Q1 2022 Toll Brothers Inc Earnings Call

February 23, 2022

[music].

Good morning, and welcome to the toll brothers first quarter earnings Conference call.

All participants will be in listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question. You May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two.

The company is planning to end the call at 930, when the market when the market opens during the Q&A. Please limit yourself to one question and one follow up. Please note. This event is being recorded I would now like to turn the conference over to Douglas yearly CEO . Please go ahead.

Thank you Jason.

Good morning, welcome and thank you for joining US with me today are Marty Connor Chief Financial Officer, Rob Powerhouse, President and Chief Operating Officer, Fred Cooper Senior VP of Finance and Investor Relations, Wendy Marlett, Chief Marketing Officer, and Gregg Ziegler excuse me senior VP and treasurer.

Before I begin I ask you to read the statement on forward looking information in our earnings release of last night and on our website 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 impact of the pandemic the availability of labor.

And material.

Inflation and many other factors beyond our control that could significantly affect future results.

I will begin by sharing some thoughts on current market conditions and sales along with the challenges we are seeing on the production side and how we are addressing them.

I'll, then turn it over to Marty to discuss the numbers.

Guidance in more detail.

Our first quarter results were solid net.

Net income and earnings per share rose, 57%, and 63%, respectively and home sales revenues grew 20% in dollars and 9% in units compared to last year's first quarter or.

Our adjusted gross margin of 25, 6% in the quarter was 270 basis points better than last year's first quarter and our SG&A expense as a percentage of home sales revenue improved 150 basis points over last year.

At first quarter end, our backlog stood at a record 10 $8 billion and 11302 homes.

Due to the strong demand we continue to see in the market and the good visibility that our backlog provides we are reaffirming all of our full year guidance.

We are pleased with our sales results in the first quarter as we saw broad strength across all of our buyer segments and geographies.

We signed 2929 net contracts for approximately $3 billion.

<unk> up 2% in units and 19% in dollars over last year is extremely strong first quarter when orders were up 59% in units compared to fiscal Q1 of 2020.

Our contracts per community at eight 8% for the quarter remained well above historical averages. This was our best first quarter sales ever.

The average selling price of signed contracts in the quarter once again exceeded $1 million and was up approximately $149000 compared to last year's first quarter.

Favorable demand dynamics allowed us to continue raising prices in nearly all of our communities throughout the first quarter.

While demand has remained strong we continue to face challenges on the production side from supply chain disruptions labor shortages and municipal delays.

These challenges were compounded by additional pressure from the omicron wave as it spread across the country, especially in January when it peaked.

It is taking us approximately two months longer to deliver a home today versus one year ago.

It's important to point out that these delayed deliveries are not loss, we continue to enjoy historically low cancellation rates and our contracts are supported by an average nonrefundable down payment of $71000.

It is simply a timing issue.

With demand and pricing as strong as they have been and with construction schedules that continue to extend due to supply chain labor and similar issues. We believe the right strategy for us at this time is to limit sales and continue to focus on production.

Over the past six weeks, we increased the number of communities on allocation from 25% to today over 50%.

In many communities we are using the traditional resale process of best and final sealed bid to maximize price.

In addition, we are starting more specs in the second quarter than we typically would to replenish inventory sold last year.

As a reminder, spec homes normally represent about 20% of our settlements.

It is important to note that this increase in spec starts and purposefully metering sales should not impact the timing of future revenues as we expect the spec homes started in Q2 to be sold later in the construction process and still be delivered in the first half of 2010.

Three.

So we expect to start more homes than we sell in Q2, and we expect our sales pace in the second quarter to be similar to the eight eight contracts per community that we booked in the first quarter.

Our non binding deposits in the first three weeks of February were consistent with the pace of the past nine months, which was approximately 325 deposits per week.

We could've taken more deposits. These past three weeks, but we chose not to in order to focus on production and manage build times.

In order to further streamline our operations and mitigate potential production bottlenecks. We also continue to optimize the number of available floor plans and options, we make available in a given community.

Offering buyers better choices by focusing on those that are most popular and more readily available.

And we continue to work closely with our subcontractors and national suppliers. So we can anticipate supply chain issues and labor delays and make any necessary adjustments.

While we do not anticipate any meaningful improvement in supply chain and labor shortages in the near term. We are encouraged by the recent steep drop in Covid cases, and the relaxing of many pandemic restrictions.

Turning back to the demand side of the equation the housing market and demand for our homes in particular is being propelled by strong demographics from both the millennial and boomer generations.

Substantial imbalance between the tight supply of homes and continued pent up demand the wealth effect of rising existing home equity.

Migration trends and the greater appreciation for home.

We believe these long term tailwind will continue to support demand for our homes well into the future.

We continue to see people move from the states, where home values taxes and cost of living or higher to less expensive regions. This dynamic is spurring demand in markets across the country and particularly in the Sunbelt and mountain States, where we have expanded in recent years.

For these buyers affordability is less of an issue.

We have also not seen an impact on demand from the recent increase in mortgage rates.

I'll remind you that our customers are generally better insulated.

From affordability concerns compared to buyers in the entry level market, our buyers tend to have higher incomes and they benefited from multiple years of appreciation in their investment portfolios and their existing homes.

They also understand that when they contracted with US today. There are interest rate will not lock until they are much closer to a settlement.

So we don't believe that demand for our homes has been pulled forward by buyers who are focused on beating a rise in rates.

Also keep in mind that rates have no impact on monthly payments for about 15% to 20% of our customers, who pay all cash and that another approximately 30% of our buyers borrow a jumbo rates, which are currently five eighths of a point lower than conforming for our clients.

And overall, our customers averaged less than 70% loan to value and their mortgages.

In fact, we've analyzed our backlog and estimate that rates would have to increase to approximately five and one quarter percent before just 10% of our backlog would need to consider in arm, a higher down payment or other alternative mortgage.

Peaks to the credit worthiness and healthy balance sheets of our customers.

As I mentioned earlier, we are reaffirming all of our guidance, including a return on beginning equity.

2022 of approximately 23%.

We also expect to generate substantial cash flow in 2022.

Our highest capital allocation priority continues to be investment in the growth of the business, including through disciplined in capital efficient land buying.

Of the approximately 86500 lots, we owned and controlled at January 31.

54% were optioned and 46% were owned.

Compared to 46% optioned one year ago.

Our shift to more option lots is an important part of our capital efficiency strategy and our focus on returns.

This lot position also provides us with all the land we need for our projected community count growth.

In fiscal year 2022 and beyond.

We continue to expect approximately 10% community count growth by the end of fiscal 'twenty two from the 340 communities. We were operating at the end of fiscal 2021.

We continue to use excess cash to further reduce leverage and return capital to shareholders in the first quarter, we repaid $410 million of our senior notes, we also repurchased $185 million of our stock.

Which reduced our outstanding share count by approximately two 5%.

We paid dividends of approximately $21 million.

Our balance sheet remains strong with ample liquidity strong expected cash flow generation and declining leverage.

These factors along with the positive fundamentals underlying our business contributed to Moody's upgrading us to an investment grade credit rating last month.

With that I'll turn it over to Martin.

Thanks, Doug.

And our first quarter, we delivered 90 129 homes at an average price of approximately $875000 generating homebuilding revenues.

169 billion.

Which was up 9% in units and 20% in dollars from one year ago.

Settlements came in 71 units below our expectation.

Due to the supply chain disruptions labor shortages and municipal delays that Doug mentioned.

We felt the greatest impact in January the last month of our quarter as the effects of the spread of omicron, where most acute.

Fortunately omicron pandemic now seems to be waning.

Our first quarter pre tax and net income were $208 million and $151 9 million respectively.

Both up approximately 57% compared to 127, four and nine I'm, sorry, $96 5 million respectively in the first quarter of 2021.

Earnings per share in the first quarter were $1 24 per share diluted up 63% compared to the <unk> 76 per share diluted that we earned one year ago.

The net income and earnings per share growth percentages were approximately triple our revenue growth percentage growth.

Our first quarter adjusted gross margin was 25, 6% compared to 22, 9% in the first quarter of 2021.

The 270 basis point improvement reflects the strong pricing environment over the last year.

It also includes the impact of elevated lumber prices from last spring.

This quarters closings.

We continue to project an adjusted gross margin of approximately 27, 5% for the full year.

We expect adjusted gross margin of 25, 5% for the second quarter of fiscal year 'twenty two.

As the impact of elevated lumber prices from last spring continues.

This will be followed by a ramp up in our gross margin in the third quarter and a greater ramp in our fourth quarter.

SG&A as a percentage of revenue was 13, 4% in the first quarter compared to 14, 9% in Q1 of last year, and 70 basis points better than projected.

Joint venture land sales and other income met our guidance at approximately $30 million in the first quarter.

Impairments and write offs were $2 2 million in the quarter.

Our tax rate in the quarter was 24, 4% compared to guidance of 26%.

Turning to future guidance, we are projecting fiscal year 2022 second quarter deliveries of 'twenty 350 homes with an average price between 865000.

And $885000.

We are maintaining our full year delivery guidance of between 11250, and 12000 homes with an average price between 875008 hundred $95000.

Deliveries will be back half weighted and will be consistent with seasonal patterns.

We expect interest and cost of sales to be approximately two 1% in the second quarter.

We project second quarter SG&A as a percentage of home sales revenues to be approximately 11, 9%.

For the full year, we continue to project SG&A as a percentage of home sales revenues to be approximately 10, 5%.

We expect community count to be approximately $330 at the end of the second quarter and 375 by fiscal year end.

Other income income from unconsolidated entities and land sales gross profit is expected to be approximately $5 million in the second quarter and a $100 million for the full year.

We projected tax rate of approximately 26% for the second quarter and 25, 8% for the year.

Our weighted average share count is expected to be $121 5 million for the full year and $122 million for the second quarter.

Based on all of these factors, we continued to project approximately $10 per share and full year earnings per share and a return on beginning equity of approximately 23%.

Now, let me hand, it back to Doug.

Thanks Marty.

This month Fortune magazine named US the number one world's most admired homebuilding company.

This is the seventh time, we have received this high honor.

I would like to thank all of our toll brothers team members for achieving this tremendous recognition.

They continue to demonstrate.

Their dedication to our brand and our customers and for that I am very proud and very grateful.

As toll brothers enters its 55th year in business I am excited about the current market and the long term prospects for our company.

Now, let me turn it over to Jason for questions.

Thank you we will now begin the question and answer session.

As a reminder, the company's planning to end the call at 930, when the market opens during the Q&A. Please limit yourself to one question and one follow up.

I'll ask a question you May press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.

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

Our first question comes from Anthony Pettinari from Citi. Please go ahead.

Hi, This is Asher summit on for Anthony Yes. Thanks for taking my question I guess my question is the last time, we saw rates rise in 2018 timeframe yourself.

Slowed down meaningfully so I was just wondering what where maybe some of the early warning signs in 2018 19 timeframe.

No we're showing the demand.

You'd be looking for around now and then I know you haven't seen any impact on demand yet, but have any of those warning sign metrics started to weaken for you at all.

Very good question the the warning signs are web traffic foot traffic.

And <unk>.

Right now web traffic and foot traffic is up significantly.

Okay. Thanks.

Bob.

Thinking about your sales pace in 2021, you sold maybe up a little a little over three homes per community per month in the quarter similar to that and then I think for the for Q2, you expect to do the same so I'm just wondering looking out to the rest of the year and then maybe even beyond that is that sales pace sustainable and maybe like a new normal or should we think about.

That 10% growth in community count coming more maybe not at the cost of a little bit more of a normalization and sales pace.

So right now we're selling at about a pace of 37 homes per community.

Per year, and we're settling at a pace of about 35 homes per community because of all the everything that all the builders have talked about and what we talked about in our prepared comments earlier.

We can and we will get the settlement pace higher as.

Supply chain labor issues improve.

Over I think it is going to be the later part of this year.

As I talked about we're going to be focused on more starts. This quarter. There was about six we were about 600 spec or we call quick move in homes behind because so many of those were sold over the last year and a half.

Through the heat of the market and we are committed to get many more homes started in the second quarter and Thats why we put over 50% of our communities on allocation.

And so longer term, we are very comfortable being in the high <unk> in both a sales cadence and a and a delivery cadence.

So community count will certainly contribute to our growth, but there are opportunities as supply chain labor settles down.

For us to we believe both sell and deliver more homes.

Okay. That's very helpful. Thanks, I'll turn it over.

The next question comes from Stephen Kim from Evercore ISI. Please go ahead.

Yes, thanks, very much guys really great info regarding the.

The buyers in.

All the factors you ran through about demand not being pulled forward. So thanks for that.

One of the things that I wanted to.

Our models spitting out that I thought was interesting is your we have your.

Net debt.

Just on what we see here easily moving back down into the low Twenty's and my I guess my question was in your outlook for return on equity.

23% can you give us a sense for what kind of range of net debt to cap you are expecting at the end of the year.

In addition, <unk>.

<unk> talked about specs here, a little bit more you are one of the few builders that doesn't actually give us.

A detailed breakdown of the number of homes you have under construction at any point in time I was wondering if you could give us that number.

Was this quarter and what it was in the year ago period.

So Stephen with respect to the.

That question I think you're Directionally accurate.

I think we're interested in operating in the low to mid twenties.

The timing of land opportunities or builder acquisition opportunities can always impact that from quarter to quarter or from year end of year end.

Encouraged by the fact that our plans.

Good shared with Moody's.

<unk> moved us up to investment grade.

So we feel very.

<unk> operating in those levels with the liquidity, we have the cash generation, we foresee and the growth opportunities we have on balance sheet or.

In process.

With respect.

With respect to your second question.

Which is the number of starts I don't know that we have that with us This morning.

As Doug mentioned, a lot of our starts in the second quarter.

We will be to replenish.

Our depleted spec inventory so we expect to start in the second quarter in the neighborhood of 34 100 3600 units.

Alright.

And Stephen in the first quarter.

We did start about as many homes as we sold.

But last year.

When we were selling a bit more homes than we were starting and that again is one of the main reasons that we have increased allocations for the moment we.

We are going to replenish the spec count.

And so this quarter as Marty said, we will be starting more homes than we sell but those homes.

In fact, they should have.

A shorter construction cycle time, because at least in the early stages of the home we don't have a client.

And we're able to move faster, but they will we believe deliver.

In the same timeframe as if they had been sold and as this market continues.

We are hopeful that maybe there's even more margin in those houses because they sold a bit later in the cycle time.

Yes, no doubt.

One of the interesting things that.

Times like this brings us to the higher margin on specs.

Second question I had for you relates to the fact that you're trading pretty darn close to your book value.

Which.

I have thought about that.

One of the things that we've analyzed is.

How much of your land that you own a lot you own life.

Likely reflect pre pandemic pricing.

The analysis that we've run suggest.

Suggests that base.

Easily all of it.

Could theoretically have been have had prices that were negotiated pre pandemic.

But there's two assumptions in there I was wondering if you could comment on that was one is.

That your.

Your land.

Now use rise.

More significantly even than the rate of home price appreciation that land values rise I've heard two X or whatever of home prices. Appreciate I wanted to check that the second thing is.

You have <unk> you have options and my understanding is that some of those options have some form of escalator, but the escalator usually is is sort of capped out right. So when you have this period, where land values have risen radically since.

The last two years.

Your escalators.

Move up at the same rate. So you really do have an embedded arbitrage on anything that you had as an option at the time of the pandemic are those two assumptions roughly correct.

It's a very very complicated answer and I don't want to bogged down, but let me start with the <unk>.

Land that we own that was contracted for pre pandemic that number is 77% of the land we own.

<unk> was tied up.

Pre pandemic.

With respect to the deal structures.

Most of our deals have what we call Kickers no kickers. So we pay for the land we may not pay all upfront.

With our obsession with capital efficiency, we may be paying over time, there may be a interest rate associated with paying overtime.

With a land banker there is an interest rate associated with taking that land down later, but.

But most of our deals don't have a kicker which means a land seller is participating on the back end with our success. However, there are some there are some deals that do have a kicker where they are either having a revenue share on the back end based on a.

Mall percentage of the price to home ultimately sales four or in a very very very limited case, there may be a profit participation where they have to get into our books and understand how we calculate profit and we have some arm wrestling over accounting and they actually get to participate on the profit side. So.

One is revenue, which as a percentage of the home price itself and the other would be.

A share of the profit made but those are the exceptions. Most cases do not have that but to your point when they do have a revenue or profit participation. We have the outsized component of that so we are benefiting far more than our.

Our seller as our prices or our profitability goes up.

Yeah. It makes sense, thanks, very much guys.

You're very welcome.

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

Hey, guys. Good morning, Thanks for taking my questions.

Yes.

Doug I'd love to follow up I think on a comment you made to a prior question about the supply chain and I think you kind of made it hopeful comment that as the year goes on maybe things will at least stabilize or maybe even improve a bit and I'm. Just curious your thoughts because you guys seem to be following a similar playbook that a lot of the industry is right now in terms of.

Limiting sales ramping spec starts.

Obviously community count is going to be growing a lot. So.

I guess, where I struggle, a little bit and I'd love to hear your thoughts or why would the supply chain stabilize if the industry is all kind of trying to ramp up the volume of spec over the next three months six months community count is going to be growing double digits for just about everybody over the next nine months what is the catalyst that would actually cause the supply chain too.

To stabilize or even improve yes, it's a great question and I just want to start by explaining that we havent modeled for any improvement.

The guidance, we've given in fact, we've increased our.

Our contingencies in our building costs recently.

To be to be more careful.

So all the guidance were providing and the way we're running this business is assuming.

But there will continue to be significant stress and there will be.

Continue to be significant pricing pressure with that said and.

Returning to my comment I made a few minutes ago.

I'm just looking at the world today.

January 9 million Americans called in sick.

That's off the chart off the chart to the normal I don't know two or $3 million pre Covid I think the prior peak to that was a year ago when it was $6 million.

January was a really really tough month, we felt we couldnt get building inspections, because the inspector was home.

We couldnt get.

Because the town clerk, who processes as the CEO .

With home our employees were home truck drivers were home.

I saw my Kid's school.

We saw it in our personal lives with friends and family and that is changing dramatically.

Yeah.

<unk> came off my Kids last week go into school.

There's a lot that's changing rapidly that just gives me some optimism that things will.

Be more normal.

Long Beach Port you don't have 100 freighters sitting in the Harbor you don't have thousands.

Containers sitting sitting on the dock.

I've heard the big suppliers are now beginning to talk about.

Some improvement, they're seeing and there are opportunities to run their factories full speed to get the truckers to transport and so that.

That was the extent of it I mean I agree with you.

Builders are growing.

There's a lot of action out there the market continues to be really strong and so of course, that's the other side of the equation, but I am hopeful.

And cautiously optimistic easing at all term.

That as this year progresses, we're going to see a bit of a more normal although still somewhat stressed.

Production environment.

I think the follow on to that a little island.

We are offering product that we know is available.

We are choosing product in these spec homes that we're building that we know is available.

And we are narrowing.

Two the most popular items.

What is offered in our design studios and that actually marries with what the manufacturers are producing they've narrowed how much they produced to drive efficiency.

Got it appreciate the comments there is I know, it's a tough environment to predict here so.

To hear how you're thinking about it.

Second question would love to just dig in a little bit in terms of the mix of your business.

One of the areas that perhaps there was some optimism on.

In terms of navigating some of the extending cycle times was the growth in the affordable luxury and the growth in newer markets, where perhaps cycle times historically have not been quite as extended as as the coasts. So I'm curious if I look at your average price growth, it's been very strong kind of consistent with the.

The broader industry. So it doesn't seem like there's really been much of a mix towards more affordable product or kind of more affordable markets. Your cycle times, obviously have not yet stabilized so should I interpret that that youre actually just seeing incrementally stronger demand from the luxury higher in price point or is that.

Not the correct interpretation and Theres something else going on underneath the surface there.

No.

We're committed to the affordable luxury business, we're committed to these new markets that tend as you point out tend to be a bit lower priced.

There is a lot less city living in 'twenty, two and there is almost no city living deliveries in 'twenty, two because of timing of buildings and our.

Our intentional decision to slow that business down as Covid hit.

And the move out of city living has ramped into <unk>.

Active adult.

As age restricted primarily but we're raising prices everywhere. So.

Don't read into this million dollar plus sales price of the last two quarters to suggest that it.

It's coastal it's very expensive places, we entered Boise four years ago selling houses at three in a quarter and our average house in Boise now is $6 50 guidance plus or minus.

And I can tell that story to many markets around the country. There is I guess, there's a bit of a new definition to affordable.

And many of these markets are seeing equal or higher percentage increase in sales price to some coastal regions.

And then when you mix it all together the prices coming out over $1 million, but.

We like the mix.

Much of the land, we're buying continues to be in these new lower priced markets, where we will be able to offer more affordable.

Holmes.

But as I said those homes are going up just as fast or faster than other areas. So no change.

<unk> strategy, it's just prices going up everywhere.

Alright, I appreciate the thoughts thanks a lot.

You're very welcome. Thank you.

The next question comes from Deepa Raghavan from Wells Fargo. Please go ahead.

Hi, Good morning, everyone. Thanks for taking my question.

A broad one for me.

If your 2022 is more or less locked in at this time, just given your backlog visibility et cetera.

What's driving that wide range in guide is that you are waiting for spring selling season or the supply chain. So the governor to the high end low end anytime.

Any thoughts there.

Yes.

Go ahead Martin.

I think our guide for deliveries.

But with the 725 units 11, $2 50 to 12000.

With.

Roughly 10000 of those to go I think that's a prudent guide in this operating environment.

Sorry, 10000 to go I misunderstood sorry.

While we delivered 19 $120 million in the first quarter got it 10.

10000 to go to deliver got it yes, I think that the reason for that range.

It's not sales we're selling into 2023.

And we're very I said last quarter that the next homes sold by Us in December .

The highest margin we've seen in this cycle.

Can repeat that comment now three months later that the nexon sold today.

Is the highest margin we've seen in this quarter, because we continue to raise prices more than costs are going up but that's a 23.

Comment as to 'twenty two.

Its supply chain.

We missed deliveries in the first quarter.

We've given you guidance in the second quarter on deliveries.

Obviously, we have a lot to do in the second half.

If we hit our delivery guidance in Q2, 63% of our full year deliveries to hit the midpoint of guidance would occur in the second half our 10 year average for second half deliveries is right at 60% and we've studied the construction status of the <unk>.

<unk> log and it is further along than it has been historically so we are comfortable that we can get to that 63%.

For the for those reasons, but.

We think it's prudent right now to keep that 750 unit.

Window.

Because of the environment, we are building and there are some quick move in spec homes that will still need to be sold.

But with the market conditions, I think thats, a very very low risk of impacting.

The ultimate delivery number I think that conservatism right now is simply based upon the production environment we're living in.

Thanks for that that's helpful color.

Another broad one for me.

You addressed a little bit.

Third remarks, Doug there is a bed narrative out there that luxury builder is a little bit more price elastic and the first move down unusually happened in that portfolio.

Resulting in luxury builders, perhaps losing buyers to other categories.

The buyers trade down in the high interest rate environment.

How would you address that.

We disagree.

I think our buyers are.

Much more financially sound I went through the numbers on.

Their credit worthiness.

Through the numbers on the average LTV is 70%.

Yes, a luxury home as a discretionary buy we understand that but.

When we look at prior cycles.

We've been the Darling of the industry.

At times when rates have gone up because the buyers can still afford our homes. It is not a monthly payment decision our buyers don't think.

Maybe except in Detroit with a lease a lot of automobile they don't think about monthly payment.

They think about moving up in their lives they think about getting that larger home as the kids had middle school buying that second home moving down as boomers into that luxury community and they have the breadth they have the ability they can afford it they don't Max out the mortgage they are 50% of our <unk>.

<unk> or more.

Today, our move up and the percentage that have a home to sell.

70%.

And look at the equity that's been generated in those existing homes or 70% of our client that allows them to move up so that little ticking right up.

$25 $50 75, even a 100 basis points historically.

We're not 100% immune but we have been in a better place than the starter home business, where it comes straight down to monthly payment and affordability.

Alright, thats great color, thanks, very much I'll pass it on very.

Very welcome thank you.

The next question comes from Truman Patterson from Wolfe Research. Please go ahead.

Hey, good morning, everyone. Thanks for taking my questions.

Hey.

First just wanted to hop back to us.

The question is on the early warning signs and.

As a portion of your orders your cancellation your cancellation rate ticked up about a point year over year, just seeing if you had any more clarity from the field is this just simply cancellations in the normal course of business or are you beginning to see the higher mortgage rates impacts.

Some buyers ability to qualify for the mortgage.

Through them and I think the cancellation.

<unk>.

As.

Low by our historical standards.

Looking back at the list 10 years and.

Six 6% looks like our long term average.

Was.

Extra low last year, it's ticked up a little bit this year, a lot of that tick up a function of how large the backlog is right. Now if you look at cancellations as a percentage of backlog rather than as a percentage of current quarter sales.

Hardly moved at all and.

We are not seeing.

An early warning sign if you will and cancellations. So I think I think that's a bit of a red herring as it relates to having gone from <unk>.

High threes to high fours as a percentage of new contracts, it's one 3% of backlog at one 4% of backlog. It was one 3% of backlog a year ago.

Okay perfect. Thank you.

And then second and in a rising price environment.

Cancellations are an opportunity for us right now because we got to sell the home at a higher price.

Okay. So cancellations are still beneficial for the gross margin.

Okay.

Australia is not.

Yeah.

Fair enough and then.

Second question on rate locks are you seeing consumers.

Beginning to use <unk> more frequently are they using longer rate locks and if so how should we think about the cost associated the toll and where it might impact the <unk>.

Income statement.

Yes.

Have not yet seen it.

Extended period of time rate locks be asked for by our customers. They can lock in mortgage.

Generally in a normal course within 60 to 90 days of closing and we are seeing them take advantage of that opportunity right now.

I want to reiterate 80% of the homes that we're selling.

Our build to order right.

That's our special sauce at our price point.

And those homes today will take nine to 14 months to deliver based on.

Where they're located how much backlog and production issues.

And so the commentary I hear that there is this pull forward.

Of demand.

Because buyers are trying to grab a rate today before it goes up.

It's just not the case.

Our buyers are not able to lock on our homes.

Until 60, maybe 90 days before.

That home delivers and we are seeing tremendous demand and tremendous pricing power.

In the last month as rates have risen and buyers know that they are not running in palatka lower rate when they buy a home from toll brothers.

Yeah. It's interesting when you say that if you actually look at the data historically youre exactly correct.

Kind of dispels the pull forward narrative so.

Thanks for taking my questions I appreciate it.

Very welcome Thank you chairman.

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

Good morning, guys and thank you for taking my questions as well.

First one is.

I'm curious how many communities you are implementing that best and final sealed bid in and along those lines, how do customers tend to react to that process.

Do you risk pushing some buyers the way that maybe chose to purchase a new home because this sort of avoid this process.

So about 90 of Ark 300.

Call It 30, plus or minus communities are currently.

Using the best and final offer program that may not be for every lot, sometimes we do it for <unk>.

Special home sites, where we know we have outsized demand.

I know on my last call I gave some great detail on how that.

Process works and how you can do it in a build to order environment, because we're not generally bidding.

Finished spec home, although we'll do that all will also do that.

If you recall, we do it through the lot premium and then if you are successful in bidding up the lot premium you can then pick your house and go through the process.

<unk>.

Customizing.

The home to your to your lifestyle.

<unk>.

Buyers.

It's how you manage the process and sales has been really well trained and how they manage the process. If there are 30 people that want a home site.

Those that are $25 26, 27 on the list are pretty happy with.

Running this process because at least they have an opportunity.

Not everybody is happy.

Just like not everybody is happy on a resale when it goes to final invest but that is the environment that we're in at the moment buyers are used to it to the resale market.

We now have a really cool app, where you can you can bid you convinced through a toll app.

That makes it.

Totally transparent.

And so I think we've done a really good job of explaining it it's a bit of a new normal in the industry.

But yes as everybody happy with it know people want to walk in and buy a house off a price sheet, but that's not the environment. We're working in at the moment and I am proud of how we're handling it and I think most buyers are understanding of it.

Yes that makes a lot of sense and then maybe going back to Steves question from before just about where the stock is trading today.

Curious how this impacts your capital allocation decisions I mean, if you guys are as confident as you sound in the sustainability of the cycle, which we would agree with what youre stock be a great investment right now and even more positive signal to the market.

While we bought a $185 million worth of stock back at $61 guys.

So I think that that gives you the answer.

Okay. Thanks, guys.

Yes.

The next question comes from Alex Barron from housing Research Center. Please go ahead.

Yes, Thank you gentlemen, and great job.

I wanted to focus on the the trend in the gross margins. This year clearly in the first half you guys in the mid 25%.

And then the back half it looks like Youll be in the high 20% range. So I know, you're probably not going to give us 2023 guidance, but I'm more curious to see.

How you guys see margins unfolding.

As we move into next year is it more likely to stay at the higher level or trend back towards that.

Kind of where margins are currently.

Yes, Alex site.

I mentioned earlier that.

The next homes sold by toll brothers is the highest margin we've seen in this cycle. So I think that bodes very well for 2023.

Got it okay, Great and then my other question has to do with expectations on on orders.

You guys, obviously, you only had one negative.

Growth quarter in October and then went back to positive this quarter.

I guess related to that.

Comment about 50% of your buyers or I think you sort of move up I'm curious what percentage of the buyers are you guys seeing that are moving across state lines and what percentage of your buyers.

Our first time buyers and I'm trying to get a sense of your mix.

And what's what's really driving the strength here.

Sure and just to clarify because we are now restricting sales significantly focusing on production and getting spec start in Q2, because I think we made very clear we will also be a quarter where.

Sales sales will be down.

40% of our sales are too.

Those moving to a different market to migration.

Got it.

And what percentage of first time guys.

30% are first time homebuyers.

Okay, Thanks, and best of luck.

Thank you very much.

The next question comes from Susan Mcclary from Goldman Sachs. Please go ahead.

Thank you good morning, everyone.

Good morning, My question is.

You made the comment that the web traffic remains high and that you haven't really seen any changes in that but just wondering if you could give us any more details in terms of what you are seeing.

Online are people looking at different products is there any change in options out there keeping an eye on are they spending more or less time and any details around what youre seeing there.

Sure. So we have about 9 million visitors to our website per quarter.

And our foot traffic as I mentioned is also up.

Even though.

All can't buy.

Because of allocations and but there is still coming out.

<unk>.

I'm very proud of our web site, we have an amazing web team, we better have the best web site in the industry being America's luxury homebuilder I think we do we.

We track the amount of time they spend on the website. The stickiness rate you get on a website in and how long do you want it and that's a big one.

We also have online sales consultants now that represent every single community and every market, where they engage with clients through web.

Texting through through phone calls.

Not only before communities open to set up the grand opening, but even as communities.

Our open and selling and we call them online concierge service and they're very very engaged now.

With the web visitors, it's very easy to see how you can click the button and start the chat with the online concierge and and they set it up they tee up that client for the sales manager at the local community.

The one thing we like to see is when they click on the directions page because that means that they're thinking about getting in their car and running out to the community.

But the opportunity to look at videos now to do walk throughs of homes to do some design of your home custom design to fiddle with colors and products.

All of that is available and im.

Im not going to bogged down on the percentages they spend on each different page, but we track it.

Very closely we also change the experience so different pictures come up different pages come up and we see what the client seems to like and when you have 9 million visitors a quarter you get some pretty good trends that.

Now us to figure out the most efficient most optimal.

Web experience and so are our website is very fluid and constantly changing.

That helped yes, but I guess are you seeing any changes in the stickiness to the website or what theyre looking at anything that's been different in the last couple of weeks as we've seen rates rise relative to where we were a couple of months ago or a couple of quarters ago or has it been consistent.

It's been consistent.

Yes, I don't think.

I'm not I'm not aware of anything in the last month or two that has changed sort of the buyer.

Experience on the website.

We track web leads where they start on the web and ultimately go to agreement, which in todays world I think it.

I'd be shocked with as a buyer that hasnt only spent a little bit of time on our website.

But I don't see I don't think anything's changed recently.

Because rates have gone up or for any other reason okay. Okay. That's helpful. And then Okay. Next question is just around when we think about where the business is today Holistically you focused a lot on growing the affordable luxury piece in the last several years when you think about the business going into a rising rate.

<unk> with the affordable luxury piece of it today would you didn't have in the past how do you think about the mix shift that we could see that.

Potential to sort of grow the luxury versus the affordable luxury pieces of things and any changes there that could be coming.

Yes, I'm very happy with the progress we've made over the last three years and widening the price point, the product offering and of course the geographies.

We're not done there will be more affordable luxury in the mix.

Now it's about 40%.

And I think it could probably get up to maybe 45% maybe 50%.

A bit of a longer term, but we're not giving up on luxury theres still a lot of opportunity at the higher price points for us and we're seeing that success.

But as you know as I look longer term at that mix. We're beginning to approach what I think is optimal but we're not quite there, but we've come a long way I would say, we're probably 80%.

On our way towards the long term strategic mixed set that we want.

By by the way when I say, 40% that's when the dollar value. So the actual number of homes would be higher since those homes are less expensive.

Got you Okay. Thank you very much for all that color and good luck.

Thank you Susan.

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

Thank you Jason Thanks, everyone. We really appreciate your interest and support.

And happy spring, it's on its way almost March one take care. Thanks.

Conference has now concluded. Thank you for attending today's presentation you may now disconnect.

[music].

Good morning, and welcome to the toll brothers first quarter earnings Conference call. All participants will be in listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero.

After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two.

The company is planning to end the call at 930, when the markets when the market opens during the Q&A. Please limit yourself to one question and one follow up. Please note. This event is being recorded I would now like to turn the conference over to Douglas yearly CEO . Please go ahead.

Thank you Jason.

Before I begin I ask you to read the statement on forward looking information.

Our earnings release of last night and on our website 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 impact of the pandemic the availability of labor and material inflation and many other factors beyond our control.

That could significantly affect future results.

I will begin by sharing some thoughts on current market conditions and sales along with the challenges we are seeing on the production side and how we are addressing them.

I will then turn it over to Marty to discuss the numbers.

And guidance in more detail.

Our first quarter results were solid net income and earnings per share rose, 57%, and 63%, respectively and home sales revenues grew 20% in dollars and 9% in units compared to last year's first quarter.

Our adjusted gross margin of 25, 6% in the quarter was 270 basis points better than last year's first quarter, and our SG&A expense as a percentage of home sales revenue.

Improved 150 basis points over last year.

At first quarter end, our backlog stood at a record 10 $8 billion and 11302 homes.

Due to the strong demand we continue to see in the market and the good visibility that our backlog provides we are reaffirming all of our full year guidance.

We are pleased with our sales results in the first quarter as we saw broad strength across all of our buyer segments and geographies we.

We signed 2929 net contracts for approximately $3 billion up 2% in units and 19% in dollars over last year is extremely strong first quarter when orders were up 59% in units compared to fiscal Q1 of 2020.

Yeah.

Our contracts per community at eight eight for the quarter remained well above historical averages. This was our best first quarter sales ever.

The average selling price of signed contracts in the quarter once again exceeded $1 million and was up approximately $149000 compared to last year's first quarter.

<unk> demand dynamics allowed us to continue raising prices in nearly all of our communities throughout the first quarter.

While demand has remained strong we continue to face challenges on the production side from supply chain disruptions labor shortages and municipal delays.

These challenges were compounded by additional pressure from the omicron wave as it spread across the country, especially in January when it peaked.

It has taken us approximately two months longer to deliver a home today versus one year ago.

It is simply a timing issue.

With demand and pricing are strong as they have been and with construction schedules that continue to extend due to supply chain labor and similar issues. We believe the right strategy for us at this time is to limit sales and continue to focus on production.

Over the past six weeks, we increased the number of communities on allocation from 25% to today over 50%.

In many communities we are using the traditional resale process of best and final sealed bid to maximize price.

In addition, we are starting more specs in the second quarter than we typically would to replenish inventory sold last year.

As a reminder, spec homes normally represent about 20% of our settlements.

Three.

So we expect to start more homes than we sell in Q2, and we expect our sales pace in the second quarter to be similar to the eight eight contracts per community that we booked in the first quarter.

Our non binding deposits in the first three weeks of February were consistent with the pace of the past nine months, which was approximately 325 deposits per week.

We could have taken more deposits. These past three weeks, but we chose not to in order to focus on production and manage build times.

Offering buyers better choices by focusing on those that are most popular and more readily available.

And we continue to work closely with our subcontractors at National suppliers. So we can anticipate supply chain issues and labor delays and make any necessary adjustments.

Turning back to the demand side of the equation the housing market and demand for our homes in particular is being propelled by strong demographics from both the millennial and boomer generations of <unk>.

Stansell imbalance between the tight supply of homes and continued pent up demand the wealth effect of rising existing home equity.

Migration trends and the greater appreciation for home.

We believe these long term tailwind will continue to support demand for our homes well into the future.

For these buyers affordability is less of an issue.

We have also not seen an impact on demand from the recent increase in mortgage rates.

I remind you that our customers are generally better insulated from affordability concerns compared to buyers in the entry level market. Our buyers tend to have higher incomes and they benefited from multiple years of appreciation in their investment portfolios and their existing homes.

They also understand that when they contract with US today, there are interest rate, while not lock until they are much closer to a settlement.

So we don't believe that demand for our homes has been pulled forward by buyers who are focused on beating a rise in rates.

And overall, our customers average less than 70% loan to value and their mortgages.

This speaks to the creditworthiness and healthy balance sheets of our customers.

As I mentioned earlier, we are reaffirming all of our guidance, including a return on beginning equity for fiscal 2022 of approximately 23%.

We also expect to generate substantial cash flow in 2022.

Our highest capital allocation priority continues to be investment in the growth of the business, including through disciplined in capital efficient land buying.

Of the approximately 86500 lots, we owned and controlled at January 31 50.

54% were optioned and 46% were owned.

Compared to 46% optioned one year ago.

Our shift to more option lots is an important part of our capital efficiency strategy and our focus on returns.

This lot position also provides us with all the land we need for our projected community count growth in fiscal year 2022 and beyond.

We continue to expect approximately 10% community count growth by the end of fiscal 'twenty two from the 340 communities. We were operating at the end of fiscal 2021.

Which reduced our outstanding share count by approximately two 5%.

And we paid dividends of approximately $21 million.

Our balance sheet remains strong with ample liquidity strong expected cash flow generation and declining leverage.

These factors along with the positive fundamentals underlying our business contributed to Moody's upgrading us to an investment grade credit rating last month.

With that I'll turn it over to Martin.

Thanks, Doug.

And our first quarter, we delivered 90 129 homes at an average price of approximately $875000 generating homebuilding revenues of $1 six 9 billion.

Which was up 9% in units and 20% in dollars from one year ago.

Settlements came in 71 units below our expectation.

Due to the supply chain disruptions labor shortages and municipal delays that Doug mentioned.

We felt the greatest impact in January the last month of our quarter.

The effects of the spread of omicron, where most acute.

Fortunately omicron pandemic now seems to be waning.

Our first quarter pre tax and net income were $208 million and $151 9 million respectively.

Both up approximately 57% compared to 127, four and nine I'm, sorry, $96 $5 million, respectively. In the first quarter of 2021.

Earnings per share in the first quarter were $1 24 per share diluted up 63% compared to the <unk> 76 per share diluted that we earned one year ago.

The net income and earnings per share growth percentages were approximately triple our revenue growth percentage growth.

Our first quarter adjusted gross margin was 25, 6% compared to 22, 9% in the first quarter of 2021.

The 270 basis point improvement reflects the strong pricing environment over the last year.

It also includes the impact of elevated lumber prices from last spring in this quarters closings.