Toll Brothers Inc Q3 2024 Earnings Call Summary

The following is excerpted from the question-and-answer section of the transcript.

Question: Stephen Kim - Evercore ISI Institutional Equities - Analyst : Yeah. Thanks very much, guys. Appreciate all the color so far, and good job in the quarter. I wanted to ask you about profitability. I was intrigued by your comment about greater efficiency in the home building operations. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 21, 2024 / 12:30PM, TOL.N - Q3 2024 Toll Brothers Inc Earnings Call I wanted to get a sense of -- if you could elaborate there. That seems to imply that there's a degree of sustainability to the strength that we're seeing in your margins. And so -- I know you haven't given guidance here for 2025, but it would be helpful for, I think, us to hear you comment on the, call it, the 17.5% operating margin you're generating this year. How sustainable do you think that is generally? Is that a number that you think is inflated by any particular variables? Or is that a level that you sort of -- as you look forward across your business over the next several years, is that a level that you sort of feel is a reasonable level to use as kind of a base?

Question: Stephen Kim - Evercore ISI Institutional Equities - Analyst : Well, that's super clear. So appreciate that. And that's obviously very encouraging. I was wondering if you could talk a little bit more about your spec model. What was the actual number of specs, both finished and total specs, that you had in the quarter? And then I had a follow-up regarding about that level.

Question: Stephen Kim - Evercore ISI Institutional Equities - Analyst : That's interesting. Okay, so you had yet about 8.5 per community total, but finished, as you said, below two. Those levels of spec, are those numbers per community what we can also expect going forward? Or do you see this changing, growing perhaps, as we go forward?

Question: Stephen Kim - Evercore ISI Institutional Equities - Analyst : Yeah, absolutely. And the level of finished specs here per community is very encouraging. I would say below two per community, that's not at all an unusually high number. So it's very clear that your process is working. So great, well, appreciate all the color. Thanks very much.

Question: John Lovallo - UBS - Analyst : Morning, guys. Thanks for taking my questions as well. Maybe just following up on -- hey, hi, how are you? Maybe just following up on Steve's question. Your backlog has continued to kind of get worked down over the past few years. I mean, how confident are you that improved cycle times in this increased spec level can continue to drive delivery growth as we move into 2025? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 21, 2024 / 12:30PM, TOL.N - Q3 2024 Toll Brothers Inc Earnings Call

Question: John Lovallo - UBS - Analyst : Makes sense. And then moving on to the fourth-quarter gross margin, what would drive the expected 140-basis-point sequential decline from the third quarter? I mean, is this the reverse of the positive mix impact in the third quarter? And what specifically was that mix impact? Was it geographic? Was it product or spec versus BTO? Thank you.

Question: Alan Ratner - Zelman & Associates - Analyst : Hey, guys, good morning. Nice quarter, and thanks for all the helpful detail so far. Doug, I'd love to drill in on pricing. Your comments suggest pricing is pretty flattish in the quarter, plus or minus, depending on the community. I'm curious, as you sit here three weeks into August, you sound pretty encouraged by the recent activity. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 21, 2024 / 12:30PM, TOL.N - Q3 2024 Toll Brothers Inc Earnings Call Have you started to or have you seen any ability to begin either dialing back incentives now that rates are a bit lower, maybe pulling back on some of the rate buydowns or even start to begin raising prices again? Or is it still premature to do that given the choppiness?

Question: Alan Ratner - Zelman & Associates - Analyst : Yeah, I was going to follow up on that, Marty, so thank you for adding that. So when you say less expensive, are you buying down the rate a lesser magnitude because you don't need to solve for a lower rate? Or is it actually buy down that same, whatever it is, 50 basis points, 100 basis points, is it actually costing you less? And if so, can you quantify that?

Question: Michael Rehaut - J.P. Morgan Securities LLC - Analyst : Hi, thanks. I appreciate you taking my questions. Good morning, everyone. Congrats on the quarter.

Question: Michael Rehaut - J.P. Morgan Securities LLC - Analyst : I wanted to dial in a little bit about your, over the years now, I guess, over the last year or two, your shift towards spec being 50% and how that kind of fits in with your prior or, still, to some degree, ongoing preference of price over pace. This quarter, it was pretty interesting in that you probably had a, relative to prior buildings reporting, a little bit more of a gap between at least our estimates of order growth and what you put out, and probably one of the stronger gross margins relative to our estimates. And I think that's generally consistent with how you operate in more temporary periods of softness, where maybe volume or orders fall off a little bit more and you hold on to the margin. At the same time, you're shifting in this more of a spec model or half of your business spec. There are points where you're going to have to, as you did in this quarter, increase incentives if your specs build up a little too much. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 21, 2024 / 12:30PM, TOL.N - Q3 2024 Toll Brothers Inc Earnings Call And so I'm wondering, going forward, how investors should think about that balance, and if there's going to be points where, perhaps, you're going to be a little more sensitive to pace, if softness is going to go past a quarter or two, and if that would drive any greater degrees of variability in your gross margin relative to the past.

Question: Mike Dahl - RBC Capital Markets - Analyst : Morning. Thanks for taking my questions.

Question: Mike Dahl - RBC Capital Markets - Analyst : Hi. So just to keep going on kind of the margin and the spec and all the mix dynamics, I guess, when you think about the 4Q gross margin, understanding that you took it up a little prior -- versus your prior, you're talking about kind of running that promotion, which may have lifted incentives. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 21, 2024 / 12:30PM, TOL.N - Q3 2024 Toll Brothers Inc Earnings Call At the same time, Steve followed up on your comments about efficiency, which does seem more sustainable and unclear why that would go away in the immediate term. So can you just help us understand in terms of maybe just the incentive load that's projected

Question: Mike Dahl - RBC Capital Markets - Analyst : Yeah. I was kind of triangulating back to make sure it was that pure mix dynamic versus something under the surface that's incremental. So thank you for that. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 21, 2024 / 12:30PM, TOL.N - Q3 2024 Toll Brothers Inc Earnings Call

Question: Mike Dahl - RBC Capital Markets - Analyst : That was the color that we were looking for. And then just thinking about seasonality, typically, you'd still keep seeing order pace decline in the fourth quarter. Obviously, you just came through a weird and challenging third quarter, and you're talking about potential acceleration in trends coming out of July. Any help you want to provide in terms of level-setting? I think, typically, your pace would be down kind of low double digits sequentially in 4Q versus 3Q. Should we be expecting kind of on seasonal trends above, below, based on what you're seeing so far?

Question: Trevor Allinson - Wolfe Research, LLC - Analyst : Hi, good morning. Thank you for taking my questions. First one, just wanted to touch on geography. You guys laid out some of the better-performing markets. I don't believe you mentioned any markets in Florida or Texas. Those have clearly gotten a lot of attention over the last few months. Can you comment on how demand in those markets has trended relative to your business overall?

Question: Trevor Allinson - Wolfe Research, LLC - Analyst : Okay, thank you for that. That's definitely encouraging. Sounds like things are definitely trending in the right direction there. And then a question on SG&A. You've talked about that moving down to 9% longer term due to some tech initiatives by 2025, or is that more of a longer-term type of SG&A level? And then for 4Q, specifically, looks like you've got it stepping down nicely sequentially. Should we think of that as just being leverage, or is there anything else driving that? Thanks.

Question: Rafe Jadrosich - BofA Global Research - Analyst : Hi. Good morning. It's Rafe. Thanks for taking my question. I wanted to follow up on some earlier questions on sort of the deliveries versus orders going forward. You've had three straight years of deliveries tracking above orders, and that's partially been because of the increase in spec. How do we think about deliveries relative to orders going forward here? Would you anticipate spec to outgrow the BTO business in terms of deliveries as we go into 2025?

Question: Rafe Jadrosich - BofA Global Research - Analyst : Got it. Okay. That's helpful. And do you think deliveries can continue to outpace orders going forward?

Question: Rafe Jadrosich - BofA Global Research - Analyst : Okay. And then the second question just on -- you increased the buyback guidance for the year. Can you talk about what drove that decision? Doug, I think you said programmatic capital return, which I don't think you've said in the past. So has there been any change here? How should we think about capital return and buyback going forward? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 21, 2024 / 12:30PM, TOL.N - Q3 2024 Toll Brothers Inc Earnings Call

Question: Sam Reid - Wells Fargo Securities, LLC - Analyst : Awesome. Thanks, guys. Appreciate the color you gave on order cadence into the fourth quarter. Just want to piggyback off of some of those questions. Are you looking to run any targeted promos in the fourth quarter that might be helping that better versus seasonal trend relative to the third quarter, in addition to the benefits you might be seeing from selling more specs and just lower overall rates?

Question: Sam Reid - Wells Fargo Securities, LLC - Analyst : Got it. That certainly helps. And maybe this is a little ambitious here, but I want to quickly talk '25 just from a very high-level standpoint. You've got some good visibility into your land pipeline and the types of communities you're going to be delivering. So to that end, do you have any sense as to what kind of community count growth we might be on track to see, especially if you look to potentially grow 5% to 10% over the long term?