Toll Brothers, Inc.

Good morning, everyone, and welcome to the Toll Brothers second quarter fiscal year 2025 conference call. All participants will be in a 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 and then one using a telephone keypad. To withdraw your questions, you press star and two. The company is planning to end the call at 9.30 when the market opens. During the Q&A, please limit yourselves to one question and one follow-up. Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Douglas Geerly, CEO. Please go ahead.

Thank you, Jamie. 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. I am pleased with our performance in the second quarter. In what proved to be a challenging environment, we met or exceeded our guidance across all key metrics. We delivered 2,899 homes at an average price of approximately $934,000, generating record second quarter home sales revenue of $2.71 billion, or $236 million better than the midpoint of our guidance. We posted an adjusted gross margin of 27.5% and an SG&A margin of 9.5%. a 25 and 80 basis points better than guidance, respectively. And we earned $352.4 million, or $3.50 per diluted share. Adjusting for the $175 million pre-tax land sale gain we recorded last year, our second quarter earnings per share were a record. We believe these results highlight the strength of our broadly diversified luxury product offerings, our balanced portfolio of build-to-order and spec homes, and our strategy of prioritizing sales pace and margin in the current environment as we seek to maximize returns. They also reflect the financial strength of our customers. Our results and the strength of our backlog also provide us the confidence to reaffirm all of our guidance for fiscal 2025, including home sales revenue of $10.9 billion at the midpoint, an adjusted gross margin of 27.25 percent, and earnings of approximately $14 per diluted share. Turning to market conditions, in the second quarter, we signed 2,650 net agreements for $2.6 billion, down approximately 13 percent in units and 11 percent in dollars compared to last year's strong second quarter. We experienced softer demand in the second quarter due to a decline in consumer confidence driven by increased economic uncertainty. These conditions have continued into our third quarter. In this environment, we believe prioritizing price and margin over pace makes the most strategic sense. we are confident that our balanced approach will allow us to continue successfully navigating this market. Our average sales price in the quarter was approximately $983,000 compared to $1 million in our first quarter and $967,000 in the second quarter of fiscal 2024. Given the softer demand environment, we modestly increased incentives in the quarter, Overall, incentives were approximately 7% of the average sale price, up from our recent average of 5% to 6%. As we discussed last quarter, we have been reducing our spec starts to match local market conditions. Our spec strategy is calibrated to effectively balance the need to have quick move-in homes available to meet buyer demand while protecting margins. Over the past decade, we have worked hard to build a nationwide platform with operations in over 60 markets in 24 states. We now serve all buyer groups with the broadest home offerings in the industry and prices that range from the $300,000 to over $5 million. We have entered new markets and expanded our offerings while enhancing all that sets us apart as America's luxury home builder. An exceptional brand our affluent customer base, prestigious locations, distinctive architecture, unrivaled choice, and an extraordinary customer experience. We've executed this growth strategy while de-risking our balance sheet, improving capital efficiency, and returning capital to stockholders. Our performance in the second quarter and over the past many years has demonstrated the competitive advantages of our business and brand in driving high returns, as well as our ability to navigate through challenging markets. And while the near-term outlook for the housing market remains cloudy due to the well-known affordability pressures and the volatile macro environment, we continue to believe the long-term outlook for the new home market remains positive, particularly for our luxury niche. With many entry-level buyers struggling with affordability challenges, we are pleased to be serving an affluent consumer. Over 70% of our business serves the move-up and empty-nester segments. These buyers are wealthier, have greater financial flexibility, and most have equity in their existing homes. The remaining 25% to 30% of our business serves the more affluent, older, first-time buyer. The financial strength of our customer base is highlighted by our industry-low cancellation rate, high percentage of all cash buyers, and low LTVs for those who take a mortgage. Consistent with the past several quarters, approximately 24% of our buyers paid all cash in the second quarter, up from our long-term average of approximately 20%. The LTVs of buyers who took a mortgage in the quarter was approximately 70%, and our contract cancellation rate was 2.8% of the beginning backlog. In addition, the average spend on design studio selections, structural options, and lot framing was approximately $200,000 per home in Q2, consistent with our first quarter. These upgrades benefit our margins as they tend to be highly accretive. We continue to expect community account growth to help drive results in fiscal 2025 and beyond. We remain on target to reach our year-end guidance of approximately 440 to 450 communities, which would represent an 8 to 10 percent increase versus fiscal year-end 2024. We project similar community count growth in fiscal 2026. We also continue to see modest improvements on our construction cycle times as we focus on increasing production efficiency. We have not yet seen any impact from potential tariffs on building costs or product availability. While it is difficult to predict where tariffs will land and the precise impact to our business, we do not believe we will see any significant impact in fiscal 2025. Turning to land, at our second quarter end, we controlled approximately 78,600 lots, 58% of which were optioned. Over the past years, excuse me, over the past year, we have increased our percentage of option lots from 48 to 58% of our total lot count, consistent with our focus on structuring land deals in more capital-efficient ways in order to enhance returns. Our land position allows us to continue to be highly selective and disciplined as we approach new opportunities. In today's environment, we have tightened our underwriting standards and are reducing land spend on new deals which we expect to primarily impact fiscal 2026 land spent. At quarter end, we held approximately $686 million of cash and cash equivalents, and our net debt-to-capital ratio was 19.8%. We continue to generate strong operating cash flows. This provides us plenty of opportunity to both grow our business and return capital to stockholders. During the quarter, we repurchased $177 million of our common stock. Given our strong financial position, healthy projected cash flow, and our focus on returning capital to stockholders, we are increasing our projected share repurchases in fiscal 2025 from $500 to $600 million. With that, I will turn it over to Marty. Thanks, Doug.

And congrats on today being the 35th anniversary of your first day at Toll and your 60th conference call. We had a strong second quarter, feeding our guidance for deliveries, home building revenue, adjusted gross margin, SG&A, and earnings. In the quarter, we delivered 2,899 homes and generated home sales revenues of $2.71 billion, up nearly 10% in units, and 2.3% in dollars compared to last year. Both were second quarter records. At the midpoint, we delivered nearly 300 more homes in our guidance, or $236 million of home sales revenue. The average price of homes delivered in the quarter was approximately $934,000, a bit below the low end of our guidance as we delivered more homes in our mountain and mid-Atlantic regions than anticipated. We signed 2,650 net agreements for $2.6 billion in the quarter, down 13% in units and 11% in dollars compared to the second quarter of fiscal year 2024. The average price of contracts signed in the quarter was approximately $983,000, up 1.6% compared to last year. At second quarter end, our backlog still stood at $6.84 billion, and 6,063 homes, down 7% in dollars and 15% in units compared to a year ago. The average price of the homes in our backlog was $1,130,000, a company record. Our second quarter adjusted gross margin was 27.5%, which was 25 basis points better than guidance. Our Q2 gross margin exceeded guidance primarily due to positive mix, strong cost control, and increased leverage from higher-than-projected revenues. Write-offs in our home sales gross margin totaled $9.8 million in the quarter, as compared to $28.4 million in the second quarter of 2024. SG&A as a percentage of home sales revenue was 9.5% in the second quarter, and 80 basis points better than guidance. Again, reflecting our focus, on cost controls, and leverage from higher-than-expected home sales revenue. Second quarter JV land sales and other income was $29 million versus our break-even guidance. Approximately $15 million of this gain was attributable to the sale of a stabilized asset in one of our apartment living joint ventures, with the remainder primarily attributable to interest income and income from our mortgage, title, and city living operations. Our tax rate in the second quarter was approximately 26.2%. Our balance sheet is very healthy. At second quarter end, we had $2.8 billion of liquidity, including approximately $686 million of cash, and our net debt-to-capital ratio was 19.8%. In addition, we are generating strong cash flows with approximately $1 billion of cash flows from operations projected for fiscal 2025. As previously reported, during the quarter, we extended the maturities of our credit facilities to February 2030 and upsized our revolver to $2.35 billion, and we increased our quarterly dividend by 9% to 25 cents per share. We repurchased $177 million of our common stock, bringing full-year repurchases to approximately $200 million, and we bought 2,073 lots for $362 million. As Doug mentioned, as a result of our strong financial position and healthy cash flows, we are increasing our projected share repurchases in fiscal 25 from $500 to $600 million. Turning to guidance, our outlook is subject to the usual caveats regarding forward-looking information and the assumptions, risks, and uncertainties inherent to projections. Based on our backlog, Recent sales activity and the number of homes currently under construction or completed, we expect to deliver between 2,800 and 3,000 homes in the third quarter. And we continue to expect to deliver between 11,200 and 11,600 homes for the full year. Our projected second half delivery cadence is consistent with what it has been over the past several years. On average, we deliver approximately 58% of full-year deliveries in the second half, with 26% of the total delivered in the third quarter and 32% in the fourth quarter. We are projecting essentially the same percentages this year. The average price of deliveries in the third quarter is expected to be between $965,000 and $985,000. We are maintaining our full-year projection of $945,000 to $965,000 for our average price of deliveries. As Doug mentioned, in today's softer demand environment, we believe it makes the most strategic sense to prioritize price and margin over pace. This strategy, combined with the gross margin embedded in our backlog, gives us confidence in maintaining our full-year projected adjusted gross margin of 27.25%. For the third quarter, we also expect the adjusted gross margin to be 27.25%. We expect interest and cost of sales to be approximately 1.2% of home sales revenues in the third quarter and also for the full year. Third quarter SG&A as a percentage of home sales revenue is expected to be approximately 9.2%. For the full year, we continue to expect it to be between 9.4% and 9.5%. Other income, income from unconsolidated entities, and land sales gross profit in the third quarter is expected to break even. We continue to project $110 million for the full year, much of which is projected to come from fourth quarter sales of our interest in certain stabilized apartment communities developed by Toll Brothers Apartment Living in joint venture with various partners. We project the third quarter tax rate to be approximately 26%, and the full year rate to be approximately 25.5%. Our community count at quarter end was 421 compared to our guide of 415. We expect 430 at the end of the third quarter and reaffirm 440 to 450 communities by the end of the fiscal year. Our weighted average share count is expected to be approximately 99 million for the third quarter and 100 million for the full year. This assumes we repurchase $400 million of common stock in the second half on top of the $200 million we've bought back so far this year, which would be consistent with the greater operating cash flow we typically generate in the second half. All of our guidance for fiscal 2025 translates to approximately $14 per diluted share. This would result in a full-year return on beginning equity of approximately 18%, and would put our year-end book value per share at approximately $90. We believe these results will once again reinforce the strength and resiliency of our business model, as well as our ability to successfully navigate changing market conditions while still delivering attractive returns to stockholders. Now, let me turn it back to Doug.