Q3 2023 Toll Brothers Inc Earnings Call

better backlog conversion because of reduced cycle times on the to-be-builts as we are in a more stable supply chain environment. We've addressed some reductions in skews and we're getting better at building the to-be-builts.

But the big piece is going to come from more specs. Specs this quarter were 28% of deliveries. We're targeting 40% of sales. We achieved that this quarter. And so there'll be 40% of deliveries and they'll have a lot less time in backlog than a Tubi bill.

The next question comes from Michael Rios with JP Morgan. Please go ahead. Okay.

Hi guys, thanks for taking my questions. This is Andrew Ozzion for Mike.

I just wanted to get a sense of, you know, kind of regionally, market by market, where you're seeing that ability to push price a little bit better and where it's a little bit more stubborn. Thanks.

Sure, so really pleased nationwide.

And by the way, the $20,000 price increase we saw in Q3, I know the question will come up, it's about a $10,000 drop in incentive.

plus a $10,000 increase in the base price or the sales sheet price.

The incentive was about...

$55,000 in Q2 when it went to $45,000 in Q3, and then the price went up by 10. That's on average. And it's not everywhere, some areas or more. We still have some locations where we've gone to, we're still doing final and best sealed bid!

on select communities or select inventory. The best markets, and we mentioned the mountain and the south had done the best this past quarter. Denver. Learn more at Denver upl seller service providerARDS.TG. subsidies.com

Very strong. Boise, Idaho is back in a big way after taking a pause. Southern California, very strong. Atlanta, very strong.

New Jersey and Pennsylvania.

Very strong. And then all of Florida.

A bit softer where we're still feeling a little bit of pain. Phoenix hasn't come back yet. It's better but it hasn't come back as we look forward to it coming back at some point but not yet.

And then on that list, I'd also throw in Portland, Oregon, which is a very small market for us, but that has been a bit softer.

Thank you for that granularity. I appreciate it. I guess I wanted to ask about the sustainability. Obviously, this was a very nice SG&AB. Maybe if you can bucket out what was driving then and kind of the sustainability going forward.

Sure, so we talked now for over a year about a commitment and a drive.

to make Toll Brothers more efficient.

And we're not done.

But our headcount is down 11%.

and our business has grown.

and there's also lower inside and outside commissions being paid on the sale side, but it is primarily overhead and we will continue to look for opportunities.

I'm super proud of the steps we've taken. It will continue. And those are the main drivers of it.

The next question comes from Steven Kim with Evercore ISI. Please go ahead. Yeah, thanks very much guys. Obviously great results.

Thanks for all your comments so far.

I do think it might be worth sort of thinking about what might happen if you were to see a slowdown in demand. I appreciated that in August what you shared with us certainly suggests you haven't seen that much.

Speaker 1: Good morning and welcome to the Toll Brothers third quarter fiscal year 2023 conference call.

of a negative impact from higher rates, but you know, I think it's also fair to say we don't really know what's going to happen with rates in the next few months. And so hypothetically, if you did see you know, buyer demand slow, do you look back upon the strategy that you pursued last year where you let orders slow significantly rather than get aggressive?

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the line on price? Yes, I'm very proud of this management team's very thoughtful decisions around our strategy to not chase the bottom. I think we I think we ramped up our spec strategy at the right time when building costs were beginning to come down supply chain was easing and so yes we are not a you know we are a margin focused builder with with with an understanding of course that capital efficiency ROE finally on the right way is critically important to long-term success but it doesn't mean you know we're gonna have our head in the sand and and not you know have more incentives in a soft market than we had in a good market I mean that's part of the conversation we've had around this modest drop in margin next and we will continue with that strategy if your hypothetical was to prove true. Excellent thanks so much for that it was very clear.

I would now like to turn the conference over to Douglas Yearly, CEO . Please go ahead.

Thank you, Betsy.

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 of last night and on our website.

I caution you that many statements on this call are forward-looking based on assumptions about the economy, world events, housing and financial markets, interest rates, the 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 Parahouse, President and Chief Operating Officer.

Fred Cooper, Senior VP of Finance and Investor Relations, Wendy Marlette, Chief Marketing Officer, and Greg Ziegler, Senior VP and Treasurer. We had another terrific quarter and are very pleased with our fiscal third quarter results. We beat our guidance for home sales revenues, adjusted gross margin, SG&A margin, and earnings. Our quarter-end backlog of 7,295 homes and $7.9 billion is strong and our cancellations remain very low. The market for new homes is solid and we are well positioned with the right strategy in place to take advantage of it. As a result, we are raising our full-year guidance for all of our core home building metrics, including deliveries, adjusted gross margin, and SG&A margin. We now project earnings of between $11.50 and $12 per diluted share in fiscal 2023 and a return on beginning equity of approximately 22%.

And then taking it a step further, can we talk a little bit more about capital allocation, again, under this hypothetical scenario, which hopefully doesn't actually manifest. If we do enter a softer demand patch, you know, you've been pretty good with, you know, capital allocation in terms of, you know, dividends and buybacks and so forth. Would you likely, though, shift even more capital to buybacks, as opposed to investing in land, particularly since you have a lot more cash actually than you did last year. And.

More broadly, with emerging long-only interest in the space, do you feel maybe the time is right to pursue a more asset-like strategy that might bring your year supply of owned land down to like two years or less as we think about the longer-term positioning of the company's strategy?

In the quarter, we delivered 2,524 homes at an average price of $1,006,000, leading to record third-quarter home sales revenues of $2.7 billion. Adjusted gross margin was 29.3%, or 140 basis points above last year's third quarter, and our SG&E expense was 8.6%,

Yes. Our next step maturity, as Marty said, is November of 2025, which is fiscal 26.

We've been generating more than $1 billion of free cash flow.

for the last several years, three or four years.

of home sales revenues 170 basis points better than last year.

last several years, three or four years.

We have dropped our lot count by 15%.

Our margins continue to benefit from cost controls and greater leverage from higher revenues. Over the course of future events, we've made sure that our budget spends more on silly

by 15%.

still being able with the land we control to grow community count last year, this year, next year, and beyond.

with a significant beat on our top line and improved margin performance.

we delivered earnings per share of $3.73.

Our land teams are very good at structuring land deals to be more capital efficient. We're doing joint ventures. We're relying upon land bankers. We're getting purchase money mortgages from land sellers. We're buying improved lots just in time.

A third quarter record.

We signed 2245 net contracts.

for 2.2 billion dollars in our third quarter, up 77% in units.

Can we get it down to two years old?

and 30% in dollars compared to last year's third quarter when mortgage rates were much lower in the 5 to 6% range.

That's all I'll say. We're moving in the direction of having less owned land.

on a per community basis.

We sold at a pace of 2.2 homes per month compared to 1.3 last year.

But I'm not going to I'm not going to agree that you know two years is possible only because our business model where we buy land is a bit different. Our land is very special. It's very unique and not every deal lines up with somebody there to feed you finished lots.

and 2.3 last quarter.

Demand was stronger than normal in our third quarter compared to the second.

with contracts down only 4% sequentially

versus the long-term average of down 15%.

At the corner of Maine and Maine in Greenwich, Connecticut, Princeton, New Jersey Irvine, California Radner Pennsylvania, take it home But we are we are moving in that direction and you will continue to see that effort

in Greenwich, Connecticut, Princeton, New Jersey, Irvine, California. Radner, Pennsylvania. Radner, Pennsylvania. Take it home. But we are moving in that direction and you will continue to see that effort as we go forward.

Remember...

The second quarter is historically stronger than the third.

since it is in the heart of the spring selling season.

So running almost flat, Q3 to Q2.

Q3 to Q2 is very encouraging.

particularly with rates higher in Q3 than Q2.

The next question comes from Joe Allersmeyer with Deutsche Bank. Please go ahead. Hey, good morning, everybody. Congrats on the results.

The next question comes from Joe Allersmeyer with Deutsche Bank. Please go ahead. Hey, good morning, everybody. Congrats on the results. Thanks, Joe. Thanks, Joe.

Demand was also solid across both geography and product lines in our third quarter, and we raised price by an average of $20,000.

I wanted to dig in on that point you made earlier about the higher down payments, lower loan to values. If you could maybe just hit on the psychology of this, whether you feel like your buyers are different in this regard, meaning again for those three out of four that are taking a mortgage.

We saw particular strength in the Mountain and South regions where we tend to have lower average prices.

Due to this shift in mix and notwithstanding the price increase,

Our average sales price was flat compared to the second quarter.

In terms of cadence, we saw a relatively steady number of deposits and contracts each month of the third quarter.

Actually June was our strongest month.

when normally July is strongest.

Often that is influenced by a sales event, and this year we ran a national sales event in June , rather than July .

As we start our fourth quarter, demand remains solid.

August deposits are usually down 25 to 30 percent.

versus July based on long-term historical trends.

as summer winds down and kids return to school.

So far in August ,

Deposits are only down 11%.

and both physical and web traffic is up slightly compared to July .

While it is only three weeks,

This is encouraging considering the increase in mortgage rates.

that has occurred during this period.

We attribute the solid demand for new homes, at least in part, to the

to the well publicized shortage of existing homes for sale.

Existing homeowners are clearly reluctant to give up their low-rate mortgages.

And while rising rates remain a challenge for the overall industry,

And while rising rates remain a challenge for the overall industry, they further cement the lock-in effect.

that has kept resale inventory at historically low levels.

This has become a tailwind for home builders and especially the larger, well-capitalized builders who build at lower costs.

and are better positioned to take advantage of spec building and buying down mortgage rates.

The supply-demand imbalance created by low resale inventory compounds the impact of the persistent underbuilding of homes.

over the past 15 years.

even before resale inventory dropped.

There was a structural shortage.

of anywhere between three and six million homes.

3 and 6 million homes in this country.

In addition, demographic and migration trends continue to provide long-term support for the industry with Millennials forming families and buying their first home later in life.

when they have higher incomes and accumulated wealth.

AB boomers, who are either retiring or planning for it, are also moving as they adjust to their new lifestyles.

There also appears to be an increase in generational wealth transfer.

with parents helping their kids buy homes.

All of these factors combined have kept demand for new homes solid.

in the face of higher rates.

and we are benefiting.

Our strategy of increasing our supply of speck homes

which we implemented several quarters ago, has helped us meet demand while also helping to improve our cycle times.

Our spec homes represented approximately 40% of our orders in the third quarter.

and we expect that to continue in the near term. Specs were 28% of deliveries in the third quarter.

We define a spec as any home without a buyer that has a foundation poured.

We sell our specs at various stages of construction with a preference to sell before we finish the home as many of our buyers want to personalize their homes.

In this way, our buyers are able to select their fixtures, appliances,

flooring, and other finishing options.

while we benefit from a faster and more efficient construction schedule.

At third quarter end, our backlog stood at $7.9 billion.

and 7,295 homes.

our cancellation rate.

as a percentage of backlog was 3.2% in the third quarter, down from 3.9% in the second quarter.

Our industry low cancellation rate is due to significant up-front down payments our buyers make.

as well as the emotional attachment they form as they personalize their homes with us.

Our buyers also tend to be more affluent.

In the third quarter, 25% of our buyers paid all cash, up from 23% in the second quarter, and our long-term average of 20%.

Hires who do take a mortgage make higher down payments.

with an average LTV of 68% in this past quarter.

We are also seeing modest improvements in our cycle times as supply chains and labor constraints continue to ease.

and as we increase production of spec homes.

We expect cycle times to continue to improve as we move forward.

Turning to land, at the end of our fiscal third quarter, we owned or controlled 70,200 lots, half of which were controlled and the other half owned. Excluding the 7,295 lots committed to homebuyers in our backlog, our controlled land represents 56% of total lots. Our lot count is down nearly 15% year over year, which reflects our selective approach.

to buying land and our focus on ROE and capital efficiency. Still, this land position provides us with sufficient land needed for growth in fiscal year 2024 and beyond.

and allows us to continue being selective and disciplined in our approach to buying land.

Since the start of the third quarter.

We re-furchased $163 million of our common stock.

We have also paid $69 million in dividends year-to-date. We expect buybacks and dividends to remain an important part of our capital allocation priorities well into the future. As a reminder, we have planned for $400 million of share repurchases in Fiscal 2023. When we buy back an additional $144 million at the current price in the fourth quarter, which would get us to the $400 million for the year, we will have bought back about 5%.

of our diluted share count at the beginning of the year. With that, I'll turn it over to Marty. Thanks, Doug. It was a great quarter.

We grew earnings per share by 59% and net income by 52% over last year.

Homebuilding revenue of $2.7 billion was a third quarter record.

increased 19% compared to one year ago.

With the health performance in the third quarter, we are raising our full year deliveries guidance. We now expect to deliver between 9,500 and 9,600 homes, an increase of approximately 200 homes at the midpoint of our previous guidance. We are also increasing our guidance for full year average delivered price to between $1 million and $5,000 and $1 million and $15,000.

This translates to a home building revenue projection of approximately $9.65 billion at the midpoint for the full year. We signed 2245 net contracts in the third quarter for $2.2 billion, up 77% in dollars by 2011.

and 30% in units over last year. The average price of contracts signed in the quarter was approximately $964,000 which was down 1.1% compared to our second quarter average price of $975,000.

As Doug noted, we actually raised price by an average of $20,000 in the third quarter through base price increases and reduced incentives.

which was offset by changes in mix. Turning back to the P&L.

Pre-tax income was $553 million compared to $366 million in the third quarter of fiscal 2022. Net income was $414.8 million or $3.73 per share diluted.

compared to $273.5 million and $2.35 per share diluted one year ago. Our third quarter adjusted gross margin was 29.3% compared to 27.9% in the third quarter of 2022, and 160 basis points better than projected.

The improvement was due primarily to better cost control and fixed cost leverage on higher than expected home sales revenues.

We are raising our full year adjusted gross margin guidance from 27.8% to 28.5%.

This 28.5% is also what we expect in our fourth quarter.

Note that our fourth quarter gross margin guidance includes the impact of homes that we sold a year ago in a softer sales environment.

SG&A as a percentage of revenue was 8.6% in the third quarter, compared to 10.3% in the third quarter of last year. This is 170 basis points better than projected.

In dollar terms, our SG&A expense was $4 million lower this quarter.

compared to the third quarter of fiscal year 22, despite over $400 million of additional home sales revenue.

the impact of inflation.

As we pointed out before, we've been very focused on becoming more efficient, and we're now seeing the benefits flow through our results.

We are projecting full year sGNA costs.

to be approximately 9.4% of home sales revenues, which represents a 60 basis point improvement from our prior guidance.

For the fourth quarter of fiscal year 2023, we expect SG&A to be approximately 8.8% of home sales revenue.

Third quarter JV, land sales and other income was $39.4 million in the quarter or $14.4 million above our guidance.

We now expect our full year joint venture land sales and other income to be approximately $105 million.

Down from the $125 million previously projected. This is due primarily to a challenge market for apartment building asset sales. Our new guidance assumes we close the sale of three stabilized apartment communities that we expect to sell in this fourth quarter.

Our tax rate in the third quarter was 25%, 100 basis points better than our guidance.

We expect our fourth quarter tax rate to be 26%, which would bring the full year rate to approximately 25.4%.

We expect interest in cost of sales to be approximately 1.5% in the fourth quarter and for the full year as we continue to benefit from our reduced leverage.

We expect community count to be approximately 375 by fiscal year end, with continued growth in fiscal year 2024.

Our weighted average share count is expected to be approximately $111 million for the full year and $109.5 million for the fourth quarter.

We reiterate our guidance for approximately $400 million of share repurchases here, implying approximately $150 million of buybacks in the fourth quarter.

Putting this all together, we expect to earn between $11.50

and $12 per share in fiscal year 2023.

We expect to achieve a full year return on beginning equity of approximately 22%.

We expect to bring our book value to approximately $65 per share at year end.

This would be the second year in a row we earned well over $1 billion. And this is in a period when mortgage rates doubled from slightly over 3% in November of 2021 to their current level around 7.5%.

In addition, since 2020, we have generated an average of $1.1 billion of operating cash flow per year.

and we expect 2023 to also exceed $1 billion.

Turning to the balance sheet, we finished the quarter with a net to capital ratio of 20.5%.

$1 billion in cash and cash equivalents and $1.8 billion available under our $1.9 billion revolving bank credit facility.

providing us with ample flexibility to both grow our business and return capital to stockholders.

We are now rated investment grade by all three major credit rating agencies. Now let me turn it back to Doug. Thanks, Marty. Before I open it up for questions, I'd like to recognize the hard work and dedication of all of our great Toll Brothers employees. It is your passion for our business and commitment to our customers that will ensure our continued success. Betsy, let's open it up for questions.

We will now begin the question and answer session. As a reminder, the company is planning to end the call at 9.30 when the market opens.

During the Q&A, please limit yourself to one question and one follow-up.

To ask a question, you may press star then 1 on your touch tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys.

To withdraw your question, please press star then 2. At this time we will pause momentarily to assemble our roster.

The first question today comes from Raft Jadrosich of Bank of America. Please go ahead. Don't worry.

Hi, good morning. Thanks for taking my question. More than two more minutes.

Doug, I wanted to follow up on a comment you made earlier on the gross margin. You're saying the fourth quarter outlook for 28.5% includes the impact of homes that were sold last year in a softer sales environment. How do we, you have more visibility than other builders on the gross margin outlook.

How do we think about how that goes going forward, just given that we saw at the beginning of the year the sales environment definitely improved?

how that goes going forward, just given that we saw at the beginning of the year the sales environment had definitely improved.

Sure, so we'll get full guidance in December as we always do for 2024, and so we're not going to get ahead of ourselves right now. Marty's comment and our guidance, which is about 80 basis points lower than the 29.3 gross margin we achieved in Q3 for a 28.5 and 28.5.

in Q4 was just a reminder that if you go back 12 to 15 months

They are using to knowingly pull forward that cash outlay and just reduce their overall debt service.

Joe for sure and to put it in probably I know I've said, it but I'll remind everybody long term, 20% of our clients were all cash this quarter was 25%.

And there's a good reason for it I have the money I'm wealthy.

And I don't love, a seven 5% rate.

More of my own money to work in animals and less of the banks.

Money to work our LTV has gone from 70% is for those that do get a mortgage to 68.

Same reason.

I'm going to put.

A little bit more down our buyers are clearly wealthier they have equity in their homes remember the resale market is very interesting, but good solid hull used homes.

Sorry, we liked that term as new homebuilders.

They sell and Theyre selling quickly and they are selling in many cases above asking price.

What is sitting on the market. It is the old tired inventory, which actually makes it even better for us because not only is the resale market really tight but the quality of what's sitting on the resale market.

As lousy.

We hope our buyers have some of the better homes that are moving faster.

And therefore, they may be getting a bit more equity out of their home than they had thought so they're wealthier, they're getting a bit more equity out of the existing home and they want to move.

I talked about it on the last call.

Buying a house for people Besides Marty Connor, our CFO is not as a direct financial decision. It's a family decision its emotional it's moving all of your life, it's getting the kids in the better school, it's moving down as an empty nester, it's buying a second home.

And all of that wins at trunks.

It trumps the strained financial calculation.

On a back of a napkin and where do they go they may start on a resale market they cant find anything.

We're really proud of what we do we're really good at what we do we have groupies people want and aspire to get into the toll brothers House, we sell 10000, a year hope to sell 12000, and then 14 than 16, but in the scheme of the million plus houses new homes.

That are sold in this country in a year, where a small fraction of it and there are plenty of buyers still out there.

That.

Are in the market.

Even at seven 5% and we're benefiting from that and Thats going to continue as our brand gets better and better.

Yeah. It makes a ton of sense I'm glad you sort of took at that direction, because I think a lot of times.

Folks are hearing the word tailwind and maybe understanding it.

At least on the existing home inventory point to me in future headwind right and I'm. Just curious if you see it this way it sounds like you don't I don't want to put words in your mouth, but maybe if you could just and your answer sort of touch on what you see as the most likely scenario for existing home inventory rising and whether you know whether or not you think for toll.

Actually would represent sort of a follow on tailwind because it means more of your perspective buyers are shaken loose from those existing homes.

Yes, I'm not sure.

Suggesting that a seven 5% market.

Is good for the industry.

It has proven.

To be good for the new homebuilders, because the wider the spread between mortgage.

Of the existing homeowner.

And today's new rate.

The more lock in effect is occurring.

So.

The resale market is tighter and a seven 5% rate environment than it was in the six and a half because there's more people that are locking in.

But all day long I will take a five and a quarter rate market.

That frees up.

More existing homeowners to want to move up into our homes.

Of course I'll take that.

And will there be a bit more competition on the resale market because it is freeing up yes.

But there'll be many more of those buy of those home owners that want to move up.

Overall, we will benefit and have even better results.

We're just very pleased with how well we're doing.

Considering how fast the rates have gone up how they continue to go up.

And our traffic is good our web traffic is good and our sales are good and is primarily driven by what I said there are still buyers out there. They have very few options. They therefore find their way to us and they fall in love as we knew they would.

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

Good morning, Thanks for taking my questions.

Doug just a follow up on.

The LTV cash buyer dynamic one of the interesting things about.

This recent rise in rates is I think at various points over the last year. The conventional 30 year had gone above seven but <unk>.

You look at arms are jumbos, or FHA, VA and they had kind of lift more in the six to six five range now all rates of kind of surpassed seven the spreads of all compressed.

Can you just talk a little about have you seen that like as people are putting that little extra.

Money down or are you seeing people shift.

Out of out.

Out of jumbos into conventionals, or any sipson loan products and part two is given theres not as much.

Hypothetical arb between jumping around.

Products today have you started to lean back into your buy downs over the last month as rates have risen.

Mike I'll take a shot at the first half of that in terms of what we have seen buyers do.

Often when rates rise, we would see them gravitate to adjustable rates.

We haven't seen that because it hasnt been attractive spread between adjustable and fixed just has not been substantial enough to motivate somebody to go in that direction.

We also just came through a period, where jumbos where.

Less expensive than conventionals, and so in 2021 'twenty two we saw buyers borrow more so that you get to the lower jumbo rates.

Right now we're seeing the inverse of that we are seeing them increase their down payments.

And reduce what their borrowings so they can stay in conventional to a greater extent.

With respect to buy downs, and whether we've accelerated that lately the answer is no.

The buy down program doesn't.

Work for the build to order business, because you can't buy that at a rate Thats 12, 14 months out.

But it does work well.

As a lead marketing headline.

For the spec inventory that can deliver over a four month period of time. So we may advertise four spec inventory.

That will take a seven 5% rates out of five and a half.

But.

The cost of that and let's just.

Let's just say, it's maybe 40 or $45000 on the million dollar home the toll.

Cells.

It doesn't.

It doesn't capture the buyers' attention as much.

As them deciding what can I use that 45005 finishes in the house.

Or do something that is long term and I think the reason for that is they don't look at the seven 5% rate of the 30 year rates are suffering.

They look at it as a shorter term timeframe, where theyre going to refi out of it when the rate comes down and so why use my incentives to buy a rate down.

That I'm not going to have for a long period of time that doesn't mean, some don't take advantage of the buy down, but it's not like all of our spec inventory.

Is being sold through the buy down program and Thats, where all the incentive is going.

It's a marketing headline it grabs attention it starts conversation some take it but more.

Flip the dollar value of the buy down into upgrades or features within the home.

Yes, that's interesting thanks, and maybe maybe that's also a differentiation for your wealthier buyer.

The second question right, because it's not it's not a straight affordability issue, where they have to have the four 5% rate to get approved.

It's more discretionary as to where do they want to spend the incentives.

Okay.

Okay.

Question, maybe Marty this is just.

Technicality or clarification on the earnings guide $11 50 at the low end if I bridge your if I.

Bridge, your operating metrics and account for the year to date charges I think yes.

Get to a number that's that's still maybe 30.

Give or take north of that so is that really just hedging or youre, saying your guidance, including a three.

Building that you anticipate that closed is that as simple as youre hedging case, those don't close in the fourth quarter or is there something else.

In the core operating metrics.

Where do you think there could be some some give or take.

Well I think we're trying to get to some rounded numbers $11 50 to $12 was pretty rounded.

<unk>.

There is some caution in there if something doesn't go according to plan.

We don't we don't project any impairments, we don't expect any but there may be some and so it's as simple as that like I don't think I think you read much more into it than you should.

That's helpful. Thanks.

Youre welcome.

The next question comes from Ken <unk> with Seaport Research. Please go ahead.

Good morning, good morning, everybody.

Good morning, Ken.

I'm doing well.

I appreciate all your comments I Wonder if you could.

Quantify.

You've mentioned based pricing could you give us a sense this quarter last quarter versus a longer term trend, what's your kind of base price and how much of options traditionally been.

A percent of your sales and the reason I'm asking that is.

Obviously with this liquidity from your buyers.

Options historically have a higher margin profile, so I'm trying to sense.

If you are seeing greater share of options.

And what the impact is historically on your gross margins. If you can give us some context my first question sure.

Long term.

Average.

Upgrades and that includes the whole lot premium.

Right, it's 21%.

Q3.

It was 27%.

$236000.

That's counterintuitive right with rates going up you think maybe people are moving towards.

Smaller homes more affordable homes, not the case and that goes right to the.

The wealth.

Of our client.

And how we do it.

This is their dream move and if they can afford it theyre going to reach.

So I'm not telling you that trend is going to continue I don't know, but those are the numbers.

21% long term average upgrades Q.

Q3, 27% and yes, the margin coming out of our design studios.

We send the client to pick all their beautiful finishes is higher than the company's gross margin.

And the lot premium is 100% gross margin in the lot for Amy.

Alright.

Correct what is the.

Yes.

The.

Well I guess.

Following up on that what is the split between.

Land and the physical upgrades, if you would and then the second question I really want to address that you talked about 2200.

Presale units last quarter I don't know if you guys are up caveats on inventory units yet.

That would be useful but could you maybe talk about where we are in terms of those pre sales starts as well as that land.

Grade mix, if you could thank you.

Greg So I think we would have approximately 2400 specs under construction compared to the 22 800, you mentioned and we have around 400.

At Seo or beyond compared to approximately paired to 350 ish last quarter last quarter.

In terms of a breakdown.

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The option premium versus things in the house.

What do we got there you.

You said, yes sure Greg.

Kevin So it's a big house prices for the quarter was call it eight.

$870000. So the lot premium this quarter again at 100% gross margin was almost $60000 and then the option upgrades were around 175000 now that will include both the design studio and the structural options.

Thanks.

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

Yeah. Thanks, everybody.

I was hoping we could focus a little bit on your ASP trends, especially in orders.

I'm guessing July quarter.

Quarter, a year ago was a bit distorted by cancellations, maybe not maybe you can clarify that.

But clearly the trend has gone from $1 1 million towards 916000.

Hmm.

Trying to understand that better is that due to more specs that are lower price are you guys building smaller homes.

Okay.

A more intentional thing thats going to continue or do you feel like the prices are here to stay at that level of the orders this quarter.

It's up some better understanding would be helpful.

It's really a function of mix.

Alex I think we talked about the success, we've had in the mountain region and in the South where our prices are generally lower than they are in California or in.

In the north.

And so as the business has shifted to those geographies.

And as we've increased the affordable luxury.

<unk> as a percentage of total.

The average price mathematically comes down it is not a function of.

Building <unk> type a.

This year at 4000 square feet.

Last year, it was 4200 square feet.

It's really just a function of the mix shift from a geography perspective, as well as a market segment perspective.

Okay. So all else being equal you don't necessarily see these trends holding the price further donaldson earlier, possibly yes.

I think they could modestly go lower but again it can be very lumpy quarter to quarter based on what is delivering.

We are now north of 40% affordable luxury.

And I think we've said, we're kind of we're comfortable with affordable luxury getting as high as half of our business.

And we also have to be careful how we define affordable luxury now because.

It is it has gone up fairly dramatically in price through the Covid years, and it's a very gray area. As you know we don't marketed to the public as affordable luxury it's is an internal term to.

To help us with how we prepare for marketing how fancy, we decorate the model homes and build the entrants features.

And also I think it helps the street and understanding this move we made in price.

But we're close to where I think we want to be long term in terms of the mix.

PPP between the affordable luxury the true luxury.

The empty nester move down et cetera, so there could be some modest.

Drop in price, but I think you've seen most of it already.

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

Good morning, guys. Thank you for taking my question.

I guess the first one is that seasonality has certainly been a little bit tricky over the past few quarters and you guys did better than normal seasonality in the most recent quarter just curious how you're thinking about absorption as we move into the fourth quarter, given what youre seeing out there in the market today.

Yes, it feels right now John like it's trending very similar to Q3.

And I think our comments around three weeks of.

August .

Explain that.

We're running at a pace right now of about 24 homes.

Sold per year per community.

Last year was 25 homes.

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Per year per community. So it's.

It's relatively flat and that some.

That's what we're projecting the 2010 to 2019 timeframe.

Again pre COVID-19, we tracked at about 22.

Sales per community per year, so we're modestly call it 10% or so above that.

But thats, what we anticipate.

For the fourth quarter.

Okay. That's helpful. And then you guys mentioned cycle times, improving I'm just wondering if you could help us kind of quantify where they are today, maybe versus last quarter, maybe pre COVID-19 and then how much of that improvement is getting better on the on the two build to be built side versus just offering more spec.

Yeah.

So.

Cycle times are coming down.

Slowly we're picking up a couple of weeks.

For the next homes sold.

Our range is about 10 to 11 months.

I think the exact number I think is 315 days is what we project.

When you when you average out the entire company, that's obviously down dramatically from the Covid years.

And it's.

It's similar to what we saw pre COVID-19, but we are more efficient. There is no question, we changed our operating model in the field.

And we're enjoying those efficiencies the spec build as a larger percentage of our business is certainly helping.

Because we can get the house started without the customer making all the selections.

We can build a house without the customer visiting every Sunday afternoon and.

And coming back at us with their own little Punch list.

And how those are less complicated because we're not loading them up as much as some of our clients do when they run through the design studios. So that is certainly helping.

We have less skus, we have optimized all of our plans we have less homes that we offer.

And all of that is contributing.

I do feel like it's just the beginning particularly with almost half of our business being an affordable luxury which means smaller simpler homes.

And this operations focus.

On becoming a better production builder.

There is still.

Room to go but I am encouraged that were down a few weeks and it's trending in an even better direction.

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

Thank you Betsy Thank you everyone.

We appreciate all of your great questions and all of your interest we're always here as you know to answer any additional questions offline.

Hope everyone had a wonderful summer.

After believe it's over.

And.

We will see it through the fall.

Back on our call in December .

Thanks again take care.

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

Okay.

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Okay.

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Sure.

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Yes.

Yes.

Okay.

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Good morning, and welcome to the toll brothers third quarter fiscal year 2023 conference call.

All participants will be in a listen only mode.

Should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.

After todays presentation, there will be an opportunity to ask questions.

To ask a question you May press Star then one on your telephone keypad.

To withdraw your question. Please press Star then two.

The company is planning to end the call at 930, when the market opens during the Q&A session. Please limit yourself to one question and one follow up.

Please note this event is being recorded.

Now I'd like to turn the conference over to Douglas yearly CEO . Please go ahead.

Thank you Betsy.

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 Marlett, Chief Marketing Officer, and Gregg Ziegler senior VP and treasurer.

We had another terrific quarter and are very pleased with our fiscal third quarter results.

We beat our guidance for home sales revenues adjusted gross margin SG&A margin and earnings.

Our quarter end backlog of 7295 homes and seven $9 billion is strong and our cancellations remain very low.

The market for new homes is solid and we are well positioned with the right strategy in place to take advantage of that.

As a result, we are raising our full year guidance for all of our core homebuilding metrics, including deliveries.

Adjusted gross margin and SG&A margin.

We now project earnings of between $11 50, and $12 per diluted share in fiscal 2023.

And our return on beginning equity of approximately 22%.

In the quarter, we delivered 2524 homes at an average price of $1 million $6000, leading to record third quarter home sales revenues of $2 $7 billion.

Adjusted gross margin was 29, 3% or 140 basis points above last year's third quarter and our SG&A expense was eight 6% of home sales revenues.

170 basis points better than last year.