Toll Brothers Q3 2025 Earnings Call Transcript

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Provided by Quartr
August 20, 2025

Key Takeaways

  • Positive Sentiment: Record Q3 results: Delivered 2,959 homes generating $2.9 B in sales, achieved a 27.5% adjusted gross margin (+25 bps vs guidance) and SG&A at 8.8% (-40 bps vs guidance), resulting in $3.73 EPS.
  • Neutral Sentiment: Signed 2,388 net contracts totaling $2.4 B, with a 4% YoY decline in units but flat revenue as average sales price rose 4.5% YoY to just over $1.0 M.
  • Positive Sentiment: Backlog remains strong at 5,492 homes valued at $6.38 B with an average sales price of $1.16 M, a low 3.2% cancellation rate, and 26% of buyers paying all cash.
  • Neutral Sentiment: Maintained full-year guidance with expected deliveries of ~11,200 homes, a 27.25% adjusted gross margin, 8%–10% community count growth, and EPS of $13.75.
  • Positive Sentiment: Financial position strengthened by $852 M in cash, $2.2 B revolver availability, a net debt-to-capital ratio of 19.3%, and $500 M of 10-year notes issued to extend maturities.
AI Generated. May Contain Errors.
Earnings Conference Call
Toll Brothers Q3 2025
00:00 / 00:00

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Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

Good morning. Welcome and thank you all for joining us. With me today are Marty Connor, Chief Financial Officer Rob Perahouse, President and Chief Operating Officer Wendy Marlett, 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.

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

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. Before we jump into our quarterly results and our outlook for the remainder of fiscal twenty twenty five, I'd like to take a moment to thank Marty for the enormous contributions he has made to our company since he joined us in 02/2008. As we announced in July, Marty plans to retire from the CFO role at the end of our fiscal year in October. During his seventeen years with Toll Brothers, Marty has been an outstanding leader, business partner, financial steward and good friend. He has played a central role in enhancing value for our stakeholders and helped shape the financial strategies that have been such a vital part of our success.

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

Marty, your intelligence, wit and the spirit of fun you bring to the office every day will be missed by all of us. On behalf of the entire Toll Brothers team, thank you. Of course, one of our responsibilities we take very seriously here is developing talent. We have a very deep bench in our finance group, which includes Greg Ziegler, a familiar name to many of you on this call. I am pleased that Greg will be stepping up in November to become our next CFO.

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

He has a wealth of experience, including twenty three years at Toll Brothers and an unmatched understanding of our business. I look forward to working with him in his new role and I'm confident that he is the right leader to continue our track record of financial success. With that, let's turn to our third quarter results. I'm very pleased with our performance in the quarter. In a difficult market, our balanced operating model, broadly diversified luxury business and strategy of prioritizing price and margin over pace continues to pay dividends.

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

In the quarter, we delivered 2,959 homes at an average price of $974,000 generating record third quarter home sale revenues of $2,900,000,000 Our adjusted gross margin of 27.5% exceeded guidance by 25 basis points and our SG and A expense was 8.8% of home sales revenues or 40 basis points better than guidance. The outperformance on both our top line and in our margins contributed to third quarter earnings of $370,000,000 or $3.73 per diluted share. We also returned approximately $226,000,000 to stockholders through dividends and share repurchases in the quarter, positioning us to deliver another year of healthy profitability and solid returns in fiscal twenty twenty five. In the quarter, we signed 2,388 net contracts for $2,400,000,000 While units were down approximately 4% year over year, dollars were flat due to an increase in average sales price to just over $1,000,000 Our ASP was up 4.5% versus the 2024 and up 3% versus last quarter. We are pleased with the resilience of our luxury business and more affluent customer base.

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

While our contract ASP was up and our margin outperformed, our sales volumes have been impacted by the softer market. As a result and given our strategy of balancing price and pace, we now expect deliveries to be approximately 11,200 homes for the full year at the lower end of our previous range. We are maintaining all other key guidance metrics, including a full year adjusted gross margin of 27.25%. In this environment, we continue to actively manage our spec starts and inventory levels on a community by community basis to match local market conditions. In some markets, especially in the North Region, where inventory remains low and demand is strongest, we have increased spec production.

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

Overall, as local markets evolve in the coming months, we will be making decisions as to how many spec homes to start as we plan ahead for fiscal twenty twenty six. In addition to the 3,200 specs that are in various stages of construction, we have another 1,800 building permits ready to go. As we see market improvement, we have the ability to quickly ramp up our spec production. Remember, our spec business model is differentiated. We sell our spec homes at various stages of construction, all the way from foundation poured to finished home.

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

This offers some of our spec buyers the opportunity to personalize their homes with features and finishes that match their tastes as choice remains a key pillar the Toll Brothers buying experience, while also providing us a faster and more efficient construction schedule. From a pricing perspective, we modestly increased incentives in the third quarter. The average incentive in new contracts was approximately 8%, up from approximately 7% in the second quarter. At third quarter end, our backlog stood at 5,492 homes valued at $6,376,000,000 with an average sales price in that backlog of $1,160,000 We are pleased with both the average sales price and the gross margin embedded in our backlog. We also have 3,200 spec homes at various stages of completion.

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

Our cancellation rate was 3.2% of beginning backlog as compared to 2.4% in last year's third quarter and 2.8 in the second quarter. Our cancellation rate remains the lowest in the industry, continuing to reflect the financial strength of our buyers and demonstrating that they remain comfortable and confident in completing their home purchases. About 26% of our buyers paid all cash in the third quarter, consistent with recent trends and well above our long term average of 22%. The loan to value ratio for financed buyers was approximately 70%, highlighting the strong financial profiles of our customers. We continue to make progress improving construction cycle time.

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

Overall, we have not seen any significant impact on build costs from tariffs and we do not expect to see any this fiscal year. In fact, we are anticipating that build costs will come down modestly in the foreseeable future. We ended the third quarter with four twenty active selling communities. We remain on track to end the fiscal year with four forty to four fifty communities, representing 8% to 10% year over year community count growth. Our land position remains strong and we continue to prioritize capital efficient deal structures that support long term growth.

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

In the quarter, we spent $433,000,000 on new land. We remain disciplined in our underwriting and focused on securing high quality land at attractive returns with a continued emphasis on keeping land off balance sheet as long as practical to enhance capital efficiency. At quarter end, we owned or controlled 76,800 lots, 57% of which were controlled and 43% owned. This land position allows us to continue to be selective, disciplined and focused on efficiency when we assess new land opportunities. With that, I'll turn it over to Marty.

Martin Connor
Martin Connor
CFO at Toll Brothers

Thanks, Doug.

Martin Connor
Martin Connor
CFO at Toll Brothers

I appreciate the kind remarks at the outset and want to express my sincere gratitude for the opportunity afforded to me to be Toll's CFO for the past fifteen years. It has been a real honor and I'm proud of all that Toll Brothers has achieved over the past decade and a half. I would also like to express appreciation for the great teams I have here at Toll as well as at home. I'm proud and pleased that Greg will be picking up the reins when I step down. Greg and I have worked closely since my first day and I have the utmost confidence that Greg is the right person for the job.

Martin Connor
Martin Connor
CFO at Toll Brothers

Turning back to the numbers, it was a great third quarter. We significantly exceeded our guidance with earnings of $500,000,000 before taxes and $370,000,000 after or $3.73 per diluted share. As Doug mentioned, we delivered 2,959 homes, generating record third quarter home sales revenues of $2,900,000,000 This was a 5% increase in units and a 6% increase in dollars compared to last year's third quarter. The average delivered price of $974,000 was in line with the midpoint of our guidance of $975,000 and included approximately $207,000 spent on lot premiums, structural options and design studio upgrades, which are highly accretive to our margins. We signed 2,388 net contracts for $2,400,000,000 in the quarter, a 4% decline in units, but flat in dollars compared to Q3 twenty twenty four.

Martin Connor
Martin Connor
CFO at Toll Brothers

The average price of contracts signed in the quarter was $1,010,000 The average price in our backlog is even higher at $1,160,000 which includes $234,000 of lot premiums, structural options and design studio upgrades. Our buyers continue to demonstrate their financial strength and the value they place on their homes with the significant investments they make. Our third quarter adjusted gross margin was 27.5% or 25 basis points better than we had projected and guided. The outperformance was spread evenly across products and regions and it was attributable to both greater efficiency in our homebuilding operations and favorable mix. SG and A as a percentage of revenue was 8.8% in the third quarter compared to 9% in the 2024 and compared to our guidance of 9.2%.

Martin Connor
Martin Connor
CFO at Toll Brothers

SG and A came in better than expected, primarily due to increased leverage from higher than forecast revenues as well as cost controls. We remain very focused on efficiency and we continue to see the benefits flow through our results. Third quarter joint venture, land sales and other income was 15,000,000 ahead of our breakeven guidance as we realized gains in income related to several joint ventures in the quarter and saw better than forecast earnings in our mortgage operations. Our tax rate in the quarter was 26%. I'll turn it over to Greg to review our balance sheet, financial position and liquidity.

Gregg Ziegler
Gregg Ziegler
SVP - IR & Treasurer at Toll Brothers

Thanks, Marty. I'm honored to be the next CFO of Toll Brothers and appreciate the confidence you and Doug have shown to me. As we announced earlier this month, in the third quarter, we issued $500,000,000 of ten year senior notes at a 5.6% coupon. At the same time, we called $350,000,000 of senior notes that were scheduled to mature this November. With the issuance and redemption, we extended the weighted average years to maturity of our senior notes from two point five four point eight years.

Gregg Ziegler
Gregg Ziegler
SVP - IR & Treasurer at Toll Brothers

This comes on top of the refinancing of our credit facilities in our second quarter, which pushed out a revolver and term loan by five years and increased the size of the revolver by nearly $400,000,000 We now have no significant bank or senior debt maturities until March 2027. We finished the third quarter with a net debt to capital ratio of 19.3%, dollars $852,000,000 in cash and equivalents and $2,200,000,000 available under our $2,350,000,000 revolving credit facility. This year, we expect to generate another $1,000,000,000 in cash flow from operations. In the quarter, we spent $433,000,000 to acquire 2,755 lots. We paid a dividend of $24,200,000 and repurchased 201,400,000 of common stock at an average price of $112.4 For the full year, we've repurchased approximately $4.00 $2,000,000 of common stock at an average price of $111.08 We continue to project $600,000,000 of share repurchases for the full year.

Gregg Ziegler
Gregg Ziegler
SVP - IR & Treasurer at Toll Brothers

To summarize, our balance sheet, financial position and liquidity are as strong as they've ever been. They provide us ample flexibility to both invest in the future growth of our business, while also returning capital to stockholders. This has been a pillar of our overall financial strategy for at least the past decade and will continue well into the future. Marty, I'll turn it back to you to address guidance.

Martin Connor
Martin Connor
CFO at Toll Brothers

Thanks, Greg. As usual, our outlook is subject to all the 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 spec homes completed or currently under construction, we expect to deliver approximately 3,350 homes in our fourth quarter, which comes to approximately 11,200 homes for the full year. The average price of deliveries in the fourth quarter is expected to be between $970,000 and $980,000 We continue to expect a full year average delivered price between $950,000 and $960,000 As Doug mentioned, we continue to balance price and margin with 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 percent.

Martin Connor
Martin Connor
CFO at Toll Brothers

For the quarter, we expect adjusted gross margin to be 27%. We expect interest and cost of sales to be approximately 1.1% of home sales revenues in the fourth quarter and for the full year. Fourth quarter SG and A as a percentage of home sales revenues is expected to be approximately 8.3%. For the full year, we continue to expect it to be between 9.49.5%. Other income, income from unconsolidated entities and land sales gross profit for the full year is projected to be $110,000,000 For the fourth quarter, we expect it to be approximately $65,000,000 We project the fourth quarter tax rate to be approximately 25.5% and the full year rate to be approximately 25.1%.

Martin Connor
Martin Connor
CFO at Toll Brothers

Our community count at quarter end was four twenty compared to our guide of four thirty as we moved some openings into the fourth quarter. We continue to expect four forty to four fifty communities opened by the end of the fiscal year. Our weighted average share count is expected to be approximately 98,000,000 for the fourth quarter and 100,000,000 shares for the full year. Putting this all together, we expect to earn approximately $13.75 per diluted share in fiscal twenty twenty five, achieve a full year return on beginning equity of approximately 18% and bring our book value to approximately $88 per share at year end, which would cap off another great year for Toll Brothers. Now let me turn it back to Doug.

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

Thank you, Marty. Our results in the third quarter and our projections for the full year reinforce the strength and resiliency of our business model. They prove out our ability to successfully navigate changing market conditions while still delivering attractive returns to stockholders. This is the result of the hard work of all of our Toll employees.

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

It is their passion for our business, dedication to our luxury brand and commitment to our customers that will ensure our continued success. With that, let's open it up for questions. Drew?

Operator

We will now begin the question and answer session. As a reminder, the company is planning to end the call at 09:30 when the market opens. During the Q and A, please limit yourself to one question and one follow-up. The first question comes from Stephen Kim with Evercore ISI. Please go ahead.

Stephen Kim
Senior MD at Evercore ISI

Yes. Thanks very much, guys. Appreciate all the color. Congrats to Greg and Marty. I guess, let me just start off with a simple one.

Stephen Kim
Senior MD at Evercore ISI

Your cash flow from operations, I think you guided to greater than $1,000,000,000 What was it year to date? Because I didn't see that in the release. And then if I could also ask you, you mentioned construction costs, you expect a decline in near term. I was wondering if you could kind of give us a breakdown and what components you're expecting to get some betterment. Thanks.

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

Greg?

Gregg Ziegler
Gregg Ziegler
SVP - IR & Treasurer at Toll Brothers

I was trying to find our nine months to date. It's little rough. It's probably somewhere in that $400 plus million. So, we do expect to see a lot of that pickup happening in Q4 to get to that $1,000,000,000 for the year.

Gregg Ziegler
Gregg Ziegler
SVP - IR & Treasurer at Toll Brothers

Which is typical. Which is typical. Because in Q1, it's usually relatively negative, Q2 starts to even out, Q3 positive.

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

Building costs, flat to modestly down in the short term. Steve, we're just beginning to see trades negotiate a bit more than they were suppliers. We're out in the market for some major material supply renewals, and we're making some progress there on good pricing. It's community and market specific, But and it's moderate, but building costs are beginning to come down across the board. I can't point to one or two things.

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

It's a combination of both subcontractor contracts for our major trades and materials.

Operator

The next question comes from John Lovallo and UBS. Please go ahead.

John Lovallo
John Lovallo
Equity Research Analyst at UBS Group

Good morning, guys. Thanks for taking my questions. The first one is, the only concern we're hearing out there really today is that the ability for you guys to grow next year. And then maybe I'll frame the question this way. I mean, the past, you've talked about achieving a sales pace of two communities sorry, two homes per community per month on average through the year.

John Lovallo
John Lovallo
Equity Research Analyst at UBS Group

I just want to confirm that there's no change to the thinking there. And do you think that this is something that can be achieved in fiscal year twenty twenty six after what appears to be closer to maybe 1.8 in 2025?

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

So John, as you know, we're going to give all sorts of great details on '26 in December. We are very focused on '26. We are very excited by the community count growth we will see next year. In fact, we are expecting 20 to 30 openings in Q4 when you do the math off of the numbers we gave you of where community count stands at the end of Q3 and where we think it will be at the end of the year. We've had some terrific openings lately.

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

We just opened a community this weekend in Philadelphia that took 21 deposits. We actually shut down the action that got so hot at $2,000,000 in Bucks County, Pennsylvania. We have a community in Irvine Ranch, Southern Cal that has taken 24 contracts north of $6,000,000 in the last month. We are positioning ourselves with the communities that are opening and with the business we have to set up for next year. We have 3,200 spec homes in process.

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

We have 1,800 spec permits that we are ready to start homes on as we see market improvement. And as I mentioned, we're already beginning to do that in the North. We have fewer shares right now and we're going to have even fewer shares next year that helps drive some EPS. Average price is up. That $1,160,000 average price in backlog, which right now is about 5,500 homes, is significant.

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

But even on the homes we're selling today, the average price is up to $1,000,000 Build time, cycle time has come down. We now have about 35% of our communities that can build houses in eight months or less. That gives us more visibility, more ability to sell homes into the early part of the spring selling season and still have those homes delivered by the end of the fiscal year. One of the things we look at all the time is what do we think a local market will look like next summer when most people want to close on their home to get their kids into school? And when do we have to start new specs to have those homes ready next summer?

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

And those decisions are all dependent about how long it takes to build the specs in each given community and what the market demand looks like in that community. And we are evaluating those opportunities daily and making the appropriate decisions as we move through it. On the macro level, rates have come down nicely. We're now at 6.38 here at Toll Brothers. It looks like short term rates are going to be coming down for the balance of the year and hopefully into next year.

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

While there's not a direct correlation between those short term rates and the thirty year mortgage, it's certainly encouraging. There's pent up demand building out there every day. There's still such an imbalance between supply and demand. And every day, have buyers who have been on the sidelines who are waiting to come back in. And of course, the demographics are terrific.

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

Our traffic is up, both web traffic and foot traffic in August. We're heading into the fall, which is a better time. So I told you I wasn't going to give you any guide on '26 into December, and I don't think I've given you any guide except that we are positioned and very focused to have a good '26. We understand that we do need to drive activity through the community openings and through the spec strategy that we have employed. And we're ready to go.

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

It's a big focus of us and we're excited for the future year. We continue to have great leverage over SG and A. We're really proud of what we've done there. And as we continue to build spec, that leverage increases. And so there you have it.

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

Sorry for the long answer, but it gave me an opportunity to give you sort of my feeling about the market. I feel better today than I did a few months ago. I think the economy is starting to heal. I think the buyers are beginning to come back out. I think rates dropping a little bit.

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

Is more psychological for our clients than it is affordable affordability wise because we have more of a luxury client that can afford our homes. They just have to feel good about the economy. So we'll have to see what the fall brings. But we are positioned, particularly with all these specs that permit to be nimble and react quickly. And I'm feeling certainly feeling better than I was a few months ago.

John Lovallo
John Lovallo
Equity Research Analyst at UBS Group

Yes, that's really helpful, Doug. And that's really what I was trying to get at is the backlog maybe being down a bit from where people would have thought it might be perhaps. You guys still feel comfortable with the community count growth in 2026 and the ability to drive orders to drive growth as we move into the next couple of years?

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

We do very much so. And we're really excited about our land positions and we haven't guided yet. But on the last call, gave a soft guide that we have similar community count growth projected for '26. I can reaffirm that. We just have terrific land and terrific communities coming. So it's all good.

Operator

The next question comes from Mike Dahl with RBC Capital Markets. Please go ahead.

Mike Dahl
Mike Dahl
MD, Equity Research - Homebuilders & Building Products Analyst at RBC Capital Markets

Hi, Thanks for taking my question. Hi. Marty, heck of a run. Congrats and congrats, Greg.

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

Mike.

Mike Dahl
Mike Dahl
MD, Equity Research - Homebuilders & Building Products Analyst at RBC Capital Markets

Doug, just to thanks for all that. To follow-up, can you help us walk through how sales pace trended through the quarter and maybe elaborate a little more on your August comments. And the follow-up question would be similarly, if you think about the incentives ending up at 8% versus 7%. I think a lot of your peers talked about sequentially increasing incentives through each month of the summer period. So if you could talk about how that shook out for you and whether we should be thinking the exit rate on incentives was higher than that 8%. Sorry, that's two questions in there, but those are my two.

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

We understand. So May was the worst month. June and July were better. August has been similar to what we saw throughout the quarter. No, the incentives are not up at the July from where they were in May or they're not up today from where they were in July or June.

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

The increase in incentive from that 7% to 8% is primarily driven by a little bit more discounting we had to do with some finished spec. As we continue to explain, and I know you all understand, our spec strategy is a bit different where we do sell a number of our specs earlier where the client can hit the design studio, buy a bunch of upgrades, feel like it is a custom home even though we started it. And that process is very accretive to us and the margin has been closer to build to order margin when we sell those specs earlier. But we do have a number of finished specs in some markets that are under a bit of pressure. And that explains the little bit of an increase you see on the average incentive.

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

I am a little bit encouraged, it's early, but over the last three weeks, we have seen the incentive in finished specs moderate a bit. So no, it's in fact not what you described, which is maybe going up a bit, but it's actually stabilized or come down a little bit. And again, it's only three weeks, so we'll have to see. But we as I mentioned earlier, our web traffic in August is up, that exact number is around five percent to 10% and our foot traffic into our communities is up about 15%. It is taking people longer to deposit because they're more cautious, but our conversion ratio from deposit to agreement of sale is about the highest it's ever been around 80%.

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

So four out of five people that go to deposit are several weeks later pressing firmly and moving forward with a binding agreement. I mean historically that number when I was a kid in this business was running like 60%. So it takes a bit longer to get them to the table to deposit, but then they stick. And so we haven't seen an immediate impact from the rates dropping from, call it, 6.75% or 6.75% down to 6.75%. It's only been a couple of weeks.

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

I wouldn't have expected it to be that immediate, particularly for our client where it's not, oh my gosh, now I can afford that monthly payment, let me jump in. It's our clients don't think that way. Plus it's August. We're closing up summer houses. We're getting kids back to school.

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

I think people might be waiting to see if the rates come down a little bit more. We're going know a lot more through the month of September. And I am anticipating as these rates settle into the market, we're going to see more demand coming out from all this pent up demand that's been waiting on the sidelines.

Mike Dahl
Mike Dahl
MD, Equity Research - Homebuilders & Building Products Analyst at RBC Capital Markets

That's really helpful. Thanks, Doug.

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

You're welcome, Mike.

Operator

And we have a follow-up from Stephen Kim with Evercore ISI. Apologies, please go ahead.

Stephen Kim
Senior MD at Evercore ISI

Thanks very much.

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

Stephen, I'm sorry. I'm sorry Drew cut you off.

Gregg Ziegler
Gregg Ziegler
SVP - IR & Treasurer at Toll Brothers

Was not

Stephen Kim
Senior MD at Evercore ISI

enough. Great. I'll get even with Drew later. So, Chris, question, I guess, on the volumes that we saw the orders. I think last year, Doug, you had referred to the order cadence. I think you had sort of talked about how typically 4Q orders are down about 10% from third quarter. And you had said last year that, that was going to be different and all that. You kind of called that out, if I recall. Can you talk to us about what the order picture you think would look like this year as we move sequentially from 3Q to 4Q?

Stephen Kim
Senior MD at Evercore ISI

Is there anything that would be helpful for us as we think about your near term plans on absorptions?

Martin Connor
Martin Connor
CFO at Toll Brothers

So

Martin Connor
Martin Connor
CFO at Toll Brothers

I'll take a shot at this, Steve. I think our community count growth in the fourth quarter is going to be outsized compared to other quarters this year and a year ago. So that gives us encouragement. We see rates have dropped 50 basis points as we head to our fourth quarter. That's got to be a positive.

Martin Connor
Martin Connor
CFO at Toll Brothers

We've had some of these new openings that Doug mentioned that have really jump started right out of the gate for the fourth quarter. And as Doug mentioned, he's feeling better than he did a couple months ago. So all that builds some optimism as we head to our fourth quarter here.

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

And Steve, as you know, because you know the numbers so well, fourth quarter is historically about 4% down from Q3. I've already mentioned that for three weeks of August, which is a very short glimpse into what's going to happen, we're about flat to Q3, but that's deposits. That's not even agreements. That's just a couple of weeks of taking the deposit checks. So we'll have to see.

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

What Marty described is spot on. It gives us some optimism, but we'll just have to see how the balance of August and September and October play out. We are well positioned with the community openings we have, with the interest we have, the interest list we have in some of those openings that are coming. But we'll just have to see how it plays out. But historically, it's down four percent and first three weeks of August have been flat.

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

It's trending about where history would suggest it should, but we do have some reason to be optimistic that we could do better.

Operator

The next question comes from Trevor Allinson and Wolfe Research. Please go ahead.

Trevor Allinson
Director - Equity Research at Wolfe Research LLC

Hi, good morning. Thank you for taking my questions. I'll echo congratulations to both Marty and Greg as well. Thanks, First question, we've heard a few builders talk about seeing some relief on development costs. A couple of questions around that. Are you guys also seeing some softening on development? How widespread is that? And then if you are, what's the timeline for when that starts to flow through your P and and how much benefit do you think you could proceed from that and what you're seeing currently?

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

Trevor, we have not seen much relief on land development costs. There may very well be some downward pressure if there is less activity for land developers and they become a bit more aggressive in their pricing. But I don't think we've experienced that yet.

Trevor Allinson
Director - Equity Research at Wolfe Research LLC

Okay. Got you. Makes sense. And then the second question on the 4Q community count guide. It looks like a really nice jump here sequentially going from $4.20 to $4.45.

Trevor Allinson
Director - Equity Research at Wolfe Research LLC

How should we think about the timing of those? Do they come on pretty ratably throughout the quarter? Or is there a good portion that's scheduled to open up near the end of the quarter? And then any regional concentration that we should considering? Thank you.

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

So it's spread throughout. There's no real concentration in terms of timing. And remember, that's a net number at $4.45. So there are some communities that are closing, selling out in the next two point five months. So the gross number of openings will actually be modestly more than that 25.

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

That gets you from four twenty to four forty five because of sellouts. Regionally, it's pretty well spread, right guys, around the country. So there's no I wouldn't call it any particular regional concentration.

Gregg Ziegler
Gregg Ziegler
SVP - IR & Treasurer at Toll Brothers

North Mid Atlantic South seems to be a little bit of the concentration for Q4 opening.

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

I like that. Considering Boston to Washington, D. C. Is our strongest corridor. Charlotte, Charlotte has been hot lately.

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

So there you go. A little bit more in the North, Mid Atlantic and South.

Operator

The next question comes from Sam Reid with Wells Fargo. Please go ahead.

Sam Reid
Sam Reid
Executive Director - Equity Research, Home Builders & Building Products at Wells Fargo

Awesome. Thanks, guys. And congrats to Marty and Greg. Greg, looking forward to keeping it going. Wanted to talk cycle times.

Sam Reid
Sam Reid
Executive Director - Equity Research, Home Builders & Building Products at Wells Fargo

35 of your communities can build in eight months or less. It's a great, very helpful stat. Can you just talk to what cycle times look like across the remaining 65% of your communities? And then when we think about ways to improve that on the spec and build to order side, Just talk through levers that you can pull to improve cycle times into next year.

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

So the balance of 65% would be eight months in a day to probably eleven months. And the eleven months, we'll take the extreme, really big houses that have probably a lot of build to order with a lot of money spent in the design studio and maybe a lot of structural options that are being offered and the houses are more complicated. They may very well be in towns that have some difficult permitting and inspection processes that can slow you down a little bit. They could also be in locations where we have significant backlog because we've been hot and it just takes a little bit longer to build. So every community has its own story, but that is generally the reason why we have some that are still stuck in eleven months.

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

And how do we get better? We just keep doing what we're doing, which is working really hard. We have teams out there that study every home we build every day, why we lost a day here or there, what we can do to improve it, how we make our floor plans and our architecture more efficient, more optimized, how we get people through the design studios faster. We track how many days it takes somebody to get through that design studio and sign off so we can get going. So we are all over it.

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

I am so proud of the progress we've made and there is more to come. The spec side of the business helps a lot too. Exactly. As a 50% spec builder now, those homes don't have a customer yet in the early stages. So we don't have we're able to build them a lot faster because we pick the finishes, we pick the structural changes, we can go full speed without waiting for a design studio process, without reacting to a client's walk through on Sunday afternoon as the house is under construction.

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

And that certainly helped bring the overall cycle time down.

Martin Connor
Martin Connor
CFO at Toll Brothers

And on the front end, we have that permit sitting on a shelf. We don't have to spend incremental time to go get that permit for those spec homes.

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

Great. Thanks, Marty.

Sam Reid
Sam Reid
Executive Director - Equity Research, Home Builders & Building Products at Wells Fargo

No, that helps, Really appreciate it. Maybe switching to another line item on the P and L. In the prepared remarks, you alluded to better cost controls behind the SG and A beat versus guide. Would you love a little bit of context in terms of what those cost controls were? How sustainable that is perhaps into 2026?

Sam Reid
Sam Reid
Executive Director - Equity Research, Home Builders & Building Products at Wells Fargo

And then thinking about Q4 specifically, you've got a step up in community count quarter over quarter. Would just love to know any grand opening expenses that might be embedded in that guidance for SG and A? Thanks.

Martin Connor
Martin Connor
CFO at Toll Brothers

Sure. So our cost controls span the gamut of cost. We've done a great job of maintaining pretty stable headcount despite growth in community count. We've maintained inside and outside sales commissions at a reasonable level despite the challenging market. And we continue to benefit from the technology investments we've made over the last six or seven years in terms of our systems from a CRM and an ERP perspective and even in HR.

Martin Connor
Martin Connor
CFO at Toll Brothers

There is pressure on some costs. Insurance costs are pressured and there are incremental costs associated with community count openings, but they're all baked into our guidance.

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

Just to remind everyone, one of the primary reason why the Q4 guide on SG and A is modestly higher is because of all these communities we are opening that have front end expenses without the revenue coming in yet.

Operator

The next question comes from Alan Ratner with Zelman and Associates. Please go ahead.

Alan Ratner
Managing Director at Zelman Partners LLC

Hey guys, good morning. Add all the graphs to Marty and Greg there. Looking forward to the Thank you. On the spec mix, Doug, I think you mentioned it's fifty-fifty today. Can you just refresh our memory what it was pre COVID or kind of in more normal times?

Alan Ratner
Managing Director at Zelman Partners LLC

And what the margin differential currently is on your spec product, maybe across the three buckets in terms of completion status versus a build to order?

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

Sure. In the old days, 10% to 15% was our spec business. I remember when I was a kid and I was a project manager in the field, Bob Toll would give us one spec per community. And if we wanted to build a second spec, we'd go see him personally. So What answer would he give you?

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

He would put you through the ringer is what he would do, so that you wouldn't come back the next time. So yes, I'd say 10% to 15% up to where we are today. The margin delta between spec and build to order is consistent with what we've been talking about for the last few quarters. It has widened a little bit. We're really pleased that the build to order side of the business has gone up to north of 30.

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

And again, on the spec side, it depends a lot on when we sell the house in terms of the timing during the construction cycle. Of late, as I described, some of these finished specs we have, we've had to discount a bit more. But I we love the business. And the combined margin in that 27% range, as we talked about, we think is the right way to run the business. There's tremendous capital efficiency that is brought to us by the spec business.

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

There's obviously opportunities to pivot, as we've been talking about with all these spec permits we have to move pretty quickly if we want to, to try to fill that hole in the future when the time comes for people who want to move in. So we have a 27 average. As we talked about last quarter, we were just north of 30, around 30 or just north of 30 on build to order, call that three points plus or minus up. And so obviously, if it's fifty-fifty, the math would tell you we're about three points plus or minus down for the spec business.

Alan Ratner
Managing Director at Zelman Partners LLC

Got it. That's really helpful. And I guess my follow-up is a more difficult question. But presuming you don't maybe get back to 90% built order, it sounds like if you can get that share a little bit higher, that would certainly be a positive for your margin and certainly for the visibility in your business. How do this whole and the industry get back to a more normal built to order respect mix?

Alan Ratner
Managing Director at Zelman Partners LLC

Mean, seems like everybody's kind of pivoted very hard towards spec. And during the early stages of the pandemic when resell inventory was so tight, that made a lot of sense. But now it almost feels like builders are forced to keep the spec machine running if they want to maintain growth and have the volume ready to go. So I'm just curious how you see this playing out and what can be done to get back to a more normal build to order mix?

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

Alan, it's a good question and I'm not sure what back to normal is going to mean in the future because I think the industry, for some time now has been pretty committed to some level of spec construction. We, as I described, had very few spec and we are very comfortable at fifty-fifty even in this somewhat softer environment. We're getting really good at it. Our construction teams are not picking the structural changes that go into spec. They're certainly not picking the finished choices that go into spec.

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

We have national designers that decorate our model homes that have come up with different packages and we market those. These are curated packages that have been picked by the designer that you're walking through a model home and you fall in love with the decorating and we tell you that the spec you're interested in was designed by that nationally acclaimed decorator who just decorated this model you love. And so we're selling them at different stages. I like the business. I mean, will it move from 40% to 50%, maybe to 60% back to 40%?

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

Sure. And a lot of that is market specific. But I don't think your thesis that when do we get back to the good old days of 90% build to order, I don't see it. And you're hearing that from the one company that did the least spec out there. So it's fluid.

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

You have to really manage it closely. But I the buyers today also, particularly the millennials that are coming along that are more affluent and are not just buying more expensive first homes at 38 years old, but they're now in their 40s moving up, They're not all that interested in waiting a year and designing their custom house. And if we can give them a home that they can move into in ninety days, five months, seven months because it's under construction and still have the opportunity to pick finishes to make it feel like their own and live like their lifestyle and their decorating choices, it's a smart way to go. And we're going to keep at it within that range I talked about, I'd say, of let's say 40 to 60.

Martin Connor
Martin Connor
CFO at Toll Brothers

We're generating great returns with this mix. We're maintaining high margins with this mix. I don't know why we would feel compelled at this moment to change this mix based on how we're doing. And I echo Doug's comments. I think there is a greater percentage of consumers that don't have the patience or the desire to wait and spend the time to design, particularly when they walk into some of our highly curated spec homes and say, Wow, this is pretty good.

Martin Connor
Martin Connor
CFO at Toll Brothers

Remember, we do this all day long. An individual does it one, two, three times in their lifetime. So we do it pretty well.

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

And the other thing, Alan, just to wrap it up, in many of our communities, we have some very special lots, home sites that generate very high lot premiums. We save those for the build to order business. We're not going to spec on the $400,000 lot premium lot because we know the buyer of that lot who's going to put a home on that lot is going to load it with structural changes and really load it with design studio changes, all of which are very accretive. And so part of our strategy is more of the vanilla generic lots, not all, but more of them get the spec house and we drive the margin.

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

One of the reasons that margin is north of 30% is because we are saving the better lots for the client who we know will spend more money with the upgrades.

Operator

The next question comes from Michael Rehaut with JPMorgan. Please go ahead.

Michael Rehaut
Michael Rehaut
Executive Director at JP Morgan

Great. Thanks. Thanks for taking my questions. And Marty, it's been a pleasure. Best of luck in the future. Greg, obviously, and looking forward working with you more.

Gregg Ziegler
Gregg Ziegler
SVP - IR & Treasurer at Toll Brothers

Thanks Thank you, Nick.

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

I met Marty's grandbaby Saturday night and now I fully understand why he's retired.

Michael Rehaut
Michael Rehaut
Executive Director at JP Morgan

That's great. That's great. Yes, a couple of questions. I guess, first, just on the incentives. It's very helpful, Doug, kind of giving the detail that a lot of that increase, 8% versus 7% related to finished spec.

Michael Rehaut
Michael Rehaut
Executive Director at JP Morgan

And maybe that's come down slightly recently. But I think if I'm right, looking back a couple of quarters, your incentives as a percent of sales have increased maybe closer to 200 basis points year to date. Obviously, you're expecting a little bit of relief on some build costs, perhaps lot cost inflation would be an ongoing issue on the other side. But it would seem like, again, without pinning it down to 26 guidance, which I know you're not going to give, but is there any reason directionally why we shouldn't expect somewhat of a moderation in '26 versus '25 at this point?

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

Again, Mike, we're to give all the details in December. You're right. It's in the numbers. Our incentive in the third quarter is higher than it was in the second quarter and higher than it was in the first quarter. That 5,500 homes in backlog that has an average price of $1,160,000 is high margined, and that is very comforting for us.

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

But I'm not in a position to start giving you some guide on where the gross margin will be in 2026. We're going to we'll address that in December. And frankly, there's a lot of time between now and December. There's a lot of market in front of us that is going to be evolving. And we've talked about our ability to start all these specs and be ready for next summer when people want to move in.

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

We're just going to have to see where this market is through the course of September, October and November before that December call to have a much better idea for you on where things are. Because when you do sit on a lot of spec, current market conditions can really affect the amount of incentive on those specs. As you recall through the COVID years, toll was penalized a bit because we didn't have the spec and home prices were going up so rapidly. We sold the house at agreement of sale and the home buyer got the benefit of home price appreciation during construction. And those builders that were spec builders got the benefit of the home price appreciation during construction because they didn't sell to the end.

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

That was unusual. That doesn't usually happen. But we'll have to see what takes hold through the fall. And stay tuned for December.

Martin Connor
Martin Connor
CFO at Toll Brothers

Mike, I'd also point out that our gross margin a year ago, for the quarter ended a year ago, adjusted gross margin 28.8%. And at the end of this year, our fourth quarter, it's projected at 27%. So we've seen a lot of that margin unfortunate erosion already over the course of the past twelve months and the next three months in our projections.

Michael Rehaut
Michael Rehaut
Executive Director at JP Morgan

Right. No, no, that's definitely fair. Thanks for that, Marty. And maybe just secondly, Doug, I think you alluded to earlier a little bit lower rates over the last maybe by, I want to say, 30 bps, maybe on a broader market level. You talked about June and July being a little better from a sales pace perspective versus March versus May and obviously the last few weeks.

Michael Rehaut
Michael Rehaut
Executive Director at JP Morgan

I'm wondering if you're trying to maybe parse out the increase in incentives maybe throughout the quarter to and maybe that was again to move the finished spec. You also have obviously some seasonality. But I'm wondering between seasonality and maybe a little bit of a higher incentive, how do you think about that, let's say, twenty, thirty bp decline in rates impact on demand relative to some of the other factors that perhaps are driving sales pace currently and into the fall?

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

Mike, as I mentioned, we haven't yet seen an immediate impact in sales from the lower rate. It will be coming. With every tick down in rate, you're going to have more buyers that step into the market. It's August. I think we just have to wait a little bit and see how it plays out.

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

And we also have to see what the Fed does and we have to see what the macroeconomic world looks like. There's a lot of moving parts here and I am encouraged by where it feels like things are headed. But I have no empirical data for you as to what's happened since rates came down and I'm certainly not going to give you the crystal ball projection on where things go. We'll wait and see. We love our positioning, and I'm feeling a bit better.

Operator

This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.

Douglas Yearley
Douglas Yearley
Chairman & CEO at Toll Brothers

Drew, thank you very much. We appreciate it. Thanks everyone for all your great questions and all your interest. Have a wonderful end to the summer and we'll see you all soon. Thanks. Take care.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Executives
Analysts
    • Stephen Kim
      Senior MD at Evercore ISI
    • John Lovallo
      Equity Research Analyst at UBS Group
    • Mike Dahl
      MD, Equity Research - Homebuilders & Building Products Analyst at RBC Capital Markets
    • Trevor Allinson
      Director - Equity Research at Wolfe Research LLC
    • Sam Reid
      Executive Director - Equity Research, Home Builders & Building Products at Wells Fargo
    • Alan Ratner
      Managing Director at Zelman Partners LLC
    • Michael Rehaut
      Executive Director at JP Morgan
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