Q4 2019 Earnings Call

Thank you Rocco.

Welcome and thank you for joining us with me today or Bob told Chairman Emeritus, Marty Conor Chief Financial Officer, Rob pair House, and Jim Boyd, our new co chief operating officers overseeing toll east in total west respectively, Fred Cooper Senior VP of finance and Investor Relations Wendy Marlette Chief.

Marketing officer, and Greg Ziglar, senior VP and treasurer.

Before I begin I ask you to read the statement on forward looking information in our earnings release and on our website I caution you that many statements on this call. Our forward looking based on assumptions about the economy world events housing in financial markets and many other factors beyond our control that could significantly affect future results.

Those listening on the web can email questions to Investor relations at toll brothers Dot com.

Fiscal 2019 ended on a strong note building on a steady improvement in buyer demand throughout the year, our fourth quarter contracts were up 18% in units and 12% in dollars and our contracts per community were up 10% compared to one year ago.

Through the first six weeks of fiscal year 2000, Twentys first quarter, we have seen even stronger demand than the order growth in fiscal year 2019 fourth quarter.

This improving demand should positively impact gross margins over the course of fiscal 2020.

We reported fourth quarter home sales revenues of $2.3 billion with a 21.9% adjusted gross margin and net income of $202.3 million or $1.41 cents per share diluted.

Our fiscal yearend backlog was $5.26 billion and 6266 units, which was down 5% into this but up 3% in units from last year.

We are positioning ourselves for growth as we expand our luxury brand to new price points product lines and geographies.

Our land position supports this strategy and we believe provides a platform for continued growth in coming years.

We now operate in 23 states and the district of Columbia. This year, we expanded our footprint into four new states and seven new markets, we acquired sharp residential to enter Metro Atlanta, and Sable homes to enter Charleston, Greenville, and Myrtle Beach South Carolina.

Both companies offer a wide range of price points to their customers. We also opened our first communities in Salt Lake City, Utah, and Portland, Oregon.

And we have land under contract in Tampa, Florida.

We remain committed to our luxury niche, we will always be Americas luxury homebuilder.

We will continue to buy land and built communities at the corner of main Street and main street and allow our customers to our and our buyers to customize their homes through our unique design studio experience.

This market is strong and demographic suggest it will grow over the next decade.

As millennials mature.

We are also strategically focusing on more affordable luxury communities. One third of our current communities offer at home with a base price of $500000 or less.

We believe we receive a premium for these homes because of our brand.

This will position us for faster growth as we expand our product lines price points and geographies.

While affordable luxury crosses all buyer segments, including move up and active adult. This initiative is driven in large part by a growing number of millennials, who are older more a fluent and more discerning when they buy their first home.

Think of it as a BMW three series a great example of affordable luxury.

In fact in fiscal year 2019 over 20% of our closings had one purchaser 35 years old or under.

This strategy builds on our strong brand reputation and complements our focus on capital efficiency as lower priced faster paced communities tend to turn capital quicker.

Our multifamily group, which develops upscale rental apartments and student housing in both suburban and urban locations across the country continues to show impressive growth.

Toll brothers apartment living was named number 14 largest and number one fastest growing apartment developer in the country in 2019 by the National multifamily housing Council.

We have a nationwide pipeline of over 20000 units in various stages of development or operation nearly all of which we undertake in joint ventures.

Some of these projects will be held long terms and others will be sold upon completion.

Most recently, we entered the purpose built single family rental market in partnership with an experienced operator and a major financial institution.

Which we believe has great potential.

As we enter our fiscal year 2020 the economy remains very supportive of housing.

October housing starts were at their highest level since July of 2007, while the month supply of homes on the market remains constrained.

Consumer confidence is healthy household formations are strong and interest rates and unemployment remain low.

With this positive environment as a backdrop, we are encouraged by the start of fiscal 2020, we are projecting 10% community count growth over the course of the year.

With this growth are well established brand our great land positions, our broadening geographic footprint and are increasingly diverse product lines and price points. We believe we are well positioned as we enter this new decade.

Now, let me turn it over to Marty.

Thanks, Doug.

Before I address the specifics of this quarter I want to note that a reconciliation of the non-GAAP measures referenced during today's discussion to their comparable GAAP measures can be found in the back of our earnings release.

I also want to note that our guidance is subject to our normal caveats on forward looking statements.

Q4 home sales gross margin was 18.8% of home sales revenue.

Adjusted home sales gross margin, which excludes interest and inventory write downs was 21.9% of home sales revenue.

These numbers are consistent with our guidance at third quarter end and are reflective of the challenge sales environment, a year or so ago. When we sold most of these just delivered homes.

SDMA as a percentage of home sales revenues was 9%.

Income from operations was 9.5% of total revenues.

Other income income from unconsolidated entities and land sales gross profit was $48.4 million.

Our balance sheet remains strong.

We ended fiscal year 19, with 1.3 billion in cash and cash equivalents and had $1.7 billion available under our bank revolving credit facility.

Benefiting from our strong reputation in the capital markets and favorable market conditions in fiscal year 2009 teens fourth quarter.

We increased our bank revolving credit facility from $1.3 billion to $1.9 billion and extended the facilities maturity to five years, along with that of our 800 million dollar bank term loan facility.

During our fourth quarter, we also raised $400 million of 10 year, 3.8% debt in the public capital markets a portion of which we later used to retire $250 million of more expensive maturing public debt.

As we began fiscal 2020, we have over $3 billion of liquidity through cash and Undrawn bank credit facilities with no public or bank debt maturities in the next 24 months.

Our weighted average debt maturity is 5.8 years.

We have increased our focus on capital efficiency in our land acquisition process.

By broadening our geographic footprint price points and product types, we intend to also improve efficiency through quicker inventory turns and lower upfront land costs.

We continue to execute on other capital efficient efficiency initiatives as well.

In fiscal year 19, we repurchased approximately 6.6 million shares of common stock at an average price of $35 in 28 cents for a total purchase price of approximately $233.5 million.

In our fourth quarter, we purchased 1.85 million shares at $35.66 per share for approximately $66 million total.

Fiscal year end 2019, stockholders' equity was $5.07 billion compared to $4.76 billion at fiscal year end 2018.

And our fiscal year 2019 book value per share was $35.99.

Compared to $32.57 at fiscal year end 2018.

We ended fiscal year 2019, with a net debt to capital ratio of 32.9%.

Looking forward.

We are projecting first quarter deliveries of between 1600, 50, and 1800 50 units.

An average price of between 800008 hundred $20000.

The drop in average price from $863000 a year ago is strategic.

And reflects changes in mix as we execute on our geographic and product diversification strategy.

It also reflects our increased focus on the affordable luxury segment.

And a reduction in the number and mix of homes being delivered in California.

Two more lower priced and attached homes.

We project first quarter adjusted home sales gross margin of approximately 21.25% of home sales revenues.

This first quarter gross margin should be the lowest of the fiscal year.

As most Q1 2020 deliveries were from contracts signed in the first half of fiscal 2019, which was our slowest period.

Sales were down 21% in the first half of 2019 compared to 2018 and that chelan challenged selling environment impacts gross margins in Q4 of 19 in Q1 of 20.

As the latter half of 2019 in the beginning of this year have seen a progressive improvement in market conditions, we have been able to increase sales pace and in many cases increased price.

And over the same period building cost increases have slowed.

For these reasons, we anticipate that our gross margin.

We'll increase modestly quarter by quarter as fiscal 2020 progress.

With the stronger demand.

Particularly over the last quarter and a half we want to carefully evaluate and understand how it impacts full fiscal 2020 results will for providing full year unit deliveries revenue and adjusted gross margin guidance.

We project first quarter SDMA.

As a percentage of home sales revenues of approximately 13.5%.

This includes approximately $10 million of GNS expense related to stock compensation that is not expected to occur in the subsequent quarters in fiscal 2020.

With our projected 10% growth in community count.

Which involves investment in personnel and and in other cost in advance of revenue generation.

We would expect SDMA as a percentage of revenues to be modestly higher this fiscal year.

Essentially as we opened new communities, we will incur some cost in advance of the revenue, but we believe this investment is appropriate and the resulting home sales revenue will provide SGN a leverage in future years.

First quarter other income income from unconsolidated entities and land sales gross profit is expected to be approximately $15 million.

We reiterate our expectation that we will generate $100 million to $150 million of such income annually and expect the same in fiscal 2020.

We expect that the majority of this income will Brazil will be realized in the last two quarters of the year.

We project, the first quarter and full year tax rate of approximately 26.5%.

In Q1 fiscal year 2020 weighted average shares outstanding of 142.5 million shares.

Now, let me turn it back to Doug.

Thank you Marty.

For the fifth consecutive year, we were named world's most admired homebuilder by Fortune magazine.

This honor attribute to all of our toll brothers colleagues, we thank them for their tremendous hard work.

Now, let's open it up for questions.

Rocket we're ready yes, Sir we will now begin the question and answer session to actually question. We run press Star then one under Touchtone phone.

You are using the speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then too.

Let me answer some time, we ask you please limit yourself to one question in a single follow up.

At this time, we will pause momentarily to assemble a roster.

And today's first question comes from Ivy Zelman of Zelman and Associates. Please go ahead.

Thank you Rocco good morning, and congrats on a solid quarter guys in may.

Agreement that is definitely looking a lot more positive than where we were a year ago. So it's nice to hear good news.

Maybe we could just dig in a little ahead on where we we've seen weakness and that's starting to see the reacceleration of demand a little bit more color around California. Your orders were still down double digits and is that can you count our absorption lot of concern Doug around salt and obviously you commented that you do have.

Nice empowering communities. So just maybe first question just just drilling down on California Credit Suisse.

Sure.

So just to give a bit of an update.

Southern Cal.

Was pretty flat to last year Ivy.

And it's running.

Add about the company average for sales.

And for the first six weeks so call it half of this quarter.

This quarter that we're now sitting in.

We're encouraged that deposit sir.

I'll call it low double digit and so Cal.

Northern Cal was down.

Year over year, and that was primarily driven by a.

A number of cancellations that we had to that came through.

In Q4 from a large.

Community.

Outside of San Francisco called Metro crossing and those cancellations occurred because of weather that led the construction delays. This is a significant.

Multi condo town home.

Community that had construction cycle time of.

14, the 20.

The month sat down with weather extended even as long as.

Two years, and we had about 250 or more home.

Who is in backlog.

And because of the weather delays.

We lost some of those contracts.

Mhm Thankfully many of those were lost it earlier and the prices are actually up.

But that issue was what led to.

A bit of a distorted dropped in the California numbers, because those cans came through pretty much in one quarter as the buildings are now delivering.

And they through the numbers off a bit overall, we're encouraged by what we see in California, It feels a lot better.

Our mix is a bit different as as we mentioned where the prices down a bit.

But I think.

For sure, California fields.

Better than a year ago, even six months ago.

So I hope that helps with.

A bit of an understanding of yet where we are in California.

Other top markets seek to help okay. Im more recently I'd say Boise is doing really well, Northern Virginia, Denver, Orlando New Jersey.

Massachusetts, New York City living feels better Las Vegas Reno.

Those sort of round out I'm not sure I gave you 10, but I gave you about 10.

So they would be on topic.

Well. Thank you for the detail and just to have my follow up but others drill in California that like more detailed that was really helpful. I got what I need it you guided for 10% community count growth over the next year, which is stronger than even we were anticipating it's it's great to see the cross coming.

You talk about you know the mix of how that business evolves in terms of net is committee opening in terms of like smaller square footage I think you got any excellent job keeping luxury by providing escrow smaller square footage. So just trying to understand like what should we be thinking about absorption versus actual community count and how that breaks down by price.

Point, a little bit.

Sure so.

We expect opened 156.

That's a very specific number new communities. This year [laughter] that offset that obviously moves up and down with approvals and with new land, we acquire but obviously that's a huge number.

There's many that are selling out so and so obviously, that's not the net number but thats a lot of activity in that also helps explain.

Hi, Marty Marty is commentary on EPS, GNS and how that can get out ahead of revenue coming in.

In terms of locations.

The top locations for those 156, new openings are Arizona, which for us as Phoenix.

Philadelphia, Denver Jacksonville Seattle.

Now, there's many others that could hit the last but I'm, just giving you the top five price point.

It will continue to get wider and wider we are fully committed the main street in main street selling luxury first second move up.

With the.

The opportunity to truly customize your home.

And that is a major part of the toll brothers business. However, there is more and more three series BMW affordable luxury focused on the little bit older more affluent millennial plus some move ups and frankly some moved down.

That.

Our go to reach quite as high as the typical Paul House, but are still chasing affordable luxury so I think what you'll see.

Is it.

A modestly higher percentage of lower priced communities.

That will have higher sales velocity, because they're lower priced and faster turns with less customization.

And smaller homes, we can build them more efficiently and faster and so that will get mixed in.

But it is incremental we've been at this now for a couple of years is accelerating but.

But it is really just supplementing the core business of the traditional luxury move up.

Another point on meets our.

On another point higher value than.

Community Count is that it's going to happen.

Over the course of the year I think in other and other of these calls we've cited as back ended this is a bit steadier over the course of the year.

Great and just.

Making sure I understand that sounds awesome, just with respect to absorption growth for you looking into existing business are you comfortable saying that you can grow same store on top of the community count at this time based on what you guys see today.

Based on what we see today with our commentary on how the first six weeks of Q1 or even better than the sales growth we saw in Q4.

Yes.

But we don't have that crystal ball as to how the balance of the year plays out but right now.

The macroeconomic environment is encouraging.

Our land positioning is very encouraging.

Our geographic growth is exciting our price points and product line diversity is strategic and exciting so right now we feel very good about the business.

Awesome and a special shout to my body, Bob Happy holidays, great to have you on the call he wasn't.

Thanks to everybody.

Hi, good I'd.

And our next question today comes from John Lovallo, a bank of America Merrill Lynch. Please go ahead.

Hey, guys. Thank you for taking my questions.

The first the first one is on gross margin you know understanding that.

You did say that it's going to improve throughout the year in anything you want to give a full year look but is it unreasonable to assume that as we trend through the year that we could exit.

The fourth quarter at somewhere closer to that 23, and a half or 24%.

John I don't think we're going to get into any.

Peculiar numbers with that one feels a bit aggressive.

Okay understood.

And then just looking at the.

The west in the South.

Which we do obviously performances were very good from an order standpoint can you just help us understand some of the drivers there maybe some of the you are the key markets that to help support that growth.

Sure so in the south where.

Sales were up 49% that was primarily driven by Orlando Jacksonville.

Raleigh and of course, the acquisitions of sharp in Atlanta, and Sable and three markets in South Carolina.

And in the West which was up 46% in units.

That was driven by Boise and Denver.

And then number three would be Phoenix, and remember, we entered Salt Lake City, and Portland, which also contributed.

Okay. That's helpful. If I could squeeze one quick one in here on the land sales $87 million seems like it came in at a fairly low margin can you give any color on that.

Yeah, I think you'll see that in our income statement in the future. It really relates to finding joint venture partners for apartments. So we will often by the apartment land a few months before we find a partner in the accounting rules are that we reflect that is land sales revenue and land sales cost.

And we sell it sometimes we sell it for a gain but oftentimes will sell it at our cost into the joint venture and that's what happened in that quarter.

Got it thank you guys.

You're welcome.

And our next question today comes from Mike Dahl of RBC capital markets. Please go ahead.

Hi, Thanks for taking my questions and for the helpful information So far.

Marty just a quick clarification on the community count growth comment you said it'll be a bit steadier. It is that in terms of.

The year on year growth rate steady each quarter around the 10% or a steady sequential build in the number of communities throughout the course of the year.

With 10% will happen evenly over the course of the year.

Okay, Thanks for that and the.

Second question just on Metro crossing I guess I'm now that the project is.

Starting to deliver on on some of these buildings.

I guess, a little little surprised to see cancellations come through.

Understanding that there has been significant delays, but it's still supply constrained market and that's a that's a pretty prime location. So.

You know pricings I would imagine up over the course of the life of the community. So so far as you've been selling what what have you heard as far as the rationale for the cancellations at this stage in the game and then.

Are you finding success maybe in these for six weeks of the first quarter at reselling some of the canceled units and any additional color you can provide there would be great.

Sure So metro Carl seniors in Fremont.

Its right next to the Tesla plant, it's at a new Bart station. It is a spectacular location.

And we are building.

800, plus or minus condos and.

Townhomes in what feels like a village with multiple product lines within that high density community.

And when we open for sale, we are incredibly hot.

And we quoted.

18 month delivery and because of significant weather delays that occurred in northern Cal that I think we're all familiar with from last year. Those buildings took 24 months to Delever, we lost six months.

There were a number of buyers.

Where their lifestyle changed where they needed to move where they wanted to move within the timeframe that we quoted and they asked to get out it is a small percentage.

Of the 250 plus in backlog that we had.

Right around 10%.

And we have back filled many of those with new sales in some cases at higher prices because the community has seen significant price increases over those 24 months.

So it that's the that's the extent of it.

And thankfully that market is still very strong we're now delivering and prices are up.

Okay. That's that's helpful and now it just seems like them. The distortion is really just because it's low volume selling period and.

25, or so cancellations actually makes difference thanks.

You're welcome.

Our next question today comes from Matthew Bouley, Oh Barclays. Please go ahead.

Hi, This is actually Kristina <unk> on for Matt today.

First question is regarding the first quarter gross margin guidance and commentary that no. One key margins would be the bottom for the year is this just attribute it to a timing of deliveries from the first half or what's giving you confidence in margin improvement.

Sure. It generally takes us a nine to 12 months to build a hall.

So the deliveries in the quarter, we just had and the quarter that were in our associated with sales that happened approximately a year ago and that was the most challenged sales environment that we have seen in quite a while and that results in.

A little lower price, maybe a little bit more incentive and those lower margins.

Got it as the world has gotten better over the balance of 2019 and here into the first six weeks of 2020.

We don't face those same market challenges and it gives us optimism on gross margin.

Got it and then on the California margin differential versus the remainder of your homebuilding business.

How does the differential this quarter given the mix down in California that you mentioned earlier compared to what you previously seen.

I am I think you know the California marketplace.

A year ago was hit a bit harder than many of the others and so the margin there is down a couple of hundred points compared to where it has been in the past.

But it is still higher than company average and as we outlined.

On the first question, we are encouraged by California.

Got it thank you.

And our next question today comes from Susan Maklari of Goldman Sachs. Please go ahead.

Thank you good morning, everyone.

Good morning wondering Susan.

My first question is just around the land strategy can you talk to any changes that we should expect in there, especially as you do pursue this kind of shift to a wider asap and a lighter product range is there anything in terms of maybe operating more lot. There are pursuing other means of I've kind of land acquisition that we should.

Be aware of.

Oh sure season, so we as we talked about in art.

Opening comments.

We're very focused on capital efficiency.

And with that comes.

How you structural land by.

Ah trying to get a optioned land.

Over owned land with a land seller, where you can have a purchase money mortgage and pay for land over time.

On occasion, we've gone to third parties to land Bank land.

Two increase the capital efficiency.

And you will continue to see more and more.

Of that from us when we buy.

The expensive land at the corner of main and main it is more difficult at times to do that.

When we buy.

Land for lower price luxury.

Communities affordable luxury that may be in Master plan communities. For example, where there are developers that will feed you finished lots on an as needed basis.

There is more opportunity to do that.

Those lower priced affordable luxury homes will also.

Turned faster, we should have more sales because of the price point and of course that returns capital quicker and that also leads to more capital efficiency. So over time.

I mean, you will see us.

With more diversity of land at more different price points, which generally means more lower price points.

And those deals structured.

With more options and last solved.

In the fourth quarter.

32% of the lots that we put.

Under option.

At a base price.

Proposed a base price of homes under $500000.

So I.

I think that.

Is fairly consistent with our strategy.

That number has been like that for several quarters now.

And I just think it shows as a supplement to our traditional main and main strategy.

More and more affordable luxury that will be more capital efficient.

And that's a base price Yeah 500000 doesn't include options are lot premium correct correct.

Okay, Great. That's very helpful. And then just as a follow up can you talk a little bit to what you've seen on the cost side of things in terms of labor and material. It seems like lumber prices. That's come out there that lately how are you thinking about that heading into next year.

We're encouraged in that cost in the fourth quarter for both labor and materials or flat.

And tariffs have not had an adverse impact.

Okay. Thank you.

You're welcome.

And our next question today comes from Truman Patterson of Wells Fargo. Please go ahead.

Yeah actually it's a possible ski first I was wondering again give us any color on the active adult demand in the quarter and to be Pedro proceedings were weighing on that buyers sentiment.

Active adult and Q4 was steady.

It's it's a very important part of our business.

And it's doing very well and it's expanding as we've talked about we're moving it into many new markets. We have a number of very exciting active adult communities coming.

One of which is in La County, another very large one is in Phoenix.

And no I have not heard.

That the impeachment proceedings are weighing on that buyer.

At that that's nothing that has gotten to me from anyone in the field and the sales results would not reflect.

Any.

Added concern or anything from that from that demographic for any buyer segment correct. We haven't heard the impeachment proceedings.

So Paul just raised and if you if it if you look at their results we've been talking about for the last.

Yeah, four and a half month.

Those proceedings I've been ongoing.

They don't appear to have any adverse impact whatsoever.

Okay.

You know as you look to improving your inventory returns so to.

Inventory turns to improve your returns.

Is there anything you could do on the vertical capital side and increased efficiency there.

Also note that effort.

Oh, we're looking at that all the time.

As you know we have five panel in trust glass.

Very efficiently.

Help us build houses in the northeast mid Atlantic and Midwest.

There's no new.

A technology.

Or extraordinary innovation.

We have yet found in the industry. We're we're very involved in tracking.

All of that and even investing.

And in some of that innovation, that's coming to homebuilding, but.

You know for us it to continue to refine our architecture.

And make it as efficient as possible.

To have a very robust purchasing group.

That works very hard to add I'm driving prices down.

By.

By having Oregon, the job sites, where one contract to show up the houses ready they can get in and get out and make their money.

And of course, taking advantage of the balance sheet to make sure we pay religiously every other Friday.

And we will continue to build on those disciplines.

And hopefully drive costs down.

Thank you one real quick what is there any purchase accounting and the one fuel gross margin good.

It's very modest fall.

Okay. Thank you.

You're welcome thank you.

And our next question today comes from Jade Rahmani Oh KBW. Please go ahead.

Thanks very much.

I think in your opening remarks, you commented that is city living or perhaps it was in response to the question that city living we're seeing an uptick. So wondering if you could comment on how you see things in the New York City condo market some of the.

Brokers have indicated sales that seem to have picked up in November .

Yeah. So.

You know we're active in Hoboken.

Jersey City and Manhattan.

<unk>, where we're under.

Beginning construction and Philadelphia for an exciting high rise.

We have a small mid rise building in L.A. and we're about to began.

A new high rise in downtown Seattle.

So right now the revenue is coming out of New York and.

And the gold coast of New Jersey.

And as I remind you were not.

And in the Super luxury towers, we are focusing on.

Plus or minus $2000 per square foot in Manhattan.

And $1000 per square foot on the Jersey side.

That is relatively affordable and the New York City market.

And we like that.

Our niche and we've done pretty well as an example, we have a building at 77 charlatan.

Which is in a while we call it west So ho.

And that building at about $2000 a foot took 20 sales in the fourth quarter.

And into Hoboken Jersey City side, we continue to sell well.

Oh, the thousand dollars a foot.

We had 14 sales in a building in Jersey City, we attend sales and a building.

And Hoboken during that fourth quarter.

So you know New York not back to where it was.

Four or five years ago, but.

It's better.

And I very much like where we positioned ourselves at these price points and locations I've described.

Thanks, very much secondly.

Can you give the percentage of deliveries that came from quick delivery homes, and how that may be compared with the year ago period.

Sure Yeah, Greg is looking that up for us a it's a few days in Q4.

19.

It was approximately.

15% and you asked about a year ago.

Yes.