Q1 2023 Toll Brothers Inc Earnings Call
Speaker 1: St we nine pro.
[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 our conference specialist by pressing the Starkey followed by zero.
After todays presentation, there will be an opportunity to ask questions.
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Companies plan to end the call at 930, 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 and now I'd like to turn the conference over Dulles yearly CEO . Please go ahead.
Thank you Keith 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 material 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 Marlett, Chief Marketing Officer, and Gregg Ziegler senior VP and treasurer.
I am very pleased with the strong first quarter results.
We exceeded the midpoint of our guidance on all key metrics and.
And we have seen a meaningful uptick in demand that started in January and has continued through this past weekend.
And our first quarter, we delivered 1826 homes.
Generated homebuilding revenue of $1 $75 billion up three 7% in dollars compared to the first quarter of fiscal 2022.
Our adjusted gross margin was 27, 5% or 50 basis points better than guidance and 190 basis points better than last year's first quarter.
SG&A expense at 12, 1% of homebuilding revenues was significantly better than both last year's first quarter and our guidance as we are benefiting from cost savings initiatives that we've implemented over the past year.
Moving forward, we will continue to execute on additional cost savings plans to further reduce SG&A expense.
Pre tax income was 253 $8 million and earnings per share was $1.70 diluted of 26% and 37% respectively.
Impaired to last year's first quarter.
First quarter end, our backlog stood at $8 $6 billion and 7733 homes.
Although we've seen orders declined 15% to 60% on a unit basis over the past three quarters.
Backlog is down only 21% in dollars.
Prior to one year ago.
As a result, we can.
<unk> to expect solid results this year and we are reaffirming our full fiscal year 2023 guidance of an adjusted gross margin of 27% and $8 to $9 a diluted earnings per share.
Turning to the sales environment, we are encouraged by what we've seen across our footprint over the past month and a half.
Beginning in the first week of January .
<unk> picked up beyond the normal seasonality that we typically see at the start of the spring selling season and has continued into February .
We've seen demand improve in most markets across the country.
Including Florida Atlanta.
South Carolina Charlotte.
D C Metro, Pennsylvania, New Jersey, Texas.
Colorado and southern California.
Over the past few weeks, we have also seen signs that demand is improving markets that struggled the most in the second half of 2022.
Such as Boise, Phoenix, Reno, Las Vegas, and Austin.
We attribute the increase in demand to improve buyer sentiment.
As inflation appears to be receding and the overall economic outlook seems to be more stable than it was a few months ago.
Over the past decade, the housing market has been driven by 75 million millennials entering their prime home buying years baby boomers, who have been buying homes as they retire and adopt new lifestyles and migration trends that have favored the Sunshine and mountain states.
At the same time the U S has chronically underproduce new homes study. After study has shown that home starts have not kept up with household formations for many years.
And as a result, they are now because there's a deficit of anywhere between three and 6 million homes in this country.
This supply shortage was obvious during the pandemic one buyer urgency served.
Demand spike in prices rapidly increase it.
It was less obvious.
The second half of 2022 when.
When the impact of the sharp and rapid increase in rent and mortgage rates caused many prospective buyers to put their searches on pause.
Now however, with the traditional spring selling season upon us and consumer confidence improving.
Buyers are coming off the sidelines.
The most telling sign that these fundamentals are real and meaningful.
Is the fact that rates didn't have to go back to three 5%.
Or even five 5%.
For buyers to come back out.
In fact, this past week, we had the most deposits we have seen in a month.
Even though rates have moved back up over six 5%.
The improvement in demand is playing well into the strategy, we outlined on our December call.
In the second half of fiscal 'twenty, two with demand inelastic in many markets that is buyers were not all that moved probably price concessions.
And with extended delivery times and elevated building costs, we chose not to chase the market down.
Instead, we focus on delivering our large high margin backlog, while taking a more patient and balanced approach to new sales and waiting for what we believed would be a better spring selling season.
We are now replenishing, our supply of spec homes, and increasing community count into the spring selling season, taking advantage of improving supply chains and cycle times and building costs that are stabilizing.
All while demand appears to be rebounding.
As we execute on this strategy, we continue to make appropriate adjustments to product price and incentives at each of our communities based on a detailed assessment of local market dynamics, including the elasticity of demand the size of each community's backlog and the depth and quality.
Our land holdings in the market.
In our first quarter about two thirds of the 117000 dollar sequential decline in the average sales price of new contracts was attributable to mix.
The remaining one third was due to increased incentives leading to a first quarter average incentive.
Of about 8%.
Today's incentive on the next homes sold is about six 5% historically, our average incentive has been approximately 3% over the past 15 years.
Based on the recent strength in the market, we expect to continue to pull back on incentives in select communities.
With the resale market tight and buyers eager to lock their mortgages at contract and.
Move more quickly into their new homes demand for spec homes has been very strong.
For the past several quarters approximately one half of our orders were for specs, which we have sold at various stages of construction.
Please remember that we define a spec as any unsold home with at least a foundation in the ground.
Considering current market conditions, we are strategically starting more spec homes in select markets.
But most will be sold early enough in the construction cycle. So the buyer will.
Still have the opportunity to personalize their finishes, which is very important to our luxury buyers.
We are also pleased that our cancellations have remained low cans.
Cancellations in the first quarter totaled 244.
From the 312 cancellations, we recorded in the fourth quarter.
As a percentage of backlog cancellations were 3%.
Our long term average of approximately two 3%.
Our low cancellation rates speak to the financial strength of our buyers the sizable deposits they make and how emotionally invested they become as they personalize their new toll homes.
While we are encouraged that buyers are returning to the market, we recognize that the direction of the overall economy mortgage rates and the housing market remains unclear.
In light of this uncertainty we plan to remain prudent as we invest in the growth of our business.
Disciplined in capital efficient land buying.
We have sufficient land in our existing portfolio to support community count growth in both.
Fiscal 'twenty three and 2024.
Which allows us to be highly selective as we assess new land opportunities and take downs under existing options.
At the end of our first quarter, we owned or controlled approximately 71300 lots.
Versus 76000 lots at the end of our 2020 to fourth quarter.
And 86500 lots one year ago.
52% of our 2023 first quarter and lots were owned and 48% were controlled through options excluding.
Excluding the lots in backlog, 54% of our total lots were controlled through options.
We continue to expect to generate substantial cloud cash flow in 2023, and we have ample liquidity under our credit facilities.
We intend to use excess cash to further reduce leverage and return capital to our shareholders.
With that I will turn it over to Marty.
Thanks, Doug.
We are pleased with our first quarter results.
We grew both our top and bottom lines and operated more efficiently compared to last year.
First quarter net income was $191 5 million or $1 70 per share diluted up, 26% and 37%, respectively compared to $151 $9 million and $1 24 per share diluted a year ago.
Our net income and earnings per share were both first quarter Records.
We delivered 826 homes and generated homebuilding revenues of $1 $75 billion.
The average price of homes delivered in the quarter was $958000.
We signed 1400 61 net agreements in the quarter down 50% compared to the first quarter of fiscal year 2022.
However, demand improved each month as the quarter progressed.
In fact, our January 2023, net agreements exceeded both November and December combined.
As Doug mentioned earlier February continues to show strength through this past weekend.
The average price of contracts signed in the quarter was approximately $995000.
This was down approximately 3% year over year and 11% on a sequential basis.
As Doug mentioned two thirds of this sequential decline was simply mix.
Our first quarter adjusted gross margin was 27, 5%.
190 basis points compared to the 25, 6% in the first quarter of 2022.
Gross margin exceeded our guidance due to good cost control and less than expected incentives in our deliveries.
Write offs in our home sales gross margin totaled $8 million.
In the quarter.
Approximately $3 million of this was related to walk away costs on 4100 option lots that we decided not to buy.
And the balance was related to one operating community in the state of Washington.
SG&A.
As a percentage of revenue was 12, 1% in the first quarter compared to 13, 4% in the same quarter one year ago.
Note that our SG&A expense in the first quarter always includes accelerated stock compensation expense. It was $12 million this quarter compared to $10 million last year. This is an annual expense that only hits in the first quarter.
The year over year 130 basis point reduction in SG&A margin reflects leverage from increased revenues as well as benefits from tighter cost controls.
Total SG&A expense declined $15 million in the quarter compared to Q1 of 2022.
With this improved operating efficiency, we are lowering our projected SG&A expense as a percentage of homebuilding revenue.
For the full year by 30 basis points.
We now expect the full year 2023, SG&A margin of 11%.
Joint venture land sales and other income was $16 8 million during the first quarter compared to $29 $9 million in the first quarter of fiscal year 'twenty two.
We exceeded our guidance by approximately $7 million, even after a $13 million impairment to mark down land, we intend to sell to its fair value.
We ended the first quarter with $2 $6 billion of liquidity, including approximately $790 million of cash and $1 $8 billion of availability under our revolving bank credit facility.
Last week, we extended our 'twenty two bank one nine O 5 billion revolving credit facility out five years to February of 2028.
We also extended the maturity of $487 $5 million of our $650 million term loan out to February of 2028.
The remaining 162 $5 million of our term loan.
Sure and part in November of 'twenty five in November of 2006.
Importantly, $400 million of our $650 million term loan has been hedged through November of 2025 with interest rate swaps that are fixed at approximately one 5%.
Our net debt to capital ratio was 27, 5% of first quarter and down from 31, 9% one year ago.
We plan to further reduce our debt by repaying $400 million of senior notes when they come due in April of 2023.
After we repay these notes we will have no significant maturities of our long term debt until fiscal 2026.
Our book value per share at quarter end was $55 98.
And I remind you that we have almost no intangibles on our balance sheet.
In the first quarter of fiscal 2023.
We returned $32 million to shareholders through share repurchases and dividends.
We continue to target $400 million of annual share repurchases.
And we continue to pay a quarterly dividend.
<unk> per share.
Our community count at quarter end was $3 328, compared to our guide of 340.
The variance from our guide was almost entirely due to selling out 11 communities faster than we anticipated.
Our openings generally met our plan.
Our forward guidance is subject to the usual caveat regarding forward looking information.
That being said the 70 733 homes in backlog first quarter and gives us good visibility for the remainder of the year.
We are projecting fiscal 2023 second quarter deliveries of approximately 2015 to 20 150 homes.
With an average delivered price of between $980000 and $1 million.
For fiscal year 2023.
We're maintaining our guidance and project deliveries of between 8000 to 9000 homes with an average price of between 965000 and $985000.
We expect our adjusted gross margin in the second 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 5% in the second quarter for the full year.
This would represent a 20 basis point reduction in interest expense in cost of sales year over year as our leverage continues to decline.
Yeah.
We project second quarter SG&A as a percentage of home sales revenues to be approximately 11, 2%.
And as I mentioned for the full year, we now expect it to be 11.0%.
Other income income from non consolidated unconsolidated entities and land sales gross profit is expected to be approximately breakeven in the second quarter.
$125 million for the full year.
Much of this full year. Other income is projected from second half 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 the sale of these stabilized rental properties is unpredictable due to volatility in the capital markets. Our Occupancies remained strong and we do currently expect to sell our interest in four of these joint ventures by the end of the fiscal year.
We project the second quarter tax rate at approximately 26% and our full year tax rate at 25, 7%.
Our weighted average share count is expected to be approximately 120, I'm, sorry, 112 million shares for the second quarter and 111 million shares for the full 2023 fiscal year <unk>.
This assumes we repurchased a targeted $100 million of common stock for the second quarter and $400 million for the year.
Putting this all together that works out to be between $8 $9 per share for the full year, which would move our book value above $60 at fiscal year end 2023.
Lastly, as Doug mentioned, we expect to continue generating strong cash flow in 2023.
And we remain cautious on new land spend.
But based on the land, we currently own or control, we continue to expect community count to grow by 10% by the end of fiscal year 2023.
This would be off the base of 348 communities that we started the year with.
We also control enough land to grow community count in fiscal year 2020.
Now, let me turn it back to Doug.
Thank you Marty.
Earlier this month Fortune magazine named US the number one world's most admired homebuilding company.
This is the eighth time, we've received this 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 to our customers and for that.
I'm very grateful.
I am so proud of our team.
And of our company.
With that Keith let's open it up to questions.
Yes. Thank you we will now begin the question and answer session.
A reminder, the company is planning to end the call at 930, when the market opens.
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 you're using a speaker phone please pick up your handset before pressing the Hayes.
Your question. Please press Star then two.
This time, we will pause momentarily to assemble the roster.
Yeah.
And the first question comes from Stephen Kim with Evercore ISI.
Thanks, very much guys. Thanks for all the great color here, obviously, it seems like the tone of your demand has stayed strong and so I'm not going to ask about that probably others, well, but it's very encouraging I was curious about you.
Your customer acquisition costs. This environment, we've been living through over the last couple of years, there's been some unusual but as you look forward with a market that potentially is normalizing can you give us a sense for what your customer acquisition costs look like.
Relative to let's say, what it was like pre pandemic I'm thinking things like external broker.
Fees and maybe increased use of the internet to attract incremental customers to give us a sense for where your SG&A margin.
Likely to trend over the next couple of years.
Sure. It's a great question Steven.
Yes.
The money, we spend is 99% digital today, you won't find over others on the T V on the radio or in the.
And the Sunday paper.
And it's become more and more efficient.
We've gotten better and better at how we target clients.
Through through digital means.
We're very proud of our web site, we have an internal web team.
All they do.
And we get lots of compliments from our clients on their ability to navigate on our web site to try to find other homes that they want and so I think we will continue to become more and more efficient.
With the dollar spend when it comes to the digital marketing, which is so important to us. The biggest expense of course is as brokers reorders and we have been.
Our comfort Inn and happy to see that the real winner.
Engagement involvement with the client is coming down.
Back 510 years ago as you know we were running about 60%.
Our sales had a reorder and that number today is down around 40%.
You know you could you could argue a year ago, when we were on allocation.
When we sort of had clients lined up.
That you had more clients that were coming in without the reorder because they were just waiting in line further opportunity, but in today's market for that number to be down around 40%.
We're very encouraged.
And we're hearing from our clients.
With the resale market has been tight.
They are moving faster or exclusively to new homes.
And they're able to go on our websites and learn everything they need to learn where they are confident and comfortable that they can buy on their own without the broker. So the real in our community is important to us we support that community.
We know we need them, but it is a significant expense and it has come down we're going to have to wait a few quarters to see if this is a you know.
<unk>.
Pretty longer term.
Permanent change to the business, but for the last couple of quarters, it's been down about 40% range at a time when you wouldn't think it would be down so for that we are encouraged that I think we're going to get more and more efficient on the <unk> of the SG&A.
Gotcha.
That's helpful.
I wanted to also ask about.
The difference Youre seeing in your let's call. It your App philosophy, our affordable luxury customer versus your more traditional luxury customer.
As it relates to your comments about <unk>.
Incentives.
You had talked about.
Incentives actually running at six 5% today versus 8% in the past quarter, which would imply obviously that things are getting better I wanted to understand is that reduction in the incentive.
Due primarily to the fact that the mortgage rate buy down isn't is not costing you as much just because the prevailing market rate has come down or is that actually due to <unk>.
Actions proactive actions on your part.
To not have to offer a significant incentives and is there a difference between what youre seeing in the incentive trend at the lower not low end, but affordable luxury and versus the traditional luxury end.
Sure So let's start with sales.
The sales cadence between affordable luxury luxury end.
What we call empty nester active adult which is.
Commerce.
For the for the first quarter was the same we were down 50% as we mentioned.
In each of those segments was virtually identical.
So theyre all performing about the same.
When it comes to the <unk>.
Yes.
It is slightly higher.
On the age restricted.
And then it is on the affordable luxury.
And it is quite significantly lower.
On the true luxury our bread and butter so.
Let's just pick a number of 8% to go back to the to the to the <unk>.
First quarter.
Age targeted age restricted ran about eight 5% affordable luxury ran about eight and the luxury ran around four ish in that range.
The luxury client.
Wealthier.
Less impacted by rate.
They it's just a different buyer as we've talked about for many many years and we think we have that advantage.
In a volatile rate market.
With respect to what we're doing with incentives.
Yeah.
The increase in demand in January and now into February .
When we look back on it it was partially driven.
By us increasing some incentives as I mentioned in the prepared comments as we saw demand become more elastic.
We could incentivize a little more and see good results, but we think it is more driven.
By buyer sentiment.
By this seasonality by people coming back out to absorb.
They were able to absorb the higher rate.
And they wanted to buy and when they went out to the market. They realize the resale market is so tight theres no opportunity and they came to us and they started here on our salespeople talk about significant increase in traffic the boss, saying I may be raising.
Or dropping incentives and their became the sense of urgency with the client that Oh boy. It sure sounds like were off the bottom and I don't want to Miss this opportunity, even though yes. The rate is higher it sounds like toll brothers, maybe raising some prices are dropping some incentives and.
And that urgency was created and it's real we aren't dropping incentives we are raising prices.
We're doing it selectively we're doing it surgically, but it's happening throughout the country, which is one of the reasons why I explained in my prepared comments that the today's incentive is less than it was.
Back in December .
And we think that's going to continue.
To go down so that's the market environment, that's the breakdown between our product mix I Hope I helped you.
Thank you.
The next question comes from Michael Rehaut with J P. Morgan.
Thanks, Good morning, everyone.
I know there's.
You know a lot of discussion you just kind of alluded to some things around you know buyer confidence versus interest rates and obviously very interesting that you're saying the strongest sales week and it's been this past and that is obviously after a pretty tumultuous February so far.
I guess the question is yes.
Obviously, sometimes it takes a little bit of time for a move in rates to have its impact.
The marketplace. The MVA purchase App index was down pretty sharply this morning.
So just wanted to get your take as you've seen.
The volatility in rates.
Over the past six months seven months, how you view this most recent move.
And obviously, it's a pretty encouraging data point over this past weekend.
But how do you put into context. This most recent move over the past months.
And does it.
Right, you know kind of create any concerns or.
Anything in terms of traffic over the last few weeks that might make you concerned as you saw a lot of volatility obviously over the last two or three quarters.
Sure so.
Mike if you'd asked me.
Doug if the rate goes from seven and three eights to six in a quarter.
These buyers are going to be rolling back in I honestly would have told you I don't know I don't think I don't know if thats enough.
And they did.
And then when you asked me Doug on a two week period of time when the rates go from six in the quarter to six and three quarters.
What's that going to do I would tell you the truth I'd be worried.
And it's not that I'm not worried youre right its only one week.
We've had rates go up now for two weeks and we've had two good weeks with this last week been.
The better of the two and how the prior week was the Super Bowl week, which isn't historically isn't quite as strong as the fault. The week following the Super Bowl, which is what we are now and so it's too early.
It would be running around here with a lot of high fives I get that but it is very encouraging that buyers came back out at six in a quarter.
It didn't take five and a half it didn't take 499.
Certainly didn't take the old the good old days of a year ago three.
That was really encouraging and it's even more encouraging with a very short timeframe data point that as those rates moved from that six and a quarter to six and three quarters.
They're still out traffic is really good.
Web activity is really good we have we have continued to create urgency and the sales center because we are dropping incentives we are raising prices and the buyers are out, but I'm not going to sit here and tell you that.
Is that were out of the woods, we understand the volatility to rates we understand.
The clouds over the economy, they haven't all cleared yet.
<unk> better.
You know conflation as coming down defense seems to be doing their job, but there.
Mark markets until the last few weeks have performed well.
Our buyers are less impacted by rates for all the reasons, we've been talking about.
Back to the top total used to talk about it 25 years ago.
But we're encouraged by the recent activity that's the best I can tell you.
And it's happening in the six and a half plus.
Rate environment remember that the 10 year is.
<unk> from the 10 year to the 30 years 300 points.
Historically it runs in the high one hundreds.
So if that spread does tighten to more historical norms.
We're.
We're going to be in good shape.
And the buyer doesn't have a mentality of I am locked into this six and a half rate for 30 years.
Yeah.
Refi.
Happens all the time, our buyers are sophisticated most of those homes before almost all of them have refined in their life and one for two to $3 $4000. They can get out of a high rate jump into a low rate and there is also that mentality. They wanted to move on with their lives. They took eight months off they're now sensor.
Seen some urgency.
And they are back and I'm, not saying rates arent important and they don't impact affordability, they do but for our business model. It is not the number one thing.
Right No no no.
Appreciate the comments, Doug and certainly a lot of it.
Makes sense, particularly on the refi side.
I guess secondly, just wanted to make sure I heard right from a prior question.
The decline in average incentives going from eight.
To currently six and a half I just missed it that was.
Driven by actual outright incentive reductions or Boston.
You know mortgage rate buy downs being less expensive.
And that broadly.
Sorry.
Its incentives, it's not it's not a difference in the high that rate.
Okay, well, that's the heart of the question, though was.
Looking at the guidance you took down SG&A due to some.
Progress on cost saves.
The gross margin, though I'm curious if that was more based on the 8% average incentive and it.
You continue to have six 5% or potentially even lower.
Could that ultimately drive some upside in your gross margin guidance for the full year I think you said that the upside in the first quarter was due to.
Less incentives as well.
Yes, Mike it's Marty Thanks for your questions.
We expect our gross margin to be relatively consistent through the balance of the year.
Get to that 27% for the year.
There's estimates and that obviously with respect to what's in the backlog and what may be sold and settled in the interim.
But.
<unk>.
We feel like we've accounted for that.
And takes that we showed in the guidance we've given you.
And part of that Mike There is a budget in place.
As part of that guidance.
That occasional need to work with some of the backlog to get them to close.
We've been very pleased with how low that can rate is and how little we have had to.
Spend with that backlog.
Thank you.
And the next question comes from Rafe <unk> from Bank of America.
Hi, good morning, Thanks for taking my question.
Absolutely.
The net debt to cap is already kind of at the low end of your historical range can you just talk about the right level, you're thinking about going forward and then with the market improving a little bit here and supply chain improvement youre going to generate a lot of cash how do you think about the land spend versus buybacks going forward.
With respect to the.
Net debt to cap I think we're comfortable with the gross level in the high <unk> and a net level in the mid twenties.
Thats consistent with our discussions with the rating agencies. It may fluctuate a little bit around those numbers based on timing of maturities.
With respect to.
New land and.
Debt pay downs and stock repurchases.
As it relates to capital allocation, it's a delicate balance.
We are fortunate based on our financial flexibility to do a little bit of all of those are right now.
The deal flow for land.
Has to hit a much higher underwriting threshold and it has been a little bit.
Yes, there are plenty of deals in our pipeline that meet those thresholds, particularly those that were underwritten.
A number of years ago, and we continue to execute on those.
And we have $400 million of debt that will be paying off in the second.
Second quarter here, while we continue to buy land and buy stock back.
And I would point out that over the last five quarters, we have walked away from 14000 option lots.
Part of our strategy, a few years ago to get more capital efficient.
And have less risk in our land holdings was the option more land.
And as you've seen by the modest walk away costs that we've.
And over those five quarters, it's been pretty tame lifts.
To walk away from those lots because in today's environment. They werent working.
Now that will be replenished at the right price and also with capital efficient strategies.
But.
I think it shows.
It's the pay off of being very capital efficient and selective in how we've been buying land that we can walk away from that number of options.
Painlessly.
Thank you that's helpful and then in the <unk>.
Gross margin guidance can you talk about the underlying assumptions or just what youre seeing in terms of construction cost.
Going forward here.
For example, could you talk about maybe for how it started today, what's the construction cost that you would anticipate versus a similar house three months ago have you started to see that come down and what type of tailwind can we expect from a from a margin perspective there.
Sure.
So let's start supply chain is improving.
Cycle time is improving as contractors have more capacity.
And costs have stabilized.
Except for lumber, which is our biggest material cost has come down significantly.
So there's a very nice tailwind with lumber.
Flattened out in the last month or so six weeks, maybe but before that it was it was coming down pretty rapidly every week.
We do believe as the year progresses that there will be other costs, both labor and materials that will be coming down but right now.
Costs are stabilized.
Except for lumber, which is a nice tailwind so.
Stay tuned for the balance of the year.
We are actively talking to trades.
Normal conversation as the trade that Didnt have capacity and outcomes is hey, I've got an extra framing crew or two that could use some work.
That is the opening.
To get a price concession and that so that is the beginning of the process of seeing cost come down.
Thank you and our next question comes from John Lovallo with UBS.
Hi, guys. Thank you for taking my questions as well.
The first one is on just going back to SG&A down $15 million year over year on a similar revenue base.
And I know you've talked about broker commissions and a few other things Doug, but what are some of the more structural cost saving plans that you guys have been successful with.
Head count.
We're trimming the firm.
We're learning we're learning how to be more efficient with less people.
As we have retirements, where we're replacing from within we're promoting from within.
Our meeting another another person.
We've gone through a very difficult.
Thoughtful.
Round of.
Cuts in the last 30 days.
We have a plan.
For it to become even more efficient with head count and and some other initiatives in the firm, but it's primarily head count.
Got it and maybe if I could just follow up on that is there a risk that you're going to.
Negatively impact growth if things were to pick up here, keeping those head count reductions.
No.
Okay. Okay, Great and then second question is.
Just digging into buyer mentality and psyche here, which is pretty interesting I mean, it looks like there was a slight step up in cash buyers quarter over quarter at least as a percentage and you mentioned some fear of missing out maybe more confidence but in.
In general from what you're hearing do you think folks are just getting more accustomed to higher interest rates.
Yes, so cash one from 20% of our buyers to 'twenty three.
That we expected it's common sense right as rates go up if you can afford it.
To check you write the check.
But I do believe as we thought.
It would take some time for the buyers to adjust.
To a higher rate environment.
And that's exactly what happened it happened back.
And for the mid <unk> to the mid two thousands which was good market, we were at 6% plus mortgage rate environment.
It's been many years since we've been there and now we're back there and it took some time.
I think that's the primary we have great fundamentals I know I went through them.
The migration trends, the demographics with millennials and boomers.
The pent up demand tight resale market three to 6 million to few homes in this country.
Big demand supply and balance its been there for a decade all of that can't be ignored and as the buyer took a pause and absorb the higher rate.
It appears there coming back out.
That's what we've seen over the last seven weeks.
Thank you and our next question comes from Susan Mcclary with Goldman Sachs.
Thank you good morning, everyone.
My first question is around the commentary that you gave of increasing your spec construction just given that people are looking for quick move in homes can you give a bit more detail on.
The number of specs, you have and how youre thinking about adding supply as we go further into the spring.
Sure. So Susan our model right now we have about 2200 specs to answer your question and those are again, we define a spec as foundation or beyond.
And we sell a lot of these with enough time left for the client to pick finishes. So they can get kitchen cabinets and countertops in flooring and some of the other fancy things we show up in our design Studios our business model right now is to be about 30% to 35% spec, which means we will be starting more.
Homes without a buyer.
But we're not holding them up off the market.
But that's the that's the business model at the moment.
It's obviously market dependent community dependent.
Based upon local dynamics, but that is what we're targeting and I'm very comforted when I look at those 200 specs on where they are spread between permit and foundation and framing and finishes and complete because we break all that down its a really good mix. So when the client comes in.
On a house in 60 days, we may very well have it if they wanted to four months and I wanted to take some finishes we may very well have it it's really nicely spread so what we're talking about is the cadence of the starts of the new specs to continue to fill in.
As we sell what we have and we have a very detailed plan in place.
But it should get to about that 30% this year.
Susan.
And Doug hinted at this but it's a very carefully managed process as to how many specs to start based on what you just sold what stage of construction other units are in.
And so we've developed some pretty sophisticated ways looking at this by market by community by stage of construction by pace of sales.
Given the guide and the commentary is it fair to assume that the margin that you're realizing on those box is not materially different than what you're getting on the core product.
So through Covid specs generated a higher margin.
Because people were paying a premium to get into a home quickly.
From the summer through the end of the year.
Specs, we're getting a lower margin than to be built because the market was a lot softer as buyers are on the sideline and now we are trimming the incentives on specs faster than the to be built and so that's a long answer to say, yes today.
The margin between spec and to be built has narrowed and we think if this demand for specs continues we're going to get back to.
Having the spec margin be a bit higher but we're not there yet but it is beginning to trend in that direction.
Thank you and the next question comes from Truman Patterson with Wolfe Research.
Yes.
Hey, good morning, guys. Thanks for taking my questions.
Hum.
First I'm, just hoping to get perhaps a clean.
Number on orders pricing because a couple of quarters ago, I think there was a accounting and mix issue and in the order ESP.
And I understand that incentives have reduced recently.
But sometimes incentives can turn into base price cuts et cetera, So I'm trying to understand.
What core pricing might be down from peak between these price cuts and just all in incentives.
Well.
We tried to address that in our comment that one third of the price.
Difference this quarter versus last quarter was associated with incentives so call that 35% to $40000, which is also based price drops.
It's all one bucket right okay.
Got you Okay. So that's kind of an all in number that you all gave perfect.
And then.
Over the past decade decade, or so we've had some pretty nice geographical expansion from mid Atlantic northeast out west and south etc.
I'm trying to understand.
Even.
The softness in the market the recession that we've just gone through are there any areas that you might find some land opportunities or geographical areas that youre targeting to expand to in the coming years.
We've expanded quite a bit in the last three or four years, we wanted to San Antonio We went at the Tampa We've gone to.
Portland, Oregon, we've gone to Salt Lake City.
We went to Spokane quarter Leen.
And so at the moment Truman there.
There are there are we going to long island, we just opened in long island. Thank you Marty.
So at the moment there is no hot new market that we have our eyes on that were far enough along.
To tell you that we think we're going we're always looking.
I think we're most focused however on getting bigger and more diversified in the existing core markets, where we're operating really well. That's also going to really help leveraging the SG&A because some of these smaller market startups are pretty inefficient for a number of you.
Years before you get the machine going.
And so I think over the next couple of years Youll see less of the secondary tertiary market expansion and more growth in our core markets.
One market you didn't mentioned is Nashville, where we do have expense and we don't have any community right.
Great.
Thank you. Our next question comes from Mike Dahl with RBC capital markets.
Good morning, Thanks for fitting me in.
Yes.
Follow up on on the <unk>.
On the orders environment.
Paul in terms of the color on January being greater than November and December combined so I guess the high level math would be January at.
Around 750.
50 orders compared to $3 50 give or take in.
November December but could you could you put a finer point on just help walk us through the monthly trends and then when you talk about the February improvement if you could give us.
<unk> put a quantification on order.
Hello.
Alright got it right here so.
November was down 72% year over year.
December was down 55% year over year.
January was down 31% year over year.
January sales were the highest pre January 2020.
Since January of 2005 fab.
February is the same as January .
Okay. That's very helpful. Thank you.
And when you say okay.
In unit terms or percentage.
For one.
Yes.
Units.
Yes.
Okay. Thank you my follow up question just on the land side I mean, you guys, obviously tightened up your underwriting quite a bit you've given some high level metrics in terms of a combined margin in <unk>.
There are thresholds in the past.
Where do those stand now have you have you maintain the similar.
Threshold have you shifted that threshold at all up or down based on what you are saying.
We've kept it the same which is.
We used to be 55% combined gross margin IRR to buy ground.
I went to 60, it's now 65% so.
If you're going to have a 25 gross margin youre going to need.
40, IRR, if youre going to have a 30 gross margin we will give you a 35 IRR, it's tight it's hard to find deals.
Deal flow is happening, but we are being very disciplined right now.
And that very high combined underwriting.
And we're using current paces and.
In other years, we might have had a 12 month basis put in front of us.
And we say the <unk>.
12 months don't matter, we need to see what happened over the last four weeks eight weeks kind of pace because that should that's what you should annualize not the full 12 months right now as cycle times come down as some building costs come down.
The team allowed to plug in current conditions for that too, but they have to work off of current market.
Conditions when it comes to sales price and sales pace.
So.
We have some frustrated land teams out there but.
Good they're hustling and we celebrate deals we're doing deals and we make sure everybody knows that the treasury is open.
Just hi.
Yeah.
Thank you and this concludes our question and answer session I would like to turn the conference back over to management for any closing comments.
Hey, Thank you very much thanks, everyone for your interest and support.
We appreciate very much we're always here to answer any individual questions you may have.
And.
What is it 60 internally today, so spring is common.
So much take care.
Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.