Release Date: August 21, 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 2,814 homes at an average price of $968,000, generating record third-quarter home sale revenues of $2.72 billion.
- The company's adjusted gross margin of 28.8% exceeded guidance by 110 basis points due to greater efficiencies in home building operations and favorable mix.
- Toll Brothers Inc (TOL) signed 2,490 net contracts for $2.4 billion, up approximately 11% in both units and dollars compared to last year's third quarter.
- The company is on target to reach its goal of operating from 410 communities by fiscal year-end, representing 11% growth compared to the start of the year.
- Toll Brothers Inc (TOL) has repurchased $427 million of its common stock year-to-date and increased its buyback expectations for the full year from $500 million to $600 million.
Negative Points
- Demand in the third quarter was uneven, with a slowdown in June despite a strong start in May and a strong finish in July.
- The average pace of home sales per community was 2.1 homes per month, down slightly from 2.2 homes per month in last year's third quarter.
- The company's third-quarter adjusted gross margin of 28.8% was lower than the 29.3% achieved in the third quarter of 2023.
- SG&A expenses as a percentage of revenue increased to 9.0% in the third quarter compared to 8.6% in the same period last year.
- The company's backlog stood at $7.1 billion and 6,769 homes, indicating a potential challenge in converting backlog into deliveries efficiently.
Q & A Highlights
Q: Can you elaborate on the greater efficiency in home building operations and its impact on margins?
A: Douglas Yearley, CEO: Yes, we believe the operating margin is sustainable. Our long-term gross margin target is 27% to 28%, supported by our wide price point and geography, 50% specs, and more affordable luxury communities. As we become more efficient on the SG&A line, this operating margin is definitely sustainable.
Q: What was the actual number of specs, both finished and total, in the quarter?
A: Martin Connor, CFO: At the end of the quarter, we had around 3,400 specs, with around 750 at [CO] or beyond, equating to 1.8 per community.
Q: How confident are you that improved cycle times and increased spec levels can drive delivery growth into 2025?
A: Douglas Yearley, CEO: We are very confident. We are currently doing it and will continue to turn houses faster. The spec business is maturing, and we are improving our conversion rates.
Q: What would drive the expected 140-basis-point sequential decline in fourth-quarter gross margin?
A: Douglas Yearley, CEO: The third quarter had a 110 basis points better margin due to a favorable mix of high-margin homes in the Pacific and South and fewer spec homes. This reverses in the fourth quarter with fewer high-margin homes and about 60% of deliveries being spec.
Q: Have you seen any ability to begin dialing back incentives or raising prices given recent activity?
A: Douglas Yearley, CEO: We are seeing more pricing power as rates are down and traffic quality has improved. While we increased incentives modestly in July for some specs, we also raised prices on build-to-order homes. We are optimistic about having more pricing power heading into the fall.
Q: How should investors think about the balance between price and pace with the shift towards 50% spec homes?
A: Douglas Yearley, CEO: We may be more focused on price than pace compared to other builders, but we are not margin proud. We are focused on top-line growth, sustainable long-term margins, and efficiency. The spec strategy is maturing, and we are confident in our long-term margin targets.
Q: Can you comment on demand trends in Florida and Texas?
A: Douglas Yearley, CEO: Texas has seen significant improvement recently, with no inventory issues in Dallas and Houston. Florida has been softer, with some elevated inventory levels, but we are seeing improvement, particularly in the East Coast and new communities like the Panhandle.
Q: What is driving the sequential decline in SG&A for the fourth quarter?
A: Martin Connor, CFO: We are growing the company without adding people, becoming more efficient, and leveraging flat G&A dollars. The S side is variable, with increased spending on commissions and marketing, but overall, we are confident in our efficiency.
Q: How should we think about deliveries relative to orders going forward?
A: Martin Connor, CFO: Deliveries and orders will reach equilibrium soon. The build-to-orders generally have a longer build cycle, but we do not expect spec to outgrow the BTO business in terms of deliveries.
Q: What drove the decision to increase the buyback guidance for the year?
A: Douglas Yearley, CEO: We expect strong free cash flow and want to continue rewarding shareholders. A robust, programmatic stock buyback program helps maintain high return on equity. The increase from $500 million to $600 million reflects our strong performance and additional free cash flow.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
