Toll Brothers Inc Q4 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 : Appreciate all the color. Certainly, I think the results in the quarter were strong all on the order front. Your ASP was also very strong. You've talked about the guidance for the first quarter though and for the full year that are a little lower than, I think, we and many others were expecting for the full year as well as the quarter. I wanted to talk about the operating margin. If you just kind of cut through the growth in this (inaudible) and just talk about the operating margin. It seems like you're guiding to something in the neighborhood of like sub-17%. You've done 18% in each of the last two years basically. I'm curious if you can talk about what sort of exogenous factors or factors that are out of your control? Are you embedding in your assumptions for 2025 in terms of the market outlook? I'm thinking things like can you give us a sense for what you're looking for mortgage rates. Can you give us a sense for if you're anticipating any disruptions from, let's say, Trump's immigration policies and things like that?

Question: Stephen Kim - Evercore ISI Institutional Equities - Analyst : Got you. I appreciate that color. I didn't catch a cash flow guide for 2025. I was wondering if you could give us that. And is it also -- would you -- I think I asked you this question maybe a quarter or two ago about what you think the long-term sustainable operating margin range might be? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 10, 2024 / 1:30PM, TOL.N - Q4 2024 Toll Brothers Inc Earnings Call And I think at that time, you had mentioned something in the neighborhood of 17%, 18% or 7.5%. Is that something that you still believe that general range is where you could sustain your operating margin longer term, you think?

Question: John Lovallo - UBS - Analyst : I'm going to dovetail off of Steve here for a moment. With the cash flow projected to be about the same year-over-year, why is the intent to buy back less stock, the $500 million versus the $628 million that you guys did in fiscal year '24?

Question: John Lovallo - UBS - Analyst : Yes. That makes sense. And then on the first quarter gross margin, I think you guys explained that pretty well with mix and higher incentives on finished specs that are going to deliver in the first quarter. But I guess the question is $27.5 million that we would need through the remainder of the year. Is there a cadence that we should think about for that does it assume that interest rates actually come down from here? Or could you achieve it at rates that are at the same level or potentially a tad higher, if that's the way things went?

Question: Trevor Allinson - Wolfe Research, LLC - Analyst : First question, I want to visit some of your positive demand commentary. You mentioned demand over the last 6 weeks has been pretty strong. Can you provide any additional color around that now that we're post election, perhaps on traffic rates or absorption paces? And then any differences that you guys are seeing between your different consumer segments.

Question: Trevor Allinson - Wolfe Research, LLC - Analyst : Okay. That's helpful and very encouraging. And then the second question is on your lot supply. You mentioned your release having all the lots you need to grow in 2026. As we look at your lot supply currently on a four-year supply basis, it seems like it's down a bit from where it's been in the last few years. So the question is, as you stand here today, given your outlook for 2025, demand is still healthy for your product. Do you need to accelerate the loss you have under control from here?

Question: Christopher Kalata - RBC Capital Markets - Analyst : Actually Chris Kalata for Mike. Just going back to your incentive comments, you guys saw a step up in incentives this quarter. You're expecting that to moderate down modestly. Could you just help quantify what you're expecting incentive to kind of settle out as we enter the new year? And then given your expectation of kind of a nationwide price increase and more moderate incentive load. I mean, what's your confidence that you'll be able to maintain that two per month absorption trend that you guys called out into 1Q and then the rest of this year?

Question: Christopher Kalata - RBC Capital Markets - Analyst : Okay. And then you just plan to operate at that level for the remainder of the year, correct? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 10, 2024 / 1:30PM, TOL.N - Q4 2024 Toll Brothers Inc Earnings Call

Question: Michael Rehaut - J.P. Morgan Securities LLC - Analyst : Doug, first, on the first quarter -- I'm sorry, fourth quarter description about -- I'm sorry, first quarter description about the gross margin being the low point due to a combination of mix and incentives. I was wondering to get perhaps a rough breakout of how much of that difference in the first quarter versus the rest of the year is due to mix versus incentives. And more broadly, when you think about your spec strategy, obviously, you kind of highlighted the higher level of incentives that you applied to the finished spec in your -- that you had in the fourth quarter. If the market continues to be a little more volatile, if there's a little bit more, let's say, looseness in inventory or whatnot, would that cause you to shift a little bit away from spec maybe versus how you've approached the market in the last couple of years?

Question: Michael Rehaut - J.P. Morgan Securities LLC - Analyst : Great. I appreciate that your perspective as well. I think it's helpful. Secondly, I'd love to just revisit your comments around the strong start to the first quarter. I'm just trying to understand a little bit better what you think are the drivers behind that? In other words, is it some of the election uncertainty that's maybe gone away? Is it rates perhaps stabilizing? And also to kind of delve into just the broader market trends, (inaudible) love a sense of how inventory is trending in your view across your key markets. If there's any markets where you've seen inventory pick up and how that might be playing into market dynamics as well?

Question: Rafe Jadrosich - BofA Global Research - Analyst : Just following up on the first quarter gross margin guidance and then the improvement in the second -- through the second to fourth quarter. Can you just talk about maybe what you're assuming for spec margins? I know it's a little bit different for you because you have different levels of spec, whether it's sold free drywall or is finished specs. So what do you assume for spec margins in the first quarter and then for the rest of the year?

Question: Rafe Jadrosich - BofA Global Research - Analyst : And then assuming it goes back to normal for the normal spread in the remainder of the year?

Question: Rafe Jadrosich - BofA Global Research - Analyst : All right. That's helpful. And then I think, Doug, in the past, you've spoken about some either regional or market differences. When you look at the fiscal -- the fourth quarter and heading into the fiscal first quarter, where are you seeing relative pockets of strength? And then where -- are there any specific markets where you've had to be a little bit more aggressive on the incentive side? Are there specific regional trends? Or is it by price point? Can you just talk about the relative differences?

Question: Alan Ratner - Zelman & Associates - Analyst : Thanks for all the great color so far. Most of my questions have been answered here, but I got a few. First on the potential for tariffs. I'm curious if you guys have done any internal analysis of your supply chain to try to figure out what potential exposure might be there either from China, Canada, Mexico, and if you've done any work to try to kind of expand your supplier base to kind of avoid some of those risks.

Question: Alan Ratner - Zelman & Associates - Analyst : Great. Appreciate the thoughts there, Doug. This one might be for Marty, but obviously, a huge focus on ROE across the company, and it's pretty visible. The steps are taking there to keep that ROE high. I wanted to just touch quickly on the joint venture line on the balance sheet. You've got about $1 billion investment there. And if I look back historically, the joint venture line on the P&L has traditionally been a pretty solid contributor of earnings this past year, it wasn't. And I know the composition of your (inaudible) have changed, I think, historically, it might have been a bit more city living projects and now maybe it's some land JVs. So I was hoping you could just give a little bit more color on what's embedded in that investment and how we should expect to see that flow through the P&L and the returns 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. DECEMBER 10, 2024 / 1:30PM, TOL.N - Q4 2024 Toll Brothers Inc Earnings Call

Question: Alex Barron - Housing Research Center LLC - Analyst : Yes. Thank you. Yes, I wanted to ask about the price cuts you've mentioned. I think I heard $12,000 or something like that. I mean it doesn't seem like that level of price cut would make a big difference in the affordability of people buying your homes. So I'm just wondering if that's working, what's -- is it just more of an emotional thing that gets people over the fence to buy because of that? Is there any offsetting thing you guys are doing, say, on closing costs or something else? Or like can you just elaborate a little bit on that? How is it moving the needle?