Toll Brothers, Inc. Q2 FY2025 earnings call

Key Points

• Met or exceeded guidance across all key metrics in Q2, delivering 2,899 homes with record second quarter home sales revenue.
• Adjusted gross margin and SG&A margin were better than guidance.
• Highlighted strength of diversified luxury product offerings, balanced portfolio, and strong customer financials.
• Market conditions were softer due to economic uncertainty, but prioritizing price and margin was strategic.
• Continues to see community count growth, with target of 440-450 communities by year-end.
• Land position controlled ~78,600 lots, with 58% optioned.
• Increased share repurchases in fiscal 2025 from $500 million to $600 million.

In the second quarter, Toll Brothers delivered 2,899 homes with home sales revenue of $2.71 billion, an average price of approximately $934,000. Adjusted gross margin was 27.5% and SG&A margin was 9.5%. Earnings were $352.4 million or $3.50 per diluted share. The company's luxury product offerings, balanced portfolio of build-to-order and spec homes contributed to these results. Revenue from home sales was the key segment performance, with the luxury segment being a significant contributor.

Fiscal 2025 Guidance

• Reaffirmed home sales revenue midpoint of $10.9 billion, adjusted gross margin of 27.25%, and earnings of approximately $14 per diluted share.
• Projected deliveries between 11,200 and 11,600 homes for the full year.
• Third quarter deliveries expected to be between 2,800 and 3,000 homes, with average price between $965,000 and $985,000.
• Increased share repurchases in fiscal 2025 to $600 million.

Risks

• Economic uncertainty impacting consumer confidence.
• Volatile housing and financial markets.
• Availability of labor and materials.
• Inflationary pressures.
• Uncertainty regarding tariffs and their impact on building costs and product availability.

Q: Stephen Kim asked about spec data and where specs stand, both completed and under construction, and how specs relate to delivery run rate.

A: Marty Connor stated there are 1,028 fully completed spec units, ~2,400 in progress, and permits for another 1,000-2,000 not commenced. Douglas Yearley mentioned comfort with spec business and budgeting conservatively on incentives.

Q: John Lovallo asked about third quarter gross margin outlook and sustainability into next year.

A: Douglas Yearley said fourth quarter margin expected to be similar to third quarter, with tailwind from mix (more luxury deliveries, Pacific and Mid-Atlantic regions) offsetting some downward pressure from spec sales.

Q: Mike Dahl asked about backlog covering second half deliveries and margin details for homes sold.

A: Marty Connor explained ~4,500 homes from backlog, ~1,900 from spec inventory (1,028 completed, others under construction), with selling price being key risk but margins accounted for based on recent sales.

Q: Trevor Allinson asked about demand improvement with stock market rebound and buyer pool commentary.

A: Douglas Yearley said market is soft, but modest positive indicators in traffic and quality of traffic, with under supply and demographics as tailwinds for future growth.

Q: Sam Reid asked about SG&A leverage in Q4.

A: Marty Connor said leverage driven by more revenue, with focus on managing costs despite some inflationary pressures like healthcare.

Q: Alan Ratner asked about stock market volatility impact on buyer pool.

A: Douglas Yearley said modest impact, with affluent buyers less affected by interest rates due to high cash and low LTV, and some positive indicators from sales and traffic.

Q: Alex Barron asked about backlog dynamics and when backlog might trend up.

A: Marty Connor explained shift from spec to build-to-order preference in softer market, with backlog expected to trend up as market conditions improve.

Q: Buck Horne asked about land spend and geographic market performance.

A: Marty Connor said land spend consistent with prior quarters, with better markets in Eastern Seaboard and parts of West, and softer spots in Pacific Northwest, parts of Florida, Texas, and Phoenix.