Toll Brothers, Inc.

Good morning, and welcome to the Toll Brothers first quarter fiscal year 2025 conference call. All participants will be in a listen-only mode. Should you need assistance, please signal conference specialists 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. And to withdraw your question, please press star then two. The company is planning to end the call at 930 when the market opens. during the question and answer session. Please limit yourself to one question and one follow-up. And please note, this event is being recorded. I would now like to turn the conference over to Mr. Douglas Yearley, CEO. Please go ahead, sir.

Thank you, Chuck. Good morning. Welcome and thank you all for joining us. With me today are Marty Conner, Chief Financial Officer, Rob Parrahouse, President and Chief Operating Officer, Wendy Marlette, Chief Marketing Officer, and Greg 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. Last night, we reported first quarter deliveries of 1,991 homes at an average price of $925,000 for home sales revenues of $1.84 billion. Our adjusted gross margin was 26.9%, or 65 basis points better than guidance, and our SG&A expense as a percentage of home sales revenue was 13.1%, or 40 basis points above guidance. While our net income and earnings per share came in below expectations, this was due primarily to impairments and a delay in the sale of a stabilized apartment property in one of our joint ventures. Our core home building operations met expectations in the quarter. From a demand perspective, we signed 2,307 net contracts for $2.3 billion in the first quarter, up 13% in units and 12% in dollars compared to last year's very strong first quarter when contracts were up approximately 40% in both units and dollars. On a per-community basis, contracts were up 2% compared to last year. We also continued to see a very healthy deposit conversion ratio in the first quarter, with 82% of our deposits converted to sales, significantly higher than our five-year average of 70%. The average sales price of orders in our first quarter was approximately $1 million, which was essentially unchanged compared to the fourth quarter of 2024. On average, net pricing after incentives was flat in the first quarter compared to the fourth quarter of 2024. Geographically, first quarter demand was strongest in our north and mid-Atlantic regions, from Boston to Atlanta, as well as Houston, Dallas, Boise, Denver, Las Vegas, and all of California. Among our buyer segments, both move-up and first-time luxury were up on a per-community basis with a slight decline in empty nester. Although demand was solid in our first quarter, we have seen mixed results so far this spring selling season. While demand has remained healthy in many of our markets, and particularly at the higher end, affordability constraints and growing inventories in certain markets are pressuring sales, especially at the lower end. However, all that being said, we are somewhat encouraged by our sales activity this past week. Against this backdrop, we are carefully monitoring our pricing incentives and spec inventory on a community-by-community basis to best match local selling conditions and to appropriately balance pace and price with a view towards generating higher returns in our overall business. Based on our first quarter results, the gross margin embedded in our backlog, and the mixed trends that we are seeing early in the spring selling season, we are maintaining all of our key home building guidance for the full year, including deliveries, average price, adjusted gross margin, SG&A margin, and community count growth. We continue to see the long-term outlook for the new home market to be very positive, particularly for our luxury niche. Demand for our homes continues to be supported by our affluent customer base. Over 70% of our business is luxury move-up and empty nester, which serves a wealthy cohort that has benefited from years of home price and stock market appreciation. The remaining 25% to 30% serves the more affluent first-time buyer, many of whom are older millennials buying their first home later in life when they have higher incomes and are more financially secure. Consistent with the past several quarters, approximately 26% of our buyers paid all cash in the first quarter, and the LTVs for buyers who took a mortgage was approximately 68%, also consistent with recent quarters. Our contract cancellation rate in the first quarter remained low at 2.4% of beginning backlog. This industry-low cancellation rate speaks to the financial strength of our buyers, as well as the sizable deposits they make and how emotionally invested they become as they personalize their homes at our design studios. In the first quarter, our spec homes represented approximately 55% of sales and 52% of deliveries, and we had approximately 3,200 spec homes in inventory at quarter end. Overall, we are comfortable with this level of specs in our inventory and their stage of construction. As I mentioned, we are actively managing our spec starts and will adjust them on a community by community basis based on local market conditions. This will mean fewer starts in some communities where inventories are building and may mean increased starts in other communities where demand has been strong. However, on a net basis, we do expect to reduce overall spec starts in the near term. Remember, we sell our specs at various stages of construction, from foundation poured to finished home. One-third of our specs sell before framing is completed, so the risk profile and margin for these homes is not all that different from build-to-order homes. In addition, many of our spec buyers have the opportunity to visit our design studios and personalize their homes with finishes that match their taste. This benefits our margins as design studio upgrades tend to be highly accretive. In the first quarter, design studio upgrades, structural options, plus lot premiums averaged $200,000, or 25% of our average base sales price, as compared to the long-term average of about 21%. At first quarter end, we were operating from 406 communities slightly below the 410 that we guided to last quarter. We continue to target 8% to 10% community count growth in fiscal 2025, which would put us at 440 to 450 communities by fiscal year end. In the quarter, we saw modest improvements in our construction cycle times as we continue to focus on increasing production efficiency. We have not seen any immediate supply chain impacts from tariffs or labor shortages due to changes in immigration policies, although we are monitoring developments closely and will pivot as necessary to deal with any issues that arise. We have all learned valuable lessons from the supply chain shocks we navigated through a few years ago with the pandemic. Turning to land, at the first quarter end, we owned or controlled approximately 77,700 lots, 56% of which were options. We are pleased that we continue to make progress in the quarter towards a goal of 60% optioned and 40% owned. Our solid land position provides us flexibility and allows us to be highly selective and disciplined as we assess new land opportunities. Our underwriting standards for the new land continue 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. Our balance sheet is very healthy. We have increased liquidity, low net debt, and no significant debt maturities this fiscal year. As announced last week, we recently extended the maturities of our credit facilities to February 2030, and upsized our revolver to $2.35 billion. We also continue to expect strong cash flow generation from operations this year and reaffirm our $500 million of targeted full-year share repurchases. We expect to continue investing in the growth of our business while simultaneously returning excess capital to our shareholders. With that, I will turn it over to Marty.

Thanks, Doug. First quarter net income was $177.7 million, or $1.75 per share diluted. These results were below expectations due to impairments and lower than projected joint venture land sales and other income. The miss on joint venture and other income was mainly due to a delay in the sale of a stabilized apartment building from one of our joint venture. We now expect this sale, which is under contract, to close in the second half of fiscal 2025. Positively, our core home building operations met expectations. In the first quarter, we delivered 1,991 homes at an average price of $925,000 and generated home sales revenue of $1.84 billion. The average price of homes delivered in the quarter was at the low end of our range due primarily to mix as we delivered more homes in our mountain region and had fewer deliveries in the north and Pacific regions than we had projected. As Doug mentioned, we signed 2,307 net agreements for $2.3 billion in the quarter. This was up 13% in units and 12% in dollars. compared to the first quarter of fiscal year 2024. The average price of contracts signed in the quarter was approximately $1 million, which was essentially flat compared to both the fourth quarter of fiscal 24 and the same period last year. Our first quarter adjusted gross margin was 26.9%, 65 basis points better than our guidance of 26.25%. Q1 gross margin exceeded our guidance due primarily to mix, increased operating efficiency, and slightly better margin from sell and settle spec homes compared to what we had projected. All regions and all product segments exceeded our expectations. Based on our first quarter results, the gross margin embedded in our backlog and the mixed trends that we are seeing early in the spring selling season, we are maintaining our full-year adjusted gross margin guidance of 27.25%. We expect our second quarter adjusted gross margin to also be 27.25%. Write-offs in our home sale gross margin totaled $16.4 million in the quarter, $3.9 million of these impairments were associated with pre-development costs on deals we are no longer pursuing, and the remaining $12.5 million was related to a handful of operating communities in various markets around the country. We also had $1.8 million of land sale impairments and $4.4 million of pre-development write-offs in other incomes related to apartment projects we are no longer pursuing. SG&A as a percentage of revenue was 13.1% in the first quarter compared to our guide of 12.7%. Note that our SG&A margin in the first quarter is always higher as it is generally our lowest revenue quarter and includes an accelerated employee stock-based compensation expense that only hits in that first quarter. 40 basis point SG&A miss relative to our guidance was due to the loss of fixed cost leverage, due to lower than anticipated home building revenues, as well as due to higher than anticipated selling and marketing expenses in the quarter. Our tax rate in the first quarter was 19.7%, or about 230 basis points lower than the guidance. due entirely to the accounting benefit of stock compensation deductions on a lower base of pre-tax income. These stock compensation deductions will not repeat in the balance of the year. We ended the first quarter with over $2.3 billion of liquidity, including approximately $575 million of cash and $1.8 billion of availability under our revolving bank credit facility. We've added $400 million to that, subsequent to the quarter end. As Doug mentioned, we increased the capacity of our revolving credit facility, and we also extended the maturities of both our revolver and our $650 million term loan to February 2030. We thank our banks for their continuing support. Our net debt to capital ratio was 21.1% at first quarter end, down from 21.4% one year ago. We have no significant maturities of our long-term debt until fiscal 2026, when $350 million of notes come due this November. Our community count at quarter end was 406 compared to our guide of 410. Now let me turn to our forward guidance, which is subject to the usual caveats regarding forward-looking information. We are projecting fiscal 2025 second quarter deliveries of approximately 2,500 to 2,700 homes, with an average delivered price between $940,000 and $960,000. For full fiscal year 2025, we are maintaining our projected deliveries to be between 11,200 and 11,600 homes, with an average price between $945,000 and $965,000. As I noted earlier, we expect adjusted gross margin to be 27.25% for both the second quarter and the full year. we expect interest in cost of sales to be approximately 1.2% in the second quarter and for the full year. We project second quarter SG&A as a percentage of home sales revenues to be approximately 10.3%. For the full year, we continue to expect it to be 9.4% to 9.5%. Other income, income from unconsolidated entities and land sales gross profit in the second quarter is expected to break even. We continue to expect $110 million for the full year, which includes the sale of several stabilized apartment projects in the second half. As noted earlier, we had planned to close one of these apartment sales in the first quarter. The sale is under contract, and the transaction is now expected to close in the second half of the year. We project the second quarter tax rate to be approximately 26%, and the full year rate to be approximately 25.5%. 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. We expect to be operating from 415 selling communities at the end of the second quarter. Our weighted average share count is expected to be approximately 101 million shares for the second quarter and 100.5 million shares for the full year. This assumes we repurchase a targeted $500 million of common stock for the full year, with most of that occurring later in the year, aligned with our anticipated higher cash flows. Now let me turn it back to Doug.