Release Date: May 22, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Toll Brothers Inc (TOL, Financial) delivered 2,641 homes at an average price of approximately $1 million, generating record second quarter home sales revenues of $2.65 billion, up 6% compared to last year.
- The company signed 3,041 net agreements for $2.94 billion, up 30% in units and 29% in total dollars compared to last year.
- Adjusted gross margin was 28.2% in the second quarter, 60 basis points better than guidance.
- SG&A expense as a percentage of home sales revenues was 9.0%, 70 basis points better than guidance.
- Toll Brothers Inc (TOL) raised its full-year 2024 revenue and earnings guidance, expecting to deliver 10,600 homes at an average price of approximately $965,000, resulting in $10.23 billion of revenue.
Negative Points
- The average price of contracts signed in the quarter was approximately $967,000, down about 1% compared to last year and down 4.4% sequentially.
- Spec homes generally carry a lower margin compared to build-to-order homes, with spec homes delivered at a 26.1% margin compared to 29.8% for build-to-order homes.
- Write-offs in home sales gross margin totaled $28.4 million in the quarter, compared to $11.1 million in the second quarter of 2023.
- SG&A as a percentage of revenue is expected to tick up about 20 basis points quarter-over-quarter, despite slightly higher revenue.
- The company is seeing modest increases in resale inventory in some markets, which could impact future demand and pricing strategies.
Q & A Highlights
Q: You mentioned in your opening remarks that the spec homes that you build tend to be built on home sites with lower lot premiums, I think you said. And as a result, the gross margin somewhat lower as well as the fact that you also will incentivize them sometimes more. But I was wondering if you could disaggregate that for us because if you're building homes these specs on home sites with lower lot premiums, even if you didn't build them on a spec basis, they would probably still generate a somewhat lower margin is what I'm thinking. So curious how much is spec building for you actually driving a lower margin on an apples-to-apples basis, do you think taking out that issue?
A: Yes. So let me start at the beginning of your question and just take you through the business model. So right now, we're running at about 50% spec as we've talked about. I think long term, particularly if rates come down and the resale markets open up a bit, we've kind of targeted 40% or 50% as a long-term appropriate business model for the percent that will be spec. We define a spec as a foundation in the ground. It's a little earlier than many other builders. We sell about 1/3 of our spec, up until when the house is framed. We sell another 1/3 of the spec between framing and when the finishes go in, and then the final 1/3 of the specs we sell when they are completed. The higher incentive tends to be on the completed specs. We are not incentivizing nearly as much. In fact, it's quite similar to the build-to-order incentive when the home is sold either as it's been framed or between drywall and the finishes. And we think that's a good business model because there's a lot of people [who] want to move in sooner, and we now have the inventory for them. We also strategically plan when we start spec thinking about when they will be completed and when the buyers want the house. So there are more specs that get started in time to be completed in the summer and early fall months because we know many buyers, particularly those with kids, and most of our buyers have kids want to move into the summer and the early fall as schools are opening. So that's all part of the strategy. And so we've always expected and we discussed that we will be a bit more spec-heavy in the second half of the year than in the first half in terms of deliveries. And those homes have a little bit lower margin. The reason they have a lower margin is because of 3 things. One, we tend to build them on the generic lot, the less valuable lot. So spec may carry -- an average spec may carry a lot premium of $25,000 where the build-to-order business has a lot premium of [$50,000] or higher. We also [put] less in the house in terms of upgrades. And as you know, our upgrade business through our design studio is accretive to margin. We get about a 40% margin out of the design studio. But we're cautious. We don't want to overload a spec and be outside or above the market. So that is part of the strategy. And then the third reason is that the house gets to completion, we do incentivize it a bit more. We have built in, we think, very conservative incentives for the balance of homes, we need specs that we need to sell and still deliver by October. And there's about 6,000 deliveries between now and the end of the year, half of, call it, 11,000 plus or minus. And about 1/4 of those or 1,500 are unsold specs that are being constructed right now. Some will sell in the next few months with modest incentive, but some may be sold when they're completed late in the summer, and we are budgeting for a higher incentive. We don't know where that incentive will be. It could be higher than our budget, it could be lower than our budget. We are encouraged by the start to May, which been very strong. We are encouraged by rates coming down. So we are certainly hopeful that we won't use all the incentivized -- or all the budgeted incentive but we'll just have to see how that plays out. As to your main question, which is aren't we just substituting a spec home with the same margin as a build-to-order? Not quite because I think we are being more conservative than the market would be when they step up and they get to the design studio and they all fall in love with all the finishes, and they put more into the house than we are putting in because we want to make sure we sell that spec and we don't overdo it. So it's a fair point. There is certainly lower margin, and lower lot premium lots because the lot premium is 100% margin, and there's lower margin when you put less upgrades in a home because of the accretive nature of the upgrade business. But I think our spec strategy is to be a bit more conservative than the client buying a build-to-order on that lot.
Q: Okay. Good. All right. So second question relates to the M&A landscape. I'm curious if you could give us your assessment of the M&A landscape, specifically as it relates to Toll Brothers and your growth plans. How it fits in. We're hearing that private builders are finding it tougher and tougher to compete with the likes of public such as yourself. But also the pool of prospective buyers is pretty robust right now, particularly with the Japanese interest. And at the same time, you have been talking about moving land light and having that be an integral part of your strategy going forward. So with all of those 3 major pieces, I'm curious if you could give us your general assessment of the M&A landscape. How interested are you in tapping the M&A pool to grow geographically or grow across different price points and things of that nature?
A: Sure. So what we're actually seeing more from the smaller builders who are facing some capital crunch is land deals that they have tied up, they process approvals on. They thought about building homes on. They're having a hard time finding the regional bank to finance them. And while they can't make a full profit they would have made had they built homes, they can make a fair profit by flipping the land to us. And so we're seeing quite a few deals like that out of the smaller, more local and regional builders. In terms of M&A, it's very active. There's a lot of deals out there. We're in action. We look at every deal. We have a seasoned team that's dedicated to M&A. That's all they do. There's nothing to report. Frankly, there's nothing that's exciting to us. We're really happy with the geographic footprint. We're really happy. There's very few new markets we're looking at. We're growing this company by getting bigger with wider price ranges in the markets we're in, where we know we're underserving most of the markets we are in. You pay a premium to buy a builder. It's a lot harder to pay that premium when you're in a market with a brand, with employees, with land, with contractors, with
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
