Q1 2024 Toll Brothers Inc Earnings Call
[music].
Okay.
Operator: Good morning, everyone, and welcome to the Toll Brothers first quarter fiscal year 2024 conference call. All participants will be in a listen-only mode.
Speaker Change: Good morning, everyone and welcome to the toll brothers first quarter fiscal year 2024 conference call.
Speaker Change: All participants will be in a listen only mode.
Operator: If you need assistance, please contact a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press the star key and then 1 on your telephone keypad.
Speaker Change: Should you need assistance. Please signal conference specialist by pressing the star key followed by zero.
Speaker Change: After todays presentation, there will be an opportunity to ask questions.
Speaker Change: To ask a question you May press Star and then one on your telephone keypad.
Operator: To withdraw your question, you may press star and 2. The company is planning to end the call at 9.30 when the market opens. During the Q&A, please limit yourselves to one question and one follow-up. Please also note today's event is being recorded, and at this time, I'd like to turn the floor over to Douglas Yearley, CEO. Please do so.
Speaker Change: All your question you May press Star two.
Speaker Change: The company is planning to end the call at 930, when the market opens.
Speaker Change: During the Q&A, please limit yourself to one question and one follow up.
Speaker Change: Please also note today's event is being recorded and at this time I'd like to turn the floor over to Douglas yearly CEO. Please go ahead.
Douglas C. Yearley: Thank you, Jamie. 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 Perryhouse, 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.
Douglas: Thank you Jamie.
Douglas: Morning.
Douglas: 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.
Douglas: I caution you that many statements on this call are forward looking based on assumptions about the economy world events housing and financial markets.
Douglas: Interest rates, the availability of labor and materials inflation and many other factors beyond our control that could significantly affect future results.
Speaker Change: 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.
Douglas C. Yearley: I am very pleased with our strong first quarter results. We beat our guidance across the board and saw another quarter of solid sales, with contracts up 40% in units and 42% in dollars compared to last year. In addition, since the start of the spring selling season in mid-January, we have seen a meaningful uptick in demand that has continued through this past weekend.
Speaker Change: I am very pleased with our strong first quarter results, we beat our guidance across the board and saw another quarter of solid sales with contracts up 40% in units and 42% in dollars compared to last year.
Speaker Change: In addition, since the start of the spring selling season in mid January we have seen a meaningful uptick in demand that has continued through this past weekend.
Douglas C. Yearley: In our first quarter, we delivered 1,927 homes at an average price of approximately $1 million, generating record first quarter home sales of 1.93 billion dollars, a 10.4% increase in dollars compared to the first quarter of fiscal 2023. Our adjusted gross margin was 28.9%. 90 basis points, better than guidance, and 140 basis points better than last year's first quarter. The outperformance versus our guidance was due to MEC, driven by earlier-than-expected deliveries in certain of our higher-margin Pacific and Mid-Atlantic communities and fewer-than-expected deliveries in lower-margin mountain communities.
Speaker Change: In our first quarter, we delivered 1927 homes.
Speaker Change: At an average price of approximately $1 million generating record first quarter home sales of $1 $93 billion.
Speaker Change: Up 10, 4% in dollars compared to the first quarter of fiscal 2023.
Speaker Change: Our adjusted gross margin was 28, 9%.
Speaker Change: 90 basis points better than guidance, and 140 basis points better than last year's first quarter.
Speaker Change: The outperformance versus our guidance was due to mix driven by earlier than expected deliveries and certain of our higher margin Pacific and mid Atlantic communities and fewer than expected deliveries and lower margin mountain communities.
Douglas C. Yearley: SG&A expense, at 11.9% of home sales revenues, was 20 basis points better than last year's first quarter and 50 Basis Points Better Than Guidance, in addition to greater fixed cost leverage from higher revenues. We continue to benefit from cost reduction initiatives we've taken over the past several years. We continue to look for ways to operate more efficiently. Pre-tax income was $311.2 million, and earnings per share were $2.25 diluted, up 23% and 32%, respectively, compared to last year's first quarter.
Speaker Change: SG&A expense at 11, 9% of home sales revenues was 20 basis points better than last year's first quarter.
Speaker Change: And 50 basis points better than guidance.
Speaker Change: In addition to greater fixed cost leverage from higher revenues.
Speaker Change: We continued to benefit from cost reduction initiatives, we've taken over the past several years.
Speaker Change: We continue to look for ways to operate more efficiently.
Speaker Change: Pretax income was $311 $2 million and earnings per share.
Speaker Change: We're $2.25 diluted up 23% and 32% respectively compared to last year's first quarter.
Douglas C. Yearley: With the adequate performance in our first quarter and a strong start to the spring selling season, we are raising our full-year guidance across all of our key home building metrics. At the midpoint of our guidance, we now expect full-year deliveries of 10,250 homes, an adjusted gross margin of 28%, and an SG&A margin of 9.8%. In addition, earlier this month, we sold a parcel of land to a commercial developer for net cash proceeds of $180.7 million, which will result in a pre-tax land sale gain of approximately $175 million in our second quarter.
Speaker Change: With the outperformance in our first quarter and a strong start to the spring selling season, we are raising our full year guidance across all of our key homebuilding metrics that's.
Speaker Change: At the midpoint of our guidance, we now expect full year deliveries of 10250 homes on adjusted gross margin of 28%.
Speaker Change: In an SG&A margin of nine 8%.
Speaker Change: In addition earlier this month, we sold a parcel of land to a commercial developer for net cash proceeds.
Speaker Change: Of $187 million, which will result in a pretax land sale gain of approximately $175 million.
Speaker Change: And our second quarter.
Douglas C. Yearley: We are raising our full-year joint venture and other income guidance from $125 million to $260 million. Factoring in both the increase in our home building guidance and the impact of this land sale, we now expect to earn between $13.25 and $13.75, for a diluted share in fiscal 2024, up from the 12 to 1250 we got into last quarter.
Speaker Change: We are raising our full year joint venture and other income guidance.
Speaker Change: From 125 million to 102, excuse me $260 million.
Speaker Change: Factoring in both the increase in our homebuilding guidance and the impact of this land sale.
Speaker Change: We now expect to earn between <unk>.
Speaker Change: $13 25, and $13.75 per diluted share in fiscal 2024.
Speaker Change: Up from the 12 to 12 50, we guided to last quarter.
Douglas C. Yearley: We now also expect our return on beginning equity to be approximately 21% in fiscal 2024, which would be our third year in a row above 20%. Turning to market conditions, demand in the first quarter was solid. We signed 2,042 net contracts at an average price of $1,011,000, up 40% in units and 42% in total dollars compared to the first quarter of 2023. Demand in our first quarter steadily improved as the quarter progressed, following the normal seasonal pattern. December was stronger than November, and January was significantly stronger than December.
Speaker Change: We now also expect a return on beginning equity to be approximately 21% in fiscal 2024, which would be our third year in a row above 20%.
Speaker Change: Yeah.
Speaker Change: Turning to market conditions demand in the first quarter was solid.
Speaker Change: We signed 2042 net contracts at an average price of $1 million $11000 up 40% in units and 42% and total dollars compared to the first quarter of 2023.
Speaker Change: Demand in our force for first quarter steadily improved as the quarter progressed following the normal seasonal pattern.
Speaker Change: December was stronger than November and January was significantly stronger than December.
Douglas C. Yearley: Based on both deposit and agreement activity, our January was better than normal seasonality, and the strong demand has continued through the first three weeks of February. From a geographic standpoint, demand was broadly distributed across our footprint. We saw particular strength in our Pacific region, including all of California and Seattle, and also in Las Vegas, all of Texas, Denver, and from Atlanta up through Boston.
Speaker Change: Based on both deposit and agreement activity, our January was better than normal seasonality.
The strong demand has continued through the first three weeks of February.
Speaker Change: From a geographic standpoint demand was broadly distributed across our footprint we.
Speaker Change: We saw particular strength in our Pacific region, including all of California, and Seattle.
Speaker Change: And also in Las Vegas.
Speaker Change: All of Texas, Denver, and from Atlanta up through Boston.
Douglas C. Yearley: Demand was solid across all product types as well, with affordable luxury accounting for 45% of our units and 34% of dollars, luxury 36% and 49%, and active adults 19% and 17%. Another indicator of healthy demand was our deposit to agreement conversion ratio, which at 76% in the first quarter was significantly higher than our five-year average of 67. We are pleased that we have been able to continue taking advantage of healthy demand while managing our incentives. While mortgage rates are buy down..., are heavily marketed and offered nationwide. Very few of our buyers use incentive dollars to buy down their rates.
Speaker Change: Demand was solid across all product types as well with affordable luxury accounting for 45% of our units and 34% of dollars luxury 36% and 49%.
Speaker Change: And active adult 19% and 17%.
Speaker Change: Another indicator of healthy demand was our deposit to agreement conversion ratio.
Speaker Change: Which had 76% in the first quarter was significantly higher than our five year average of 67%.
Speaker Change: We are pleased that we've been able to continue taking advantage of healthy demand, while managing our incentives.
Speaker Change: While mortgage rate buy downs or heavily marketed and offered nationwide very few of our buyers use incentive dollars to buy down their rates.
Douglas C. Yearley: The vast majority of our customers can qualify for a market-rate mortgage without a buy-down, and they prefer to use any incentive offered on Design Studio Upgrades or to reduce their closing costs. Additionally, consistent with the past several quarters, approximately 25% of our buyers paid all cash in the first quarter, and the LTVs for buyers who took a mortgage dropped to approximately 67 percent.
Speaker Change: The vast majority of our customers can qualify for a market rate mortgage without a buy down.
Speaker Change: And they prefer to use any incentives offered on design studio upgrades or to reduce their closing costs.
Speaker Change: Additionally, consistent with the past several quarters.
Speaker Change: Approximately 25% of our buyers paid all cash in the first quarter.
Speaker Change: And the Ltvs for buyers, who took a mortgage <unk>.
Speaker Change: We're off to approximately 67%.
Douglas C. Yearley: 200 basis points lower than our average over the prior four quarters. So, for the 75% of our buyers who took a mortgage... On average, they put down 33%. All of these factors highlight the financial strength of our more affluent customers.
Speaker Change: 200 basis points lower than our average over the prior four quarters.
Speaker Change: So for the 75% of our buyers who took a mortgage on average they put down 33%.
All of these factors highlight the financial strength of our more affluent customers.
Douglas C. Yearley: During the quarter, we once again benefited from our strategy of increasing our supply of Speco, which represented approximately 50% of orders and 40% of deliveries in the first quarter. As we have discussed before, we sell our spec homes at various stages of construction, from foundation to finished home. This allows many of our spec buyers the opportunity to visit our design studios and Personalize Their Homes, with finishes that match their taste. So choy.
During the quarter, we once again benefited from our strategy of increasing our supply of spec homes, which represented approximately 50% of orders and 40% of deliveries in the first quarter.
Speaker Change: As we've discussed before we sell our specs at various stages of construction.
Speaker Change: From foundation to finished home.
Speaker Change: This allows many of our spec buyers the opportunity to visit our design studios and.
Speaker Change: And personalize their homes with finishes that match their tastes.
Speaker Change: So choice a pillar of toll brothers is still part of our spec strategy.
Douglas C. Yearley: A pillar of Toll Brothers is still part of our SPECT strategy. This benefits our margins as design studio upgrades tend to be highly accretive. We are also pleased that our cancellation rate in the first quarter remained consistent with recent quarters at 2.9% of beginning backlog. Our low cancellation rate speaks to the financial strength of our buyers, as well as the sizable deposits they make and how emotionally invested they become as they personalize their new Toll Brothers home. We continue to expect Community Count growth to help drive results in Fiscal 20, 24, and beyond. In the first quarter, we were operating from 377 communities, two more than we guided to last quarter, and we remain on target to reach our year-end guidance of approximately 410 communities, which would be an approximate 10% increase from fiscal year-end 2023. Importantly, we control sufficient land for community cap growth beyond 2024. At first quarter end, we controlled approximately 70,400 lots.
Speaker Change: This benefits our margins as design studio upgrades tend to be highly accretive.
Speaker Change: We are also pleased that our cancellation rate in the first quarter remained consistent with recent quarters at two 9% of beginning backlog.
Speaker Change: Our low cancellation rates speaks to the financial strength of our buyers as well as the sizable deposits they make and how emotionally invested they become as they personalize their new toll brothers home.
Speaker Change: We continue to expect community count growth to help drive results in fiscal 2024 and beyond.
Speaker Change: In the first quarter.
Speaker Change: We were operating from 377 communities to more than we guided to last quarter.
Speaker Change: And we remain on target to reach our year end guidance of approximately 410 communities.
Speaker Change: Which would be an approximate 10% increase from fiscal year end 2023.
Speaker Change: Importantly, we control sufficient land for community count growth beyond 2024.
Speaker Change: At first quarter end, we controlled approximately 70400 lots.
Speaker Change: 49% of which were options.
Speaker Change: This land position allows us to be highly selective and disciplined as we assess new land opportunities.
Speaker Change: We believe we have a competitive advantage acquiring land at the corner of main and main.
Speaker Change: We're very few of the big well capitalized publics and privates play.
Speaker Change: Our main competition for this land tends to be the smaller local and regional builders, who are not as well capitalized.
Speaker Change: Our balance sheet is very healthy with ample liquidity low net debt and no significant near term debt maturities.
Speaker Change: We also continue to expect strong cash flow generation from operations this year.
Douglas C. Yearley: 49% of which were options. This land position allows us to be highly selective and disciplined as we assess new land opportunities. We believe we have a competitive advantage acquiring land at the corner of Main and Main, where very few of the big, well-capitalized publics and privates play. Our main competition for this land tends to be the smaller local and regional builders, who are not as well capitalized.
Speaker Change: In addition, as I mentioned earlier, we received $181 million in cash from a land sale at the start of our second quarter.
As a result, we are increasing the amount we are budgeting for fiscal 2020 for share repurchases.
Speaker Change: From 400 million to $500 million.
Speaker Change: Longer term, we continue to expect buybacks and dividends to remain an important part of our capital allocation priorities.
Speaker Change: With that I will turn it over to Marty.
Martin P. Connor: Thanks, Doug.
Martin P. Connor: We are very pleased with our first quarter results.
Martin P. Connor: We grew both our top and bottom lines.
Douglas C. Yearley: Our balance sheet is very healthy with ample liquidity, low net debt, and no significant near-term debt maturity. We also continue to expect strong cash flow generation from operations this year. In addition, as I mentioned earlier, we received $181 million in cash from a land sale at the start of our second quarter.
Martin P. Connor: And operated more efficiently compared to last year.
Martin P. Connor: First quarter net income was $239 6 million.
Martin P. Connor: Our $2 25 per share diluted.
Martin P. Connor: Up, 25% and 32%, respectively, compared to $191 $5 million and $1 70 per share.
Martin P. Connor: <unk> a year ago.
Martin P. Connor: Our net income and earnings per share were both first quarter Records.
Douglas C. Yearley: As a result... We are increasing the amount we are budgeting for fiscal 2024 share repurchases from $400 million to $500 million. Longer term, we continue to expect buybacks and dividends to remain an important part of our capital allocation priorities. With that, I will turn it over to Marty. Thanks, Doug.
Martin P. Connor: We delivered 90 127 homes.
Martin P. Connor: And generated homebuilding revenues of $1 $93 billion.
Martin P. Connor: Average price of homes delivered in the quarter.
Martin P. Connor: Was $1 million $3000.
Martin P. Connor: We signed 2042 net agreements for $2.06 billion.
Martin P. Connor: In that first quarter.
Martin P. Connor: Up 40% units and 42% in dollars compared to the first quarter of fiscal year 2023.
Martin P. Connor: We are very 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 $239.6 million, or $2.25 per share diluted, up 25% and 32%, respectively, compared to $191.5 million and $1.70 per share diluted a year ago.
Martin P. Connor: The average price of contracts signed in the quarter was approximately $1 million $11000.
Martin P. Connor: This was up one 6% year over year, and two 3% on a sequential basis.
Martin P. Connor: Our first quarter adjusted gross margin was 28, 9%.
Martin P. Connor: Up 140 basis points compared to 27, 5% in the first quarter of 2023.
Martin P. Connor: As Doug mentioned.
Martin P. Connor: Q1 gross margin exceeded our guidance due primarily to more deliveries in our higher margin Pacific and mid Atlantic regions.
Martin P. Connor: Our net income and earnings per share were both first quarter records. We delivered 1,927 homes and generated home building revenues of $1.93 billion. The average price of homes delivered in the quarter was $1,003,000.
Martin P. Connor: In less than expected deliveries in our lower margin Mountain region.
Martin P. Connor: We expect the inverse to be true in our second quarter and this is reflected in our second quarter adjusted gross margin guidance of 27, 6%.
Martin P. Connor: We signed a 2042 net agreement for $2.06 billion in that first quarter, up 40% in units and 42% in dollars compared to the first quarter of fiscal year 2023. The average price of contracts signed in the quarter was approximately $1,011,000. This was up 1.6% year over year and 2.3% on a sequential basis. Our first quarter adjusted gross margin was 28.9%, up 140 basis points compared to 27.5% in the first quarter of 2023. As Doug mentioned, Q1 gross margin exceeded our guidance, due primarily to more deliveries in our higher-margin Pacific and Mid-Atlantic regions and less-than-expected deliveries in our lower-margin mountain region. We expect the inverse to be true in our second quarter, and this is reflected in our second quarter adjusted gross margin guidance of 27.6 percent.
Martin P. Connor: Overall, we have increased our full year adjusted gross margin 10 basis points to 28.0%.
Martin P. Connor: Write offs in our home sales gross margin totaled $1 $5 million in the quarter and were all associated with pre development costs on deals we are no longer pursuing.
Martin P. Connor: SG&A as a percentage of homebuilding revenue was 11, 9% in the first quarter compared to 12, 1% in the same quarter one year ago.
Martin P. Connor: Note that our SG&A expense in that first quarter includes $14 million of accelerated employee stock based comp expense.
Martin P. Connor: Only hits in the first quarter.
Martin P. Connor: The year over year 20 basis point reduction in SG&A margin.
Martin P. Connor: Flex leverage from increased revenues as well as benefits from tighter cost controls.
Martin P. Connor: In the face of inflation.
Joint venture land sales and other income was $8 $6 million during the first quarter compared to $16 8 million in the first quarter of fiscal year 'twenty three.
Martin P. Connor: And compared to our guidance of a $10 million loss.
Martin P. Connor: Overall, we have increased our full-year adjusted gross margin by 10 basis points to 28.0 percent. Write-offs in our home sales gross margin totaled $1.5 million in the quarter and were all associated with pre-development costs on deals we are no longer pursuing. SG&A, as a percentage of home building revenue, was 11.9% in the first quarter, compared to 12.1% in the same quarter one year ago. Note that our SG&A expense in that first quarter includes $14 million of accelerated employee stock-based comp expense that only hit in the first quarter. The year-over-year 20 basis point reduction in SG&A margins reflects leverage from increased revenues as well as benefits from tighter cost controls in the face of inflation. Joint venture, land sales, and other income was $8.6 million during the first quarter, compared to $16.8 million in the first quarter of fiscal year 23, and compared to our guidance of a $10 million loss.
Martin P. Connor: We exceeded our guidance due primarily to better than expected results in our mortgage unit.
And higher than projected interest income.
Martin P. Connor: Our tax rate in the first quarter was 23% or about 300 basis points lower than guidance.
Martin P. Connor: Due to the accounting benefit of stock compensation deductions, which we do not expect to repeat at the same level for the rest of the year.
Martin P. Connor: We ended the first quarter with over two and a half a billion dollars of liquidity.
Martin P. Connor: <unk> approximately $755 million of cash and $1 8 billion.
Martin P. Connor: Availability under our revolving bank credit facility.
Martin P. Connor: Our facility is four years until maturity.
Martin P. Connor: Our net debt to capital ratio was 21, 4% at first quarter end.
Martin P. Connor: Down from 27, 5% one year ago.
Martin P. Connor: We have no significant maturities of our long term debt until fiscal 2026, when $350 million of notes come due in November of 2025.
Martin P. Connor: Our community count at quarter end was 377 compared to our guide of 375.
Martin P. Connor: We exceeded our guidance, due primarily to better-than-expected results in our mortgage unit and Higher Than Projected Interest Income. Our tax rate in the first quarter was 23%. We're about 300 basis points lower than guidance due to the accounting benefit of stock compensation deductions, which we do not expect to repeat at the same level for the rest of the year. We ended the first quarter with over $2.5 billion of liquidity, including approximately $755 million of cash and $1.8 billion of availability under our revolving bank credit facility. Our facility has four years until maturity. Our net debt to capital ratio was 21.4% at first quarter end, down from 27.5% one year ago. We have no significant maturities of our long-term debt until fiscal 2026, when $350 million of notes come due in November of 2025. Our community count at quarter end was 377 compared to our guide of 375.
Martin P. Connor: Looking forward our guidance is subject to the usual caveats regarding such forward looking information.
Martin P. Connor: We are projecting fiscal 2024 second quarter deliveries of approximately 2400 2500 homes with an average delivered price.
Martin P. Connor: Between $1 million and $1 million $10000.
Martin P. Connor: For fiscal year 2024, we are increasing our projected deliveries too.
Martin P. Connor: Yeah.
To be between 10000, and 10500 homes with an average price between 940900 $60000.
Martin P. Connor: As I noted earlier, we expect adjusted gross margin to be 27, 6% in the second quarter and 28% for the full year 10 basis points better than our previous full year guidance.
Martin P. Connor: We expect interest and cost of sales to be approximately one 3% in the second quarter and for the full year.
Martin P. Connor: This is also a 10 basis point improvement from our earlier John.
Martin P. Connor: We project second quarter SG&A as a percentage of home sales revenues to be approximately nine 7%.
Martin P. Connor: For the full year, we expect it to be nine 8%.
Martin P. Connor: Another improvement of 10 basis points compared to our previous guidance.
Martin P. Connor: Looking forward, our guidance is subject to the usual caveats regarding such forward-looking information. We are projecting fiscal 2024 second quarter deliveries of approximately 2400 to 2500 homes with an average delivered price of between $1,000,000 and $1,010,000. For fiscal year 2024, we are increasing our projected deliveries to be between 10,000 and 10,500 homes with an average price between $940,000 and $960,000. As I noted earlier, we expect the adjusted gross margin to be 27.6% in the second quarter and 28% for the full year, 10 basis points better than our previous full year guidance. We expect interest in cost of sales to be approximately 1.3% in the second quarter and for the full year.
Martin P. Connor: Other income income from unconsolidated entities and land sales gross profit in the second quarter is expected to be approximately $180 million, which reflects the impact of the commercial land sale Doug mentioned.
Martin P. Connor: We now expect it to be $260 million for the full year, which is up significantly from our prior guide of $125 million.
Martin P. Connor: Aside from the land sale much of this full year. Other income is projected from sales of our interests in certain stabilized apartment communities developed by toll brothers apartment living in joint venture with various partners.
Martin P. Connor: We project the second quarter tax rate to be approximately 25, 8% and the full year rate to be approximately 25, 5%.
Martin P. Connor: That's 50 basis points of improvement compared to our prior full year guidance.
Martin P. Connor: Our weighted average share count is expected to be approximately $106 million for the second quarter and $105 million for the full year.
Martin P. Connor: This is also a 10 basis point improvement from our earlier guide. We project second quarter SG&A as a percentage of home sales revenues to be approximately 9.7%. For the full year, we expect it to be 9.8%, another improvement of 10 basis points compared to our previous guidance. Other income, income from unconsolidated entities, and landfills gross profit in the second quarter is expected to be approximately $180 million, which reflects the impact of the commercial land sale Doug mentioned.
Martin P. Connor: This assumes we repurchased approximately $166 million of common stock per quarter for the remainder of the year to reach the $500 million guide Doug referred to earlier.
Martin P. Connor: As Doug mentioned with our updated guidance and the Q2 land sale gain we now expect to earn between $13 25 and.
And $13 75.
Martin P. Connor: Our diluted share in fiscal 2024.
Martin P. Connor: This would result in a full year return on beginning equity of approximately 21% and we will put our year end book value per share at approximately $77 per share.
Martin P. Connor: Now, let me turn it back to Doug.
Doug: Thank you Marty.
Doug: Before I open it up for questions I'd like to thank our toll brothers' employees for another great quarter.
Martin P. Connor: We now expect it to be $260 million for the full year, which is up significantly from our prior guide of $125 million. Aside from the land sale, much of this full year other income is projected from sales of our interests in certain stabilized apartment communities developed by Toll Brothers Apartment Living in joint venture with various partners. We project the second quarter tax rate to be approximately 25.8 percent and the full-year rate to be approximately 25.5 percent.
Doug: So proud of their dedication hard work and commitment to each other and our customers there.
Doug: Their talent and constant focus on our business as the driver of our long term success.
Doug: Jamie with that let's open it up to questions.
Speaker Change: Ladies and gentlemen at this time, we'll begin the question and answer session.
Speaker Change: As a reminder, the company is planning to end the call at 930, when the market opened.
Speaker Change: During the Q&A, we do please limit yourselves to one question and one follow up.
Speaker Change: SaaS question, you May Press Star and then one on your Touchtone telephone.
Speaker Change: You are using a speaker phone, we do ask that you. Please pick up the handset prior to pressing the keys to withdraw your question you May press Star two.
Speaker Change: Our first question today comes from Jesse Letterman from Zelman and Associates. Please go ahead with your question.
Douglas C. Yearley: That's 50 basis points of improvement compared to our prior full year of guidance. Our weighted average share count is expected to be approximately $106 million for the second quarter and $105 million for the full year. This assumes we repurchase approximately $166 million of common stock per quarter for the remainder of the year to reach the $500 million guide Doug referred to earlier. As Doug mentioned, with our updated guidance and the Q2 land sale gain, we now expect to earn between $13.25 and $13.75 per diluted share in fiscal 2024. This would result in a full-year return on beginning equity of approximately 21 percent and would put our year-end book value per share at approximately $77 per share. Now, let me turn it back to Doug.
Speaker Change: Hey, guys, it's actually Ivy, but thank you.
Ivy: First I just wanted to say congratulations it's a great quarter and.
Ivy: Really excited about your strategic initiatives of driving returns higher.
Ivy: The land sale unexpected in 'twenty, four just thinking about other opportunities too.
Ivy: Generate cash flow to maybe do some.
Ivy: Continued buybacks or other ways to drive returns higher, but it's really been quite a tremendous improvement and just overall management working capital and returns and love to see continued improvement and wondering how strategically you can do so thanks for the opportunity.
Speaker Change: You Ivy.
Ivy: Yes, the land sale was.
Speaker Change: I Shouldnt say never but I think it was a one off we had a unique piece of property in northern Virginia that we were processing for approvals to.
Ivy: To build homes on and our data center operator came along.
Speaker Change: And made us an offer that we couldnt refuse.
Speaker Change: There could be something like that out there one never knows but.
Operator: Thank you, Marty. Before I open it up for questions, I'd like to thank our Toll Brothers employees for another great quarter. I'm so proud of their dedication, hard work, and commitment to each other and our customers. Their talent and constant focus on our business is the driver of our long-term success. Jamie, with that, let's open it up to questions.
Speaker Change: We will continue.
Speaker Change: To always look for opportunities.
Speaker Change: To be more capital efficient to drive gross margin.
Speaker Change: To grow this company.
Speaker Change: And Thats beyond just core homebuilding, where we get bigger and the markets. We're in and we have lots of opportunities to do that because as everyone knows that our price point, we tend to have a fairly small market share in many of our markets and as we expand our price points.
Speaker Change: Coming down in price.
Speaker Change: We have great opportunities in our 60 markets that we're in to get bigger.
Operator: Ladies and gentlemen, at this time, we'll 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, we do, please ask that you limit yourselves to one question and one follow-up. To ask a question, you may press star and then one on your touch-tone telephone. If you are using a speakerphone, we do ask that you please pick up the handset prior to pressing the button.
Speaker Change: We have the widest variety.
Speaker Change: Product in the widest range of price.
Speaker Change: Of any of the builders and so we think that gives us the greatest opportunity for core growth within homebuilding outside of that we will continue to focus on the apartment business will continue to focus on opportunities other opportunities to generate positive cash flow and as you can see as you know we're committed to returning capital.
Speaker Change: All of the shareholders.
Speaker Change: We're taking the vast majority of the proceeds from the data center sale to.
Speaker Change: To increase our buyback we're committed long term to the dividend we are committed to continue to grow that dividend and so.
Ivy Lynne Zelman: To withdraw your questions, you may press Standard.' Our first question today comes from Jesse Letterman from Zelman & Associates. Please go ahead with your question. Hey, guys, it's actually Ivy, but thank you.
Speaker Change: I'm, just really pleased with where we are the initiatives to come down in an affordable luxury price points is now.
Speaker Change: Well on its way with 40% plus of our sales in our closings now and what we call the affordable luxury.
Speaker Change: The business model. We are also committed to a greater spec strategy and that is really working well.
Ivy Lynne Zelman: First, I just want to say congratulations. It's a great quarter, and I'm really excited about, you know, your strategic initiatives of driving returns higher. You know, with the land sale expected in 2024, just thinking about other opportunities to, you know, generate cash flow to maybe do some continued buybacks or other ways to drive returns higher. But it's really been quite a tremendous improvement in just overall management, working capital, and returns, and I would love to see continued improvement and wondering how strategically you can do so. Thanks for the opportunity. Thank you, Ivy.
Speaker Change: 50% of our sales in the first quarter respect, 40% of our deliveries were spec.
Speaker Change: The market is.
Speaker Change: It is.
Speaker Change: Is very much in place with the tight resale market to gravitate towards total total spec, particularly since as I explained much of that spec still allows us to.
Speaker Change: Offer choice, where they can go to the design studio finishes and spec is not just affordable luxury it's not just the lower priced lower margin communities. We are building spec across all of our price points all of our product lines and so.
Speaker Change: You gave me a general question I gave you a general answer and then I don't know Thats really helpful. I think one thing that you've also done a significant debt reduction, which the balance sheet.
Speaker Change: Best position, it's ever been and so I think that you're probably my guess would be at a debt to capital level that youre comfortable with so are there opportunities.
Douglas C. Yearley: Yeah, the land sale was, I shouldn't say never, but I think it was a one-off. We had a unique piece of property in Northern Virginia that we were processing for approval to build homes on, and a data center operator came along and made us an offer that we couldn't refuse. You know, there could be something like that out there.
Speaker Change: <unk> for bolt on acquisitions, given that privates are really disadvantage for many reasons that you mentioned cost of capital or is it more likely that you will continue to grow organically and focus on share buyback to be capital efficient and generate higher returns.
Speaker Change: Yes.
Speaker Change: At World.
Speaker Change: Thank you we're always in the conversation on M&A, we have acquired 15 builders in 30 years, we're very selective.
Douglas C. Yearley: One never knows, but we will continue to always look for opportunities. To be more capital efficient, to drive gross margin, to grow this company, and that's beyond just core home building, where we get bigger in the markets we're in. And we have lots of opportunities to do that, because, as everyone knows, at our price point, we tend to have a fairly small market share in many of our markets, and as we expand our price point, and come down in price, we have great opportunities in our 60 markets that we' We have the widest variety of products and the widest range of prices of any of the builders.
World: I'm very happy with our geographic footprint. So I can't tell you that theres five or 10 markets out there that we really want to get into where you use M&A most often to enter a new market, but there are a few markets. We're looking at better new and there's many opportunities for bolt on M&A to get bigger and diversify the offer.
World: <unk> in an existing market about five of our 15 acquisitions were in existing markets. So those opportunities still exist youre right. The M&A market has heated up a lot and we're certainly studying opportunities but.
World: But I think youre going to see more with.
World: Capital returned to shareholders with toll then youre going to see new M&A.
Great well good luck guys. Thank you.
Speaker Change: Thanks Avi.
Speaker Change: Our next question comes from Sam Reed from Wells Fargo. Please go ahead with your question.
Sam Reed: Awesome. Thanks, so much guys and congrats on the quarter I wanted to touch on the updated delivery guide for 'twenty four yes. It clearly shows youre seeing some momentum into spring, but my question is kind of help us gauge the level of conservatism that might be embedded in that outlook and what would we need to see specifically in March and April.
Douglas C. Yearley: And so we think that gives us the greatest opportunity for core growth within home building. Outside of that, we'll continue to focus on the apartment business. We'll continue to focus on other opportunities to generate positive cash flow, and as you can see, as you know, we're committed to returning capital to shareholders. We're taking the vast majority of the proceeds from the data center sale to increase our buyback. We are committed long-term to the dividend. We are committed to continuing to grow that dividend. And so...
Sam Reed: For you to be comparable to take that number up again.
Speaker Change: Or do you want to go with that Marty is Andre question is where do you want to answer that's a tough question to answer level of conservatism I think Sam it's safe to say, there's no difference in the construct of our guidance right now than there traditionally has been.
Speaker Change: I think obviously, if we see a.
Speaker Change: A really strong March and April, particularly it was our spec strategy that could result in additional deliveries beyond the guide that we've given but were very comfortable with the guidance, we've given and.
Douglas C. Yearley: I'm just really pleased with where we are. The initiatives to come down in affordable luxury price points are now well on its way, with 40% plus of our sales and our closings now in what we call the affordable luxury business model. We've also committed to a greater speculative strategy, and that is really working well. 50% of our sales in the first quarter were speculative, and 40% of our deliveries were speculative. The market is... is very much in place with the tight resale market to gravitate towards toll spec, particularly since, as I explained, much of that spec still allows us to offer choice where they can go to the design studio and pick finishes. And spec is not just affordable luxury.
Speaker Change: We will update it in three more months.
Speaker Change: And remember art on the build to order side of our business, which is 50% to 60% of our operation.
Speaker Change: These houses are big these houses are complicated they have.
They have upgrades because we send everybody through our design studio and let them design their house to their lifestyle and so they take some time to build so.
Speaker Change: We are now.
Speaker Change: Three five months in the fiscal 'twenty, four and there arent all that many communities remaining where the next sale of a build to order home can be delivered by the end of October there are still some communities that can do that but with every passing week there are less and less.
Speaker Change: We do have a lot of specs in process.
Speaker Change: That are certainly going to be completed sold and delivered by year end, but I think as the year progresses.
Douglas C. Yearley: It's not just the lower-priced, lower-margined communities. We are building specifications across all of our price points, all of our product lines. And so... You gave me a general question; I gave you a general answer? No, no, no. It's really helpful.
Our guidance becomes even more definitive because of the build to order nature of our business.
Speaker Change: No that's helpful and maybe to drill down a little bit more on that kind of spec build to order dynamic here. So on your gross margin guide for second quarter can you give us a sense as to what the spread between your spec deliveries and your build to order deliveries might be between those two buyer.
Douglas C. Yearley: I think one thing that you've also done is a significant debt reduction, which is the balance sheet in the best position it's ever been in. So I think that you're probably, my guess would be, at a debt to capital level that you're comfortable with. So are there opportunities for bolt-on acquisitions, given that privates are really disadvantaged for many reasons, not to mention cost of capital? Or is it more likely that you'll continue to grow organically and focus on share buyback to be capital efficient and generate higher returns? Yeah, we're... Thank you. Thank you.
Speaker Change: Groups and is there any.
Speaker Change: Inclination that that could potentially narrow going forward. Thanks.
Speaker Change: Yes, it's a great question.
Speaker Change: It has narrowed.
Speaker Change: Let me give a little historical for the last few quarters.
Speaker Change: In Q4 of 'twenty three.
Speaker Change: Our spec gross margin was 26, 3%.
Speaker Change: In Q1 of 'twenty for this past quarter that jumped to 27, 9%.
Speaker Change: And as you know that the gross margin for the.
Douglas C. Yearley: We're always in the conversation about M&A. We've acquired 15 builders in 30 years. We're very selective.
Speaker Change: The company for the first quarter was 28 nine so in the first quarter specs ran exactly 100 basis points.
Douglas C. Yearley: I'm very happy with our geographic footprint, so I can't tell you that there are 5 or 10 markets out there that we really want to get into where you use M&A most often to enter a new market. But there are a few markets we're looking at that are new, and there are many opportunities for bolt-on M&A to get bigger and diversify the offering. In an existing market, about 5 of our 15 acquisitions were in existing markets, so those opportunities still exist. You're right, the M&A market has heated up a lot, and we are certainly studying opportunities. But I think you're going to see more with capital return to shareholders with Poll than you're going to see new M&A. Great. Well, good luck, guys. Thank you. Thanks, Ivy.
Speaker Change: Below.
Speaker Change: The full gross margin for the quarter now some of those specs came out of.
Speaker Change: The west out of the Pacific Region, California.
And were more expensive and has a higher embedded gross margin in them, but we are definitely encouraged by.
Speaker Change: By the increase in spec gross margin over time here and we think that will continue so in terms of the second quarter guide.
Speaker Change: I think it's probably fair that that 100 basis point difference is is about where we'll be.
Speaker Change: Sure. So yes, I think so it might be a little wider than that because that would be helpful.
Speaker Change: In fact less from the Pacific right.
Speaker Change: But again it depends to a certain extent on how strong the spring is right what we do with pricing as we progress and please understand our business strategy and our business modeling is for the speck business to have a lower gross margin.
Speaker Change: We expect that the houses tend to the specs tend to be built on the more average lot that doesn't have the high lot premium we saved that very high lot premium for the build to order business, where that client will spend a lot more money in the design studio.
Douglas C. Yearley: Our next question comes from Sam Reed from Wells Fargo. Please go ahead with your question. Okay. Thanks so much, guys, and congrats on the quarter. I wanted to touch on the updated delivery guide for 24. You know, it clearly shows you're seeing some momentum into spring, but my question is kind of to help us gauge the level of conservatism that might be embedded in that outlook. And what would we need to see specifically in March and April for you to be comfortable taking that number up? Marty, you want to go with that? Marty's looking at me.
Speaker Change: We also while we upgrade the spec homes.
Speaker Change: We don't take them in some cases to the level that the client will in a build to order.
Speaker Change: <unk>.
Speaker Change: So and we also know that some of the spec inventory does make its way all the way to the end, where it's a completed home that is unsold and when that does happen.
Speaker Change: Though we may have to incentivize a bit more to move it because its standing finished inventory that can deliver so.
Speaker Change: Our strategy has always been as we got into the spec business that there would be a lower gross margin, but we're very pleased with how closely it has been to the overall company's margin.
Douglas C. Yearley: That's a tough question to answer. What level of conservatism do you prefer? I think, Sam, it's safe to say there's no difference in the construct of our guidance right now than there traditionally has been. I think, obviously, if we see a really strong March and April, particularly with our spec strategy, that could result in additional deliveries beyond the guidance that we've given. We're very comfortable with the guidance we've given, and we'll update it in three more months. And remember, on the build to order side of our business, which is 50 to 60 percent of our operation. These houses are complicated.
Speaker Change: Our next question comes from Stephen Kim from Evercore ISI. Please go ahead with your question.
Stephen Kim: Yes, thanks, very much guys I appreciate all the color.
Stephen Kim: Just wanted to.
Stephen Kim: Zoom, the lens out a little bit and try to get a sense for.
Maybe if 2024 is a.
Stephen Kim: The year, where we can see some of the dust settle on rates and some of the volatility subsides, if we could focus a little bit more on what your longer term.
Stephen Kim: Targets are and how you seek to operate the business, let's start with the.
Stephen Kim: With what you just were talking about with an increased spec.
Stephen Kim: Mix I would assume that that would allow you to run at a higher level of absorptions, our sales per community and I think that you've talked in the past about something in the $24 25 per year.
Douglas C. Yearley: They have upgrades because we send everybody through our design studio and let them design their house according to their lifestyle. And so they take some time to build. So, we're now... three-and-a-half months into Fiscal 24, and there aren't all that many communities remaining where the next sale of a build-to-order home can be delivered by the end of October. There are still some communities that can do that, but with every passing week, there are fewer and fewer.
Stephen Kim: Range I was curious as to whether or not this spec strategy is something that's going to be going forward kind of a thing we might see that at more approach something like 30.
Stephen Kim: Year, how you sort of feel about that.
Stephen Kim: And also whether we might see your backlog turnover ratio also sort of remain or move higher let's say into the forty's on backlog turns I'm not talking about the next quarter I'm not even talking this year I'm just talking about in general going forward.
Douglas C. Yearley: We do have a lot of specifications in process that are certainly going to be completed, sold, and delivered by year-end. But I think as the year progresses... Our guidance becomes even more definitive because of the build-to-order nature of our business. No, that's helpful.
Speaker Change: Great question Stephen.
Youre spot on.
Speaker Change: We delivered 27 homes per community in 2023.
Douglas C. Yearley: And maybe to drill down a little bit more on that kind of spec build to order dynamic here. So on your gross margin guide for the second quarter, can you give us a sense as to what the spread between your spec deliveries and your build to order deliveries might be between those two buyer groups? And is there any, you know, inclination that that could potentially narrow going forward? Yeah, it's a great question.
Speaker Change: And we expect to be at 27 to 28 homes per community in 2024 in 'twenty three we did 23 or 24 in 'twenty four we're doing 2000.
Speaker Change: Say that I think you said 23 twice I'm, sorry, you said, 27% twice my apologies 20.
Speaker Change: Or per community in 2023, and 27% to 28 per community in 2024 and that is in part.
Douglas C. Yearley: It has narrowed. Let me give you a little historical data for the last few quarters, in Q4 of 23. Our SPEC gross margin was 26.3 percent. In Q1 of 24, this past quarter, that jumped to 27.9 percent. And as you know, the gross margin for the company for the first quarter was 28.9. So in the first quarter, specs ran exactly 100 basis points below the full gross margin for the quarter. Now, some of those specs came out of...
Speaker Change: The spec strategy it's.
Speaker Change: It's in part.
Speaker Change: Cycle time coming down.
Speaker Change: But it's primarily.
Speaker Change: The new strategy, we have a building more and more spec.
Speaker Change: We think that can improve as we head into 'twenty five and beyond and we are certainly planning for that you talk about 30 per year, yes.
Speaker Change: Thats out there thats our goal Thats achievable.
Speaker Change: With the spec strategy.
Speaker Change: We're nimble our flexible we follow the market and right now there is a very very strong market.
Douglas C. Yearley: The West, the Pacific region, California, and were more expensive and had a higher embedded gross margin in them, but we are definitely encouraged by the increase in spec gross margin over time here, and we think that will continue. So, in terms of the second quarter guide, Guys, I think it's probably fair that that 100 basis point difference is about where we'll be. I think it might be a little wider than that because we're having less feedback from the Pacific.
Speaker Change: Or are spec homes that can be delivered faster.
Speaker Change: Particularly those homes that we may put on the market at frame.
Speaker Change: Still allows the clients the opportunity to hit the design studio and fix it finishes.
Speaker Change: Suit their lifestyle so.
Speaker Change: It's been a big move for the company to go from less than 10% back to now the 40% to 50% range, we are committed to it.
Speaker Change: <unk>.
It's going to be another.
Speaker Change: The reason why we think we can.
Speaker Change: Yes.
Speaker Change: Increased community absorptions and Thats, where.
Douglas C. Yearley: But again, it depends to a certain extent on how strong the spring is and what we do with pricing as we progress. And please understand, our business strategy and our business modeling is for the spec business to have a lower gross margin. We expect that the houses tend to, the spec homes tend to be built on the more average lot that doesn't have the high lot premium.
Speaker Change: We're certainly headed the existing.
Speaker Change: Our homes the resales on the market are still historically tight.
Speaker Change: Even with a modest drop in rates that has not freed up the resale market. There is still a lock in effect and.
Speaker Change: And let's not forget.
Speaker Change: Even as rates do come down, which I think they will and that market begins to modestly loosen up.
Douglas C. Yearley: We save that very high lot premium for the build order business, where that client will spend a lot more money in the design studio. We also, while we upgrade the spec homes, we don't take them, in some cases, to the level that the client will in a bill-to-order purchase.
Speaker Change: The average resale home is now 45 years old.
Speaker Change: There is a flight to new that is not just because of unavailable inventory due to the lock in effect, but because of the quality of that resale inventory and that will continue.
Douglas C. Yearley: And we also know that some of the spec inventory does make its way all the way to the end, where it's a completed home that is unsold. And when that does happen, we know we may have to incentivize a bit more to move it because it's standing finished inventory that can deliver. Our strategy has always been, as we got into the spec business, that there would be a lower gross margin, but we're very pleased with how close it has been to the overall company's margins. Our next question comes from Stephen Kim from Evercore ISI. Please go ahead with your question. Yeah, thanks very much, guys. I appreciate all the color.
Speaker Change: Even as rates come down in the resale market unlocks.
Speaker Change: Great Yeah I appreciate that.
Speaker Change: I didn't hear the backlog turn a comment I don't think in terms of where we could see that going.
Speaker Change: But so I don't get cut off I want to make sure I ask my second question, which is about gross margins and SG&A and basically operating margin you've given are a rubric for this year or you are giving guidance this year for effectively a 17% operating margin.
Speaker Change: With an SG&A rate, that's kind of in the high nines. So I wanted to sort of think about that in the same kind of context like kind of how you think about your business longer term.
Speaker Change: When we look back at your margin history, we've had a lot of changes over the last couple of decades and so as we look ahead at how you seek to operate your business should we be thinking that 17 is kind of like a normalized level for you or do you think that the normalized level.
Stephen Kim: And I just wanted to zoom in a little bit and try to get a sense for maybe if 2024 is a year where we can see some of the dust settle on rates and some of the volatility subside, if we could focus a little bit more on what your longer-term targets are and how you seek to operate the business. Let's start with the, With what you just were talking about with an increased spec mix, I would assume that that would allow you to run at a higher level of absorption or sales per community. I think that you've talked in the past about, you know, something in the 24, 25 per year range. I was curious as to whether or not, you know, if this speculative strategy is something that's going to be a going forward kind of a thing. We might see that more often, you know, something like 30 times a year, how you sort of feel about that. And also whether we might see your backlog turnover ratio also sort of, you know, remain or move higher, let's say, you know, into the 40s on backlog turns. I'm not talking about the next quarter. I'm not even talking this year.
Speaker Change: Would be meaningfully different and if you could unpack sort of would that be the difference would that be more on the SG&A side, maybe opportunities to get that lower.
Speaker Change: Or in the gross margin side.
Speaker Change: Relative to your guidance for the full year.
Speaker Change: So Stephen I think.
Speaker Change: Operating margin is very important to us.
Speaker Change: Returns are very important to us.
Speaker Change: I think the numbers you are seeing.
Speaker Change: Are really close to where our long term.
Speaker Change: Expectations might be 17% that you mentioned is a really good number maybe as high as 18%. We're looking for upper teens to low twenties return on equity I wanted to throw in a shout out there for JV other than land sales as it relates to generating returns as well because it is something we have a history of doing.
Speaker Change: <unk>.
Speaker Change: Gross margins feel very good right now at this level they feel relatively sustainable at this level and we will continue to work on reducing our SG&A with our technology investments and efficiencies that we can try and generate Steven.
Douglas C. Yearley: I'm just talking about in general going forward. Great question, Stephen. You're spot on. We delivered 27 homes per community in 2023, and we expect to be at 27 to 28 homes per community in 2024. In 23, we did 23 or 24.
Speaker Change: Stephen I think we.
We have a long term strategy.
Speaker Change: We continue to maintain a gross margin in the 2728 range.
Speaker Change: They have an SG&A around nine.
Speaker Change: <unk> generates the operating margin at or above your <unk>.
Speaker Change: 17 number.
Speaker Change: Our next question comes from Mike Dahl from RBC Capital markets. Please go ahead with your question.
Mike Dahl: Hi, Thanks for taking my questions.
Mike Dahl: A lot of helpful color and context around.
Douglas C. Yearley: Yes. In 24, we're doing 27. Did I not say that? I think you said 23 twice. I'm sorry, you said 27 twice.
Mike Dahl: How are you thinking about the business.
Mike Dahl: Maybe just to drop back to.
Mike Dahl: Kind of a little more near term as you've seen the demand progress.
Mike Dahl: Favorably through the last couple of months can you talk more specifically about what you have.
Douglas C. Yearley: My apologies, four per community in 2023 and 27 to 28 per community in 2024. And that is, in part. The SPAC Strategy. It's in part cycle time coming down, but it's primarily the new strategy we have of building more and more specs. We think that can improve as we head into 25 and beyond, and we are certainly planning for that. You talk about 30 per year? Yes. That's out there, that's a goal, that's achievable with the SPECT strategy.
Mike Dahl: Dean and Don on pricing are you still kind of.
Mike Dahl: Pulp pricing relatively flat, but can you can you talk about what you've done on kind of net.
Mike Dahl: Net pricing and how you are balancing.
Mike Dahl: Page price incentives given the rebound in demand here.
Sure so in the first quarter.
Dean: We had price increases in about two thirds of our communities.
Dean: We also had a modest increase in incentives that was because.
Dean: The spec sales went up to 50% and as I've already talked about on a prior question.
Douglas C. Yearley: You know, we're nimble, we're flexible, we follow the market, and right now, there is a very, very strong market for our spec homes that can be delivered faster, particularly those homes that we may put on the market at frame, which still allows the client the opportunity to hit the design studio and fix the finishes to suit their lifestyle. So it's been a big move for the company to go from less than 10% spec to now the 40-50% range. We are committed to doing it. And it's going to be another reason why we think we can increase community absorption. And that's where we're certainly headed. Homes; resales on the market are still historically tight. Even with a modest drop in rates that has not freed up the resale market, there is still a lock-in effect. And let's not forget.
Speaker Change: We do.
Speaker Change: We have seen modestly higher incentives on our specs. So overall I'd say the pricing has been flat when you combine.
Speaker Change: The modest price increases in two thirds of communities with the modest increase in incentives on the spec sales, we have seen flat pricing.
Speaker Change: As we entered the spring season, a month ago as we do in most spring seasons, we take the first month or so to monitor where the market is because the beginning of the spring season is very important for us.
Speaker Change: <unk>, how much momentum and how much pricing power, we may have through the spring.
Speaker Change: As we've talked about we've had a terrific four weeks. This is about the time when we're in a good spring season that we begin to have price increases around the country. They will be modest because we're being careful in our rates, while they came down they ticked up a little bit and so we are still being cautious.
Speaker Change: We want to continue to drive sales, we have the capacity as we've talked about particularly with the spec program to deliver these homes and so there will be starting right around now.
Douglas C. Yearley: Even as rates do come down, which I think they will, and that market begins to modestly loosen up, the average resale home is now 45 years old. There is a slight preference for new.
Speaker Change: Modest price increases as we head further into the spring season.
Speaker Change: Got it okay.
Speaker Change: Okay.
Stephen Kim: That is not just because of unavailable inventory due to the lock-in effect, but because of the quality of that resale inventory, and that will continue even as rates come down and the resale market unlocks. Great, yeah, I appreciate that. I didn't hear the backlog turn comment, I don't think, in terms of where we could see that going, so I don't get cut off. I want to make sure I ask my second question, which is about gross margins and SG&A, and basically operating margins. You've given a rubric for this year, or you've given guidance this year for effectively a 17% operating margin with an SG&A rate that's kind of in the high nines. So I wanted to sort of think about that in the same kind of context, like how you think about your business longer term.
Follow up in terms of how you were.
Speaker Change: Thinking about that relative to the more recent uptick in rates again.
Speaker Change: So I appreciate that.
Speaker Change: I guess just secondly.
Speaker Change: On the updated.
Speaker Change: Their joint venture with <unk>.
Speaker Change: Outperformed in the quarter, you've got the new.
Speaker Change: Died in there thats attributable to the to.
Speaker Change: To the one off large parcel.
Speaker Change: Seemed like that.
Speaker Change: You didn't increase the guide by the full amount of.
Speaker Change: This landfill. So maybe can you just talk through what some of the other moving pieces are in that line, whether it's kind of some of the delayed JV interest sales or anything that kind of got pushed out into <unk>.
Speaker Change: Fiscal 'twenty five.
Speaker Change: Sure.
Speaker Change: At the beginning of the year, Mike JV land sales and other included a placeholder of 40% to $50 million for that land sale.
Speaker Change: Didn't want to count on all of it as there was very little deposit up and such deposit was not hard.
Speaker Change: But we also didn't want to fully discounted so we had handicapped at at 25% to 35% likelihood of occurring and so we included $40 to $50 million from that in our JV and other.
Douglas C. Yearley: When we look back at your margin history, we've had a lot of changes over the last couple of decades, and so as we look ahead at how you seek to operate your business, should we be thinking that 17 is kind of like a normalized level for you, or do you think that the normalized level would be meaningfully different? And if you could unpack sort of the difference, would that be more on the SG&A side, maybe opportunities to get that lower, or on the gross margin side relative to your guidance for the full year? So, David, I think... Operating margin is very important to us. Returns are very important to us. I think the numbers you are seeing are pretty close to where our long-term expectations might be. The 17% that you mentioned is a really good number, maybe as high as 18%.
Speaker Change: So when.
Speaker Change: When we increased the guidance, it's not just being increased for the 175 is being increased.
Speaker Change: A little less than that for the land sale, but some other things as well that are puts and takes the important part is our guide was $125 million and its now $260 million and a lot of that 260 million as that has occurred as we sit here today.
Speaker Change: Yeah, that's great. Thanks.
Speaker Change: Our next question comes from rate.
Speaker Change: <unk> from Bank of America. Please go ahead with your question.
Rate: Hi, good morning, Thanks for taking my question.
Speaker Change: Good morning.
Mario can you just help bridge us between the first quarter gross margin of 28 nine in the second quarter guidance.
Speaker Change: 27.
Speaker Change: Six.
Mario: There is a mix impact in there.
Mario: But you are guiding to flattish delivery asps.
Mario: I just wanted to understand like how much was the unexpected mix benefit to <unk> is that the full 90 basis points.
Douglas C. Yearley: We're looking for an upper teens to low 20s return on equity. I want to throw in a shout-out there for JV Other and land sales as it relates to generating returns as well because it is something we have a history of doing. Gross margins feel very good right now at this level. They feel relatively sustainable at this level, and we'll continue to work on reducing our SG&A with our technology investments and efficiencies that we can try and generate. Yes, Stephen, I think we... You know, we have a long-term strategy to continue to maintain a gross margin in the 27-28 range. I have an SG&A around nine, which generates an operating margin at or above year 17. Our next question comes from Mike Dahl from RBC Capital Markets. Please go ahead with your question.
Mario: Then what is the sort of reversal of bad or normalization in the second quarter.
Speaker Change: I think the majority of the 90 basis points was driven by the.
Speaker Change: Acceleration of high margin mix.
Speaker Change: And so there'll be an inverse effect from that in the second quarter. Another component of our outperformance in the first quarter, Doug touched on earlier and that our <unk> gross margin came in a little better than we expected.
Speaker Change: I am sorry, the spec excuse me the spec.
Speaker Change: <unk> is our internal term for quick move in homes spec is what you guys understand.
Speaker Change: In the first quarter came in a little better than we thought as we look at our second quarter, we expect less specific and high margin mid Atlantic deliveries. We also expect more <unk> as a percentage of total.
Mike Dahl: Thanks for taking my questions. A lot of helpful color and context around how you're thinking about the business. Maybe maybe just to draw back to kind of a little more near term, as you've seen the demand progress favorably through the last couple of months. Can you talk, you know, more specifically about what you have?
Speaker Change: Specs excuse me.
Speaker Change: As a percentage of total than happened in the first quarter.
Speaker Change: But.
Speaker Change: Thank you.
Helpful.
Speaker Change: Let's not get too hung up on quarter to quarter, because the full year gross margin guide has been increased by 10 basis points.
Speaker Change: And another 10 basis points on interest in cost of sales right.
Douglas C. Yearley: Dean and Don on pricing, our sense is you're still kind of upholding pricing relatively flat. But can you can you talk about what you've done with kind of net pricing and how you're balancing? Pace Price Incentives given the rebound in demand here. Sure, so in the first quarter... We had price increases in about two-thirds of our community. We also had a modest increase in incentives because the spec sales went up to 50%, and as I already talked about in a prior question, we do – we have seen modestly higher incentives on the spec. So overall, I'd say the pricing has been flat. When you combine the modest price increases in two-thirds of the communities with the modest increase in incentives on spec sales, we have seen flat pricing. As we entered the spring season a month ago, as we do in most spring seasons, we take the first month or so to monitor where the market is because the beginning of the spring season is very important for us to feel how much momentum and how much pricing power we may have through the spring.
Speaker Change: Got it okay.
Speaker Change: Helpful and that makes sense.
Speaker Change: And then just longer term on the increased mix of <unk> spec.
Speaker Change: There's been this strategy change it's been successful what has changed from the perspective of the market or from Kohl's positioning where this makes more sense now than it has maybe like historically.
Speaker Change: Is this temporary because retail is.
Speaker Change: <unk> market is really tight.
Speaker Change: We expect expect to go up or down over time, depending on what's going on in the market or is this something where structurally so much changed at all where this makes sense it hasn't historically to run spec at a higher percentage.
Speaker Change: Yes.
Speaker Change: What triggered it was.
Speaker Change: The.
Speaker Change: Historically tight resale market.
Speaker Change: And we realized there was a void there that we could fill.
Speaker Change: But I do think.
Speaker Change: This is long term it's structural.
Speaker Change: For a number of reasons I've mentioned the age of the resale home.
Speaker Change: The condition of that 45 year old home.
Speaker Change: We have a number of people sitting around this table here that I've taken them. It sells out of the market because they can't find a home.
Douglas C. Yearley: As we talked about, we've had a terrific four weeks. This is about the time when we're in a good spring season, and we begin to have price increases around the country. But they will be modest because we're being careful.
Speaker Change: Decent quality out there on the resale market.
Speaker Change: We've also expanded our geographic footprint, we have come down in price.
Speaker Change: While we are building spec it as I mentioned in all of our different price points.
Douglas C. Yearley: You know, rates, while they came down, they've kicked up a little bit, and so we are still being cautious. We want to continue to drive sales. We have the capacity, as we've talked about, particularly with the spec program, to deliver these homes, and so there will be, starting right around now, modest price increases as we head further into the spring season.
Speaker Change: I think the confidence we got from having more affordable luxury communities that naturally would have more spec opportunities also helped us.
Speaker Change: Move this strategy along.
Speaker Change: No.
Speaker Change: I think it's here to stay I can't tell you that it will be 40% to 50% at all times.
But but it it started because of the tight market and now we're rolling we're very confident in it and we define as back as foundation forward and we have a strategy in place to put houses on the market at different stages of construction, allowing the client in many cases.
Douglas C. Yearley: Okay. Yeah, that's a strong word. But a follow-up in terms of how you, I'm thinking about that relative to the more recent uptick in rates again, so appreciate that. I guess just secondly, on the updated... other joint venture landfills, you outperformed in the quarter; you've got the new guide in there that's attributable to the one-off large parcel. It seems like at that, you know, you didn't increase the guide by the full amount of this land sale. So maybe can you just talk through what some of the other moving pieces are in that line, whether it's kind of some of the delayed baby interest sales or anything that kind of got pushed out into Fiscal 25.
Speaker Change: As as we've talked about.
Speaker Change: Still take advantage.
Speaker Change: One of the real pillars of toll which is choice. We have 35 design studios around the country. The buyers go in there they pick all their finishes and for us to still offer that but do so with a faster delivery because the houses partially built when they buy it.
Speaker Change: I think it's here to stay.
Speaker Change: There's been some change in consumer preference.
Speaker Change: Our homes are.
Speaker Change: Good and attractive and well decorated and well appointed well designed for today's lifestyles and interest.
Speaker Change: The resales that are out there many of them need work.
Speaker Change: You have to get somebody to do that work.
Douglas C. Yearley: Sure. At the beginning of the year, Mike, JV, Land Sales, and others included a placeholder of $40 to $50 million for that land sale. We didn't want to count on all of it, as there was very little deposit up front, and such a deposit was not hard. But we also didn't want to fully discount it, so we had handicapped it at 25 to 35 percent likelihood of occurring, and so we included $40 to $50 million from that in our JV and others. So...
Speaker Change: The money to pay for that work after buying the house and so I think.
Speaker Change: The consumer is gravitating to new as Doug mentioned and.
Speaker Change: And what we offer is pretty attractive.
Speaker Change: Cycle times are down a couple of months.
Speaker Change: The.
Speaker Change: The speck business is driving higher IRR.
Speaker Change: When we open a community now we.
Speaker Change: May have.
Speaker Change: Five to 10 spec homes that have already been started so when you come in at the sales center opening weekend.
Speaker Change: You don't just have to think a year out for a build to order home, but theres. Some inventory homes that are in various stages, we get the revenue quicker that way too.
Martin P. Connor: When we increase the guidance, it's not just being increased for the $175 million. It's being increased a little less than that for the land sale, but some other things as well that are puts and takes. The important part is that our guidance was $125 million, and it's now $260 million. And a lot of that $260 million has occurred as we sit here today. Yep, that's great. Thanks.
Speaker Change: I think.
Speaker Change: We are confident that this will continue to be a big part of our strategy as.
Speaker Change: As we continue.
Speaker Change: So obsessed with being America's luxury homebuilder and to focus on the brand we will not let this spec strategy in any way bring down quality or takeaway choice.
Speaker Change: For the special sauce of toll brothers.
Speaker Change: Our next.
Speaker Change: Comes from John Lovallo from UBS. Please go ahead with your question.
John Lovallo: Good morning, guys. Thanks for taking my questions. The first one is if we look 2015 to 2019. So it's a pre COVID-19 absorptions increased call it 60% to 65% on average from the first quarter to the second quarter, you guys have talked about better than normal seasonality going on right. Now. So just curious how youre thinking about that potential step up this year.
Mike Dahl: Our next question comes from Rafe. Dr. Jadrosich from Bank of America, please go ahead with your question. Hi, good morning. Thanks for taking my question. Oh, I'm waiting for it.
John Lovallo: So I mentioned that.
John Lovallo: January.
Rafe Jason Jadrosich: Mario, can you just help bridge us between the first quarter gross margin of 28.9 and the second quarter guidance of 27.6? I know there's a mix impact in there, but you are guiding to a flattish delivery ASP. So I just wanted to understand, like, how much was the unexpected mixed benefit to 1Q? Was that the full 90 basis points? And then what is the sort of reversal of that or normalization in the second quarter? Yeah, I think the majority of the 90 basis points was driven by the acceleration of the High Margin Mix. And so there'll be an inverse effect from that in the second quarter. Another component of our outperformance in the first quarter Doug touched on earlier was that our QMI gross margin came in a little better than we expected. I'm sorry, the spec.
John Lovallo: Had outsized sales to December and November looking at past trends and February.
John Lovallo: Following normal seasonality.
John Lovallo: We have seen looking back at historic trends.
John Lovallo: Our traffic.
John Lovallo: In the last week.
John Lovallo: Was the highest week of foot traffic into our model homes since February of 'twenty, two our web traffic is up dramatically.
John Lovallo: We we have great optimism for what's coming this spring.
John Lovallo: With a really good start in January and February I think.
Speaker Change: That's the best answer I can give.
Speaker Change: That's helpful and encouraging our if we look at the first quarter.
Speaker Change: Or actually the first I guess the delivery ASP you guys are talking about slightly north of a million here in the coming quarter.
Speaker Change: And if we think about sort of the full year guide of $940 to 960 that would imply a pretty good step down I'm curious how you guys did talk about mix is that the largest driver here or are we missing something.
Martin P. Connor: Excuse me, the specification. QMI is our internal term for quick movement home. Spec is what you guys understand. In the first quarter, it came in a little better than we thought. As we look at our second quarter, we expect less specific and high-margin Mid-Atlantic deliveries. We also expect more QMIs as a percentage of total. Specs, excuse me, as a percentage of total then happened in the first quarter, but let's not get too hung up on quarter-to-quarter because the full year gross margin guide has been increased by 10 basis points and another 10 basis points on interest and cost of sale. Okay, yeah, that's helpful, and that makes sense.
Speaker Change: It's all it's the entire driver our strategy from a few years back.
Speaker Change: Come down in price to pick up big bigger market share.
Speaker Change: <unk> is now in place and is coming through in deliveries. So we are celebrating this drop in price.
Speaker Change: Because the strategy is working and so that said, it's 100% mix and that mix shift as more sell more mid Atlantic a little bit more affordable luxury and a little bit more age targeted age restricted than the first half.
Speaker Change: Helpful. Thank you guys.
Speaker Change: Welcome.
Speaker Change: Our next question comes from Michael Rehaut from Jpmorgan. Please go ahead with your question.
Michael Jason Rehaut: Thanks, Good afternoon, everyone. Thanks for squeezing me in before.
Michael Jason Rehaut: The end of the hour.
Michael Jason Rehaut: First just wanted to circle back on the comments around gross margins, where you said that you think.
Michael Jason Rehaut: Gross margins can be sustainable going forward at 27%, 28%.
Douglas C. Yearley: And then just longer term on the increased mix of QMI or SPEC, there's been this strategy change, and it's been successful. What has changed from the perspective of the market or from tolls positioning, where this makes more sense now than it did, maybe, historically? Is this temporary because the resale market's really tight? Should we expect SPEC to go up or down over time depending on what's going on in the market? Or is this something where structurally someone's changed a toll where this makes sense that it hasn't historically run SPEC at a higher percentage? Yeah, what triggered it was the historically tight resale market, and we realized there was a void there that we could fill. But I do think, um...
Michael Jason Rehaut: Obviously, a lot of builders have kind of been working through or in the process of working through maybe a little bit of a reset from.
Michael Jason Rehaut: Slightly higher price land over that was purchased perhaps also some higher development costs over the last couple of years and seeing a little bit of normalization.
Michael Jason Rehaut: Your comments would kind of suggest.
Michael Jason Rehaut: Kind of staying at this higher level versus prior years, maybe a little bit of slippage. If you kind of say, 27% to 28 and you're still at 28 four.
Michael Jason Rehaut: <unk>.
Michael Jason Rehaut: For fiscal 'twenty four.
Michael Jason Rehaut: But just wanted to make sure we're thinking about that right and really what's driving this.
Michael Jason Rehaut: This higher level of gross margin, maybe a little bit of slippage in 25 to the midpoint of the range, perhaps but.
Michael Jason Rehaut: Whats driving that that higher level of gross margin today versus prior years.
Douglas C. Yearley: This is long-term, it's structural, for a number of reasons. I mentioned the age of the resale home. The condition of that 45-year-old home. We have a number of people sitting around this table here that have taken themselves out of the market because they can't find a home of decent quality out there on the resale market. We've also expanded our geographic footprint, and we have come down in price. There, you know, while we're building spec, as I mentioned, at all of our different price points, I think the confidence we got from having more affordable luxury communities that naturally would have more spec opportunities also helped us move this strategy along. So I think it's here to stay.
Michael Jason Rehaut: Could you have any risk of slippage similar more similar to your peers.
Speaker Change: Mike I think we're in a unique position when it comes to land buying and I know, we're in a unique position when it comes to our underwriting thresholds.
Speaker Change: 50% of our own land was contracted for before December of 2020.
And as we.
Speaker Change: Our underwriting is fairly simple.
Speaker Change: And we do a combo score or we call it between IRR in gross margin.
Speaker Change: That combo score depending on the market and the performance of the team whether the lots are improved and therefore have less land development risk, whether theres, a long entitlement process and therefore, the deal may be a bit more speculative or expensive to get to the finish line.
Speaker Change: And that ranges from.
Speaker Change: The low to mid 50 combo to 60 plus combo.
Douglas C. Yearley: I can't tell you that it will be 40 to 50 percent at all times. But it started because of the tight market, and now we're rolling, and we're very confident in it. And we define a spec as foundation forward, and we have a strategy in place to put houses on the market at different stages of construction, allowing the client, in many cases, as we've talked about, to still take advantage of one of the real pillars of Toll, which is choice. We have 35 design studios around the country. The buyers go in, and they pick all their finishes.
Speaker Change: And by that I mean, youre, adding up IRR plus gross margin and we see deals regularly in fact, we required deals regularly to have gross margins.
North of 25, and IRR is north of 25.
Speaker Change: And we're still seeing good deal flow.
Speaker Change: And we are conservative in our underwriting we don't build home price appreciation in.
Speaker Change: To the model, we have big contingencies will land development cost because we know land development <unk>.
Speaker Change: We are still running away from the industry a bit and I think the main reason for it.
Speaker Change: Not only do we have great land teams around the country that were incredibly hard working and diligent, but we generally at the corner of main and main where we build do not compete with the large publics and privates that are well capitalized and are accepting significantly lower returns to grow their companies we compete at arc.
Douglas C. Yearley: And for us to still offer that, but do so with a faster delivery because the house is partially built when they buy it, I think it's here to stay. I think there's been some change in consumer preference. You know, our homes are really good and attractive and well-decorated and well-appointed and well-designed for today's lifestyles and interests. But the resales that are out there, many of them need work. You have to get somebody to do that work, and you have to have the money to pay for that work after buying the house.
Speaker Change: Price point in our locations with small local and regional builders, who have lost their banking relationships with the regional banks, who are under capitalized who cannot write the big check and we have an easier time finding the land.
Speaker Change: That's just proven out by the 20% to 25 land deals I get every Sunday night that I still review that have good solid returns.
Speaker Change: That's what gives us the call rights.
Speaker Change: We have 70000 lots.
Speaker Change: So maybe we don't have to be as aggressive.
Speaker Change: In the next slot.
Speaker Change: And some others might have to.
Douglas C. Yearley: The consumer is gravitating to new, as Doug mentioned, and what we offer is pretty attractive. However, cycle times are down a couple months. There's, you know, there's, I suspect business is driving higher IRR. When we open a community now, we may have... Five to ten spec homes that have already been started. So when you come into the sales center opening weekend, you don't just have to think a year out for a bill to order home, but there are some inventory homes that are in various stages. We get the revenue quicker that way, too.
Speaker Change: And remember, there's $150000 of upgrading and putting these houses by our client.
Speaker Change: And that those upgrades are highly accretive to our company's gross margin.
Speaker Change: So we are driving now that goes in the underwriting of course as we buy land. We know we're going to sell those upgrades, but that is driving.
Speaker Change: Added margin because choice deserves an added margin it's more difficult it takes longer more can go wrong. So we expect and we deserve that higher margin.
Speaker Change: Right and I think you've said before that the combo IRR in gross margin that youre looking for.
Speaker Change: As increased roughly 10 points over the last few years, maybe Marty you can just touch on that as well but.
Speaker Change: Wanted to the second question just going back to the ASP question, you kind of kept the $940 to $9 60 for the full year Youre doing $1 million in the first half that would suggest something around low nines in the back half.
Douglas C. Yearley: So I think, you know, we are confident that this will continue to be a big part of our strategy as we continue to obsess with being America's luxury home builder and focus on the brand. We will not let this spec strategy in any way bring down quality or take away choice with a special sauce at Toll Brothers, www.larryweaver.com. Our next question comes from John Lovallo from UBS; please go ahead with your question. Good morning, guys. Thanks for taking my questions.
Speaker Change: And just wanted to kind of make sure we're thinking about it correctly without giving guidance for 2025, but that low nines call. It maybe 920, maybe a little adjusted because of higher revenues.
Speaker Change: If that's the right kind of starting point that we should be thinking of for fiscal 'twenty five.
Speaker Change: Yes, as I mentioned I think our strategy to move into affordable luxury is now fully in place. So I think the drop youre seen in the second half of 'twenty four to the low nines.
Douglas C. Yearley: The first one is if we look 2015 to 2019, so so pre- COVID, absorptions increased call 60 to 65% on average from the first quarter to the second quarter. You guys have talked about better than normal seasonality going on right now. So just curious how you're thinking about that potential step up this year. So I've mentioned that January had outsized sales compared to December and November, looking at past trends, and February is following the normal seasonality that we have seen looking back at historic trends. Our traffic, in the last week, was the highest week of foot traffic into our model homes since February 22.
Speaker Change: Is reflective of the future business a toll.
Speaker Change: Our final question.
Speaker Change: Please go ahead Sir.
Speaker Change: That's from Buck Horne from Raymond James. Please go ahead with your question.
Buck Horne: Hey, I'll be brief I appreciate the time.
Buck Horne: Wondering we have seen a little bit of an unusual seasonal uptick in resale inventory in a couple of markets, particularly southwest, Florida, and Texas and just curious if you could speak to those regions in particular do you think.
Speaker Change: Some of the addition to retail inventory there is having any noticeable impact on the business through the early part of spring selling.
Douglas C. Yearley: Our web traffic is up dramatically, and we have great optimism for what's coming this spring, with a really good start in January and February. I think that's the best answer I can give. Okay, now that's helpful and encouraging. Or if we look at, you know, the first quarter, or actually the first, I guess the delivery ASP that you guys are talking about slightly north of a million here in the coming quarter. And if we think about sort of the full year guide of 940 to 960, that would imply a pretty good step down. Curiously, you know, you guys did talk about mix. Is that the largest driver here? Or are we missing something? It's all, it's the entire driver.
Speaker Change: Texas has been terrific we're in four markets in Texas.
Speaker Change: Austin, San Antonio Dallas Houston.
Speaker Change: Just terrific we've been thrilled with the business there.
A lot of new homes in Texas. There is a lot of competition, we have a great brand there we've been in a state a long time.
Speaker Change: And.
Speaker Change: Sure.
Speaker Change: I'm very optimistic about our future there land is relatively easy to find the risk is less because there are land developers that feed us lots.
Speaker Change: Which makes the business easier we can have just in time.
Speaker Change: <unk> provided to us which of course can drive the IRR.
Speaker Change: I wouldn't read too much into SaaS West, Florida were very small there.
Speaker Change: It's one of our smaller markets in the state.
Speaker Change: But Florida, we call at Florida, West, which is really Naples up through.
Douglas C. Yearley: Our strategy from a few years back, to come down in price to pick up bigger market share, is now in place and is coming through in deliveries. So we are celebrating this drop in price because the strategy is working. And so that's it. It's 100% mixed.
Fort Myers.
Speaker Change: <unk>.
Speaker Change: That is having a really good February in fact, Florida East, which we call Fort Lauderdale up through Stuart.
Speaker Change: <unk> is also having a really good February.
Douglas C. Yearley: And that mixed shift is more South, more Mid-Atlantic, a little bit more affordable luxury, and a little bit more age-targeted and age-restricted than the first half. Helpful. Thank you, guys. Welcome. Our next question comes from Michael Rehaut from J.P. Morgan. Please go ahead with your question. Thanks. Good afternoon, everyone.
Speaker Change: <unk>.
Speaker Change: Snowfalls in the north in the Midwest.
Speaker Change: The planes that SaaS and we're taking advantage of that.
Speaker Change: That's fantastic thanks for the color at all my other questions are answered so congrats on great quarter guys.
Speaker Change: Okay. Thanks very much.
Speaker Change: I think he is at a rapid Jamie how are we doing.
Jamie: Yes, Sir that will conclude today's question and answer session I'll turn the floor back over to you for any closing remarks.
Michael Jason Rehaut: Thanks for squeezing me in before the end of the hour. First, I just wanted to circle back on the comments around gross margins where you said that you think gross margins can be sustainable going forward at 27, 28%. You know, obviously, a lot of builders have kind of been working through or in the process of working through maybe a little bit of a reset from slightly higher-priced land that was purchased, perhaps also some higher development costs, over the last couple of years and are seeing a little bit of normalization. Your comments would kind of suggest... kind of staying at this higher level versus prior years, maybe a little bit of slippage if you kind of say 27-28 and you're still at 28-4 for Fiscal 24.
Speaker Change: Jamie Thanks, you've been great. Thanks, everyone for your interest and support as always great questions. We're always here offline to answer any follow ups you may have.
Speaker Change: Thanks again take care.
Speaker Change: And with that ladies and gentlemen, we will conclude today's conference call and presentation. Thank you for joining you may now disconnect your lines.
Michael Jason Rehaut: I just want to make sure we're thinking about that right and, you know, really what's driving this higher level of gross margin, maybe a little bit of slippage in the 25% to the midpoint of the range, perhaps, but, you know, what's driving that higher level of gross margin today versus prior years, and, you know, could you have any risk of slippage more similar to your peers? Mike, I think we're in a unique position when it comes to land buying. And I know we're in a unique position when it comes to our underwriting thresholds.
Douglas C. Yearley: 50% of our own land was contracted for.., before December of 2020. I'm, And as we, you know, our underwriting is fairly simple and, you know, we do a combo score, we call it, between IRR and gross margin, that combo score, depending on the market and the performance of the team, and whether the lots are improved and therefore have less land development risk, whether there's a long entitlement process, and therefore the deal may be a bit more speculative or expensive to get to the finish line, you know, that ranges from, It's a low-to-mid 50 combo to 60-plus combo, and by that I mean you're adding up IRR plus gross margin, and we see deals regularly, in fact, we require deals regularly to have gross margins north of 25, and IRR is north of 25, and we're still seeing good deals. And we are conservative in our underwriting. We don't build home price appreciation in to the model.
Douglas C. Yearley: We have big contingencies on land development costs because we know land development costs are still running away from the industry a bit. And I think the main reason for it... Not only do we have great land teams around the country who are incredibly hardworking and diligent, but we generally at the corner of Maine and New Hampshire where we build do not compete with the large publics and privates that are well capitalized and are accepting significantly lower returns to grow their companies. We compete at our price point in our locations with small local and regional builders who have lost their banking relationships with the regional banks, who are undercapitalized, who cannot write the big check, and we have an easier time finding the land. That's just proven out by the 20 to 25 land deals I get every Sunday night that I still review that have good, solid returns. That's who gives us the call rights. We have 70,000 lots. So maybe we don't have to be as aggressive in the next lot, and some others might have to.
Speaker Change: [music].
Douglas C. Yearley: And remember, there are $150,000 of upgrades being put in these houses by our clients. And those upgrades are highly accretive to our company's gross margin. So we are driving, now that goes in the underwriting, of course, as we buy land, we know we're going to sell those upgrades. But that is driving an added margin because choice deserves an added margin. It's more difficult.
Douglas C. Yearley: It takes longer. More can go wrong. So we expect and we deserve that higher margin. Right. And I think you've said before that the combo IRR and gross margin that you're looking for has increased roughly 10 points over the last few years. Maybe, Marty, you can just touch on that as well.
Douglas C. Yearley: But the second question, you know, just going back to the ASP question, you kind of kept the 940 to 960 for the full year. You're doing a million in the first half. That would suggest something around the low nines in the back half.
Douglas C. Yearley: And just want to kind of think, make sure we're thinking about it correctly without giving guidance for 2025. But, you know, that low nines, call it maybe 920, maybe a little adjusted because of higher revenue. If that's the right kind of starting point that we should be thinking of for fiscal 25, yeah, as I mentioned, I think our strategy to move into affordable luxury is now fully in place. So I think the drop you're seeing in the second half of 24 to the low nine is reflective of the future business of tolls. And our final question... Please, go ahead comes from Buck Horne from Raymond James. Please go ahead with your decision. Hey, I'll be brief. I appreciate the time.
Buck Horne: Just wondering, we have seen a little bit of an, maybe, unusual seasonal uptick in resale inventory in a couple of markets, particularly southwest Florida and Texas. And I was just curious if you could speak to those regions, in particular, if you think some of the addition to resale inventory there is having any noticeable impact on business through the early part of spring selling. Texas has been terrific. We're in four markets in Texas. Austin, San Antonio, Dallas, Houston—just terrific.
Douglas C. Yearley: We've been thrilled with the business there. There are a lot of new homes in Texas. There is a lot of competition. We have a great brand there. We've been in the state a long time. You know, I'm very optimistic about our future there. Land is relatively easy to find.
Douglas C. Yearley: The risk is less because there are land developers that feed us lots, which makes the business easier. We can have just-in-time lots provided to us, which, of course, can drive the IRR. I wouldn't read too much into Southwest Florida. We're very small there.
Douglas C. Yearley: It's one of our smaller markets in the state. But Florida, we call it Florida West, which is really Naples up through Fort Myers, and that is having a really good February. In fact, Florida East, which we call Fort Lauderdale up through Stuart, is also having a really good February. As, you know, as the snow falls in the north and the midwest...
Douglas C. Yearley: The plane's heading south, and we're taking advantage of that. That's fantastic. Thanks for the color.
Buck Horne: All my other questions are answered, too. Congratulations and a great quarter, guys. Thanks very much. I think is that a wrap?
Operator: Jamie, how are we doing? Yes sir, that will conclude today's question and answer session. I'll turn the floor back over to you for any closing remarks. Amy, thanks. You've been great.
Operator: Thanks, everyone, for your interest and support. As always, great questions. We're always here offline to answer any follow-ups you may have, and thanks again. Take care. And with that, ladies and gentlemen, we'll conclude today's conference call and presentation. Thank you for joining us. You may now disconnect your line. Welcome to the Toll Brothers first quarter fiscal year 2024 conference call. All participants will be in a listen-only mode.
Speaker Change: [music].
Operator: If you need assistance, please contact a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press the star key and then 1 on your telephone keypad.
Douglas C. Yearley: Withdraw your questions; you may press star and two, and the company is planning to end the call at 9:30 when the market opens. During the Q&A, please limit yourselves to one question and one follow-up. Please also note today's event is being recorded, and at this time, I'd like to turn the floor over to Douglas Yearley, CEO. Please go ahead.
Douglas C. Yearley: Thank you, Jamie. 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 Perrahaus, President and Chief Operating Officer, Fred Cooper, Senior VP of Finance and Investor Relations, Wendy Marlett, Chief Marketing Officer, and Greg Ziegler, Senior VP and Treasurer.
Douglas C. Yearley: I'm very pleased with our strong first quarter results. We beat our guidance across the board and saw another quarter of solid sales, with contracts up 40% in units and 42% in dollars compared to last year. In addition, since the start of the spring selling season in mid-January, we have seen a meaningful uptick in demand that has continued through this past weekend.
Speaker Change: Good morning, everyone and welcome to the toll brothers first quarter fiscal year 2024 conference call.
Speaker Change: All participants will be in a listen only mode.
Speaker Change: Should you need assistance. Please signal conference specialist by pressing the Starkey followed by zero.
Speaker Change: After todays presentation, there will be an opportunity to ask questions.
Douglas C. Yearley: In our first quarter, we delivered 1,927 homes at an average price of approximately $1 million, generating record first quarter home sales of 1.93 billion dollars, a 10.4% increase in dollars compared to the first quarter of fiscal 2023. Our adjusted gross margin was 28.9%. 90 basis points, better than guidance, and 140 basis points better than last year's first quarter. The outperformance versus our guidance was due to MEC, driven by earlier-than-expected deliveries in certain of our higher-margin Pacific and Mid-Atlantic communities and fewer-than-expected deliveries in lower-margin mountain communities.
Speaker Change: I'll ask a question you May press Star and then one on your telephone keypad to.
Speaker Change: Withdraw your question you May press Star two.
Speaker Change: The company is planning to end the call at 930, when the market opens.
Speaker Change: During the Q&A, please limit yourselves to one question and one follow up.
Douglas C. Yearley: Please also note today's event is being recorded and at this time I'd like to turn the floor over to Douglas yearly CEO. Please go ahead.
Douglas: Thank you Jamie good morning.
Douglas: 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.
Douglas: 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.
Douglas C. Yearley: SG&A expense, at 11.9% of home sales revenues, was 20 basis points better than last year's first quarter and 50 Basis Points Better Than Guidance, in addition to greater fixed cost leverage from higher revenues. We continue to benefit from cost reduction initiatives we've taken over the past several years. We continue to look for ways to operate more efficiently.
Speaker Change: With me today are Marty Connor, Chief Financial Officer, Rob Powerhouse, President and Chief operating Officer.
Speaker Change: Cooper Senior VP of finance and Investor Relations, Wendy Marlett, Chief Marketing Officer, and Gregg Ziegler senior VP and treasurer.
Speaker Change: I am very pleased with our strong first quarter results.
Speaker Change: We beat our guidance across the board and saw another quarter of solid sales with contracts up 40% in units and 42% in dollars compared to last year.
Douglas C. Yearley: Pre-tax income was $311.2 million, and earnings per share... were $2.25 diluted, up 23% and 32%, respectively, compared to last year's first quarter. With the strong performance in our first quarter and a strong start to the spring selling season, we are raising our full year guidance across all of our key home building metrics. At the midpoint of our guidance, we now expect full-year deliveries of 10,250 homes, an adjusted gross margin of 28%, and an SG&A margin of 9.8%. In addition, earlier this month, we sold a parcel of land to a commercial developer for net cash proceeds of $180.7 million, which will result in a pre-tax land sale gain of approximately $175 million in our second quarter. We are raising our full-year joint venture and other income guidance from $125 million to $260 million, factoring in both the increase in our home building guidance and the impact of this land sale. We now expect to earn between $13.25 and $13.75, for diluted share, in fiscal 2024, up from the 12 to 1250 we got into last quarter.
Speaker Change: In addition, since the start of the spring selling season in mid January we have seen a meaningful uptick in demand that has continued through this past weekend.
Speaker Change: And our first quarter, we delivered 1927 homes at an average price of approximately $1 million generating record first quarter home sales of $1 $93 billion up 10, 4% in dollars compared to the first.
Speaker Change: Quarter of fiscal 2023.
Speaker Change: Our adjusted gross margin was 28, 9%.
Speaker Change: 90 basis points better than guidance, and 140 basis points better than last year's first quarter.
The outperformance versus our guidance was due to mix driven by earlier than expected deliveries and certain of our higher margin Pacific and mid Atlantic communities and fewer than expected deliveries and lower margin mountain communities.
Speaker Change: SG&A expense at 11, 9% of home sales revenues was 20 basis points better than last year's first quarter.
Speaker Change: And 50 basis points better than guidance.
Speaker Change: In addition to greater fixed cost leverage from higher revenues, we continued to benefit from cost reduction initiatives.
Speaker Change: We've taken over the past several years.
Speaker Change: We continue to look for ways to operate more efficiently.
Speaker Change: Pretax income was $311 $2 million and earnings per share.
Speaker Change: Were $2 25 diluted up 23% and 32% respectively compared to last year's first quarter.
Douglas C. Yearley: We now also expect our return on beginning equity to be approximately 21% in fiscal 2024, which would be our third year in a row above 20%. Turning to market conditions, demand in the first quarter was solid. We signed 2,042 net contracts at an average price of $1,011,000, up 40% in units and 42% in total dollars compared to the first quarter of 2023. Demand in our first quarter steadily improved as the quarter progressed, following the normal seasonal pattern. December was stronger than November, and January was significantly stronger than December.
Speaker Change: With the outperformance in our first quarter and a strong start to the spring selling season, we are raising our full year guidance across all of our key homebuilding metrics.
Speaker Change: At the midpoint of our guidance, we now expect full year deliveries of 10250 homes on adjusted gross margin of 28% and.
Speaker Change: In an SG&A margin of nine 8%.
Speaker Change: In addition earlier this month, we sold a parcel of land to a commercial developer for net cash proceeds.
Speaker Change: $187 million, which will result in a pretax land sale gain of approximately $175 million.
Douglas C. Yearley: Based on both deposit and agreement activity, our January was better than normal seasonality, and the strong demand has continued through the first three weeks of February. From a geographic standpoint, demand was broadly distributed across our footprint. We saw particular strength in our Pacific region, including all of California and Seattle, and also in Las Vegas, all of Texas, Denver, and from Atlanta up through Boston.
Speaker Change: In our second quarter.
Speaker Change: We are raising our full year joint venture and other income guidance.
Speaker Change: From 125 million to $100 excuse me $260 million.
Speaker Change: Factoring in both the increase in our homebuilding guidance and the impact of this land sale.
Speaker Change: We now expect to earn between $13 25.
And $13 75.
Speaker Change: Per diluted share in fiscal 2024.
Speaker Change: Up from the 12 to 12 50, we guided to last quarter.
Douglas C. Yearley: Demand was solid across all product types as well, with affordable luxury accounting for 45% of our units and 34% of dollars. Luxury 36% and 49% An active adult, 19% and 17%. Another indicator of healthy demand was our deposit to agreement conversion ratio, which at 76% in the first quarter was significantly higher than our five-year average of 67. We are pleased that we have been able to continue taking advantage of healthy demand while managing our incentives, while mortgage rates are bought down, and are heavily marketed and offered nationwide. Very few of our buyers use incentive dollars to buy down their rates.
Speaker Change: We now also expect a return on beginning equity to be approximately 21% in fiscal 2024, which would be our third year in a row above 20%.
Speaker Change: Turning to market conditions demand in the first quarter was solid.
Speaker Change: We signed 2042 net contracts at an average price of $1 million $11000 up 40% in units and 42% and total dollars compared to the first quarter of 2023.
Speaker Change: Demand in our force for first quarter steadily improved as the quarter progressed following the normal seasonal pattern.
Speaker Change: December was stronger than November and January was significantly stronger than December.
Speaker Change: Based on both deposit and agreement activity, our January was better than normal seasonality.
Speaker Change: The strong demand has continued through the first three weeks of February.
Speaker Change: From a geographic standpoint demand was broadly distributed across our footprint.
Douglas C. Yearley: The vast majority of our customers can qualify for a market-rate mortgage without a buy-down, and they prefer to use any incentive offered for Design Studio Upgrades or to reduce their closing costs. Additionally, as has been consistent with the past several quarters, Approximately 25% of our buyers paid all cash in the first quarter, and the LTVs for buyers who took a mortgage dropped to approximately 67 percent, 200 basis points lower than our average over the prior four quarters. So, for the 75% of our buyers who took a mortgage... On average, they put down 33%. All of these factors highlight the financial strength of our more affluent customers.
Speaker Change: We saw particular strength in our Pacific region, including all of California, and Seattle.
Speaker Change: And also in Las Vegas.
Speaker Change: All of Texas, Denver, and from Atlanta up through Boston.
Speaker Change: Demand was solid across all product types as well with affordable luxury accounting for 45% of our units and 34% of dollars luxury 36% and 49%.
Speaker Change: In active adult 19% and 17%.
Speaker Change: Another indicator of healthy demand was our deposit to agreement conversion ratio.
Speaker Change: Which had 76% in the first quarter was significantly higher than our five year average of 67%.
Speaker Change: We are pleased that we've been able to continue taking advantage of healthy demand, while managing our incentives.
Speaker Change: While mortgage rate buy downs or heavily marketed and offered nationwide very few of our buyers use incentive dollars to buy down their rates.
Douglas C. Yearley: During the quarter, we once again benefited from our strategy of increasing our supply of Speco, which represented approximately 50% of orders and 40% of deliveries in the first quarter. As we have discussed before, we sell our spec homes at various stages of construction, from foundation to finished home. This allows many of our spec buyers the opportunity to visit our design studios and Personalize Their Homes, with finishes that match their taste. So choice.
Speaker Change: The vast majority of our customers can qualify for a market rate mortgage without a buy down.
Speaker Change: And they prefer to use any incentives offered on.
Speaker Change: <unk> design studio upgrades or to reduce their closing costs.
Speaker Change: Additionally, consistent with the past several quarters.
Speaker Change: Approximately 25% of our buyers paid all cash in the first quarter.
Douglas C. Yearley: A pillar of Toll Brothers is still part of our SPEC strategy, and this benefits our margins as design studio upgrades tend to be highly accretive. We are also pleased that our cancellation rate in the first quarter remained consistent with recent quarters at 2.9% of beginning backlog. Our low cancellation rate speaks to the financial strength of our buyers, as well as the sizable deposits they make and how emotionally invested they become as they personalize their new Toll Brothers home.
Speaker Change: And the Ltvs for buyers, who took a mortgage.
Speaker Change: Dropped to approximately 67%.
Speaker Change: 200 basis points lower than our average over the prior four quarters.
Speaker Change: So for the 75% of our buyers who took a mortgage on average they put down 33%.
Speaker Change: All of these factors highlight the financial strength of our more affluent customers.
Speaker Change: During the quarter, we once again benefited from our strategy of increasing our supply of spec homes, which represented approximately 50% of orders and 40% of deliveries in the first quarter.
Douglas C. Yearley: We continue to expect Community Count growth to help drive results in Fiscal 20, 24, and beyond. In the first quarter, we were operating from 377 communities, two more than we guided to last quarter, and we remain on target to reach our year-end guidance of approximately 410 communities, which would be an approximate 10% increase from fiscal year-end 2023. Importantly, we control sufficient land for community cap growth beyond 2024. At first quarter end, we controlled approximately 70,400 lots. 49% of which were options. This land position allows us to be highly selective and disciplined as we assess new land opportunities. We believe we have a competitive advantage acquiring land at the corner of Main and Main, where very few of the big, well-capitalized publics and privates play. Our main competition for this land tends to be the smaller local and regional builders, who are not as well capitalized.
Speaker Change: As we've discussed before we sell our specs at various stages of construction from foundation to finished home.
Speaker Change: This allows many of our spec buyers the opportunity to visit our design studios and.
Speaker Change: And personalize their homes with finishes that matched their tastes.
Speaker Change: So choice a pillar of toll brothers is still part of our spec strategy.
This benefits our margins as design studio upgrades tend to be highly accretive.
We are also pleased that our cancellation rate in the first quarter remained consistent with recent quarters at two 9% of beginning backlog.
Speaker Change: Our low cancellation rates speaks to the financial strength of our buyers as well as the sizable deposits they make and how emotionally invested they become as they personalize their new toll brothers home.
Speaker Change: We continue to expect community count growth to help drive results in fiscal 2024 and beyond.
Speaker Change: In the first quarter.
Speaker Change: We were operating from 377 communities to more than we guided to last quarter.
Speaker Change: And we remain on target to reach our year end guidance of approximately 410 communities.
Douglas C. Yearley: Our balance sheet is very healthy with ample liquidity, low net debt, and no significant near-term debt maturity. We also continue to expect strong cash flow generation from operations this year. In addition, as I mentioned earlier, we received $181 million in cash from a land sale at the start of our second quarter. As a result... We are increasing the amount we are budgeting for fiscal 2024 share repurchases from $400 million to $500 million. Longer term, we continue to expect buybacks and dividends to remain an important part of our capital allocation priorities. With that, I will turn it over to Marty.
Speaker Change: Which would be an approximate 10% increase from fiscal year end 2023.
Speaker Change: Importantly, we control sufficient land for community count growth beyond 2024.
Speaker Change: At first quarter end, we controlled approximately 70400 lots.
Speaker Change: 49% of which were options this.
Speaker Change: This land position allows us to be highly selective and disciplined as we assess new land opportunities.
Speaker Change: We believe we have a competitive advantage acquiring land at the corner of main and main.
Speaker Change: We are very few of the big well capitalized publics and privates play.
Speaker Change: Our main competition for this land tends to be the smaller local and regional builders, who are not as well capitalized.
Speaker Change: Our balance sheet is very healthy with ample liquidity low net debt and no significant near term debt maturities.
Martin P. Connor: Thanks, Doug. We are very 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 $239.6 million, or $2.25 per share diluted, up 25% and 32%, respectively, compared to $191.5 million and $1.70 per share diluted a year ago. Our net income and earnings per share were both first quarter records. We delivered 1,927 homes and generated home building revenues of $1.93 billion. The average price of homes delivered in the quarter was $1,003,000. We signed a 2042 NET agreement for $2.06 billion in that first quarter, up 40% in units and 42% in dollars compared to the first quarter of fiscal year 2023. The average price of contracts signed in the quarter was approximately $1,011,000.
Speaker Change: We also continue to expect strong cash flow generation from operations this year.
Speaker Change: In addition, as I mentioned earlier, we received $181 million in cash from a land sale at the start of our second quarter.
Speaker Change: As a result, we are increasing the amount we are budgeting for fiscal 2020 for share repurchases.
Speaker Change: From 400 million to $500 million.
Speaker Change: Longer term, we continue to expect buybacks and dividends to remain an important part of our capital allocation priorities.
Speaker Change: With that I will turn it over to Marty.
Martin P. Connor: Thanks, Doug.
Martin P. Connor: We are very pleased with our first quarter results.
Martin P. Connor: We grew both our top and bottom line.
Martin P. Connor: And operated more efficiently compared to last year.
Martin P. Connor: First quarter net income was $239 6 million.
Martin P. Connor: Our $2 25 per share diluted up, 25% and 32%, respectively compared to $191 $5 million and $1 70 per share diluted a year ago.
Martin P. Connor: Our net income and earnings per share were both first quarter Records.
Martin P. Connor: We delivered 90 127 homes and.
Martin P. Connor: And generated homebuilding revenues of $1 $93 billion.
Martin P. Connor: The average price of homes delivered in the quarter was $1 million $3000.
Martin P. Connor: This was up 1.6% year over year and 2.3% on a sequential basis. Our first quarter adjusted gross margin was 28.9%, up 140 basis points compared to 27.5% in the first quarter of 2023. As Doug mentioned, Q1 gross margin exceeded our guidance, due primarily to more deliveries in our higher-margin Pacific and Mid-Atlantic regions and less-than-expected deliveries in our lower-margin mountain region. We expect the inverse to be true in our second quarter, and this is reflected in our second quarter adjusted gross margin guidance of 27.6%. Overall, we have increased our full-year adjusted gross margin by 10 basis points to 28.0 percent. Write-offs in our home sales gross margin totaled $1.5 million in the quarter and were all associated with pre-development costs on deals we are no longer pursuing.
Martin P. Connor: We signed 2042 net agreements for $2.06 billion in that first quarter.
Martin P. Connor: Up 40% units and 42% in dollars compared to the first quarter of fiscal year 2023.
Martin P. Connor: The average price of contracts signed in the quarter was approximately $1 million $11000.
Martin P. Connor: This was up one 6% year over year, and two 3% on a sequential basis.
Martin P. Connor: Our first quarter adjusted gross margin was 28, 9%.
Martin P. Connor: Up 140 basis points compared to 27, 5% in the first quarter of 2023.
Martin P. Connor: As Doug mentioned.
Martin P. Connor: Q1 gross margin exceeded our guidance due primarily to more deliveries in our higher margin Pacific and mid Atlantic regions.
Martin P. Connor: In less than expected deliveries in our lower margin Mountain region.
Martin P. Connor: We expect the inverse to be true in our second quarter and this is reflected in our second quarter adjusted gross margin guidance of 27, 6%.
Martin P. Connor: Yes.
Martin P. Connor: Overall, we have increased our full year adjusted gross margin 10 basis points to 28.0%.
Martin P. Connor: SG&A, as a percentage of home building revenue, was 11.9% in the first quarter, compared to 12.1% in the same quarter one year ago. Note that our SG&A expense in that first quarter includes $14 million of accelerated employee stock-based comp expense that only hit in the first quarter. The year-over-year 20 basis point reduction in SG&A margin reflects leverage from increased revenues as well as benefits from tighter cost controls in the face of inflation. Joint venture, land sales, and other income was $8.6 million during the first quarter, compared to $16.8 million in the first quarter of fiscal year 23, and compared to our guidance of a $10 million law. We exceeded our guidance, due primarily to better-than-expected results in our mortgage unit and Higher Than Projected Interest Income. Our tax rate in the first quarter was 23%.
Martin P. Connor: Write offs in our home sales gross margin totaled one $5 million in the quarter and were all associated with pre development costs on deals we are no longer pursuing.
Martin P. Connor: SG&A as a percentage of homebuilding revenue was 11, 9% in the first quarter compared to 12, 1% in the same quarter one year ago.
Martin P. Connor: Note that our SG&A expense in that first quarter includes $14 million of accelerated employee stock based comp expense that only hits in the first quarter.
Martin P. Connor: The year over year 20 basis point reduction in SG&A margin.
Martin P. Connor: Flex leverage from increased revenues as well as benefits from tighter cost controls.
Martin P. Connor: In the face of inflation.
Martin P. Connor: Joint venture land sales and other income was $8 6 million during the first quarter compared to $16 8 million in the first quarter of fiscal year 'twenty three.
Martin P. Connor: And compared to our guidance of a $10 million loss.
Martin P. Connor: We exceeded our guidance due primarily to better than expected results in our mortgage unit.
Martin P. Connor: And higher than projected interest income.
Martin P. Connor: We're about 300 basis points lower than guidance due to the accounting benefit of stock compensation deductions, which we do not expect to repeat at the same level for the rest of the year. We ended the first quarter with over $2.5 billion of liquidity, including approximately $755 million of cash and $1.8 billion of availability under our revolving bank credit facility. Our facility has four years until maturity. Our net debt to capital ratio was 21.4% at first quarter end, down from 27.5% one year ago. We have no significant maturities of our long-term debt until fiscal 2026, when $350 million of notes come due in November of 2025. Our community count at quarter end was 377 compared to our guide of 375.
Martin P. Connor: Our tax rate in the first quarter was 23% or about 300 basis points lower than guidance due.
Martin P. Connor: Due to the accounting benefit of stock compensation deductions, which we do not expect to repeat at the same level for the rest of the year.
Martin P. Connor: We ended the first quarter with over two and a half billion dollars of liquidity.
Martin P. Connor: Including approximately $755 million of cash and $1 $8 billion of availability under our revolving bank credit facility.
Martin P. Connor: Our facility is four years until maturity.
Martin P. Connor: Our net debt to capital ratio was 21, 4% at first quarter and.
Martin P. Connor: Down from 27, 5% one year ago.
Martin P. Connor: We have no significant maturities of our long term debt until fiscal 2026, when $350 million of notes come due in November of 2025.
Martin P. Connor: Yes.
Martin P. Connor: Our community count at quarter end was 377 compared to our guide of 375.
Martin P. Connor: Looking forward, our guidance is subject to the usual caveats regarding such forward-looking information. We are projecting fiscal 2024 second quarter deliveries of approximately 2400 to 2500 homes with an average delivered price of between $1,000,000 and $1,010,000. For fiscal year 2024, we are increasing our projected deliveries to be between 10,000 and 10,500 homes with an average price between $940,000 and $960,000. As I noted earlier, we expect adjusted gross margin to be 27.6% in the second quarter and 28% for the full year, 10 basis points better than our previous full year guidance. We expect interest in cost of sales to be approximately 1.3% in the second quarter and for the full year. This is also a 10 basis point improvement from our earlier guide.
Martin P. Connor: Looking forward our guidance is subject to the usual caveat regarding such forward looking information.
Martin P. Connor: We are projecting fiscal 2024 second quarter deliveries of approximately 2400 2500 homes with an average delivered price of between 1 million and $1 $10000.
For fiscal year 2024, we are increasing our projected deliveries to be.
Martin P. Connor: To be between 10010, 500 homes with an average price between 940.
Martin P. Connor: $960000.
Martin P. Connor: As I noted earlier, we expect adjusted gross margin to be 27, 6% in the second quarter and 28% for the full year 10 basis points better than our previous full year guidance.
Martin P. Connor: We expect interest and cost of sales to be approximately one 3% in the second quarter and for the full year.
This is also a 10 basis point improvement from our earlier John.
Martin P. Connor: We project second quarter SG&A as a percentage of home sales revenues to be approximately 9.7%. For the full year, we expect it to be 9.8%. Another improvement of 10 basis points compared to our previous guidance. Other income, income from unconsolidated entities, and land sales gross profit in the second quarter is expected to be approximately $180 million, which reflects the impact of the commercial land sale Doug mentioned. We now expect it to be $260 million for the full year, which is up significantly from our prior guide of $125 million. Aside from the land sale, much of this full year's other income is projected from sales of our interests in certain stabilized apartment communities developed by Toll Brothers Apartment Living in joint venture with various partners. We project the second quarter tax rate to be approximately 25.8 percent and the full-year rate to be approximately 25.5 percent.
Martin P. Connor: We project second quarter SG&A as a percentage of home sales revenues to be approximately nine 7%.
Martin P. Connor: For the full year, we expect it to be nine 8%.
Another improvement of 10 basis points compared to our previous guidance.
Martin P. Connor: Other income income from unconsolidated entities and land sales gross profit in the second quarter is expected to be approximately $180 million, which reflects the impact of the commercial land sale Doug mentioned.
Martin P. Connor: We now expect it to be $260 million for the full year, which is up significantly from our prior guide of $125 million.
Martin P. Connor: Aside from the land sale much of this full year. Other income is projected from sales of our interests in certain stabilized apartment communities developed by toll brothers apartment living in joint venture with various partners.
Martin P. Connor: We project the second quarter tax rate to be approximately 25, 8% and the full year rate to be approximately 25, 5%.
Martin P. Connor: That's 50 basis points of improvement compared to our prior full year of guidance. Our weighted average share count is expected to be approximately $106 million for the second quarter and $105 million for the full year. This assumes we repurchase approximately $166 million of common stock per quarter for the remainder of the year to reach the $500 million guide Doug referred to earlier. As Doug mentioned, with our updated guidance and the Q2 land sale gain, we now expect to earn between $13.25 and $13.75 per diluted share in fiscal 2024. This would result in a full year return on beginning equity of approximately 21% and would put our year-end book value per share at approximately $77 per share.
Martin P. Connor: That's 50 basis points of improvement compared to our prior full year guidance.
Martin P. Connor: Our weighted average share count is expected to be approximately $106 million for the second quarter and $105 million for the full year.
Martin P. Connor: This assumes we repurchased approximately $166 million of common stock per quarter for the remainder of the year to reach the $500 million guide Doug referred to earlier.
Martin P. Connor: As Doug mentioned with our updated guidance and the Q2 land sale gain we now expect to earn between $13 25 and.
Martin P. Connor: And $13 75.
Martin P. Connor: Our diluted share in fiscal 2024.
Martin P. Connor: This would result in a full year return on beginning equity of approximately 21% and we would put our year end book value per share at approximately $77 per share.
Douglas C. Yearley: Now, let me turn it back to Doug. Thank you, Marty. Before I open it up for questions, I'd like to thank our Toll Brothers employees for another great quarter. I'm so proud of their dedication, hard work, and commitment to each other and our customers. Their talent and constant focus on our business is the driver of our long-term success.
Martin P. Connor: Now, let me turn it back to Doug.
Doug: Thank you Marty.
Doug: Before I open it up for questions I'd like to thank our toll brothers' employees for another great quarter.
Doug: So proud of their dedication hard work and commitment to each other and our customers there.
Doug: Their talent and constant focus on our business as the driver of our long term success.
Operator: Jamie, with that, let's open it up to questions. Ladies and gentlemen, at this time, we'll 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, we do please ask that you limit yourselves to one question and one follow-up. To ask a question, you may press star and then one on your touch-tone telephone. If you are using a speakerphone, we do ask that you please pick up the handset prior to pressing the button.
Doug: Jamie with that let's open it up to questions.
Speaker Change: Ladies and gentlemen at this time, we'll begin the question and answer session.
Speaker Change: As a reminder, the company is planning to end the call at 930, when the market opened.
Speaker Change: During the Q&A, we do please ask limit yourselves to one question and one follow up.
Speaker Change: Basket question, you May Press Star and then one on your Touchtone telephone.
Speaker Change: You are using a speaker phone, we do ask that you. Please pick up the handset prior to pressing the keys withdraw. Your question you May press Star two.
Operator: To withdraw your questions, you may press Standard.' Our first question today comes from Jesse Letterman from Zelman & Associates. Please go ahead with your questions. Hey, guys, it's actually Ivy, but thank you.
Speaker Change: Our first question today comes from Jesse Letterman from Zelman and Associates. Please go ahead with your question.
Speaker Change: Hey, guys, it's actually Ivy, but thank you.
Ivy Lynne Zelman: First, I just want to say congratulations. It's a great quarter, and I'm really excited about, you know, your strategic initiatives of driving returns higher. You know, with the land sale expected in 2024, just thinking about other opportunities to, you know, generate cash flow to maybe do some continued buybacks or other ways to drive returns.
Ivy: Firstly I just wanted to say congratulations it's a great quarter and.
Ivy: Really excited about your strategic initiatives of driving returns higher.
Ivy: The land sale unexpected in 'twenty, four just thinking about other opportunities too.
Ivy: Generate cash flow to maybe do some.
Ivy: Continued buybacks or other ways to drive.