Q4 2022 Toll Brothers Inc Earnings Call

December 7, 2022

[music].

Good morning, and welcome to the toll brothers fourth 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'll 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's 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.

Good morning, welcome and thank you all.

All for joining us before I begin I ask you to read our statement on forward looking information in our earnings release last night and on our website.

We 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 material inflation.

Inflation and many other factors beyond our control.

Significantly affect future results.

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 senior VP and treasurer.

One person who is not with US today is Bob <unk>.

Bob passed away in early October at the age of 81 and this is the first time in the 56 years since toll brothers was founded back in 1967.

That we look to a new year without him.

About 500 of US gathered in November to honor, Bob at our headquarters with thousands more watching on zoom.

That was attended by National business and political leaders.

And by the first sub contractors, who works with Bob and then 1960 Seventy's and Eighty's.

Friends from the Philadelphia area, He announced his childhood attended.

Along with thousands of his family members.

It was a fitting tribute to a one of a kind leader and a man who help shape this industry for decades.

Although he is no longer with us.

Toll brothers will always be Bob's company.

We miss him very much.

Turning to the business as hand, as Bob what is SaaS I'm pleased with our performance this year and extremely proud of the entire toll brothers team.

In a year filled with supply chain disruptions labor shortages permitting delays inflation, increasing mortgage rates and many other operational challenges we.

We delivered over 10500 homes the most in our history and grew homebuilding revenues by over 15% to $9 $7 billion.

In the fourth quarter, we exceeded the midpoint of our deliveries and revenue guidance by 365 homes and $368 million, respectively. As we focus on converting our backlog as efficiently as possible.

Our fourth quarter adjusted gross margin of 29%.

310 basis point increase compared to last year and.

And we met our full year guidance of 27, 5%.

Which was a 250 basis point improvement over fiscal 2021.

We reduced SG&A expense as a percentage of revenue by 110 basis points in the fourth quarter and 80 basis points for the full year.

Before taxes, we earned $1 $7 billion in fiscal 2022.

Net income was a record $1 $3 billion or $10 90 per share diluted resulting in a return on beginning equity of 24, 3%.

720 basis point increase over fiscal year 2021.

At fiscal year end, our book value per share stood at $54 79.

And our net debt to capital ratio was 23, 4%.

While we achieved record results in fiscal 2022, we are faced with a challenging market primarily due to the dramatic increase in mortgage rates since March.

Our net signed contracts were down 60% in units and 56% in dollars in the fourth quarter with no discernible change nearly halfway through our first quarter of 'twenty three.

However, both web and foot traffic, we're only down 15% in Q4.

Suggesting that while many potential buyers are on the sidelines. They remain interested and may just be waiting for more clarity on the direction of mortgage rates and the overall economy before they transact.

As we navigate this market we are strategically balancing the delivery of our large high margin backlog in fiscal year 2023.

Which is down just 7% in value from year end 2021.

With the generation of new sales for future deliveries.

We continue to assess and adjust where necessary product offerings price and incentive levels in each of our communities taking into account local market dynamics, including the elasticity of demand.

<unk> of each community's backlog and the depth and quality of our land holdings in the market.

We intend to continue making appropriate adjustments as fiscal year 2023 progresses.

Fortunately because of the size of our backlog and the strength of our projected 23 earnings.

We are able to look beyond the immediate slowdown in demand and focus on positioning the company for success in fiscal year 2024.

Let me take a moment to discuss our projected 23 results.

With a year end backlog of nearly 8100 homes valued at $8 $9 billion and with a midpoint of 8500 homes projected to be delivered.

Fiscal 'twenty three is setting up to be another solid high margin year.

Our backlog is supported by substantial nonrefundable down payments, averaging about $83000 per home.

Through our build to order model, our buyers choose their specific home site structural options and design studio finishes that match their lifestyles and their tastes.

As they customize their homes, they become both financially and emotionally invested.

Additionally, with approximately 20% of our buyers paying all cash and the average LTV for those who obtain a mortgage at 71% of <unk>.

Portability is less of an issue for our buyers who tend to be wealthier with more disposable income.

As a result, our backlog cancellation rate has been the lowest in the industry for decades.

Through good and bad markets.

During the fourth quarter, our cancellation rate as a percentage of backlog was two 9% just slightly above the average of two 3%.

Since 2010.

I want to emphasize that the right metric to focus on for our business is cancellations as a percentage of backlog.

Cancellations as a percentage of current quarter sales is simply not a meaningful as meaningful for build to order company with a substantial backlog.

Question should always be.

What percentage of the homes that have been sold and are being built are canceling.

For us that number has consistently been the lowest in the industry.

Based on the strength of our backlog and including estimates for increased cancellations and Incentivising, we're projecting a fiscal 2023 adjusted gross margin of 27%.

We expect to earn between eight and $9 per share next year.

Which would be our second best year ever.

And for our book value per share to increase to over $60 at fiscal year end 2023.

As I mentioned.

Because of our strong backlog and in an environment where potential buyers in many markets. We're on the sidelines.

We chose not to aggressively chase the market down over the past six months.

Also because of our build to order model.

We did not have to take dramatically lower prices to clear a large inventory of spec homes.

Instead, we have taken a more patient and balanced approach.

In recent quarters, our delivery times for to be built homes has been extended and.

In some cases up to 16 months.

Which was not acceptable to many buyers. Additionally.

Additionally, building costs have been elevated as the spike in inflation over the past two years and.

In that environment, it did not make sense to aggressively dropped prices.

Thankfully quota delivery times have started to come down as we work through our backlog and those trades free up capacity in this slower market.

We are also beginning to see some building costs come down beyond just lumber, which continues to steadily dropped.

The opportunity to build faster and at a lower cost maybe here.

Extended delivery times for our to be built homes have also resulted in the market for our spec homes being stronger than normal.

With elevated spec demand in our cycle times and costs come down we plan to thoughtfully replenish our supply of specs.

Select markets to generate additional deliveries in late 'twenty three and throughout 2024.

Community Count in 'twenty three 'twenty four will also drive results.

As part of our strategy, we are timing community openings to take advantage of better seasonal opportunities. We are positioning for the spring selling season.

There is typically more demand even in tougher times.

We are going back to opening our new communities and perfect White glove condition with decorated model homes, reflecting the traditional way toll has always done it.

That did not occur as often during the market frenzy that followed the pandemic, where we often to opened early without roads or models. During COVID-19 you could sell out of the back of a station wagon with success that is no longer the case.

As an industry, we probably will not have a better sense of the depth and length of this downturn until we are further into the spring selling season in March and April and hopefully after the federal Reserve's work is done.

We recognize that if market conditions do not improve we will need to be more aggressive with price reductions to rebuild our backlog and turn our inventory.

And we'd rather be doing that when the cycle times and building costs are coming down and when more of our backlog has delivered.

Then three or six months ago.

Turning to our land strategy, we continue to access SaaS all transactions, whether they involve new land opportunities or take downs under existing options using our rigorous underwriting standards that are focused on both margins and returns on our existing attractive land portfolio.

Allows us to be highly selective in this process and to walk away from or renegotiate deals that no longer meet our.

Our higher thresholds.

Over the past three quarters, we have walked away from over 9000 of our option lots and many additional deals have been deferred or restructured.

This cost us $12 million and forfeited options and sunk development costs $6 million of which was in the fourth quarter.

At fiscal year end, we owned approximately 37700 lots and controlled about 38300 through options.

This is a 6000 lot or seven 5% reduction in total loss in the fourth quarter alone.

We continue to target an overall mix of 60% option and 40% owned over the longer term.

Excluding the loss allocated to our backlog 50.

56% of total lots.

Were controlled through options.

Our existing land should allow us to grow community count 10% in fiscal year 2023.

We also control enough land for further community count growth in 2024.

As a reminder, we acquired much of the land for our planned fiscal year 'twenty three community openings prior to 2021 before land prices started inflating.

In fiscal 'twenty, two we spent approximately $2 $2 billion on land acquisition and development.

In light of current market conditions, we expect to significantly reduce the spend in 'twenty three.

Which should free up capital for other uses with.

With over $3 billion of liquidity at fiscal year end and substantial operating cash flow projected in fiscal year 2023, we are in a strong position to pay down debt buyback stock and opportunity to mystically acquired control of land that may become more attractive.

<unk> priced all while maintaining a conservative and low leverage balance sheet.

In the fourth quarter, we repurchased $159 million of our common stock since.

Since the beginning of the fiscal year, we have repurchased approximately $543 million or 9% of our outstanding share count at the end of fiscal year 2021.

We have also paid approximately $90 million in dividends and 22, and we retired $410 million of long term debt.

We expect debt reduction and share repurchases to remain an important part of our capital allocation priorities for the foreseeable future.

We are planning to retire $400 million of our $4, 375% bonds in mid January when they become callable at par and.

And we are targeting $100 million of share repurchases per quarter in fiscal year 2023.

With that I'll turn it over to Marty.

Thanks, Doug.

As you mentioned, we are pleased with our fourth quarter and full year results. Our deliveries revenue net income and earnings per share were all quarterly and full year Records.

We noticed a few analysts wrote overnight about our drop in average price per home in new contracts quarter over quarter.

We want to point out that this is not reflective of an actual price drop but rather the elevated average price from Q3 associated with our calculation methodology, which we described in detail last quarter.

Turning to fiscal year, 'twenty twos fourth quarter.

We delivered 3765 homes and generated revenues of $3 6 billion.

Which were up 12, 7% in homes and 21, 4% in dollars from a year ago.

The average price of homes delivered was $951000.

Fourth quarter, net income was $645 million or $5 63 per share diluted compared to $374 3 million and $3 <unk> per share diluted a year ago.

Included in net income was an after tax net benefit of approximately $105 million related to the settlement of a legal claim over a 2015 gas leak in California.

Including an offset for the $10 million, we used to fund our new Foundation.

Adjusting for this net benefit net income was $535 million or $4 71 per share up 43% compared to last year's fourth quarter and still an all time quarterly earnings record.

For the full year, we earned $10 90 per share on a GAAP basis.

Excluding the net benefits associated with the settlement and contribution we earned $10 per share even.

As Doug mentioned, our fourth quarter adjusted gross margin was 29% of 310 basis points compared to 25, 9% in the fourth quarter of 2021.

SG&A as a percentage of revenues was seven 7% in the quarter compared to eight 8% in the same quarter one year ago.

The year over year reduction in SG&A percentage is primarily related to the leverage from increased revenues, but also to tighter cost controls as total SG&A expense only grew $6 million on $630 million in additional revenue excluding the 10.

Contribution we made to our journal bone charitable foundation with proceeds of the legal settlement.

Joint venture land sales and other income was $152 5 million during the fourth quarter.

Which includes an approximately $141 million benefit related to the legal settlement.

That compares to $63 5 million in the fourth quarter of fiscal year 2021.

Excluding the settlement, we exceeded our guidance on this line item by approximately $12 million.

Yes.

Write offs totaled $22 million in the quarter.

Approximately $6 million of this amount was related to walk away and pre development costs on option land that we decided not to pursue.

The remainder was associated with anticipated losses on the pending sales of two wholly owned city living land parcels that we have decided not to build.

Instead, we will sell both are under contract and in due diligence with buyers. We did not have any impairments on any of our traditional homebuilding land or operating communities.

We continued to generate strong cash flow this year.

With $978 million of cash flow from operations.

We ended the fiscal year with over $3 billion of liquidity.

<unk>, one $3 billion of cash and $1 8 billion available under our revolving bank credit facility.

In fiscal year 2022, we invested $2 $2 billion in land acquisition and land development spend dropped in each quarter as the year progressed.

We also returned $633 million to shareholders through share repurchases and dividends.

And we reduced debt by approximately $410 million.

Our net debt to capital ratio was 23, 4% at fiscal year end.

As Doug mentioned, we are planning to further reduce our debt by repaying $400 million of senior notes due in April was callable at par in mid January .

After we repay these notes we will have no significant maturities of our long term debt until fiscal 2026.

During the quarter, we transferred to New York City, New York market City living projects into joint ventures, as part of our capital efficiency initiatives.

<unk> from our former city living segment are now reported in the regions in which the projects are located primarily in the north.

For this and all future reporting periods.

Prior periods reported in our earnings release have been reclassified and additional periods will be reclassified in our upcoming 10-K.

Our forward guidance is subject to the usual caveat regarding forward looking information.

As Doug mentioned, the 8098 homes in backlog at fiscal year end.

As as good visibility into next year.

The contracts in backlog are supported by sizeable non refundable down payments additional promissory notes and as Doug laid out not to be minimized the emotional attachment of our buyers have to their new highly personalized homes.

However, given the unpredictability of the current demand environment, the volatility in mortgage rates inflationary pressures and unclear global and macroeconomic conditions.

I want to stress that our forward looking projections, especially for the full year are subject to greater uncertainty than normal.

With that said, we are projecting fiscal year 2023 first quarter deliveries of approximately 17 250 to 850 homes with an average delivered price of between 950.

$970000.

Consistent with normal seasonal patterns first quarter deliveries are expected to be the low point of the year with deliveries for the full fiscal year weighted to the second half.

For full fiscal year 2023, we're projecting new home deliveries of between 8009 thousand homes with an average price between 965000 and $985000.

We expect our adjusted gross margin in the first quarter of fiscal year 2023, and for the full year to be approximately 27%.

We expect interest and cost of sales to be approximately one 6% in the first quarter and one 5% for the full year.

This would represent a 20 basis point reduction in interest expense and cost of sales year over year as our leverage continues to decline.

We project first quarter SG&A as a percentage of home sales revenues to be approximately 13, 5% versus 13, 4% one year ago.

Included in the first quarter of SG&A is about $12 million of our annual accelerated stock compensation expense that should not recur in the remainder of the year.

It was approximately it was approximately $10 million last year.

For the full year, we project SG&A as a percentage of home sales revenues to be approximately 11, 3% and expect total dollar spend to be flat with 2022.

Other income income from unconsolidated entities and land sales gross profit is expected to be approximately $10 million in the first quarter and $125 million for the full year.

Much of this full year income is projected from sales of our interest in certain stabilized apartment communities developed by toll brothers apartment living in joint venture with various partners.

While the market for rental properties is currently being disrupted by the volatility in rates and economic uncertainty, we do project selling our interest in four of our joint ventures by the end of the fiscal year.

We projected first quarter and full year tax rate of approximately 26%.

Our weighted average share count is expected to be approximately $112 5 million for the first quarter and 110 million shares for the full 2023 years.

This assumes.

We repurchased a targeted $100 million of common stock per quarter.

Based on land, we currently own or control, we expect to grow community count by 10% by the end of fiscal year 2023.

Putting this all together that works out to be between $8 and $9 per share for the full year, which would move our book values to above $60 at fiscal year end 2023.

With that I will turn the call back over to Doug. Thank you Marty.

Okay.

Continue to believe that the long term prospects for the housing market remain positive. Despite the recent market weakness demographic and migration trends continue in our favor in.

In addition, there continues to be a substantial shortage of homes in America as housing starts have not kept up with population growth for at least the past 15 years.

We believe these fundamental drivers will support the housing market well into the future.

Before I open the call to questions I want to again, thank the entire toll brothers team for another great year, we are now facing a tougher environment.

But we've been through this before.

We are executing on the right strategy for our company and I am confident that our experienced teams will once again rise to the challenge and deliver another solid year for toll brothers in fiscal 2023 and beyond.

With that let me open it up for questions.

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

To ask a question you May Press Star then one on your Touchtone phone.

We're using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two as a reminder, the company's planning to end the call at 930, when the market opens please limit yourself to one question and one follow up at this time, we will pause momentarily to assemble our roster.

Our first question comes from Michael Rehaut from Jpmorgan. Please go ahead.

Thanks, Good morning, everyone and thanks for taking my questions.

First I'd love to get your sense of.

Current pricing.

You.

Guided for a 27% gross margin for fiscal 'twenty, three which was better than we were looking for and I think.

Speaks to the strength of the backlog and your ability to maintain some margins in the backlog.

Can you try and.

Contrast that to current pricing and the amounts of discounts that you are currently offering or incentives.

I'm trying.

Trying to think about.

Real time gross margins and pricing in today's backdrop.

Sure Michael.

So our guide is 27.

And I think Marty clearly laid out some caution we have.

In 'twenty three because of the current environment. If you look on paper.

Those 8100 homes in backlog the margins higher than 27.

But we are putting in a cushion on that because we do know.

There will be what we think is some modest elevation of cancellations.

We also have some additional homes that we need to sell to hit the $8500 midpoint of the 23 delivery.

And so we buffered it a bit when we've come in with our guide of 27 because of the current market conditions.

In terms of where we are today the average incentive nationwide on the next homes sold.

Is 8%.

And remember that's not coming off of zero, even in the very good times through Covid, we always had an incentive in the range of 3% to 4% guidance is that about right.

Yes.

2025 $25000.

Great.

That's very helpful.

I guess secondly.

Noted.

The SG&A for fiscal 'twenty three on a flat dollar spend.

Can you kind of walk through.

Puts and takes of that and.

To the extent that.

Revenues would be.

Let's say a somewhat less in.

Less than expected Wheres your ability to flex there and Conversely, Conversely, if you were able to close more homes due to.

Better cycle times.

How should we think about the variable on the upside.

Yes.

It's good to hear from you.

I think.

Jay is a significant focus of ours.

Unfortunately, as an operating entity, we are not immune from the effects of inflation and so we're pretty proud that we're able to keep the number.

Flat year over year now that is on a lower expected revenue basis. So every day, we're working towards.

Initiatives to try and evaluate head count and deal with some of these inflationary pressures.

Our.

Personnel are down around 6% in the last.

Six months, our open positions are down.

Significantly over that same period of time. So we are doing a nice job of holding the line on head count.

We are.

Facing an environment, where we may need to turn the dial up a little bit on marketing spend and outside broker commissions.

No.

We are working diligently to keep SG&A as low as we possibly can obviously more revenue will help and less revenue or hurt in terms of the leverage we've given you our best estimate of what we think it will be for 2023.

Great. Thanks, so much and good luck.

Thanks, Mike.

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

Thanks, very much guys that was all super helpful, particularly the comment about the strategy around the spring selling season being.

A better time.

To get more aggressive on things.

Just I guess a point of clarification, Bob told I remember I've talked about the spring selling season really begins in some places in January .

And.

I guess I wanted to get some clarity on your incentive number there that you gave today about 8% obviously.

I would assume that is including everything.

Whether it be rate locks.

Our rate buy downs or honest. So just if you could clarify is there anything that would be decremental to your gross margin that youre doing in the negotiation with the buyer that's not in that 8%.

And then your order ASP I think you said last quarter like for like with like $1.15 million on average or something like that it was like up 7%. Just wondering if this quarter's reported order ASP do you think is pretty much like for like or if it's a different number.

So I'll answer the first part and then Marty you can jump into the second part.

Steven the 8% is all inclusive.

Whether it would be.

Price drops incentive increases or closing cost assistance or mortgage buy downs or anything that we can think of and that you can think of is included within that 8% right and yes, Bob Bob used to talk about Super Bowl Sunday to Easter.

While the Super Bowls now in February so it's a few weeks before Super Bowl Sunday and a generally extends through late April is the heart of the traditional.

New home selling season, and as I mentioned, even in tougher times, we always expect more homes sold during that period than other times of the year and so.

I think we strategically have made a good decision to work hard on delivering our backlog and protected to incentivize where there is elasticity.

Where the market is responding to incentives.

But to really wait for delivery times to come down for building costs to start coming down and to focus on when it makes the most sense to be a bit more aggressive to go chase deals if we need to do that and that is by each community by each market and in face of course upon the overall bigger.

Macro market conditions on economies and so.

That is the strategy in place I also talked about layering in some additional spec build where appropriate in those markets that have better dynamics and to do that at a time when we can build those specs for a bit less to set up.

Good results for 2020 for Marty.

I think I'm going to default to it as a like for like analysis with.

The number you quoted one 1 million $1 50, but.

But I would caution that like for like is very tough for us because we have differences in geographic mix quarter over quarter.

Differences in.

Our various segments of efflux active adult luxury so it says like for like as we ever again.

Afflux would be affordable luxury yes.

Yeah.

But again when you're Donald Duck.

We're going to get that out and I heard that you have seen a trap and im not going through.

When you sell homes from $304 million, it's just quarter to quarter. There can just be such differences because of geographic mix and price point mix.

Great, Yes, no I appreciate that.

Question I have relates to the impact of mortgage rates and.

Know that you talked about the fact that your buyer is not as sensitive to mortgage rates in terms of affordability.

And yet your buyer is also fairly savvy and mortgage rates right now.

Are we just had it reported at six 4% I mean, it's already down like 70.

Basis points or something like that in a very short period of time. The spreads are still super wide I think it's entirely possible you could see a mortgage rate come down meaningfully in the next six months and so my question is if that happens do you think your buyer would that you would see a improvement a tangible.

Palpable improvement in demand as your buyer Opportunistically take advantage of that or do you think your buyer is basically insensitive to rates, regardless, if they fall or rise.

Buyer definitely.

Relatively insensitive, sorry, I should say, okay, yes.

I don't think our buyer is even relatively insensitive to rates I think they are very smart they're wealthy.

And they are definitely aware of and focused on rates back in August when we were all together.

I spoke of some green shoots because rates have broken below six.

And we were encouraged for a few weeks and of course that went away as rates went up into the low to mid sevens.

And now they are in call it the mid sixes.

And there are some very very modest green shoots of the last few weeks as rates have come down.

But I am not ready to get sucked back into.

Comp.

<unk> I had with all of you in August when we felt better because it's just.

We have Thanksgiving in the middle of this and it's just not enough time to understand if.

That moved from 7% in the quarter to six and a half is enough to start triggering more demand at its.

December is not the time of the year to really comment on that and we got a bit burned by the comments that the industry made in August that didn't play out but longer term.

Yes.

If these rates can breakthrough sex and get into the fives.

I think we're really going to be on to something and I think that applies to whether it would be first time or whether it be the toll brothers' buyer.

Our buyers are definitely wealthier.

They have more equity in their homes. If in fact, they have a home that they're going to be selling.

There's more cash that they put up.

Theres lower leverage on the mortgage.

And so we have a lot of good things going for us, but they are absolutely aware of and sensitive to where rates are moving.

Yeah, that's what I think is well thanks very much Doug just as a clarification, though can they lock the rate when they are buying like that.

Through the end through the close.

They can lock or we can help them lock or they can lock a rate one year out and Thats why delivery times for us coming down is very helpful. Because when we were quoting 14 16 months and some of these communities that were so backed up.

It was very difficult.

Locke.

They can let me explain why I say lock.

Can they can they can cap rate a year apps and it may slow down they can lock a rate.

About 110 days before closing.

Or they can definitively lock in a mortgage rate, but you can buy a cap as far as one year.

It may not be it may not be very attractive from a pricing perspective to the consumer.

But it's available.

Okay.

Do think if a buyer wants to buy a build to order home from toll.

And it's caused us to say, it's a 13 month delivery and they can't do anything with it right now in terms of a lock.

And let's say they have a home to sell I think there may very well be some growing confidence over the next three to six months at.

That rates will be coming down when they can lock call. It seven to eight nine months out.

And as those rates come down that will make it easier for them to sell their existing home and will give them a lower rate on the toll homes and I think some people already feel that way, but I think that should grow as the fed gets closer to being done with their business.

Our next question comes from Alan Ratner from Zelman <unk> Associates. Please go ahead.

Hey, guys. Good morning, Thanks for all that great detail so far.

First question just on the margin guidance.

I certainly appreciate the disclaimer there about.

The unknown and the uncertainty.

I was just hoping to dig in a little bit more to the trajectory you guys have effectively it sounds like in.

It incorporates margins holding pretty flat for the year with the <unk> guide.

<unk> for the full year.

Is there cost relief being assumed in there that might be offsetting higher incentives and pricing pressure on specs as the year unfolds, there mixed driven why.

I'm just trying to think through why margins would hold stable for the year in an environment right now that seems like it's pricing is under pressure.

Yes, we haven't we haven't built in.

Cost reductions.

And the backlog.

We continue to maintain.

Hi, what we call building cost reserves or contingencies in our underwriting and.

And as for Marty sequentially through the year I think the biggest factor.

And what would be perceived to be a declining margin environment thats offsetting that is the lumber pricing inherent in our deliveries as the year goes on lumber fell steadily over the last.

Few quarters, and that'll be reflective and supportive of a more flat margin for 2023.

Greg hinted that number just from the.

Third quarter to the fourth quarter lumber dropped 12% to $14000 per house, just in one quarter there.

Okay. So basically I would think about that incentive number you gave earlier at 8% that's up probably four or 500 basis points from nine months or so ago.

A lot of that is being offset at least a 23 progresses through lower lumber on a per home basis.

If we need to.

Point, the one offsetting factor it's the lumber.

Got it okay.

<unk>.

We are feeling.

Talked about building costs, beginning to come down and cycle times, beginning to come down the front end trades the excavator.

Foundation and concrete the framer window installations siding roofing rough Mechanicals electric plumbing, HBC and everything you do before you insulate a home in.

And button it up with drywall those front end trades are now feeling less action as there are less starts.

They're the ones coming forward now, saying, Hey, we have some capacity in.

And as soon as you hear the capacity worried as a builder you say, great and here's the new price.

So there is negotiation occurring on the front end and that will naturally move through to the back end as those finishing trades also feel less activity.

Got it.

<unk> sense.

Second question.

Just more of a strategic question our thought you kind of maybe alluded to this a little bit Doug.

I think it makes a lot of sense being willing to forego some sales in the near term with the backlog you have and kind of a seasonally slower time of year.

Just given your build to order model, though.

Long are you willing to forego sales are kind of gave up some market share recognizing it seems like you would be setting yourself up for a pretty big air pocket in 'twenty four.

Unless you are willing to meaningfully increase the mix of specs in your business in 'twenty four because if you build cycle, even if even if it improves to the 12 months youre not going to have an opportunity for four.

Lot of sale.

Sales unless you see a demand improvement through the spring of next year. So how long are you willing to kind of gave up that market share in the near term and maybe not be as aggressive on pricing.

Or is the answer that spec ship that you are willing to take higher.

Great question, our head is not in the sand.

Mentioned that we're very focused strategically on 24.

And we will pull the levers necessary.

To have homes ready to be delivered in 'twenty, four which means we will increase spec built.

Starting in the new year.

That will be ready.

In early mid end of 'twenty four.

And it's been interesting the last.

The last couple of quarters, while we were.

We're about 75% build the order of 25% spec.

And the spec business for us.

Has been better it's been it's been higher margin.

Client one of the reasons is they can lock a rate for a quicker delivery.

And they want a little more certainty around the finances associated with buying the homes. So our spec business has done well and we've had a bit better pricing power, which gives us confidence.

We're not going to 50 50.

And.

Maybe we get to 30 70, we'll have to see but it's going to be based on certain markets and how those markets are doing and where the elasticity of demand has been.

So we will continue to keep a close eye on market conditions and adapt accordingly, and if that means not just <unk>.

Building more spec to set up those deliveries, but being a bit more aggressive on incentives.

We're going to do that we're not going to lose market share we have the land to grow this company.

Already mentioned, 10% community count growth coming this year on the land we control we have strategically delayed those openings as I mentioned, so that they hit.

And a better part of the year, which is the spring season and they hit.

Actively building models everywhere and holding off openings were in Covid. We would have opened them. We would have had what we call money shoes opening where it's hard to get on the job site.

To work hard to buy a home, we're going to you're going to just going to be Ritz Carlton White glove everything perfect and we're going to do it at the right time of the year. So there's a lot of moving parts for us, but because of the land holdings and the ability to grow community count and our flexibility on both spec build.

And.

Pricing to market where appropriate.

I am confident in our strategy is in place to have a really good 2004.

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

Thanks, it's actually possible ski.

I appreciate you guys given the order incentives at 8% I was wondering if you could combine that with your traditional market color in where incentives may be higher or lower than that average and then also if you could give us any color on your various business segments in our orders performed in the quarter sure.

Happy to do that.

Interestingly and this is the first time in some time, the east is better than the west and sales.

We've talked about Smile states and everybody moving south and everybody moving west and it is simply because our west.

Prices went up a lot more through COVID-19.

And so you have markets like Boise and Phoenix as two examples at Westin and.

The Nevada markets of Reno, and Vegas, as examples where we add communities where prices were up over 40% through COVID-19 and notwithstanding the long term positive.

Prospects for those markets because of affordability job growth Sunshine lifestyle.

As always happens in these cycles are faster you go up the first you are to come down and so the western markets are softer they have been slower.

We have bigger backlogs out west because we were so hot out there through COVID-19 and so we're being a bit more protective of that backlog in a bit more careful to not chase those markets down lower which is necessary because of the inelasticity. So places like new <unk>.

<unk> Philadelphia Atlanta.

Massachusetts, Michigan, Virginia, and all Florida, right now are our best performers in terms of market segments.

The active adult empty nester.

It's not just 55 and over its the boomers that are moving down that.

That has been our best segment for good reasons, they pay more cash.

There are less impacted by.

Rates because they have a lot more equity in the home they raise the kids in that they've owned for 20 years or 30 years and there are more affluent and they are willing to put either all or a lot more cash up and have lower mortgages.

The softness in the other three segments.

So there are two segments, which will be affordable luxury and.

Move up luxury are running about the same.

And city living.

And the best which is right now in New York only we have two buildings one in Manhattan, and one in Jersey City.

That are.

Crushing it there are alternative channels. So they are all in JV, that's going to come in through the other income line.

But we sold 80 units in Jersey city in six months.

$1 million plus a unit.

We're about to open on the upper West side of Manhattan, with what we think is significant pent up demand. So.

I haven't said that in a long time, but the city living segment is doing very very well, but it's very small.

Then in joint venture.

Okay.

Think over let's call. It the past 12 to 18 months, maybe even a little bit longer you probably have heard maybe a half a dozen new markets can you maybe.

Give us some color on where those stand and are you still committed to those markets given the new environment.

The likelihood you have achieved scale yet.

Sure so.

Sure.

We added three markets South Carolina Charleston.

It'll beach and Greenville through the acquisition of one builder down there it's fantastic.

And in those markets are doing very well, they're part of.

They were part of the Smile States when we talked about Smile states in other parts of the east because we talk about the <unk>. So we're very very happy with that acquisition, we had a very small acquisition in San Antonio.

Have a great presence in Texas, and Texas, We previously been in San Antonio, We actually have land in San Antonio for our own account when we acquired that builder, that's a small market and we're just we're just beginning to integrate there.

It's too early to say, but generally Texas is doing just fine.

What else more recent guys well, that's a new market, so spokane quarter lien, which was not a builder acquisition, but wasn't new market on the eastern side of the state of Washington and of course Quarterlane is in Idaho, but it's right down the road from Spokane that has had a very slow start.

We just entered long island.

And at three $4 million, we're doing really well.

And we opened.

Four months ago operate timing, but we actually have really good sales on nashville's and new market just too early to tell we have a couple of urban.

Buildings, not high rise, but mid rise and we haven't even opened our first suburban building so that'll take a little bit of time Tampa.

<unk>, maybe three years ago terrific sales.

Having some production issues there that we're working through the long term.

I think we're very pleased with being in Tampa and Marty.

<unk> already put it on the board for me and that rounds it out.

Our next question comes from Mike Dahl from RBC capital markets. Please go ahead.

Thanks for putting me in.

Doug just following up on.

Alan's question and Steve earlier around just the strategy of how you evaluate the spring and nothing since the kind of push on Australia.

December I guess.

Any more quantification or whats kind of that trigger point on pace basis, where you just say hey, this isn't working in the spring for the back half of your fiscal year you were at about a 1.2.

So if you'd just flatline at one two.

We've got to drive back towards two or whatever the number is there maybe just a little elaboration on.

Metrics that youre going to be looking for and what is acceptable.

Sure.

Theres not one metric.

We don't have a sales quota we have never run this company topped out topline down, but we're very mindful of the need if we get to that point of driving more sales.

And I'm, sorry for the vague answer but that means that we analyze every community locally.

We start having meetings with with.

With the sales team with the community team, we do a deep dive into the market comps and we start making pricing decisions. Accordingly. Accordingly, we also may have some modest shift in product offering.

You can come in with a smaller house, maybe you come in with the same house, but you pulled some features out of it.

There's a lot of different moves that we make.

<unk> studied weekly, but its studied very very locally so I can't tell you that.

If we sit at one two sales per month and really want to be at two.

We're going to we're going to start making some dramatic companywide moves it's going to continue to be.

Market and community specific.

And we will act accordingly.

As as we roll through the spring season.

Understood. Okay, and then maybe from a more near term standpoint given.

Some of the comments earlier in the quarter and how you say you've got burned.

But it does seem like maybe you ended the quarter closer to one a month. So when you make that comment about no discernible improvement.

That kind of relative to quarter and pace.

You were down 60% for the full quarter and Youre, just saying that bill down about 60%, maybe just give us a little more on the current sales pace and what youre trying to message with that comment.

Yes, so the demand was pretty even between August September and October so our comments on.

November and the first.

At the beginning of December here.

Are related to the entire fourth quarter.

So I wouldn't I wouldn't read more into it than that.

To my earlier comment.

We're going to we're going to continue to react.

To the need to incentivize where appropriate.

Remember.

We haven't given up on ROA and we are very focused on Roe.

And we will continue to focus on ROE not just in terms of.

Any future land buying or in terms of renegotiating existing deals, but also in terms of the need to turn inventory and.

And so building costs coming down cycle time, coming down and the need to.

Turn that inventory is.

Is front and center in our mind.

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

Jason Thank you very much thanks, everyone.

For your interest and support and great questions. We are always here too.

To help.

Clarify any any further questions you may have.

Have a wonderful wonderful holiday season.

<unk>.

We will see in the new year. Thank you.

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

Okay.

Yes.

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Yes.

Okay.

Yes.

Thanks.

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Yes.

Okay.

Yeah.

Okay.

Yes.

[music].

Pet 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.

Good morning, welcome and thank you all for joining us before I begin I ask you to read our statement on forward looking information in our earnings release 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 availability of labor and materials inflation and many other factors beyond our control that could significantly affect future results.

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.

Wendy Marlett, Chief marketing Officer, and Gregg Ziegler senior VP and treasurer.

One person who is not with US today is Bob <unk>.

Bob passed away in early October at the age of 81 and this is the first time in the 56 years since toll brothers was founded back in 1967.

And we look to a new year without him.

About 500 of US gathered in November to honor, Bob at our headquarters with thousands more watching on zoom.

That was attended by National business and political leaders.

By the first sub contractors, who works with Bob and the $19 $60 $70 <unk>.

Friends in the Philadelphia area, he announced since childhood attended.

Along with thousands of his family members.

It was a fitting tribute to a one of a kind leader and a man who help shape this industry for decades.

Although he is no longer with us.

Toll brothers will always be Bob's company.

We miss him very much.

Turning to the business as hand, as Bob would assess I'm pleased with our performance this year and extremely proud of the entire toll brothers team.

In a year filled with supply chain disruptions labor shortages permitting delays inflation, increasing mortgage rates and many other operational challenges we.

We delivered over 10500 homes the most in our history and grew homebuilding revenues by over 15% to $9 $7 billion.

In the fourth quarter, we exceeded the midpoint of our deliveries and revenue guidance by 365 homes and $368 million, respectively. As we focus on converting our backlog as efficiently as possible.

Our fourth quarter adjusted gross margin of 29%.

310 basis point increase compared to last year and.

And we met our full year guidance of 27, 5%.

Which was a 250 basis point improvement over fiscal 2021.

We reduced SG&A expense as a percentage of revenue by 110 basis points in the fourth quarter and 80 basis points for the full year.

Before taxes, we earned $1 $7 billion in fiscal 2022.

Net income was a record $1 $3 billion or $10 90 per share diluted resulting in a return on beginning equity of 24, 3%, a 720 basis point increase over fiscal year 2021.

At fiscal year end, our book value per share stood at $54 79.

And our net debt to capital ratio was 23, 4%.

While we achieved record results in fiscal 2022, we are faced with a challenging market primarily due to the dramatic increase in mortgage rates since March.

Our net signed contracts were down 60% in units and 56% in dollars in the fourth quarter with no discernible change nearly halfway through our first quarter of 'twenty three.

However, both web and foot traffic, we're only down 15% in Q4.

As we navigate this market we are strategically balancing the delivery of our large high margin backlog in fiscal year 2023.

Which is down just 7% in value from year end 2021.

With the generation of new sales for future deliveries.

We continue to assess and adjust where necessary product offerings price and incentive levels in each of our communities taking into account local market dynamics, including the elasticity of demand is.

<unk> of each community's backlog.

And the depth and quality of our land holdings in the market.

We intend to continue making appropriate adjustments as fiscal year 2023 progresses.

Fortunately because of the size of our backlog and the strength of our projected 23 earnings.

We are able to look beyond the immediate slowdown in demand and focus on positioning the company for success in fiscal year 2024.

Let me take a moment to discuss our projected 23 results.

With a year end backlog of nearly 8100 homes valued at $8 $9 billion and with a midpoint of 8500 homes projected to be delivered.

Fiscal 'twenty three is setting up to be another solid high margin year.

Our backlog is supported by substantial nonrefundable down payments, averaging about $83000 per home.

Through our build to order model, our buyers choose their specific homesite structural options and design studio finishes that match their lifestyles and their tastes.

As they customize their homes, they become both financially and emotionally invested.

Additionally, with approximately 20% of our buyers paying all cash and the average LTV for those who obtain a mortgage at 71%.

Affordability is less of an issue for our buyers who tend to be wealthier with more disposable income.

As a result, our backlog cancellation rate has been the lowest in the industry for decades, both through good and bad markets.

During the fourth quarter, our cancellation rate as a percentage of backlog was two 9% just slightly above the average of two 3% since 2010.

I want to emphasize that the right metric to focus on for our business is cancellations as a percentage of backlog.

Cancellations as a percentage of current quarter sales is simply not in meaningful as meaningful for a build to order company with a substantial backlog.

The question should always be what percentage of the homes that have been sold and are being built are canceling.

For us that number has consistently been the lowest in the industry.

Based on the strength of our backlog and including estimates for increased cancellations and Incentivising, we're projecting a fiscal 2023 adjusted gross margin of 27%.

We expect to earn between eight and $9 per share next year, which will be our second best year ever.

And for our book value per share to increase to over $60 at fiscal year end 2023.

As I mentioned.

Because of our strong backlog and in an environment, where potential buyers in many markets. We're on the sidelines, we chose not to aggressively chase the market down over the past six months.

Also because of our build to order model.

We did not have to take dramatically lower prices to clear a large inventory of spec homes.

Instead, we have taken a more patient and balanced approach.

In recent quarters, our delivery times for to be built homes has been extended and.

In some cases up to 16 months.

Which was not acceptable to many buyers. Additionally.

Additionally building costs have been elevated.

The spike in inflation over the past two years and.

In that environment, it did not make sense to aggressively dropped prices.

Thankfully quota delivery times have started to come down as we work through our backlog and as trades free up capacity in this slower market.

We are also beginning to see some building costs come down beyond just lumber, which continues to steadily drop.

The opportunity to build faster and at a lower cost maybe here.

Extended delivery times for our to be built homes have also resulted in the market for our spec homes being stronger than normal.

With elevated spec demand as cycle times and costs come down we plan to thoughtfully replenish our supply of specs in select markets to generate additional deliveries in late 'twenty three and throughout 2024.

Community Count in 'twenty three 'twenty four will also drive results as.

As part of our strategy, we are timing community openings to take advantage of better seasonal opportunities. We are positioning for the spring selling season, where there is typically more demand even in tougher times.

We are going back to opening our new communities and perfect White glove condition with decorated model homes, reflecting the traditional way toll has always done it.

That did not occur as often during the market frenzy that followed a pandemic, where we often to opened early without roads or models. During COVID-19 you could sell out of the back of a station wagon with success that is no longer the case.

As an industry, we probably will not have a better sense of the depth and length of this downturn until we're further into the spring selling season in March and April and hopefully after the federal Reserve's work is done.

We recognize that if market conditions do not improve we will need to be more aggressive with price reductions to rebuild our backlog and turn our inventory.

And we'd rather be doing that one cycle times and building costs are coming down.

And when more of our backlog has delivered.

And then three or six months ago.

Turning to our land strategy, we continue to accept SaaS all transactions.

They involve new land opportunities or take downs under existing options.

Using our rigorous underwriting standards that are focused on both margins and returns are existing attractive land portfolio allows us to be highly selective in this process and to walk away from or renegotiate deals that no longer meet.

Our higher thresholds.

Over the past three quarters, we have walked away from over 9000 of our option lots and many additional deals have been deferred or restructured.

This cost us $12 million and forfeited options and sunk development costs.

6 million of which was in the fourth quarter.

At fiscal year end, we owned approximately 37700 lots and controlled about 38300 through options.

This is a 6000 lot or seven 5% reduction in total lots in the fourth quarter alone.

We continue to target an overall mix of 60% optioned and 40% owned over the longer term.

Excluding the loss allocated to our backlog 50.

56% of total lots.

Were controlled through options.

Our existing land should allow us to grow community count 10% in fiscal year 2023.

We also control enough land for further community count growth in 2024.

As a reminder, we acquired much of the land for our planned fiscal year 'twenty three community openings prior to 2021 before land prices started inflating.

In fiscal 'twenty, two we spent approximately $2 $2 billion on land acquisition and development.

In light of current market conditions, we expect to significantly reduce the spend in 'twenty three.

Which should free up capital for other uses.

With over $3 billion of liquidity at fiscal year end and substantial operating cash flow projected in fiscal year 2023, we are in a strong position to pay down debt buyback stock and opportune net <unk> acquired control of land that may become more attractive.

<unk> priced all while maintaining a conservative and low leverage balance sheet.

In the fourth quarter, we repurchased $159 million of our common stock since.

Since the beginning of the fiscal year, we have repurchased approximately $543 million or 9% of our outstanding share count at the end of fiscal year 2021.

We have also paid approximately $90 million in dividends and 22, and we retired $410 million of long term debt.

We expect debt reduction and share repurchases to remain an important part of our capital allocation priorities for the foreseeable future.

We are planning to retire $400 million of our $4, 375% bonds in mid January when they become callable at par and.

And we are targeting $100 million of share repurchases per quarter in fiscal year 2023.

With that I'll turn it over to Marty.

Thanks, Doug.

As you mentioned, we are pleased with our fourth quarter and full year results. Our deliveries revenue net income and earnings per share were all quarterly and full year Records.

We noticed a few analysts wrote overnight about our drop in average price per home in new contracts quarter over quarter.

Turning to fiscal year, 'twenty twos fourth quarter.

We delivered 3765 homes and generated revenues of $3 $6 billion.

Which were up 12, 7% in homes and 21, 4% in dollars from a year ago.

The average price of homes delivered was $951000.

Fourth quarter, net income was $645 million or $5 63 per share diluted compared to $374 3 million and $3 <unk> per share diluted a year ago.

Included in net income was an after tax net benefit of approximately $105 million related to the settlement of a legal claim over a 2015 gas leak in California.

Including an offset for the $10 million, we used to fund our new Foundation.

Adjusting for this net benefit net income was $535 million or $4 71 per share up 43% compared to last year's fourth quarter and still an all time quarterly earnings record.

For the full year, we earned $10 90 per share on a GAAP basis.

Excluding the net benefits associated with the settlement and contribution we earned $10 per share even.

As Doug mentioned, our fourth quarter adjusted gross margin was 29% up 310 basis points compared to 25, 9% in the fourth quarter of 2021.

SG&A as a percentage of revenues was seven 7% in the quarter compared to eight 8% in the same quarter one year ago.

Contribution we made to our charitable charitable foundation with proceeds of the legal settlement.

Joint venture land sales and other income was $152 5 million during the fourth quarter.

This includes an approximately $141 million benefit related to the legal settlement.

That compares to $63 $5 million in the fourth quarter of fiscal year 2021.

Excluding the settlement, we exceeded our guidance on this line item by approximately $12 million.

Yes.

Write offs totaled $22 million in the quarter.

Approximately $6 million of this amount was related to walk away and pre development costs on option plan that we decided not to pursue.

The remainder was associated with anticipated losses on the pending sales of two wholly owned city living land parcels that we have decided not to build.

Instead, we will sell.

Both are under contract and in due diligence with buyers. We did not have any impairments on any of our traditional homebuilding land or operating communities.

We continued to generate strong cash flow this year.

With $978 million of cash flow from operations.

We ended the fiscal year with over $3 billion of liquidity.

<unk>, one $3 billion of cash and $1 8 billion.

Available under our revolving bank credit facility.

In fiscal year 2022, we invested $2 $2 billion in land acquisition and land development and our spend dropped in each quarter as the year progressed.

We also returned 633 billion to shareholders through share repurchases and dividends.

And we reduced debt by approximately $410 million.

Our net debt to capital ratio was 23, 4% at fiscal year end.

As Doug mentioned, we are planning to further reduce our debt by repaying $400 million of senior notes due in April .

<unk> at par in mid January .

After we repay these notes we will have no significant maturities of our long term debt until fiscal 2026.

During the quarter, we transferred to New York City, New York market City living projects into joint ventures, as part of our capital efficiency initiatives.

Results from our former city living segment are now reported in the regions in which the projects are located primarily in the north for this and all future reporting periods.

Prior periods reported in our earnings release have been reclassified and additional periods will be reclassified in our upcoming 10-K.

Our forward guidance is subject to the usual caveat.

Guarding forward looking information.

As Doug mentioned, the 8098 homes in backlog at fiscal year end gives us good visibility into next year.

New contracts in backlog are supported by sizeable non refundable down payments additional promissory notes and as Doug laid out not to be minimized the emotional attachment of our buyers have to their new highly personalized homes.

However, given the unpredictability of the current demand environment.

Volatility in mortgage rates inflationary pressures and unclear global and macroeconomic conditions.

Want to stress that our forward looking projections, especially for the full year are subject to greater uncertainty than normal.

With that said we are projected fiscal year 2023 first quarter deliveries of approximately 17 150 to 850 homes with an average delivered price of between 950000 and $970000.