• Homebuilding guidance: Maintaining key homebuilding guidance for full year 2025, including deliveries, average price, adjusted gross margin, SG&A margin, and community count growth.
• Land position: Owned or controlled ~56,000 lots, 56% optioned, targeting 60% optioned and 40% owned.
• Balance sheet: Healthy, increased liquidity, low net debt, no significant debt maturities in fiscal 2025, extended credit facility maturities to Feb 2030 and upsized revolver to $2.35 billion.

In the first quarter, Toll Brothers delivered 1,991 homes with an average price of $925,000, generating home sales revenue of $1.84 billion. Adjusted gross margin was 26.9%, 65 basis points better than guidance. SG&A expense as a percentage of home sales revenue was 13.1%, 40 basis points above guidance. Net contracts signed were 2,307 for $2.3 billion, up 13% in units and 12% in dollars compared to the prior year. Deposit conversion ratio was 82% in Q1, significantly higher than the 5-year average of 70%. Spec homes represented approximately 55% of sales and 52% of deliveries in Q1, with ~3,200 spec homes in inventory at quarter end. Revenue contribution was primarily from homebuilding operations.

• Fiscal 2025 second quarter deliveries projected 2,500-2,700 homes, average delivered price $940,000-$960,000.
• Full-year 2025 deliveries projected 11,200-11,600 homes, average price $945,000-$965,000.
• Adjusted gross margin expected 27.25% for second quarter and full year.
• SG&A as % of home sales revenue projected 10.3% in Q2 and 9.4%-9.5% full year.
• Targeted $500 million share repurchases for full year.

• Economic, world events, housing and financial markets, interest rates, labor and materials availability, inflation, and other factors beyond control could affect future results.
• Mixed spring selling season with affordability constraints and growing inventories pressuring sales, especially at lower end.

Q: Stephen Kim asked about inventory and spec levels, inquiring about what drove the higher inventory number and if the company was naturally at a later stage of construction.

A: Marty Connor stated they have more specs under construction at a further stage of completion with an eye on seasonality. Douglas Yearley added it's strategic, by market and community, with some markets seeing increased spec activity and others being tempered.

Q: John Lovallo asked about gross margin outlook, incentives, and specific markets with competition.

A: Douglas Yearley said second quarter gross margin guide is due to mix (more luxury and Pacific regions), and mentioned markets like Jacksonville, Tampa, San Antonio, Phoenix, Reno, Salt Lake City, and Portland where pressure is felt. Marty Connor added specs with known costs and contracted costs give confidence in future sales.

Q: Trevor Allinson asked about impacts of wildfires in Southern California and employment uncertainty in DC, and buyer behavior regarding rate expectations.

A: Douglas Yearley said Washington DC and Southern Cal are strong, and buyers are moving forward as they recognize rates likely won't drop significantly, though some areas have hesitancy due to price appreciation and inventory concerns.

Q: Mike Dahl asked about quarter-to-date trends and 2Q pace.

A: Douglas Yearley mentioned expecting to hit 3,000 contracts in Q2, and Marty Connor noted backlog is two-thirds of what's left to sell.

Q: Michael Rehaut asked about guidance incorporating mixed results and land cost inflation.

A: Douglas Yearley said guidance incorporates mixed market, and Marty Connor mentioned land cost inflation is low to mid-single digit.

Q: Ivy Zelman asked about land purchased pre-COVID and future land cost.

A: Marty Connor said ~30% of land bank is priced pre-COVID.

Q: Rafe Jadrosich asked about absorption pace and gross margin.

A: Douglas Yearley said guidance assumes mixed market, and if market softens, they'll manage pace and price.

Q: Alex Barron asked about specs concentration and other builders' actions.

A: Douglas Yearley said specs are across price points, leaning towards affordable luxury, and some builders are being cautious in spec starts.