Q2 2024 Toll Brothers Inc Earnings Call
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Yeah.
Operator: Good morning, and welcome to the Toll Brothers second quarter fiscal year 2024 conference call. All participants will be in listen-only mode.
Good morning, Andrew.
Speaker Change: Welcome to the toll brothers second quarter fiscal year 2024 conference call.
Speaker Change: All participants will be in listen only mode switching.
Operator: Should you need assistance, please signal 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 star then one on your telephone keypad.
Speaker Change: Should you need assistance. Please signal a conference specialist by pressing the star 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 then one on your telephone keypad.
Speaker Change: To withdraw your question. Please press Star then two.
Speaker Change: The company is planning to end the call at 930, when the markets when the market opens during the Q&A. Please limit yourself to one question and one follow up.
Speaker Change: Please note today's event is being recorded.
Operator: To withdraw your question, please press star. The company is planning to end the call at 9:30 when the market closes. During the Q&A, please limit yourself to one question and one follow-up. Please note, today's event is being recorded. I would now like to turn the conference over to Douglas Yearley, CEO. Please go ahead.
Speaker Change: I would now like to turn the conference over to Douglas <unk> CEO. Please go ahead Sir.
Douglas C. Yearley: Thank you, Rocco. Good morning. Welcome, and thank you all for joining us. As usual, 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. Please read our statement on forward-looking information and our earnings release last night and on our website to better understand the risks associated with our forward-looking statements.
Douglas: Thank you Rocco and good morning.
Douglas C. Yearley: Welcome and thank you all for joining us as usual 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 and could.
Speaker Change: Significantly affect future results.
Speaker Change: Please read our statement on forward looking information in our earnings release last night and on our website to better understand the risks associated with our forward looking statements.
Douglas C. Yearley: 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 Marlette, Chief Marketing Officer, and Greg Ziegler, Senior VP and Treasurer. Before I begin, I would like to take a moment to acknowledge the passing of Don Horton, Chairman and founder of D.R. Horton.
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: Like our founder Bob Toll, Dior was a pioneer and an icon of the industry who helped shape how we all do business today. We extend our deepest sympathies to the Horton family and the entire D.R. Horton organization. Turning to our second quarter results. I'm very pleased with our strong performance in the quarter. We delivered 2,641 homes at an average price of approximately $1 million, generating record second quarter home sales revenues of $2.65 billion, up 6% compared to last year and $185 million better than the midpoint of our guidance.
Speaker Change: Before I begin I would like to take a moment to acknowledge the passing of Don Horton Chairman and founder of D. R. Horton like our founder Bob told you our was a pioneer in an icon of the industry, who help shape, how we all do business today.
Speaker Change: Extend our deepest sympathies to the <unk> family and the entire D. R Horton organization.
Douglas C. Yearley: We also signed 3041 net agreements for $2.94 billion, up 30% in unit, 29% in total dollars compared to last year. Solid demand has continued into the start of our third quarter. We have had a really good first three weeks of May. Our adjusted gross margin was 28.2% in the second quarter, 60 basis points better than guidance, and SG&A expense as a percentage of home sales revenues was 9.0%. 70 basis points better than Guy.
Speaker Change: Turning to our second quarter results I'm very pleased with our strong performance in the quarter.
Speaker Change: We delivered 2641 homes at an average price of approximately $1 million generating record second quarter home sales revenues of $2.65 billion up 6% compared to last year and 185 million.
Speaker Change: It was better than the midpoint of our guidance.
Speaker Change: We also signed 3041 net agreements for.
$2.94 billion up 30% in units in.
Speaker Change: And 29% and total dollars compared to last year.
Speaker Change: Solid demand has continued into the start of our third quarter we.
Speaker Change: We have had a really good first three weeks of May.
Speaker Change: Our adjusted gross margin was 28, 2% in the second quarter 60 basis points better than guidance.
Speaker Change: SG&A expense as a percentage of home sales revenues.
Speaker Change: It was 9.0% 70 basis points better than guidance.
Douglas C. Yearley: Both benefited from strong cost controls and greater leverage of fixed costs on higher home sales revenue. Joint venture, land sales, and other income was approximately $204 million in the quarter, most of which was generated by the land sale we discussed last quarter. As a reminder, in February, we sold a parcel of land in Northern Virginia to a data center developer. That transaction generated $181 million of net cash and $175 million in pre-tax land sale gains.
Speaker Change: <unk> benefited from strong cost controls and greater leverage of fixed costs on higher home sales revenues.
Speaker Change: Joint venture land sales and other income was approximately $204 million in the quarter most of which was generated by the land sale, we discussed last quarter.
Speaker Change: As a reminder, in February we sold a parcel of land in Northern Virginia.
Speaker Change: Data center developer.
Speaker Change: The transaction generated $181 million of net cash and $175 million in pre tax land sale gains.
Douglas C. Yearley: All of this resulted in pre-tax income of approximately $650 million in the second quarter and record earnings of $4.55 per diluted share, a 60% increase over the $2.85 per share we earned last year. Adjusting for the land sale benefit, we earned $3.38 per diluted share.
Speaker Change: All of this resulted in pre tax income of approximately $650 million in the second quarter.
Speaker Change: And record earnings of $4.55 per diluted share a 60% increase over the $2.85 per share we earned last year.
Speaker Change: Adjusting for the land sale benefit we earned $3.38 per diluted share.
Douglas C. Yearley: 19% from last year. We continued strong with with constraints continued strong demand for our homes and better than projected second quarter results. We are raising our full-year 2024 revenue and earnings guide. At the midpoint of our guidance, we now expect to deliver 10,600 homes at an average price of approximately $965,000, which would result in $10.23 billion of revenue, nearly $500 million or 5% better than our previous guidance. We continue to expect a full year adjusted gross margin of 17%.
Speaker Change: 19% from last year.
Speaker Change: We continued strong with constraint continued strong demand for our homes and better than projected second quarter result.
Douglas C. Yearley: 28.0%, which translates to an additional $137 million of gross profit on our increased revenue guide, and we expect an FG&A margin of 9.6%, 20 basis points better than our previous guidance. This guidance would result in an operating margin of over 18%, earnings per share of approximately $14, and a return on beginning equity of approximately 22%.
Speaker Change: We are raising our full year 2020 for revenue and earnings guidance.
Speaker Change: At the midpoint of our guidance, we now expect to deliver 10600 homes at an average price of approximately $965000.
Speaker Change: Which would result in $10 billion to $3 billion of revenue.
Speaker Change: Nearly $500 million or 5% better than our previous guidance.
Speaker Change: We continue to expect a full year adjusted gross margin of 28.0%.
Speaker Change: Which translates to an additional $137 million of gross profit on our increased revenue guide.
Speaker Change: And we expect an SG&A margin of nine 6% 20.
Speaker Change: 20 basis points better than our previous guidance.
Speaker Change: This guidance would result in an operating margin of over 18%.
Speaker Change: Earnings per share of approximately $14 and a return on beginning equity of approximately 22%.
Douglas C. Yearley: Our outstanding results in the first half of the fiscal year and the increase in our guidance for the full year are being driven by execution of the strategies that we've outlined on recent calls to take advantage of the healthy demand and persistent lack of inventory that characterizes this market. We have both widened our price points to include more affordable luxury homes and increased our supply of spec homes, which has helped us grow market share. This also enables us to reduce cycle times.
Speaker Change: Our outstanding results in the first half of the fiscal year and the increase in our guidance for the full year are being driven by execution of the strategies that we've outlined on recent calls.
Speaker Change: And take advantage of the healthy demand and persistent lack of inventory that characterizes this market.
Speaker Change: We have widened our price points to include more affordable luxury homes and increase our supply of spec homes.
Speaker Change: She has helped us grow market share.
Speaker Change: This also enables us to reduce cycle times.
Douglas C. Yearley: Improve Inventory Turns, and Leverage Our Fixed Cost. Riving Revenue Growth and Higher Operating, with these strategies firmly in place and producing results, and with our more capital efficient land strategy. We are confident that we can continue to generate attractive returns well into the future. Turning to market conditions, demand has proven resilient even as rates increase, from six and a quarter to seven and a half percent, through the quarter. Sales were evenly spread across the second quarter, with about 1,000 net signed contracts each month.
Speaker Change: Prove inventory turns and leverage our fixed cost.
Speaker Change: Driving revenue growth and higher operating margins.
Speaker Change: With these strategies firmly in place and producing results.
Speaker Change: And with our more capital efficient land strategy. We are confident we can continue to generate attractive returns well into the future.
Speaker Change: Turning to market conditions. The man has proven resilient, even as rates increased from six and three quarter seven 5%.
Speaker Change: Through the quarter.
Speaker Change: Sales were evenly spread across the second quarter with about 1000 net signed contracts each month.
Douglas C. Yearley: As I mentioned earlier, we have seen strong demand continue through the first three weeks of May, which is encouraging. And it's nice to see rates dropping over the past week. Geographically, we saw broad-based and healthy demand across our entire footprint. We saw solid demand from Boston through Atlanta, especially in New Jersey. Texas, California, Boise, Idaho, and Colorado were also strong performers.
Speaker Change: As I mentioned earlier.
Speaker Change: We have seen strong demand continued through the first three weeks of May.
Speaker Change: Which is encouraging.
Speaker Change: And it's nice to see rates dropping over the past week.
Speaker Change: Geographically, we saw broad based and healthy demand across our entire footprint.
Speaker Change: We saw solid demand from Boston through Atlanta, especially in New Jersey.
Speaker Change: Texas, California, Boise, Idaho and Colorado.
Speaker Change: Were also strong performers.
Douglas C. Yearley: Demand was also solid across all of our products. Sales of our luxury homes were a little bit stronger compared to the first quarter, with approximately 37% of units and 53% of dollars. Affordable luxury was 44% of units, and 31% of dollars. An active adult was 19% and 16%, respectively.
Speaker Change: Demand was also solid across all of our product lines sales of our luxury homes were a little bit stronger compared to the first quarter with approximately 37% of units.
Speaker Change: 53% of dollars.
Speaker Change: Affordable luxury was 44% of units and 31% of dollars and active adult was 19% and 16% respectively.
Douglas C. Yearley: We raised the net price after incentives in about 60% of our communities, leading to an approximate $10,000 net price increase across the country. However, while mortgage rate buy-downs are heavily marketed and offered nationwide, very few of our buyers use incentive dollars to buy down their rates.
Speaker Change: We raised net price after incentives and about 60% of our communities.
Speaker Change: Leading to an approximate 10000 dollar net price increase across the company.
Speaker Change: While mortgage rate buy downs or heavily marketed and offered nationwide.
Speaker Change: 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 mortgage without a buy-down, and they prefer to use any incentives offered on design studio upgrades or to reduce their closing costs. We continue to be very pleased with our luxury focus. We're benefiting from a financially healthy consumer, Demand, and Limited Competition. With the widening of our product line, Approximately 30% of our customers are first-time homebuyers, and most of these buyers are millennials. Many of whom have waited later in life to form families and have accumulated greater wealth when they buy their first home.
Speaker Change: Vast majority of our customers can qualify for a mortgage without a buy down.
Speaker Change: And they prefer to use any incentives offered on design studio upgrades or to reduce their clothing costs.
Speaker Change: We continue to be very pleased with our luxury focus.
Speaker Change: As we are benefiting from a financially healthy consumer.
Speaker Change: Strong demand and limited competition.
Speaker Change: With the widening of our product lines approximately 30% of our customers are first time homebuyers.
Speaker Change: Most of these buyers are millennials, many of whom have waited later in life to form families and have accumulated greater well when they buy their first home.
Douglas C. Yearley: Some are benefiting from the greatest wealth transfer in U.S. history from boomer parents who want to see their kids enjoy the fruits of their success and help them financially. Approximately 27% of our buyers paid all cash in the second quarter, up from 25% in the first quarter and our long-term average of approximately 20%. The LTVs for buyers who took a mortgage were approximately 69% in the quarter. So, for the 73% of our buyers who took a mortgage, on average, they put down 31%.
Speaker Change: Some are benefiting from the greatest wealth transfer in U S history from Boomer parents, who want to see their kids enjoy the fruits of their success and help them financially.
Speaker Change: Approximately 27%.
Speaker Change: Of our buyers paid all cash in the second quarter.
Speaker Change: Up from 25% in the first quarter and our long term average of approximately 20%.
Speaker Change: The Ltvs for buyers, who took a mortgage was approximately 69% in the quarter.
Speaker Change: So for the 73% of our buyers who took a mortgage on average they put down 31%.
Douglas C. Yearley: These metrics include 30% of our customers who are first-time buyers and highlight the financial strength and affluence of our entire customer base. In fact, in the second quarter, 20% of our affordable luxury buyers, many of whom are first-time buyers, paid all cash, with an LTV of 74% for those who did get a mortgage. We are pleased that our cancellation rate in the second quarter remained low at 2.8% of beginning back.
Speaker Change: These metrics include the 30% of our customers who were first time buyers and highlight the financial strength and affluence of our entire customer base.
Speaker Change: In fact in the second quarter, 20% of our affordable luxury buyers many of whom are first time buyers paid all cash.
Speaker Change: With an LTV of 74% for those who did get a mortgage.
Speaker Change: We are pleased that our cancellation rate in the second quarter remained low at two 8% of beginning backlog.
Douglas C. Yearley: We are also benefiting from the growing difference in quality between new and resale homes. The median age of an existing home in the U.S. is now over 40 years old. Approximately 60% of existing homes were built before 1980, and 35% were built before 1970.
Speaker Change: We are also benefiting from the growing difference in quality between new and resale homes.
Speaker Change: Median age of an existing home in the U S is now over 40 years old Approx.
Speaker Change: Approximately 60% of existing homes were built before 1980.
Speaker Change: 35%.
Speaker Change: Built before 1970, making new homes, even more attractive.
Douglas C. Yearley: Making New Homes Even More Attractive. They are built better, require less maintenance, are less expensive to insure, are more energy efficient, and include features that today's buyer wants. Many are also part of communities that have spectacular amenities.
Speaker Change: They are built better require less maintenance and less expensive to ensure are more energy efficient and includes features at today's buyer wants.
Speaker Change: Many are also part of communities that have spectacular amenities.
Douglas C. Yearley: All of these factors are helping to fuel a flight to new homes that we believe will continue even if rates come down and the resale market unlocks. As good as our business is now, we look forward to and will welcome lower rates. During the quarter, we continued to execute on our spec strategy. Specs represented approximately 54% of orders and 46% of deliveries in the second quarter.
Speaker Change: All of these factors are helping to fuel a flight new homes that we believe will continue even if rates come down in the resale market unlocks.
Speaker Change: As good as our business is now.
Speaker Change: We look forward to and we will welcome lower rates.
Speaker Change: During the quarter, we continued to execute on our spec strategy.
Speaker Change: Specs represented approximately 54% of orders and 46% of deliveries in the second quarter.
Douglas C. Yearley: Allowing us to meet the strong demand from buyers to choose a quicker move in. As a reminder, we sell our specs at various stages of construction, from foundation to finished home. This allows some of our speculative buyers the opportunity to visit our design studios and personalize their homes with finishes that match their taste.
Speaker Change: Allowing us to meet the strong demand from buyers.
Speaker Change: He was a quicker moving.
Speaker Change: As a reminder, we sell our specs in various stages of construction from foundation to finished home.
Speaker Change: This allows some of our spec buyers the opportunity to visit our design studios and personalize their homes with finishes that match their tastes.
Speaker Change: So choice a very important pillar of toll brothers is still part of our spec strategy.
Douglas C. Yearley: A very important pillar of Toll Brothers, is still part of our SPECT strategy. Looking forward, we continue to expect community count growth to help drive results in fiscal 2024 and beyond. By the end of the second quarter, we were operating from 386 communities, one more than the 385 we got into last quarter. We remain on target to reach our year-end guidance of approximately 410 communities, which would be an approximate 10% increase versus first fiscal year end 2023. We control all the land we need to support continued growth in fiscal years 2025 and 2026.
Speaker Change: Looking forward, we continue to expect community count growth to help drive results in fiscal 'twenty 'twenty four and beyond.
Speaker Change: The second quarter, and we were operating from 386 communities.
Speaker Change: One more than the 385, we guided to last quarter.
Speaker Change: We remain on target to reach our year end guidance of approximately 410 communities.
Speaker Change: Which would be an approximate 10% increase versus first fiscal year end 2023.
Speaker Change: We control all the land we need to support continued growth in fiscal 2025 and 2026.
Douglas C. Yearley: At quarter end, we controlled approximately 72,000 lots, 48% of which were optioned, and 42% of which were contracted for prior to 2021. This land position allows us to be highly selective and disciplined as we assess new land opportunities. We continue to be pleased with the quantity and quality of land deals we review each week. We are seeing a healthy flow of deals that meet our rigorous underwriting standards, which are focused on both margins and returns, and we continue to structure terms in more capital efficient ways in order to enhance. Turning to the balance sheet, at quarter end, we held approximately $1 billion of cash, and our net debt-to-capital ratio was 18.7% with no significant near-term debt maturity.
Speaker Change: Second quarter, and we controlled approximately 72000 lots.
Speaker Change: 48% of which were option and 42% of which were contracted for prior to 2021.
Speaker Change: This land position allows us to be highly selective and disciplined as we assess new land opportunities.
Speaker Change: We continue to be pleased with the quantity and quality of land deals we review each week.
Speaker Change: We are seeing a healthy flow of deals that meet our rigorous underwriting standards, which are focused on both margins and returns and.
Speaker Change: And we continue to structure terms and more capital efficient ways.
Speaker Change: What did you do enhance returns.
Speaker Change: Turning to the balance sheet at quarter end, we held approximately $1 billion of cash and cash equivalents and our net debt to capital ratio was 18, 7% with no significant near term debt maturities.
Douglas C. Yearley: We have also been generating strong operating cash flow, which we expect to continue well into the future, providing us plenty of opportunity to both grow our business and return capital to shareholders. During the quarter, we repurchased $181 million of common stock and increased our quarterly dividend by 10%. Returning cash to stockholders will continue to be a very important part of our strategy. With that, let me turn it over to Marty.
Speaker Change: We have also been generating strong operating cash flows which.
Speaker Change: Which we expect to continue well into the future.
Speaker Change: This provides us plenty of opportunity to both grow our business and return capital to shareholders.
Speaker Change: During the quarter, we repurchased $181 million of common stock and increased our quarterly dividend by 10%.
Speaker Change: Returning cash to stockholders will continue.
Speaker Change: To be a very important part of our strategy well into the future.
Speaker Change: With that let me turn it over to Marty.
Martin P. Connor: Thanks, Doug. We had a terrific second quarter, meeting our guidance for deliveries. Home Building Revenue, Adjusted Gross Margin, SG&A, and Earnings. Our strategy is playing out nicely in this environment. And we are raising our full-year revenue and earnings guide. In the quarter, we delivered 2,641 homes and generated home building revenues of $2.65 billion, both up by approximately 6% compared to last year and both a second quarter record. The average price of homes delivered in the quarter was approximately $1 million.
Martin P. Connor: Thanks, Doug.
Martin P. Connor: We had a terrific second quarter.
Martin P. Connor: Beating our guidance for deliveries.
Speaker Change: Homebuilding revenue.
Martin P. Connor: The gross margin SG&A and earnings.
Martin P. Connor: Our strategy is playing out nicely in this environment and we are raising our full year revenue and earnings guidance.
Martin P. Connor: In the quarter, we delivered 2600, 41 homes and generated homebuilding revenues of $2 $65 billion, both up by approximately 6% compared to last year and both second quarter Records.
Martin P. Connor: The average price of homes delivered in the quarter was approximately $1 million.
Martin P. Connor: At the midpoint, we delivered 191 more homes than our guidance for $185 million in home sales revenue. We signed 3,041 net agreements for $2.94 billion in the quarter, up 30% units and 29% in dollars compared to the second quarter of fiscal year 2023. Both agreements and dollars were up over last year in every one of our geographic regions. The average price of contracts signed in the quarter was approximately $967,000, down about 1% compared to last year and down 4.4% sequentially.
Martin P. Connor: At the midpoint, we delivered 191 more homes in our guidance or $185 million of home sales revenue.
Martin P. Connor: We signed 3041 net agreements for $2 $94 billion in the quarter up 30% units and 29% in dollars compared to the second quarter of fiscal year 2023.
Martin P. Connor: Both agreements and dollars were up over last year in every one of our geographic regions.
Martin P. Connor: The average price and contract signed in the quarter was approximately $967000 down about 1% compared to last year and down four 4% sequentially.
Martin P. Connor: This decline was due to product and geographic mix changes, driven by our strategy of expanding our price points and building more spec homes, which we expect will lead to a continued modest drop in price over the next few quarters, but also revenue and earnings. Our second quarter adjusted gross margin was 28.2% compared to 28.3% in the second quarter of 2023 and 60 basis points better than guidance, or Q2 Gross Margin. We have exceeded our guidance primarily due to strong cost control and increased leverage from higher than projected revenues. Positive Mix vs. Projection also played a role, but to a smaller extent.
Martin P. Connor: This decline was due to product and geographic mix changes driven by our strategy of expanding our price points and building more spec homes.
Martin P. Connor: Which we expect will lead to a continued modest drop in price over the next few quarters, but also revenue and earnings growth.
Martin P. Connor: Our second quarter adjusted gross margin was 28, 2% compared to 28, 3% in the second quarter of 2023 and.
Martin P. Connor: And 60 basis points better than guidance.
Martin P. Connor: Our Q2 gross margin.
Martin P. Connor: Exceeded our guidance, primarily due to strong cost controls and increased leverage from higher than projected revenues.
Martin P. Connor: Positive mix versus projection also played a role but to a smaller extent.
Martin P. Connor: While we continue to project the full year adjusted gross margin of 28%, we have increased our revenue guidance by approximately $500 million at the midpoint and improved our SG&A Guidance by 20 Bases. For the third quarter, we project an adjusted gross margin of 27.7%, implying a fourth quarter gross margin of 27.4 percent. As Doug mentioned, 54% of homes sold in the second quarter were speculative. And we now expect more than half of our deliveries in our second half to be spent.
Martin P. Connor: While we continue to project full year adjusted gross margin of 28%.
Martin P. Connor: Increased our revenue guidance.
Martin P. Connor: Approximately $500 million at the midpoint and improved our SG&A guidance by 20 basis points.
Martin P. Connor: For the third quarter, we project, an adjusted gross margin of 27, 7%.
Playing a fourth quarter gross margin of 27, 4%.
Speaker Change: As Doug mentioned, 54% of homes sold in the second quarter were specs.
Speaker Change: And we now expect more than half of our deliveries in our second half to be specs.
Martin P. Connor: Having more spec homes available for delivery in the late summer and early fall will allow us to meet the demand from many of our buyers who want to move in when schools open. However, our spec homes generally carry a lower margin compared to our build-to-order homes. In the second quarter, the adjusted gross margin for our spec homes delivered was 26.1%, compared to 29.8% for build-to-order homes. We typically build spec homes on lower premium lots, saving higher premium sites for our build-to-order customers, who place a higher value on them, and will also spend more on upgrades.
Speaker Change: Having more spec homes available for delivery in the late summer and early fall.
Speaker Change: We expect will allow us to meet the demand from many of our buyers who want to move in when schools open.
Speaker Change: Our spec homes generally carry a lower margin compared to our build to order homes.
Speaker Change: In the second quarter, the adjusted gross margin for our spec homes delivered was 26, 1%.
Speaker Change: Impaired to 29, 8% for build to order homes delivered.
Speaker Change: We typically build spec homes on lower premium homesites saving higher premium sites or a build to order customers, who place a higher value on them and we'll also spend more on upgrades.
Martin P. Connor: We also tend to offer higher incentives on completed spec. But the advantage to our spec business is that we can build faster with margins that are still strong, and we're able to meet the demand from buyers who want to move in sooner. We believe this is the right strategy and that we can achieve overall gross margins in the high 20% range while we grow the business faster, improve operating margin, generate strong cash flow, and achieve consistently high returns on equity.
We also tend to offer higher incentives uncompleted spec homes.
But the advantage to our spec business is that we can build faster with margins that are still strong and we were able to meet the demand from buyers who want to move in sooner.
Speaker Change: We believe this is the right strategy and that we can achieve overall gross margins in the high 20% range, while we grow the business faster improve operating margin generate strong cash flow.
Speaker Change: <unk> achieved consistently high returns on equity.
Martin P. Connor: Turning back to the P&L statement, write-offs in our home sales gross margin totaled $28.4 million in the quarter as compared to $11.1 million in the second quarter of 2023. SG&A as a percentage of revenue was 9.0% in the second quarter compared to 9.1% in the same quarter one year ago. And this was 70 basis points better than Geising, again reflecting our focus on cost controls and leverage from higher-than-expected home sales revenue. Year over year, total GNA dollars were essentially flat, despite healthy increases in community count, settlements, and agreements, and the impact of overall cost inflation.
Speaker Change: Turning back to the P&L statement.
Speaker Change: Write offs in our home sales gross margin totaled $28 4 million in the quarter as compared to $11 $1 million in the second quarter of 2023.
Speaker Change: SG&A as a percentage of revenue was 9.0% in the second quarter.
Speaker Change: Compared to nine 1% in the same quarter one year ago.
Speaker Change: And this was 70 basis points better than guidance again, reflecting our focus on cost controls and leverage from higher than expected home sales revenue.
Speaker Change: Year over year total G&A dollars were essentially flat despite healthy increases in community count settlements and agreements and the impact of overall cost inflation.
Martin P. Connor: We continue to focus intently on ways to increase productivity and operate more efficiently. Second quarter JV land sales and other income were $204 million, versus approximately $1 million in the same quarter last year. As Doug mentioned, approximately $175 million of this was attributable to the gain we recognized on the sale of land to a data center developer. The remaining approximately $30 million was primarily attributable to increased interest income and a $21 million gain on the sale of an apartment living in.
Speaker Change: We continue to focus intently on ways to increase productivity and operate more efficiently.
Speaker Change: Second quarter, JV land sales and other income was $204 million.
Speaker Change: Versus approximately $1 million in the same quarter last year.
Speaker Change: As Doug mentioned approximately $175 million of this was attributable to the gain we recognized on the sale of land to a data center development.
Speaker Change: The remaining approximately $30 million was primarily attributable to increased interest income and a $21 million gain on the sale of an apartment living asset.
Martin P. Connor: J.B. Land Sales and Other Income also included $5 million of pre-development write-offs in the apartment living business as we decided not to pursue certain deals in the current capital-constrained environment for multi-families. Our tax rate in the second quarter was approximately 25.9%, basically in line with our guidance of 25.8%.
Speaker Change: JV land sales and other income also included $5 million of pre development write offs in the apartment living business as we decided not to pursue certain deals in the current capital constrained environment for multifamily.
Speaker Change: Our tax rate in the second quarter was approximately 25, 9% basically in line with our guidance of 25, 8%.
Martin P. Connor: We ended the second quarter with over $2.7 billion of liquidity, including approximately $1 billion of cash and $1.7 billion of availability under our revolving bank credit facility. Our net debt to capital ratio was 18.7% at second quarter end. We have no significant maturities of our long-term debt until fiscal 2026, when $350 million of notes come due in November 2025.
Speaker Change: We ended the second quarter with over $2 $7 billion of liquidity.
Speaker Change: Including approximately $1 billion of cash and $1 $7 billion of availability under our revolving bank credit facility.
Speaker Change: Our net debt to capital ratio was 18, 7% in second quarter end.
Speaker Change: We have no significant maturities of our long term debt until fiscal 2026, when $350 million of notes come due in November 2025.
Martin P. Connor: Our community count at Corner End was 386 compared to our guide of 385. We expect 400 at the end of the third quarter and reaffirm 410 by the end of the fiscal year. We are projecting fiscal 2024 third quarter deliveries of 2,750 to 2,850 homes, with an average delivered price between $950,000 and $960,000. For full fiscal year 2024, we are increasing our projected deliveries to be between 10,400 and 10,800 homes, with an average price between $960,000 and $970,000.
Speaker Change: Our community count at quarter end was 386 compared to our guide of $3 85.
Speaker Change: We expect 400 at the end of the third quarter.
Speaker Change: Reaffirm for 10 by the end of the fiscal year.
Speaker Change: We are projecting fiscal 2024 third quarter deliveries of 2000, and 752850 homes with an average delivered price between 950 $960000.
Speaker Change: For full fiscal year 2024.
Speaker Change: We are increasing our projected deliveries to be between 10000, and 410800 homes with an average price between 960009 hundred $70000.
Martin P. Connor: These are increases of 350 homes and $15,000 per home at the midpoint, representing approximately $500 million in additional revenue. We expect interest and cost of sales to be approximately 1.3% in the third quarter and for the full year. Third quarter SG&A as a percentage of home sales revenues is expected to be approximately 9.2%. For the full year, we expect it to be 9.6%, an improvement of 20 basis points compared to our previous guide. For their income from unconsolidated entities and land sales, gross profit in the third quarter is expected to break even.
Speaker Change: These are increases of 350 homes and $15000 per home at the midpoint, representing approximately $500 million in additional revenue.
Speaker Change: We expect interest and cost of sales to be approximately one 3% in the third quarter and for the full year.
Speaker Change: Third quarter SG&A as a percentage of home sales revenues is expected to be approximately nine 2%.
Speaker Change: For the full year, we expect it to be nine 6% an improvement of 20 basis points compared to our previous guidance.
Other income income from unconsolidated entities and land sales gross profit in the third quarter.
Speaker Change: As expected the breakeven.
Martin P. Connor: We continue to project $260 million for the full year. Much of the remaining $48 million of full-year joint venture land sale and other income is projected to come from sales of our interest in certain stabilized apartment communities developed by Toll Brothers Apartment Living in joint venture with various partners. We project the third-quarter tax rate to be approximately 26 percent and the full-year rate to be approximately 25.5 percent.
Speaker Change: We continue to project $260 million for the full year.
Speaker Change: Much of the remaining $48 million of full year joint venture land sale and other income.
Speaker Change: It is projected to come from sales of our interest in certain stabilized apartment developed.
Speaker Change: Developed by toll brothers apartment living in joint venture with various partners.
Speaker Change: We project third quarter tax rate to be approximately 26% and the full year rate to be approximately 25, 5%.
Martin P. Connor: Our weighted average share count is expected to be approximately 105 million for the third quarter and for the full year. This assumes we repurchase $500 million of common stock in the year, or another $320 million in the second half of the year, on top of the $180 million we repurchased in the first half of the year. As Doug mentioned, with our updated guidance, we now expect to earn approximately $14 per diluted share in fiscal 2024, with an operating margin of over 18%. This would result in a full-year return on beginning equity of approximately 22% and would put our year-end book value per share at approximately $76.50. Now, let me turn it back to Doug.
Speaker Change: Our weighted average share count is expected to be approximately $105 million for the third quarter and for the full year.
Speaker Change: This assumes we repurchased $500 million of common stock in the year or another $320 million in the second half of the year on top of the $180 million, we repurchased in the first half.
Speaker Change: As Doug mentioned with our updated guidance, we now expect to earn approximately $14 per diluted share in fiscal 2024 with an operating margin over 18%.
This would result in a full year return on beginning equity of approximately 22% and would put our year end book value per share and approximately $76 50.
Doug: Now, let me turn it back to Doug. Thank you Marty before I begin to open up for questions I'd like to thank.
Douglas C. Yearley: Thank you, Marty. Before I begin to open it up for questions, I'd like to thank all of our Toll Brothers employees for a great first half of 2024. I'm so proud of your dedication, hard work, and commitment to our customers, which are key drivers of our long-term success. I'd also like to announce that beginning in June, Greg Ziegler will be assuming additional responsibilities as Head of Investor Relations. Greg should be a familiar name to all of you.
Doug: All of our toll brothers' employees for a great first half of 2024 I am so proud of your dedication hard work and commitment to our customers, which are key drivers to our long term success.
Douglas C. Yearley: He has been with the company for over 20 years and is our Senior VP and Treasurer. He will be taking the reins from Fred Cooper, who has been our distinguished head of IR since he joined the company over 30 years ago in 1993. Fred is transitioning to the new role of Senior VP of Strategic Partners. We are excited that we will be able to continue to benefit from Fred's wisdom while he concentrates on developing and expanding the many relationships he has helped foster with our debt, equity, and other partners over the years. Congratulations to both Greg and Fred.
Doug: I'd also like to announce that beginning in June Gregg Ziegler will be assuming additional responsibilities as head of Investor Relations.
Doug: Greg should be a familiar name to all of you here.
Doug: Been with the company for over 20 years and is our senior VP and treasurer.
He will be taking the reins from Fred Cooper, who has been our distinguished head of IRR since he joined the company over 30 years ago and 1993.
Doug: Fred is transitioning to the new role of senior VP of strategic partnerships.
Doug: We are excited that we will be able to continue to benefit from Fred's wisdom, while he concentrates on developing and expanding the many relationships. He has helped foster with our debt equity and other partners over the years, congratulations to both Greg and Fred.
Operator: Now, let's open it up to your questions. Yes, sir. We will now begin the question and answer session. As a reminder, the company is planning to end the call at 9: 30 when the market opens. During the Q&A, please limit yourself to one question and one follow-up. To ask a question, you may press star, then 1 on your touch-tone phone.
Now, let's open it up to your questions.
Doug: Rocco.
Well now begin the question and answer session.
Speaker Change: As a reminder, the company is planning to end the call at 930, when the market opens.
Speaker Change: Turning to the Q&A, please limit yourself to one question and one follow up.
Speaker Change: To ask a question you May Press Star then one on your Touchtone phone.
Speaker Change: If you are using a speakerphone please pick up your handset before pressing the keys.
Speaker Change: To withdraw your question. Please press Star then two.
Operator: If you are using a speakerphone, please pick up your handset before pressing the button. To withdraw your question, please press star then. Today's first question comes from Stephen Kim with Evercore ISI; please go ahead. Yeah, thanks very much, guys. Appreciate all the color.
Today's first question comes from Stephen Kim with Evercore ISI. Please go ahead.
Stephen Kim: Yeah. Thanks, very much guys I appreciate all the color is as always a congrats to Greg and Fred and.
Stephen Kim: To the rest of the team.
Stephen Kim: As always, congratulations to Greg and Fred and to the rest of the team. I wanted to ask a couple of questions related to, I guess, your growth and your margins. Let's start with the margins. You mentioned in your opening remarks that the spec homes that you build tend to be built on home sites with lower lot premiums. I think you said, And as a result, the gross margin is somewhat lower, as well as the fact that you also will incentivize them sometimes more. But I was wondering if you could disaggregate that for us.
Stephen Kim: I wanted to ask a cup yeah I wanted to ask a couple of questions related to.
Stephen Kim: Yeah, I guess your growth and your margins, let's start with the margins.
Stephen Kim: You mentioned in your opening remarks that spec homes that you build.
Stephen Kim: Tend to be built on home sites with lower lot premiums I think you said and as a result.
Speaker Change: Margin somewhat lower as well as the fact that you also will incentivize them, sometimes more but I was wondering if you could disaggregate that for us because if you're building homes.
Speaker Change: On home sites with the lower lot premiums bulb that even if you didn't build on a spec basis, they would probably still generate a somewhat lower margin is what im thinking so curious how much on how much is spec building for you actually driving a lower margin on an apples to apples basis do you think.
Speaker Change: Aching out that that that issue.
Douglas C. Yearley: Because if you're building these specs on home sites with lower lot premiums, even if you didn't build them on a spec basis, they would probably still generate a somewhat lower margin, is what I'm thinking. So curious, how much is spec building for you actually driving a lower margin on an apples-to-apples basis, do you think, taking out that issue? Um, yeah, so let me, let me start at the beginning of your question and just take you through the business model.
Speaker Change: Yes, So let me let me let me start at the beginning of your question and just take you through the business model. So.
Douglas C. Yearley: So, right now, we're running at about 50% spec, as we've talked about. I think, long term, particularly if rates come down and the resale markets open up a bit, you know, we've kind of targeted 40 to 50% as a long-term appropriate business model for the percent that will be spec. We define spec as a foundation in the ground.
Speaker Change: Right now we're running at about 50% back as we've talked about I think long term, particularly if rates come down and the resale markets open up a bit.
Speaker Change: Kind of targeted 40% to 50% as a long term appropriate business model for the percent that will be spec.
Speaker Change: We define us back as a foundation in the ground its a little earlier than many other builders, we sell about a third of our stack.
Douglas C. Yearley: It's a little earlier than many other builders. We sell about a third of our SPEC... Up until when the house is framed, we sell another third of the spec, between framing and when the finishes go in, and then the final third of the spec we sell when it is completed. The higher incentive tends to be on the completed spec. We are not incentivizing nearly as much.
Speaker Change: Up until when the houses framed we sell another third of the spec between framing and when that finishes go in and then the final third of the specs. We saw when they are completed the higher incentive tends to be on the completed specs, we're not incentivizing nearly as much in fact, it's quite similar to the bill.
Douglas C. Yearley: In fact, it's quite similar to the build-to-order incentive when the home is sold either as it's being framed or between drywall and the finishes. And we think that's a good business model because there are a lot of people that want to move in sooner, and we now have the inventory for them. We also strategically plan when we start the specifications, thinking about when they will be completed and when the buyers want the house.
Speaker Change: The order incentive on the home is sold either as it's been framed or between dry wall and the finishes.
Speaker Change: And we think that's a good business model because there's a lot of people don't want to move in sooner and we now have the inventory for them. We also strategically plan. When we started this back thinking about when they will be completed and when the buyers want perhaps so there are more specs that get that gets started in time to be <unk>.
Douglas C. Yearley: So there are more specs that get started in time to be completed in the summer and early fall months because we know many buyers, particularly those with kids, and most of our buyers have kids, want to move in in the summer and early fall as schools are opening. So that's all part of the strategy.
Speaker Change: Completed in the summer and early fall months, because we know many buyers, particularly those with kids in most of our buyers have kids want to move into the summer and the early fall as schools are opening so that's all part of the strategy and so we've always expect it and we discussed that we would be a bit more spec.
Douglas C. Yearley: And so we've always expected, and we've discussed, that we will be a bit more spec heavy in the second half of the year than in the first half in terms of delivery, and those homes have a little bit lower margin. The reason they have a lower margin is because of three things. One, we tend to build them on the generic lot, the less valuable lot. So an average spec may carry a lot premium of $25,000, where the bill-to-order business has a lot premium of $50,000 or higher. We also put less in the house in terms of upgrades.
Heavy in the second half of the year than in the first half in terms of deliveries and those homes have a little bit lower margin. The reason they have a lower margin is because of three things one we tend to build them on the generic launch the less valuable lot. So spec may carry an average spec may carry a lot premium.
Speaker Change: 25000, or the build to order business has a lot of premium of 50 or higher.
Speaker Change: We also put less in the house in terms of upgrades and as you know our upgrade business through our design studio is accretive to margin, we get about a 40% margin out of the design studio, but we're cautious we don't want to overload us back.
Douglas C. Yearley: And as you know, our upgrade business through our design studio is accretive to margin. We get about a 40% margin out of the design studio. But we're cautious.
Douglas C. Yearley: We don't want to overload the specification and be outside or above the market. So that is part of the strategy. And then the third reason is that if the House gets to completion, we do incentivize it a bit more. But we have built in, we think, very conservative incentives. For the balance of homes, SPECSA, we need to sell and still deliver by October. And there are about 6,000 deliveries between now and the end of the year, half of which we call 11,000 plus or minus.
Speaker Change: N b outside or above the market. So that is part of the strategy and then the third reason is that the house gets to completion, we do incentivize it a bit more.
Speaker Change: We have built in we think very conservative incentives.
Speaker Change: For the balance of homes, we need spec, so we need to sell and still deliver by October.
Speaker Change: And there's about 6000 deliveries between now and the end of the year half of call it 11000, plus or minus.
Douglas C. Yearley: And about a quarter of those, or 1,500, are unsold specifications that are being constructed right now. Some will sell in the next few months with a modest incentive, but some may be sold when they're completed late in the summer, and we are budgeting for a higher incentive. But we don't know where that incentive will be.
Speaker Change: And about a quarter of those or <unk> hundred our unsold specs that are being constructed right. Now so we will sell in the next few months with modest incentives, but some may be sold when they are completed late in the summer and we are budgeting for higher incentive we don't know where that incentive will be it could be higher than our budget.
Douglas C. Yearley: It could be higher than our budget. It could be lower than our budget. We are encouraged by the start to May, which has been very strong. We are encouraged by rates coming down. So we are certainly hopeful that we won't use all the incentivized or all the budgeted incentives, but we'll just have to see how that plays out.
Speaker Change: Could be lower than our budget. We are encouraged by the start to May which has been very strong. We are encouraged by rates coming down. So we are certainly hopeful that we won't use all the incentivized or all the budgeted incentive but we'll just have to see how that plays out as to your main question, which is arent, we just substituting.
Douglas C. Yearley: As to your main question, which is, aren't we just substituting a spec home with the same margin as a build-to-order? Not quite, because I think we are being more conservative than the market would be when they step up and get to the design studio, and they fall in love with all the finishes, and they put more into the house that we are putting in because we want to make sure we sell that spec and we don't overdo it. So it's a fair point. There is certainly lower margin and lower lot premium lots because the lot premium is 100% of the margin.
Speaker Change: <unk>.
Speaker Change: Spec home with the same margin as a build to order.
Speaker Change: Not quite because I think we are being more conservative than the market would be when they step up and they get to the design studio and they fall in love with all the finishes and they put more into the house than we are putting in because we want to make sure we sell that spec and we don't overdo. It so.
Speaker Change: It's a fair point, there is certainly lower margin and lower lot premiums lots because a lot premium is 100% margin and theres lower margin when you put less upgrades and a home because of the accretive nature of the upgrade business, but I think our spec.
Stephen Kim: And there's a lower margin when you put less upgrades in a home because of the accretive nature of the upgrade business. But I think our spec strategy is to be a bit more conservative, then the client, buys a bill to order on that line. Great. Yeah, so what I'm hearing from you is that, you know, the apples to apples comparison, it's probably less than the 200 to 250 basis points lower gross margin versus BTO that you've talked about on a pure apples to apples basis, but it is still lower, for sure. Yeah, that's probably a fair way.
Speaker Change: Our strategy is to be a bit more conservative.
Speaker Change: Then the client.
Speaker Change: Buying a build to order on that one.
Speaker Change: Great Yeah, So I mean, what I'm hearing from you is that.
Speaker Change: The the apples to apples, it's probably less than the 200 to 250 basis point lower gross margin versus bto that you've talked about.
Speaker Change: On a pure apples to apples basis, but it is still lower for sure.
Speaker Change: That's probably a fair way to say, okay got it alright. So second question relates to the.
Stephen Kim: Okay, good. All right. So my second question relates to the M&A landscape. I'm curious if you could give us your assessment of the M&A landscape, specifically as it relates to, you know, Toll Brothers and your growth plans, how it fits in. We're hearing that private builders are finding it tougher and tougher to compete with the likes of, you know, public builders such as yourself. But also, the pool of prospective buyers is pretty robust right now, particularly with Japanese interest. And at the same time, you have been talking about moving more, you know, land light and having that be, you know, an integral part of your strategy going forward.
Speaker Change: The M&A landscape I am curious if you could give us your assessment of the M&A landscape, specifically as it relates to toll brothers and your growth plans.
Speaker Change: How it fits and we're hearing the private builders are finding a tougher and tougher to compete with the likes of public like such as yourself.
Speaker Change: But also the pool of prospective buyers is pretty robust right now, particularly with the Japanese interest.
Speaker Change: And then at the same time, you have been talking about moving more land line and having that be an integral part of your strategy going forward. So with all of those are those three major pieces I'm curious if you could give us your general assessment of the M&A landscape.
Douglas C. Yearley: So with all of those, those three major pieces, I'm curious if you could give us your general assessment of the M&A landscape. How interested are you in tapping the M&A pool to grow geographically or grow across different price points and things of that nature? Sure, so what we're actually seeing more from the smaller builders who are facing some capital crunch is land deals that they have tied up, they've processed approvals on, they've thought about building homes on. They're having a hard time finding the regional bank to finance them, and while they can't make the full... profit they would have made had they built homes. They can make a fair profit by flipping the land, so we're seeing quite a few deals like that out of the smaller, more local, and regional. Builders
Speaker Change: How interested are you in tapping the M&A pool to grow geographically or grow across different price points and things of that nature sure. So.
Speaker Change: Well, we're actually seeing more from the smaller builders, who are facing some capital crunch.
Speaker Change: Is land deals.
Speaker Change: But they have tied up the process approvals on a thought about building homes on or having a hard time, finding the regional bank to finance them.
Speaker Change: They can't make a full <unk>.
Speaker Change: Profit they would've made has a built homes. They can make a fair profit by flipping the land and so we're seeing quite a few deals like that out of the smaller more local and regional.
Douglas C. Yearley: In terms of M&A, it's very active. There are a lot of deals out there. We're in the action.
Speaker Change: <unk> in terms of M&A, it's very active.
Speaker Change: A lot of deals out there.
Douglas C. Yearley: We look at every deal. We have a seasoned team that's dedicated to M&A. That's all they do. There's nothing to report.
Speaker Change: We're in action, we look at every deal we have a seasoned team that's dedicated to M&A. That's all they do.
Douglas C. Yearley: Frankly, there's nothing that's that exciting to us. We're really happy with the geographic footprint, really happy. There are very few new markets we're looking at. We're growing this company by getting bigger with wider price ranges in the markets we're in, where we know we're underserving most of the markets we are in. You pay a premium to buy a builder.
Speaker Change: Nothing to report frankly, theres nothing that exciting to us, we're really happy with the geographic footprint.
Speaker Change: Really happy Theres very few new markets. We're looking at we're growing this company by getting bigger with wider price ranges in the markets. We're in where we know were under serving most of the markets. We are in <unk>.
Speaker Change: You pay a premium to buy a builder.
Douglas C. Yearley: It's a lot harder to pay that premium when you're in a market with a brand, with employees, with land, with contractors, with realtor relations, and you're cooking. You pay that premium when you want to enter a new market. We did it 15 times in this company over the years as we were on a geographic growth mode. But right now, we love the footprint.
Speaker Change: A lot harder to pay that premium when you enter a market with a brand with employees with land with contractors with reorder relations and you're cooking you pay that premium when you want to enter a new market. We did at 15 times in this company over the years as we are on a geographic growth mode right now.
Speaker Change: Now we love the footprint, we're getting bigger where we are this doesn't mean M&A is off the table, but it's going to be much harder to pencil and we're going to be more careful.
Douglas C. Yearley: We're getting bigger where we are. It doesn't mean M&A is off the table, but it's going to be much harder to pencil in, and we're going to be more careful. Thank you. And our next question today comes from John Lovallo at UBS. Please go ahead.
John Lovallo: Good morning, guys. Thank you for taking the time to answer my questions. The first one, and I may have misheard this, so please correct me if I'm wrong, but I think you may have talked about gross margins settling in the kind of the 27 to 28% range. And if so, I'm just curious about what's contemplated in this, you know, spec deliveries increase here, lot prices are going up. What are sort of the positive offsets from the fiscal fourth-quarter exit rate of, we'll call it, 27.4? Yeah, John, I think it's that range we're comfortable with the 27 to 28 long term.
Speaker Change: Thank you and our next question today comes from John Lovallo with UBS. Please go ahead.
John Lovallo: Good morning, guys excuse me. Thank you for taking my questions. The first one and I may have misheard. This so please correct me if I'm wrong, but I think he may have talked about gross margins settling in the kind of the 20% to 27% 28% range.
John Lovallo: So I'm just curious kind of whats contemplated in this.
Spec deliveries increase here lot prices are going up.
Speaker Change: The positive offsets from the fiscal fourth quarter exit rate of call. It 27.4.
John Lovallo: Yes, John I think it's in that range, we're comfortable with the 27% to 28 long term.
Douglas C. Yearley: We think this is the right range for our business model. Remember, we're building houses faster. Our SG&A is coming down.
John Lovallo: We think is the right range for our business model.
John Lovallo: Remember.
John Lovallo: It houses faster.
John Lovallo: Our SG&A is coming down.
Douglas C. Yearley: So don't lose sight of the operating margin, which is going up, even with a gross margin in that range, and that's obviously very important to us. Um, you know, we've been on this strategy of widening the price point. Coming down with more affordable luxury, focusing on the affluent, first-time millennial, doing more and more active adult things, and building more spec, particularly at some of the lower price points. That strategy has now been with us for several years. It's pretty much fully implemented.
John Lovallo: So they don't lose sight of the operating margin, which is going up.
John Lovallo: Even though the gross margin in that range and that's obviously very important to us.
John Lovallo: We've been on this strategy of widening price point come.
John Lovallo: Coming down with more affordable luxury focusing on the affluent first time millennial Dewey.
John Lovallo: Doing more and more active adult.
John Lovallo: <unk> more spec, particularly at some of the lower price points.
John Lovallo: That strategy has now been with us for several years.
John Lovallo: It's pretty much fully implemented so while we think average delivered price may come down a little bit more we think it's going to settle in the low nine hundreds we think gross margin should settle in the 27 to 28 range.
Douglas C. Yearley: So while we think the average delivered price may come down a little bit more, we think it's going to settle in the low 900s. And we think gross margins should settle in the 27 to 28 range. And, you know, we're just very comfortable with that business model. The spec business is allowing us to capture a bigger part of the market, not just in terms of price but in terms of buyers that want to move in faster.
John Lovallo: And we're just very comfortable with that business model.
John Lovallo: The speck business is allowing us to capture a bigger part of the market not just in terms of price, but in terms of buyers or want to move in faster.
Douglas C. Yearley: And it's giving us an opportunity to build houses faster. And so when we combine that at a slightly lower margin with the build order business that is still driving very high margins, for all the reasons we're giving, we think that allows more growth.
John Lovallo: And.
John Lovallo: It's giving us opportunity to build houses faster and so when we combine that at a slightly lower margin with the build to order business that is still driving very high margins for all the reasons we were giving.
John Lovallo: We think that allows more growth.
Yes.
Douglas C. Yearley: John, gross margin is obviously a very key metric for us. But we can't ignore the fact that we're trying to generate a high return on equity. There is a balance between gross margin and revenue growth. We'll strike that balance.
John: John gross margin is obviously, a very key metric for us.
Speaker Change: Well, we can't ignore the fact that we're trying to generate high return on equity.
Speaker Change: And if.
Speaker Change: There is a balance between gross margin and revenue growth, we'll work that balance and example is our land banking arrangements, where the cost of that land ultimately is a bit higher thus, putting a bit of downside pressure on gross margin for that community.
Douglas C. Yearley: An example is a land-backed arrangement, where the cost of that land ultimately is a bit higher, thus putting a bit of downside pressure on gross margin for that community, but it allows us to grow revenue and have more capital to allocate to new deals, buybacks, debt repurchase, dividends, et cetera. So it's a balancing act, and I think we've done a nice job of balancing here, as we've been able to continue to maintain. Pretty high industry, leading gross margins, while also generating a very strong return on equity. Okay, that's helpful.
But it allows us to grow revenue and have more capital to allocate to new deals buybacks debt repurchase dividends et cetera.
Speaker Change: So it's a balancing act and I think we've done a nice job.
Speaker Change: <unk> here as we've been able to continue to maintain.
Pretty high industry.
Speaker Change: Leading gross margins while also generating.
Speaker Change: Very strong return on equity.
John Lovallo: And then maybe just sticking on the cost side, which was very strong in the quarter. I mean, SG&A as a percentage of sales is expected to tick up about 20 basis points quarter over quarter. Despite the slightly higher revenue, what's driving the sort of the uptick here in SG&A? And how should we sort of think about that as we move forward?
Speaker Change: Okay. That's helpful. And then maybe just sticking on the cost side.
Speaker Change: Which was very strong in the quarter SG&A as a percentage of sales I think is expected to tick up about 20 basis points quarter over quarter. Despite the slightly higher revenue, what's driving sort of the uptick here in SG&A and how should we sort of think about that as we move forward.
Speaker Change: Yes, some of it just the inflationary pressures some of its incentives on some of our spec homes that are given to the brokerage community.
Speaker Change: And we'd see more brokers involved in the spec home sales than we do in the build to order sales. So.
Speaker Change: There is additional cost and marketing right now.
Speaker Change: And I think thats.
Speaker Change: The basis, we also have quite a few communities that will be opening in the second half of the year.
Douglas C. Yearley: Yeah, some of it's just inflationary pressures. Some of it is incentives on some of our spec homes that are given to the brokerage community. And we see more brokers involved in the spec home sales than we do in the build-to-order sales, so there's an additional cost in marketing right now. And I think that's the basis. We also have quite a few communities that will be opening in the second half of the year.
Douglas C. Yearley: There are always up-front community opening costs where communities have not yet generated revenue, and so I think part of it, Marty, is that also. Thank you. And our next question today comes from Alan Ratner with Zelman & Associates. Please go ahead.
Speaker Change: Theres always upfront community opening costs that where communities have not yet generated revenue and so I think part of it Marty is that also absolutely.
Speaker Change: Yeah.
Speaker Change: Thank you and our next question today comes from Alan Ratner with Zelman <unk> Associates. Please go ahead.
Alan S. Ratner: Hey guys, good morning. Congrats on a great quarter and thanks for all the helpful comments so far. First question, Doug, you know, I was listening to your comments on some of the market commentary there, and I think one market you left out was Florida. And I know we've seen, at least in some of the markets in Florida, some pretty decent increases in resale inventory off of the trough levels of late. So I'm curious, you know, specific to Florida, but I guess across your entire footprint in areas where resale inventory has begun to rise, how is that impacting your business? Are you seeing the need for additional incentives? Are you seeing absorption slow at all?
Speaker Change: Hey, guys. Good morning, Congrats on a great quarter and thanks for all the helpful.
Alan S. Ratner: Color so far.
Speaker Change: First question Doug.
Doug: I was listening to your comments on some of the market.
Speaker Change: Commentary, there and I think one market youll have that with Florida, and I know we've seen at least in some of the markets in Florida pretty decent increases in resell inventory off of the trough levels of late so I'm curious.
Douglas C. Yearley: Just talk to that trend would be great. Sure. Every one of our markets in Florida is in the top half of our list on rating performance. I didn't highlight Florida in my opening comments because they're not top five markets at the moment. And I tried to limit my comments to the best of the best.
Speaker Change: Can you say like the Florida, but I guess across your entire footprint in areas, where retail inventory has begin to inflect higher how is that impacting your business are you seeing the need for additional incentives or are you seeing absorptions slow at all.
Speaker Change: Just talk to that trend would be great.
Speaker Change: Sure.
Speaker Change: Every one of our markets in Florida is in the top half.
Speaker Change: Of our list on ratings performance.
Speaker Change: I Didnt highlight Florida in my opening comments because.
Speaker Change: They're not top five markets at the moment and I tried to limit my comments to the best of the best.
Douglas C. Yearley: Florida East, which is small for us, called the Fort Lauderdale corridor, and the Vero Beach Corridor is very good. We are encouraged because May has been very strong throughout Florida. We are keeping an eye on inventory. It has modestly increased in some of our markets. Jacksonville and Orlando are two examples, but we don't see it impacting our business. I would grade Florida a B+. I wouldn't give it an A, but I wouldn't give it a B-.
Speaker Change: Florida East, which is small for us.
Speaker Change: Called the Fort Lauderdale.
Speaker Change: Bureau of each quarter.
Speaker Change: Is very good we are encouraged because may has been very strong throughout Florida, we are keeping an eye on inventory it has increased mom.
Speaker Change: Modestly and some of our markets Jacksonville Orlando as two examples, but we don't see it impacting our business. So.
Speaker Change: Oh, I would grade, Florida, a b plus.
Speaker Change: I wouldn't give it us on a but I wouldn't give it a b minus I think it's a solid good market.
Douglas C. Yearley: I think it's a solid, good market. And, you know, we're going to keep growing down there. And like I said, the last three weeks have been very good. So, no worries about what's going on down in the sunshine.
And.
We're going to keep growing down there and like I said the last three weeks have been very good so.
Speaker Change: No worries about what's going on down in the Sunshine State.
Alan S. Ratner: Got it. I appreciate that info there. Second, on kind of the NAR settlement and, I guess more broadly, your relationship with the brokerage community right now, can you talk about how you view the relationship there? What percentage of your transactions are used in a co-broke? You know, do you think of that brokerage community as a vehicle to attract more traffic? Do you kind of flex commission rates there to any extent?
Speaker Change: Got it I appreciate that that info there.
Alan S. Ratner: And where do you see that going forward post-settlement? Sure, so about 65% of our sales involve a Realtor, a broker. The brokerage community is very important to Toll Brothers. We take great care of them. We market to them regularly. I think they like coming, bringing their clients to our communities.
Speaker Change: Second on kind of the the NAR.
Speaker Change: Our settlement and I guess more broadly your relationship with the brokerage community right. Now can you talk to how you view the relationship there what percentage of your transactions are used in a co broke.
Speaker Change: Do you think of that brokerage community as a vehicle to attract more traffic do you kind of Flex commission rates there to any extent.
Speaker Change: And where do you see that going forward post settlement.
Speaker Change: Sure so about 65%.
Speaker Change: Our sales involve a.
Speaker Change: Reorder a broker.
Speaker Change: The brokerage community is very important to toll brothers we.
Speaker Change: We take great care of them.
Speaker Change: We market to them regularly.
I think they like coming bringing their clients to our communities.
Douglas C. Yearley: The business is changing. Co-ops are coming down, industry-wide. We're just beginning to see it. We're not going to be a leader.
Speaker Change: The business is changing.
Speaker Change: Co ops are coming down industry wide, we're just beginning to see it we're not going to be a leader we're going to be a follower.
Douglas C. Yearley: We're going to be a follower, but we are already bringing brokerage commissions down in many markets around the country. We think that will continue. But we will not be an outlier. Right now,
Speaker Change: We are already bringing brokerage commissions down in many markets around the country, we think that will continue.
Speaker Change: But we will not be an outlier.
Speaker Change: <unk> right now.
Douglas C. Yearley: The brokerage commission for us around the country is in the range of two to two and a half percent. You know, it was two and a half to three percent. There are some markets that are going to flat C. I think the industry is going to see more and more builders moving to flat fees and getting away from a percentage. So it's very fluid, but it is definitely a tailwind on the S component of SGNA, and we're just in the early stages. Thank you. And our next question today comes from Mike Dahl with RBC Capital Markets. Please go ahead.
Speaker Change: The brokerage commission for us around the country is in the range of two to two 5%.
Speaker Change: It was 2.5% to 3%.
Speaker Change: There are some markets that are going to flat fee.
Speaker Change: Thank the undersea youre going to see more and more builders moving to flat fee and getting away from a percentage.
Speaker Change: So it is very fluid.
Speaker Change: It is definitely a tailwind.
Speaker Change: On the yes component of SG&A and we're just in the early stages.
Speaker Change: Okay.
Speaker Change: Thank you and our next question today comes from Mike Dahl with RBC capital markets. Please go ahead.
Michael Glaser Dahl: Morning. Congratulations to Greg and Fred. Thanks for all the comprehensive, So far, just back on the gross margin in the near term, I mean, the margin performance has been exceptional. So, yeah, that not only do we look at the trajectory that's implied, you know, Transcript by Transcription Outsourcing, LLC. 2013 Transcription Outsourcing, LLC.
Speaker Change: Good morning, Congrats Greg and Brad.
Speaker Change: Thanks for all the comprehensive information.
Speaker Change: So far.
Speaker Change: Back on the gross margin in the near term.
Speaker Change: The margin performance has been exceptional.
Speaker Change: Yeah that notwithstanding.
Speaker Change: If we look at the trajectory of that implied you beat the second quarter. The guide so it does imply slightly weaker plug everything you're saying sounds on balance more positive.
Douglas C. Yearley: Doug, everything you're saying sounds, on balance, more positive, you know, pretty broad increases that you've implemented. The spec closing next has already been elevated, as you talked about, at the QQ level, so a little increased spec doesn't seem like it's going to move the needle that much on margins. So maybe just help us bridge the gap a little bit more on just kind of, after such a strong QQ performance, you know, why the back half margins would still trend down and call it 70 basis points, 70 basis points by the time you get to 4Q versus 2Q. Thanks, bye.
Speaker Change: We've seen the same pricing trends you were alluding to in terms of yeah pretty broad increases that you've implemented.
Speaker Change: The spec closing next is already been elevated as we've talked about a multi level. So a little a little increase.
Speaker Change: Seem like it's been moved that much on margin.
Speaker Change: Maybe just help US bridge the gap a little bit more I'm just kind of.
Speaker Change: After such a strong <unk> performance.
Speaker Change: Why the why the back half margins would spill.
Speaker Change: That trend down call it like.
Speaker Change: 80 basis points 70 basis points by the time you get up.
Speaker Change: Thank you.
Speaker Change: Yes.
Michael Glaser Dahl: Thanks, Mike.
Michael Glaser Dahl: As Doug kind of hinted at, we forecast approximately 4500 ohms in backlog to deliver in our second half, along with another 1,500 unsold generally lower margin spec homes. Remember, a large number of those 4,500 backlog homes are also spec homes that have been sold but have not yet been completed and delivered. We expect deliveries in our second half will far exceed 50% of total deliveries, and as we've said, they generally carry lower marks.
Speaker Change: As Doug kind of hinted at what we forecast.
Speaker Change: Approximately 4500 homes in backlog to deliver in our second half.
Speaker Change: Along with another 500 own unsold generally lower margin spec homes.
Remember a large number of those 45 on a backlog homes are also specs.
Speaker Change: That have been sold and then not yet been completed and delivered.
Speaker Change: The spec deliveries in our second half.
Speaker Change: Far exceed 50% of total deliveries.
Speaker Change: And as we've said they generally carry lower margins.
Martin P. Connor: So despite some recent margin beats. As we look at those 4,500 homes, the concentration of specs in them, and the additional 1500 specs still to be sold, we feel prudent to hold our Gross-Martin guidance at 28% for the full year. And then just as a point of clarification, Marty, does that assume, I know you said it baked in kind of higher incentives on specs. So does that assume that, Unknown Speaker 07.
Speaker Change: So despite some recent margin beats.
Speaker Change: As we look at those 4500 homes the concentration of specs in them. The additional 1500 specs still to be sold we feel it prudent to hold our gross margin guidance at 28% for the full year.
And then just as a point of clarity Marty does that assume.
Speaker Change: Set it baked in kind of higher incentives on spec so does that assume that.
Speaker Change: Our spec gross margin will be lower in the second half than it was in the first half and then my follow up question.
Michael Glaser Dahl: I suspect gross margin will be lower in the second half than it was in the first half. And then my follow-up question is, you know, when you think about that long-term gross margin guide, you've obviously tightened up your, you know, your kind of algorithm for thinking about the total margin and return that allows you to underwrite a deal. It still seems like you're finding success, you know, getting to that high 20s margin on new deals, which is a little bit surprising given the amount of capital out there chasing land.
Speaker Change: When you think about that long term gross margin guide, you've obviously tightened up.
Speaker Change: Youre kind of algorithm for thinking about the total margin and return on that allows you to underwrite a deal.
Speaker Change: Still seems like you are finding success getting to that high <unk> margin on new deals.
Speaker Change: Which is a little bit surprising.
Speaker Change: Given the amount of capital out there chasing chasing land and so I guess, just talk a little bit about that kind of ability to continue to underwrite and as youre pushing things into land banking ultimately what percent of those deals are still self developed.
Michael Glaser Dahl: And so I guess just talk a little bit about that kind of ability to continue to underwrite and as you're pushing things into land banking, you know, ultimately what percent of those deals are still self-developed, and maybe that's still a delta that's allowing you to, you know, really capture both. There's a lot there.
That's still a delta that's allowing you to.
Speaker Change: Yes really capture both.
Martin P. Connor: Let me see how I can address that. I think our spec margin in the back half of the year is expected to be a little bit lower than it was in the first half of the year because the first half of the year was particularly benefited by a strong spec gross margin in the first quarter. And that came out of the Pacific region, where we just don't expect that to continue.
Speaker Change: Sure. So there's a lot there.
Speaker Change: Let me see I can address that.
Speaker Change: Our spec margin in the back half of the year is expected to be a little bit lower than it was in the first half of the year because the first half of the year was particularly benefited was strong spec gross margin in the first quarter.
Speaker Change: And that came out of the Pacific region, where we just don't expect that to continue as it release and as it relates to underwriting and elevated standards. You are right. We are able to find deals there is a bit of capital out there chasing deals.
Martin P. Connor: As it relates to underwriting and elevated standards, you're right. We are able to find deals. There is a bit of capital out there chasing deals, but maybe not as much as you might think at our price points and at our deal sizes.
Speaker Change: But maybe not as much as you might think at our price points and at all.
Speaker Change: Our deal size, we'll do 40 lot deals we will do 50 lot deals.
Martin P. Connor: You know, we'll do 40-lot deals; we'll do 50-lot deals. We're advantaged compared to the smaller, less-capitalized builders who we compete with for those deals. And as Doug mentioned, we're actually getting a number of deals from some of the smaller, less capitalized builders as they can't close on all the deals they have out there. So we're encouraged by what we're seeing there.
Speaker Change: We're advantaged compared to the smaller less capitalized builders, who we compete with for those deals and as Doug mentioned.
Speaker Change: We're actually getting a number of deals from some of the smaller less capitalized builders as they can't close on all the deals they have out there. So we're encouraged by what we're seeing there in terms of.
Martin P. Connor: In terms of land banking, I think it's probably a good rule of thumb to say 25% of our deals are land banked. We continue to be encouraged by the depth and the permanence of that land banking market, or the perceived permanence of that land banking market. So that number may go up. That puts a little pressure on gross margin, but, as we've said before, really enhances returns and growth. Thank you. Was there another question in there?
Speaker Change: Land banking I think it's probably a good rule of thumb to say, 25% of our deals our land bank. We continue to be encouraged by the depth and the permanence of that land banking market or the perceived permanent so that land banking market. So that number may go up and it puts a little pressure on gross margin.
Speaker Change: But as we've said before really enhances returns and growth.
Speaker Change: Was there another question in there you've got to invent sustainability of margin higher underwriting land today okay.
Martin P. Connor: He's asking about the sustainability of Mars and how you're underwriting land today. Okay. Yeah, our underwriting is rigorous, and we are not compromising margin in that underwriting, so we would expect... We continue to achieve the 27 to 28 percent we talked about earlier. Thank you. And our next question comes from Rafe Jadrosich with Bank of America. Please go ahead.
Speaker Change: Yeah, our underwriting.
Speaker Change: Is rigorous and.
Speaker Change: We are not compromising margin in that underwriting. So we would expect to continue to achieve the 27% to 28% we talked about earlier.
Speaker Change: Thank you and our next question comes from Richard.
Speaker Change: Joseph.
Speaker Change: Bank of America. Please go ahead.
Rafe Jason Jadrosich: Hi, good morning. Thanks for taking my question. If I look at the lot count since the beginning of 2023, it's been relatively stable, kind of in the low 70,000 range. Over that time period, you've added about, I think, 70 new communities. How do you think about the level of land spend and community count growth going forward? And then when would you need to start to see lots growing to keep up with your long-term growth targets?
Hi, good morning, Thanks for taking my question.
If I look at the lot count.
Speaker Change: Since the beginning of 2023, it's been relatively stable kind of in the low 70000 range.
Speaker Change: Over that time period, you've added about I think 70 new communities.
How do you think about the level of land spend and community count growth going forward and then when would you need to start to see the lots growing to keep up your long term term growth targets is it are we talking about years or quarters.
Rafe Jason Jadrosich: If you're talking about years or quarters, how long can you sustain the community count growth at this level of lot count? So, as I mentioned, we have the land controlled to grow the community count in 25 and 26, and we're seeing it. 10 to 25 deals a week. So, and and you know, some of those are very, very long entitlement processes, but many of them will be able to deliver houses or at least sell houses. Over the next few years, this means the communities could open.
Speaker Change: Like how long can you can you sustain the community count growth at this level of lockout.
Speaker Change: So as I mentioned, we have the land controlled.
Speaker Change: To grow community count in 'twenty, five and 'twenty six.
Speaker Change: And we're seeing.
Speaker Change: 10% to 25 deals a week so.
Speaker Change: And some of those are very very long entitlement.
Speaker Change: Processes, but many of them.
Speaker Change: We will be able to deliver houses or at least sell houses.
Speaker Change: Over the next few years, which means the communities could open. So we are we are on plan to grow community count, 10% and 24 over 'twenty three and we are confident we can continue.
Douglas C. Yearley: So we are on plan to grow the community count 10% in 24 over 23, and we are confident we can continue that type of community camp growth based on the land we control and the deal flow we see. Unknown Speaker So, you know, 70,000 lots when you're building 10, 11, 12, 13, 14,000 homes a year. As we continue to grow this company, this is putting us in great shape and allowing us to be diligent and conservative and careful as we continue to look at new land opportunities. So land is about the least of my worries here. We have some terrific teams.
Speaker Change: That type of community count growth base.
Speaker Change: Based on the land, we control and the deal flow we see.
Speaker Change: So.
Speaker Change: 70000 lots when you're building 10, 11, 12, 13 14000 homes a year as we continue to grow this company.
Speaker Change: It's putting us in great shape, and allowing us to be diligent and conservative and careful as we continue to look at new land opportunities. So.
Speaker Change: Land is about the least of my worries here, we have terrific teams, we have a great brand town salaries wanted to sell to us towns want us to build our homes in their towns.
Douglas C. Yearley: We have a great brand. Sellers want to sell to us. Towns want us to build our homes in their towns.
Douglas C. Yearley: The type of deals we're seeing is widening dramatically. I talked about smaller builders selling us land. I can't tell you the number of suburban offices, complexes that are half leased up, that are being sold to be torn down and redeveloped into townhomes.
Speaker Change:
Speaker Change: The type of deals we're seeing is widening dramatically I talked about smaller builders selling us land.
Speaker Change: I can't tell you the number of suburban office.
Speaker Change: Complex is that our half leased up that are being sold to be torn down and redeveloped into townhomes.
Douglas C. Yearley: I'm seeing all sorts of new deals that we didn't see years ago, based on the nature of today's market. And new deal structures, you know, as we've encouraged our land teams to get creative in deferring payment terms. We've seen a few deals where we don't pay for the land until the home closes.
Speaker Change: There's all sorts of new deals that we didn't see years ago based on the nature of today's market a new deal structures as we've encouraged our land teams to get creative and deferring payment terms, we've seen a few deals where we don't pay for the land until the loan closes right and we've seen more profit.
Douglas C. Yearley: And we've seen more profit participation arrangements, where there might be an upfront payment for the land and then an additional payment at closing. Also, we're seeing more seller take-back financing terms. So while we are still at this 50-50, roughly split between owned and optioned, don't be misled by that because a lot of our payments are actually happening very late for that land that we may already own. And that really helps us with cash flow, and it helps us with return on equity. Thank you; that's helpful.
Speaker Change: As a patient arrangements, where there might be an upfront payment for the land and then an additional payment at closing so and we're seeing more.
Speaker Change: Seller takeback financing terms, so while we.
Speaker Change: Are still at this 50 50, roughly split between owned and optioned.
Don't be misled by that because a lot of our payments are actually happening very late for that land that we may already owned and that really helps us with cash flow and it helps us with the return on equity.
Speaker Change: Got it. Thank you that's helpful. And then the SG&A you mentioned, it's been down pretty material I think on a year over year basis, you're up $10 million.
Rafe Jason Jadrosich: And then the SG&A, you mentioned earlier, it's been down pretty materially, I think, on a year over year basis, you're up $10 million on even if you pull up the land sales on 160 million of higher home sales. Can you give us more call on where you're getting the leverage and how sustainable that is going forward if there's additional opportunity? You know, as I mentioned in the prepared remarks, our general and administrative dollars expended are flat year over year.
Speaker Change: Even if you pull out the land sales on a $160 million of higher.
Speaker Change: Home sales.
Speaker Change: Can you give us some more color on like where you're getting the leverage and how sustainable that is going forward. If there's additional opportunity. Thank you.
Speaker Change: As I mentioned in the prepared remarks, our general and administrative dollars expanded our flat year over year. So <unk> has gone up a little bit with the volume of additional revenue and a little bit more broker usage.
Martin P. Connor: So S has gone up a little bit with the volume of additional revenue and a little bit more broker usage, but the G&A for the team around this operation has been flat, and we're getting more done with the same amount of people or even less people despite community count growth. We're increasing productivity, we've completed the implementation of new ERP systems, customer relationship management systems, and human resource systems, and we're starting to reap the benefits from some of those technological investments. Thank you. And our next question comes from Sam Reid with Wells Fargo. Please go ahead.
Speaker Change: But the G&A for the team around this operation has been flat.
Speaker Change: We're getting more done with the same amount of people or even less people despite community count growth.
Speaker Change: Increasing productivity, we've completed implementation of new ERP systems customer relationship management systems and <unk>.
Speaker Change: Human resource systems, and we're starting to reap the benefits from some of those technological investments.
Speaker Change: Thank you and our next question comes from Sam Reed with Wells Fargo. Please go ahead.
Sam Reid: I wanted to talk about order volumes really quickly. I know you don't guide on orders, but could you just give us some high-level context on how orders should theoretically trend in Q3 and Q4? And I guess what I'm getting at here is, should we see a departure from the seasonal cadence as you mix deeper into spec? Thanks.
Speaker Change: Awesome. Thanks, guys.
Sam Reed: Talk order volumes really quickly I know you don't guide on orders, but could you just give us some high level context on how orders should theoretically trend in Q3, and Q4 and I guess, what I'm getting at here is should we see.
Sam Reed: Departure from the seasonal cadence as you mix deeper into spot okay.
Douglas C. Yearley: Sure. So I mentioned that we're really happy with three weeks of May. It's only three weeks, but we are trending higher than the historic numbers would suggest. The third quarter is usually down about 15% from the second quarter, if you look back in history, and we're doing much better than that for these three weeks.
Speaker Change: Sure. So I mentioned that we're really happy with three weeks of May.
Speaker Change: It's only three weeks, but we are trending higher.
Speaker Change: Then the historic <unk>.
Speaker Change: <unk> would suggest.
Speaker Change: Yeah.
Speaker Change: Third quarter is usually down about 15% from the second quarter. If you look back in history, and we're doing much better than that.
Speaker Change: These three weeks.
Sam Reid: I think you're right, we don't guide to sales, sales per community per month. We're very comfortable with how this quarter has begun, and that is, You know, that's better than normal seasonal trends at the beginning of the third quarter, so I think that's the best flavor I can give you on it. No, that helps. And then maybe pivoting really quickly to land.
Speaker Change: I think you are right, we don't guide to sales.
Speaker Change: Two four sales per community per month.
Speaker Change: We're very comfortable with right now with how this quarter has begun and that is.
Speaker Change: That's better than normal seasonal trends.
Speaker Change: In the beginning of the third quarter, So I think thats it.
Speaker Change: It's the best flavor I can give you on it.
Douglas C. Yearley: I know you've already touched on some of this, but I wanted to get a sense of the visibility you have into your land pipeline because it sounds like you pretty much have a good idea of what's going to happen in 2025 and 2026. So the question here is, you know, sort of, you know, do you have any view on how we should be modeling block cost inflation over those next few years? Thanks. So right now, it's been running.
Speaker Change: No that helps and then maybe pivoting really quickly to land I know you've already touched on some of this but I.
Speaker Change: I wanted to get a sense for the visibility you have into your land pipeline can.
Speaker Change: Because it sounds like you're pretty much half.
Speaker Change: Good idea as to what's going to happen in 2025 and 2026. So the question here it sort of.
Speaker Change: Do you have any view on how we should be modeling lot cost inflation over this next few years. Thanks.
Speaker Change: So right now it's been running.
Douglas C. Yearley: 5% to 10%, maybe probably closer to 5% up, over the last year or so. Um... And I, you know, I think that's a fair number if you're gonna put it in a model. I think 5% is probably a fair number. It's important to reiterate that 42% of the lots that we own and control were priced for, and contracted for, prior to 2021, which is... kind of when the land market started to reap the benefits of COVID and the demand we saw in COVID. Thank you. This concludes our question and answer session. I'd like to turn the conference back over to management for any closing remarks. Rocco, thank you very much. You were terrific.
Speaker Change: 5% to 10%, maybe probably closer to 5% up.
Speaker Change: Over the last year or so.
Speaker Change:
And I.
Speaker Change #100: Thats a fair if you're going to put it in our model I think 5% is probably.
Speaker Change #100: A fair number.
Speaker Change #100: It's important to reiterate that 42% of the lots that we own and control.
Speaker Change #100: We're priced for contracted four prior to 2021, which is.
Speaker Change #100: Kind of when the land market started to reap the benefits of Covid and the demand we saw in Covid that's great.
Speaker Change #101: Thank you. This concludes our question and answer session I would like to turn the conference back over to management for any closing remarks.
Douglas C. Yearley: Thanks, everyone. We appreciate all your interest and support. We're always here to answer any questions you may have, and I hope you have a wonderful Memorial Day and the start of a great summer. Thank you. Thank you, sir.
Speaker Change #102: Rocco. Thank you very much you are terrific.
Rocco: Thanks, everyone. We appreciate all your interest and support we're always here to answer any questions you may have.
Rocco: And I hope you have a.
Rocco: Wonderful Memorial day, and the start of a great summer. Thank you.
Operator: This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day. I'll see you next time. ?? Good morning, and welcome to the Toll Brothers second quarter fiscal year 2024 conference call. All participants will be in a listen-only mode.
Speaker Change #104: Thank you Sir This concludes today's conference call. We thank you all for attending today's presentation.
Operator: Should you need assistance, please signal 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 star then 1 on your telephone keypad.
Speaker Change #105: You may now disconnect your lines have a wonderful day.
Speaker Change #105: Yes.
Speaker Change #105: Okay.
Speaker Change #105: Okay.
Speaker Change #105: Yes.
Speaker Change #105: [music].
Speaker Change #105: [music].
Operator: To withdraw your question, please press star. The company is planning to end the call at 9: 30, when the market opens. During the Q&A, please limit yourself to one question and one follow-up. Please note, today's event is being recorded. I would now like to turn the conference over to Douglas Yearley, CEO. Thank you, Rocco.
Speaker Change #105: Good morning.
Speaker Change #106: Welcome to the toll brothers second quarter fiscal year, 'twenty 'twenty four conference call.
Speaker Change #107: All participants will be in listen only mode switching.
Speaker Change #108: Should you need assistance. Please signal a conference specialist by pressing the star followed by zero.
Speaker Change #108: After todays presentation, there will be an opportunity to ask questions.
Speaker Change #108: To ask a question you May press Star then one on your telephone keypad.
Speaker Change #108: To withdraw your question. Please press Star then two.
Speaker Change #109: The company is planning to end the call at 931 of the markets when the market opens during the Q&A. Please limit yourself to one question and one follow up.
Speaker Change #109: Please note today's event is being recorded.
Speaker Change #110: I would now like to turn the conference over to Douglas <unk> CEO. Please go ahead Sir.
Speaker Change #111: Thank you Rocco and good morning.
Douglas C. Yearley: Good morning. Welcome, and thank you all for joining us. As usual, 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. Please read our statement on forward-looking information and our earnings release last night and on our website to better understand the risks associated with our forward-looking statements.
Douglas C. Yearley: Welcome and thank you all for joining us as usual 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 and could.
Douglas C. Yearley: Significantly affect future results.
Douglas C. Yearley: Please read our statement on forward looking information in our earnings release last night and on our website to better understand the risks associated with our forward looking statements.
Douglas C. Yearley: 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. Before I begin, I would like to take a moment to acknowledge the passing of Don Horton, Chairman and founder of D.R. Horton.
Douglas C. Yearley: 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: Like our founder Bob Toll, Dior was a pioneer and an icon of the industry who helped shape how we all do business today. We extend our deepest sympathies to the Horton family and the entire D.R. Horton organization. Turning to our second quarter results. I'm very pleased with our strong performance in the quarter. We delivered 2,641 homes at an average price of approximately $1 million, generating record second-quarter home sales revenues of $2.65 billion, up 6% compared to last year and $185 million better than the midpoint of our guidance.
Douglas C. Yearley: Before I begin I would like to take a moment to acknowledge the passing of Don Horton Chairman and founder of D. R. Horton.
Douglas C. Yearley: Like our founder Bob Cole.
Douglas C. Yearley: <unk> was a pioneer in an icon of the industry, who help shape, how we all do business today.
Douglas C. Yearley: We extend our deepest sympathies to the <unk> family and the entire D. R Horton organization.
Douglas C. Yearley: We also signed 3041 net agreements for $2.94 billion, of 30% in unit, 29% in total dollars compared to last year. Solid demand has continued into the start of our third quarter. We have had a really good first three weeks of May.
Douglas C. Yearley: Turning to our second quarter results I'm very pleased with our strong performance in the quarter.
Douglas C. Yearley: Our adjusted gross margin was 28.2% in the second quarter, 60 basis points better than guidance, and SG&A expense as a percentage of home sales revenues was 9.0%, 70 basis points better than the guys. Both benefited from strong cost controls and greater leverage of fixed costs on higher home sales revenue. Joint venture, land sales, and other income was approximately $204 million in the quarter, most of which was generated by the land sale we discussed last quarter.
Douglas C. Yearley: We delivered 2641 homes at an average price of approximately $1 million generating record second quarter home sales revenues of $265 billion up 6% compared to last year and 185 million.
Douglas C. Yearley: Better than the midpoint of our guidance.
Douglas C. Yearley: We also signed 3041 net agreements.
Douglas C. Yearley: For $2 $94 billion up 30% in units and 29% and total dollars compared to last year saw.
Douglas C. Yearley: Solid demand has continued into the start of our third quarter we.
We have had a really good first three weeks of May.
Douglas C. Yearley: Our adjusted gross margin was 28, 2% in the second quarter 60 basis points better than guidance.
Douglas C. Yearley: SG&A expense as a percentage of home sales revenues.
Douglas C. Yearley: Was 9.0% 70 basis points better than guidance.
Douglas C. Yearley: Both benefited from strong cost controls and greater leverage of fixed costs on higher home sales revenues.
Douglas C. Yearley: Joint venture land sales and other income was approximately $204 million in the quarter most of which was generated by the land sale, we discussed last quarter.
Douglas C. Yearley: As a reminder, in February, we sold a parcel of land in Northern Virginia to a data center developer. That transaction generated $181 million of net cash and $175 million in pre-tax land sale gains. All of this resulted in pre-tax income of approximately $650 million in the second quarter and record earnings of $4.55 per diluted share, a 60% increase over the $2.85 per share we earned last year. Adjusting for the land sale benefit, we earned $3.38 per diluted share.
Douglas C. Yearley: As a reminder, in February we sold a parcel of land in Northern Virginia to a data center developer.
Douglas C. Yearley: That transaction generated $181 million of net cash and $175 million in pre tax land sale gains.
Douglas C. Yearley: All of this resulted in pre tax income of approximately $650 million in the second quarter and record earnings of $4.55 per diluted share a 60% increase over the $2 85 per share we earned lag.
Douglas C. Yearley: Year.
Douglas C. Yearley: Adjusting for the land sale benefit we earned $3 38 per diluted share up 19% from last year.
Douglas C. Yearley: 19% from last year. We continued strong with with constraints continued strong demand for our homes and better than projected second quarter results. We are raising our full-year 2024 revenue and earnings guidance. At the midpoint of our guidance, we now expect to deliver 10,600 homes at an average price of approximately $965,000, which would result in $10.23 billion of revenue, nearly $500 million or 5% better than our previous guidance. We continue to expect a full year adjusted gross margin of 17%.
Douglas C. Yearley: We continued strong with concern continued strong demand for our homes and better than projected second quarter results. We.
Douglas C. Yearley: 28.0%, which translates to an additional $137 million of gross profit on our increased revenue guide, and we expect an FG&A margin of 9.6%, 20 basis points better than our previous guidance. This guidance would result in an operating margin of over 18%, earnings per share of approximately $14, and a return on beginning equity of approximately 22%.
Douglas C. Yearley: We are raising our full year 2020 for revenue and earnings guidance.
Douglas C. Yearley: At the midpoint of our guidance, we now expect to deliver 10600 homes at an average price of approximately $965000.
Douglas C. Yearley: Which would result in $10 billion to $3 billion of revenue.
Douglas C. Yearley: Nearly $500 million or 5% better than our previous guidance.
Douglas C. Yearley: We continue to expect a full year adjusted gross margin of 28.0%.
Douglas C. Yearley: Which translates to an additional $137 million of gross profit.
Douglas C. Yearley: Our increased revenue guide.
Douglas C. Yearley: And we expect an SG&A margin of nine 6% 20 basis points better than our previous guidance.
Douglas C. Yearley: This guidance would result in an operating margin of over 18%.
Earnings per share of approximately $14 and a return on beginning equity of approximately 22%.
Douglas C. Yearley: Our outstanding results in the first half of the fiscal year and the increase in our guidance for the full year are being driven by the execution of the strategies that we've outlined on recent calls to take advantage of the healthy demand and persistent lack of inventory that characterizes this market. We have both widened our price points to include more affordable luxury homes and increased our supply of spec homes, which has helped us grow market share. This also enables us to reduce cycle times.
Douglas C. Yearley: Our outstanding results in the first half of the fiscal year and the increase in our guidance for the full year are being driven by execution of the strategies that we've outlined on recent calls.
Douglas C. Yearley: To take advantage of the healthy demand and persistent lack of inventory that characterizes this market.
Douglas C. Yearley: We have widened our price points to include more affordable luxury homes and increase our supply of spec homes, which has helped us grow market share.
Douglas C. Yearley: This also enables us to reduce cycle times improve inventory turns and leverage our fixed costs.
Douglas C. Yearley: Improve Inventory Turns, and Leverage Our Fixed Costs. Riving Revenue Growth and Higher Operating, with these strategies firmly in place and producing results, and with our more capital efficient land strategy. We are confident that we can continue to generate attractive returns well into the future. Turning to market conditions, Demand has proven resilient even as rates increase, from six and a quarter to seven and a half percent through the quarter. Sales were evenly spread across the second quarter, with about 1,000 net signed contracts each month.
Douglas C. Yearley: Driving revenue growth and higher operating margins.
Douglas C. Yearley: With these strategies firmly in place and producing results.
And with our more capital efficient land strategy. We are confident that we can continue to generate attractive returns well into the future.
Douglas C. Yearley: Turning to market conditions demand has proven resilient, even as rates increased from six and three quarter to seven 5%.
Douglas C. Yearley: Through the quarter.
Douglas C. Yearley: Sales were evenly spread across the second quarter with about 1000 net signed contracts each month.
Douglas C. Yearley: As I mentioned earlier, we have seen strong demand continue through the first three weeks of May, which is encouraging. And it's nice to see rates dropping over the past week. Geographically, we saw broad-based and healthy demand across our entire footprint. We saw solid demand from Boston through Atlanta, especially in New Jersey. Texas, California, Boise, Idaho, and Colorado were also strong performers.
Douglas C. Yearley: As I mentioned earlier.
Douglas C. Yearley: We have seen strong demand continues through the first three weeks of May.
Douglas C. Yearley: Which is encouraging and it is nice to see rates dropping over the past week.
Douglas C. Yearley: Geographically, we saw broad based and healthy demand across our entire footprint.
Douglas C. Yearley: We saw solid demand from Boston through Atlanta, especially in New Jersey.
Douglas C. Yearley: Texas, California, Boise, Idaho, and Colorado were also strong performers.
Douglas C. Yearley: Demand was also solid across all of our product lines. Sales of our luxury homes were a little bit stronger compared to the first quarter with approximately 37% of units and 53% of dollars; affordable luxury was 44% of units, And 31% of dollars; an active adult was 19% and 16%, respectively. We raised the net price after incentives in about 60% of our communities, leading to an approximate $10,000 net price increase across the country. Mortgage rate buy-downs are heavily marketed and offered nationwide. Very few of our buyers use incentive dollars to buy down their rates.
Douglas C. Yearley: Demand was also solid across all of our product lines sales of our luxury homes were a little bit stronger compared to the first quarter with approximately 37% of units and 53% of dollars.
Douglas C. Yearley: Affordable luxury was 44% of units and 31% of dollars and active adult was 19% and 16% respectively.
We raised net price after incentives and about 60% of our communities.
Douglas C. Yearley: Leading to an approximate 10000 dollar net price increase across the company.
Douglas C. Yearley: While mortgage rate buy downs or heavily marketed and offered nationwide.
Douglas C. Yearley: 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 mortgage without a buy-down, and they prefer to use any incentives offered on design studio upgrades or to reduce their closing costs. We continue to be very pleased with our luxury focus. We're benefiting from a financially healthy consumer. Strong Demand and Limited Competition. With the widening of our product line, Approximately 30% of our customers are first-time homebuyers. Most of these buyers are millennials, many of whom have waited later in life to form families and have accumulated greater wealth when they buy their first home.
Douglas C. Yearley: Vast majority of our customers can qualify for a mortgage without a buy down and.
Douglas C. Yearley: And they prefer to use any incentives offered on design studio upgrades or to reduce their closing costs.
Douglas C. Yearley: We continue to be very pleased with our luxury focus as we are benefiting from a financially healthy consumer strong demand and limited competition.
Douglas C. Yearley: With the widening of our product lines approximately 30% of our customers are first time homebuyers.
Douglas C. Yearley: Most of these buyers are millennials, many of whom have waited later in life to form families and have accumulated greater wells when they buy their first home.
Douglas C. Yearley: Some are benefiting from the greatest wealth transfer in U.S. history from boomer parents who want to see their kids enjoy the fruits of their success and help them financially. Approximately 27% of our buyers paid all cash in the second quarter, up from 25% in the first quarter and our long-term average of approximately 20%. The LTVs for buyers who took a mortgage were approximately 69% in the quarter. So, for the 73% of our buyers who took a mortgage, on average, they put down 31%.
Douglas C. Yearley: Some are benefiting from the greatest well transfer in U S history from Boomer parents, who want to see their kids enjoy the fruits of their success and help them financially.
Douglas C. Yearley: Approximately 27%.
Douglas C. Yearley: Of our buyers paid all cash in the second quarter.
Douglas C. Yearley: Up from 25% in the first quarter and our long term average of approximately 20%.
Douglas C. Yearley: The Ltvs for buyers, who took a mortgage was approximately 69% in the quarter.
Douglas C. Yearley: So for the 73% of our buyers who took a mortgage on average they put down 31%.
Douglas C. Yearley: These metrics include the 30% of our customers who are first-time buyers and highlight the financial strength and affluence of our entire customer base. In fact, in the second quarter, 20% of our affordable luxury buyers, many of whom are first-time buyers, paid all cash, with an LTV of 74% for those who did get a mortgage. We are pleased that our cancellation rate in the second quarter remained low, at 2.8% of beginning back.
Douglas C. Yearley: These metrics include the 30% of our customers who were first time buyers and highlight the financial strength and affluence of our entire customer base.
Douglas C. Yearley: In fact in the second quarter, 20% of our affordable luxury buyers many of whom are first time buyers paid all cash.
Douglas C. Yearley: With an LTV of 74% for those who did get a mortgage.
Douglas C. Yearley: We are pleased that our cancellation rate in the second quarter remained low at two 8% of beginning backlog.
Douglas C. Yearley: We are also benefiting from the growing difference in quality between new and resale homes. The median age of an existing home in the U.S. is now over 40 years old. Approximately 60% of existing homes were built before 1980, and 35% were built before 1970.
Douglas C. Yearley: We are also benefiting from the growing difference in quality between new and resale homes.
Douglas C. Yearley: The median age of an existing home in the U S is now over 40 years old.
Douglas C. Yearley: Approximately 60% of existing homes were built before 2018, and 35% were built before 1970, making new homes, even more attractive.
Douglas C. Yearley: Making New Homes Even More Attractive. They are built better, require less maintenance, are less expensive to insure, are more energy efficient, and include features that today's buyer wants. Many are also part of communities that have spectacular amenities.
Douglas C. Yearley: They are built better require less maintenance or less expensive to insure are more energy efficient and includes features at today's buyer wants.
Douglas C. Yearley: Many are also part of communities that have spectacular.
Douglas C. Yearley: Entities.
Douglas C. Yearley: All of these factors are helping to fuel a flight to new homes that we believe will continue even if rates come down and the resale market unlocks. As good as our business is now, we look forward to and will welcome lower rates. During the quarter, we continued to execute on our spec strategy. Specs represented approximately 54% of orders and 46% of deliveries in the second quarter.
Douglas C. Yearley: All of these factors are helping to fuel a flight to new homes that we believe will continue even if rates come down in the resale market unlocks.
Douglas C. Yearley: As good as our business is now.
Douglas C. Yearley: We look forward to and we will welcome lower rates.
Douglas C. Yearley: During the quarter, we continued to execute on our spec strategy.
Douglas C. Yearley: <unk> represented approximately 54% of orders and 46% of deliveries in the second quarter.
Douglas C. Yearley: Allowing us to meet the strong demand from buyers to choose a quicker move in. As a reminder, we sell our specs at various stages of construction, from foundation to finished home. This allows some of our speculative buyers the opportunity to visit our design studios and personalize their homes with finishes that match their taste.
Douglas C. Yearley: Allowing us to meet the strong demand from buyers who choose a quicker moving.
As a reminder, we sell our specs in various stages of construction from foundation to finished home.
Douglas C. Yearley: This allows some of our spec buyers the opportunity to visit our design studios and personalize their homes with finishes that match their tastes.
Douglas C. Yearley: So choice a very important pillar of toll brothers is still part of our spec strategy.
Douglas C. Yearley: A very important pillar of Toll Brothers, is still part of our SPECT strategy. Looking forward, we continue to expect community count growth to help drive results in fiscal 2024 and beyond. At second quarter end, we were operating from 386 communities, one more than the 385 we got into last quarter. We remain on target to reach our year-end guidance of approximately 410 communities, which would be an approximate 10% increase versus first fiscal year end 2023.
Douglas C. Yearley: Looking forward, we continue to expect community count growth to help drive results in fiscal 2024 and beyond.
Douglas C. Yearley: At second quarter end, we were operating from 386 communities.
Douglas C. Yearley: One more than the $3 85, we guided to last quarter.
Douglas C. Yearley: We remain on target to reach our year end guidance of approximately 410 communities.
Douglas C. Yearley: Which would be an approximate 10% increase versus first fiscal year end 2023.
Douglas C. Yearley: We control all the land we need to support continued growth in fiscal 2025.
Douglas C. Yearley: We control all the land we need to support continued growth through fiscal 2025 and 2026. At second quarter end, we controlled approximately 72,000 lots, 48% of which were optioned, and 42% of which were contracted for prior to 2021. This land position allows us to be highly selective and disciplined.
Douglas C. Yearley: And 2026 at.
Douglas C. Yearley: At second quarter end, we controlled approximately 72000 lots.
Douglas C. Yearley: 48% of which were optioned and 42% of which were contracted for prior to 2021.
Douglas C. Yearley: This land position allows us to be highly selective and disciplined as we assess new land opportunities.
Douglas C. Yearley: As we assess new land opportunities, we continue to be pleased with the quantity and quality of land deals we review each week. We are seeing a healthy flow of deals that meet our rigorous underwriting standards, which are focused on both margins and returns, and we continue to structure terms in more capital efficient ways, in order to enhance returns. Turning to the balance sheet, at quarter end, we held approximately $1 billion in cash.
Douglas C. Yearley: We continue to be pleased with the quantity and quality of land deals we review each week.
Douglas C. Yearley: We are seeing a healthy flow of deals that meet our rigorous underwriting standards, which are focused on both margins and returns and.
Douglas C. Yearley: And we continue to structure terms and more capital efficient ways.
Douglas C. Yearley: Order to enhanced returns.
Douglas C. Yearley: Turning to the balance sheet at quarter end, we held approximately $1 billion of cash and cash equivalents and our net debt to capital ratio was 18, 7% with no significant near term debt maturities.
Douglas C. Yearley: Cash Equivalent, and our net debt-to-capital ratio was 18.7% with no significant near-term debt maturity. We have also been generating strong operating cash flow, which we expect to continue well into the future, providing us plenty of opportunity to both grow our business and return capital to shareholders. During the quarter, we repurchased $181 million of common stock and increased our quarterly dividend by 10%. Returning cash to stockholders will continue to be a very important part of our strategy. With that, let me turn it over to Marty.
Douglas C. Yearley: We have also been generating strong operating cash flows which.
Which we expect to continue well into the future.
Douglas C. Yearley: This provides us plenty of opportunity to both grow our business and return capital to shareholders.
Douglas C. Yearley: During the quarter, we repurchased $181 million of common stock and increased our quarterly dividend by 10%.
Douglas C. Yearley: Returning cash to stockholders will continue.
Douglas C. Yearley: To be a very important part of our strategy well into the future.
Speaker Change #112: With that let me turn it over to Marty.
Martin P. Connor: Thanks, Doug.
Martin P. Connor: Thanks, Doug. We had a terrific second quarter, meeting our guidance for deliveries. Home Building Revenue, Adjusted Gross Margin, SG&A, and Earnings. Our strategy is playing out nicely in this environment, and we are raising our full-year revenue and earnings guidance. In the quarter, we delivered 2,641 homes and generated home building revenues of $2.65 billion, both up by approximately 6% compared to last year and both second quarter records. The average price of homes delivered in the quarter was approximately $1 million.
Martin P. Connor: We had a terrific second quarter.
Martin P. Connor: Beating our guidance for deliveries.
Speaker Change #113: Homebuilding revenue.
Speaker Change #113: Adjusted gross margin SG&A and earnings.
Speaker Change #113: Our strategy is playing out nicely in this environment and we are raising our full year revenue and earnings guidance.
Speaker Change #113: In the quarter, we delivered 2600, 41 homes and generated homebuilding revenues of $2 $65 billion.
Speaker Change #113: <unk> up by approximately 6% compared to last year and both second quarter Records.
The average price of homes delivered in the quarter was approximately $1 million.
Martin P. Connor: At the midpoint, we delivered 191 more homes than our guidance for $185 million in home sales revenue. We signed 3,041 net agreements for $2.94 billion in the quarter, up 30% units and 29% in dollars compared to the second quarter of fiscal year 2023. Both agreements and dollars were up over last year in every one of our geographic regions.
Speaker Change #113: At the midpoint, we delivered 191 more homes in our guidance were $185 million of home sales revenue.
Speaker Change #113: We signed 3041 net agreements for $2 $94 billion in the quarter.
Speaker Change #113: 30% units and 29% in dollars compared to the second quarter of fiscal year 2023.
Speaker Change #113: Both agreements and dollars were up over last year in every one of our geographic regions.
Martin P. Connor: The average price of contracts signed in the quarter was approximately $967,000, down about 1% compared to last year and down 4.4% sequentially. This decline was due to product and geographic mix changes, driven by our strategy of expanding our price points and building more spec homes, which we expect will lead to a continued modest drop in prices over the next few quarters but also revenue and earnings growth. Our second quarter adjusted gross margin was 28.2% compared to 28.3% in the second quarter of 2023 and 60 basis points better than guidance, or Q2 Gross Margin. We have exceeded our guidance primarily due to strong cost control and increased leverage from higher than projected revenues. Positive Mix vs. Projection also played a role, but to a smaller extent.
Speaker Change #113: The average price and contract signed in the quarter was approximately $967000 down about 1% compared to last year and down four 4% sequentially.
Speaker Change #113: This decline was due to product and geographic mix changes driven by our strategy of expanding our price points and building more spec homes.
Speaker Change #113: Which we expect will lead to a continued modest drop in price over the next few quarters, but also revenue and earnings growth.
Speaker Change #113: Our second quarter adjusted gross margin was 28, 2% compared to 28, 3% in the second quarter of 2023, and 60 basis points better than guidance.
Speaker Change #113: Our Q2 gross margin.
Speaker Change #113: We exceeded our guidance, primarily due to strong cost controls and increased leverage from higher than projected revenues.
Speaker Change #113: Positive mix versus projection also played a role but to a smaller extent.
Martin P. Connor: While we continue to project the full year adjusted gross margin of 28%, we have increased our revenue guidance by approximately $500 million at the mid... and improved our SG&A Guidance by 20 Bases. For the third quarter, we project an adjusted gross margin of 27.7%, implying a fourth-quarter gross margin of 27.4%. As Doug mentioned, 54% of homes sold in the second quarter were speculative. And we now expect more than half our deliveries in our second half to be specked.
Speaker Change #113: While we continue to project a full year adjusted gross margin of 28%.
Speaker Change #113: Increased our revenue guidance by.
Speaker Change #113: Approximately $500 million at the midpoint and improved our SG&A guidance by 20 basis points.
Speaker Change #113: For the third quarter, we projected adjusted gross margin of 27, 7%.
Speaker Change #113: Implying a fourth quarter gross margin of 27, 4%.
Speaker Change #114: As Doug mentioned, 54% of homes sold in the second quarter were specs.
Speaker Change #114: And we now expect more than half of our deliveries in our second half to be specs.
Martin P. Connor: Having more spec homes available for delivery in the late summer and early fall will allow us to meet the demand from many of our buyers who want to move in when schools open. However, our spec homes generally carry a lower margin compared to our build-to-order homes. In the second quarter, the adjusted gross margin for our spec homes delivered was 26.1%, compared to 29.8% for build-to-order homes. We typically build spec homes on lower premium lots, saving higher premium sites for our build-to-order customers, who place a higher value on them, and will also spend more on upgrades.
Speaker Change #114: Having more spec homes available for delivery in the late summer and early fall.
Speaker Change #114: We expect will allow us to meet the demand from many of our buyers who want to move in when schools open.
Speaker Change #114: Our spec homes generally carry a lower margin compared to our build to order homes.
Speaker Change #114: In the second quarter, the adjusted gross margin for our spec homes delivered was 26, 1%.
Speaker Change #114: Impaired to 29, 8% for build to order homes delivered.
We typically build spec homes on lower premium homesites saving higher premium sites for our build to order customers, who place a higher value on them and we'll also spend more on upgrades.
Speaker Change #114: We also tend to offer higher incentives on completed spec homes.
Martin P. Connor: We also tend to offer higher incentives on completed spec. But the advantage to our spec business is that we can build faster with margins that are still strong, and we are able to meet the demand from buyers who want to move in sooner. We believe this is the right strategy so we can achieve overall gross margins in the high 20% range while we grow the business faster, improve operating margin, generate strong cash flow, and achieve consistently high returns on equity.
Speaker Change #114: But the advantage to our spec business is that we can build faster with margins that are still strong and we were able to meet the demand from buyers who want to move in sooner.
Speaker Change #114: We believe this is the right strategy and that we can achieve overall gross margins in the high 20% range, while we grow the business faster improve operating margin generate strong cash flow.
Speaker Change #114: <unk> achieve consistently high returns on equity.
Martin P. Connor: Turning back to the P&L statement, write-offs in our home sales gross margin totaled $28.4 million in the quarter as compared to $11.1 million in the second quarter of 2023. SG&A as a percentage of revenue was 9.0% in the second quarter compared to 9.1% in the same quarter one year ago.
Speaker Change #114: Turning back to the P&L statement.
Speaker Change #114: Write offs in our home sales gross margin totaled $28 $4 million in the quarter as compared to $11 1 million in the second quarter of 2023.
Speaker Change #114: SG&A as a percentage of revenue was 9.0% in the second quarter.
Speaker Change #114: Compared to nine 1% in the same quarter one year ago.
Martin P. Connor: And this was 70 basis points better than guidance, again reflecting our focus on cost controls and leverage from higher than expected home sales revenue. However, year over year, total GNA dollars were essentially flat, despite healthy increases in community count, settlements, and agreements, and the impact of overall cost inflation.
Speaker Change #114: And this was 70 basis points better than guidance again, reflecting our focus on cost controls and leverage from higher than expected home sales revenue.
Year over year total G&A dollars were essentially flat despite healthy increases in community count settlements and agreements and the impact of overall cost inflation.
Martin P. Connor: We continue to focus intently on ways to increase productivity and operate more efficiently. Second quarter JV land sales and other income were $204 million, versus approximately $1 million in the same quarter last year. As Doug mentioned, approximately $175 million of this was attributable to the gain we recognized on the sale of land to a data center developer. The remaining approximately $30 million was primarily attributable to increased interest income and a $21 million gain on the sale of an apartment we lived in.
We continue to focus intently on ways to increase productivity and operate more efficiently.
Speaker Change #114: Second quarter, JV land sales and other income was $204 million.
Speaker Change #114: Versus approximately $1 million in the same quarter last year.
Speaker Change #115: As Doug mentioned approximately $175 million of this was attributable to the gain we recognized on the sale of land to a data center development.
Speaker Change #115: The remaining approximately $30 million was primarily attributable to increased interest income and a $21 million gain on the sale of an apartment living asset.
Martin P. Connor: JV Land Sales and Other Income also included $5 million of pre-development write-offs in the apartment living business as we decided not to pursue certain deals in the current capital-constrained environment for multifamily. Our tax rate in the second quarter was approximately 25.9%, basically in line with our guidance of 25.8%.
Speaker Change #115: JV land sales and other income also included $5 million of pre development write offs in the apartment living business as we decided not to pursue certain deals in the current capital constrained environment for multifamily.
Speaker Change #115: Our tax rate in the second quarter was approximately 25, 9% basically in line with our guidance of 25, 8%.
Martin P. Connor: We ended the second quarter with over $2.7 billion of liquidity, including approximately $1 billion of cash and $1.7 billion of availability under our revolving bank credit facility. Our net debt to capital ratio was 18.7% at second quarter end. We have no significant maturities of our long-term debt until fiscal 2026, when $350 million of notes come due in November 2025.
Speaker Change #115: We ended the second quarter with over $2 $7 billion of liquidity.
Speaker Change #115: Including approximately $1 billion of cash and $1 $7 billion of availability under our revolving bank credit facility.
Speaker Change #115: Our net debt to capital ratio was 18, 7% in second quarter end.
Speaker Change #115: We have no significant maturities of our long term debt until fiscal 2026, when $350 million of notes come due in November 2025.
Martin P. Connor: Our community count at Corner End was 386 compared to our guide of 385. We expect 400 at the end of the third quarter and reaffirm 410 by the end of the fiscal year. We are projecting fiscal 2024 third quarter deliveries of 2,750 to 2,850 homes with an average delivered price between $950,000 and $960,000. For full fiscal year 2024, we are increasing our projected deliveries to be between 10,400 and 10,800 homes with an average price between $960,000 and $970,000.
Speaker Change #115: Our community count at quarter end was 386 compared to our guide of $3 85.
Speaker Change #115: We expect 400 at the end of the third quarter and reaffirm for 10 by the end of the fiscal year.
Speaker Change #115: We are projecting fiscal 2024 third quarter deliveries of 2000, and 750 to 2850 homes with an average delivered price between $950 to $960000.
Speaker Change #115: For full fiscal year 2024.
Speaker Change #115: We are increasing our projected deliveries to be between 10000, and 410800 homes with an average price between 960009 hundred $70000.
Martin P. Connor: These are increases of 350 homes and $15,000 per home at the midpoint, representing approximately $500 million in additional revenue. We expect interest and cost of sales to be approximately 1.3% in the third quarter and for the full year. Third quarter SG&A as a percentage of home sales revenues is expected to be approximately 9.2%. For the full year, we expect it to be 9.6%. An improvement of 20 basis points compared to our previous guide for their income from unconsolidated entities and land sales gross profit in the third quarter is expected to break even.
Speaker Change #115: These are increases of 350 homes and $15000 per home at the mid point, representing approximately $500 million in additional revenue.
Speaker Change #115: We expect interest and cost of sales to be approximately one 3% in the third quarter and for the full year.
Speaker Change #115: Third quarter SG&A as a percentage of home sales revenues is expected to be approximately nine 2%.
Speaker Change #115: For the full year, we expect it to be nine 6% an improvement of 20 basis points compared to our previous guidance.
Speaker Change #115: Other income income from unconsolidated entities and land sales gross profit in the third quarter.
Speaker Change #115: As expected the breakeven.
Martin P. Connor: We continue to project $260 million for the full year. Much of the remaining $48 million of full year joint venture land sale and other income is projected to come from sales of our interest in certain stabilized apartment communities developed by Toll Brothers Apartment Living in joint venture with various partners. We project the third-quarter tax rate to be approximately 26% and the full-year rate to be approximately 25.5%.
Speaker Change #115: We continue to project $260 million for the full year.
Speaker Change #115: Much of the remaining $48 million of full year joint venture land sale and other income.
Speaker Change #115: As projected to come from sales of our interest in certain stabilized apartment communities developed by toll brothers apartment living in joint venture with various partners.
Speaker Change #115: We projected third quarter tax rate to be approximately 26% and the full year rate to be approximately 25, 5%.
Martin P. Connor: Our weighted average share count is expected to be approximately 105 million for the third quarter and for the full year. This assumes we repurchase $500 million of common stock in the year, or another $320 million in the second half of the year, on top of the $180 million we repurchased in the first half of the year. As Doug mentioned, with our updated guidance, we now expect to earn approximately $14 per diluted share in fiscal 2024, with an operating margin of over 18%. This would result in a full-year return on beginning equity of approximately 22% and would put our year-end book value per share at approximately $76.50. Now, let me turn it back to Doug.
Speaker Change #115: Our weighted average share count is expected to be approximately $105 million for the third quarter.
Speaker Change #115: And for the full year.
Speaker Change #115: This assumes we repurchased $500 million of common stock in the year or another $320 million in the second half of the year on top of the $180 million, we repurchased in the first half.
Speaker Change #116: As Doug mentioned with our updated guidance, we now expect to earn approximately $14 per diluted share in fiscal 2024 with an operating margin over 18%.
Speaker Change #116: This would result in a full year return on beginning equity of approximately 22%.
Speaker Change #116: We've put our year end book value per share and approximately $76 50.
Doug: Now, let me turn it back to Doug. Thank you Marty before I begin to open up for questions I'd like to think of.
Douglas C. Yearley: Thank you, Marty. Before I begin to open it up for questions, I'd like to thank all of our Toll Brothers employees for a great first half of 2024. I'm so proud of your dedication, hard work, and commitment to our customers, which are key drivers of our long-term success. I'd also like to announce that beginning in June, Greg Ziegler will be assuming additional responsibilities as Head of Investor Relations. Greg should be a familiar name to all of you.
Doug: All of our toll brothers' employees for a great first half of 2024.
Doug: I am so proud of your dedication hard work and commitment to our customers, which are key drivers to our long term success.
Douglas C. Yearley: He has been with the company for over 20 years and is our Senior VP and Treasurer. He will be taking the reins from Fred Cooper, who has been our distinguished head of IR since he joined the company over 30 years ago in 1993. Fred is transitioning to the new role of Senior VP of Strategic Partners. We are excited that we will be able to continue to benefit from Fred's wisdom while he concentrates on developing and expanding the many relationships he has helped foster with our debt, equity, and other partners over the years. Congratulations to both Greg and Fred.
Doug: I'd also like to announce that beginning in June.
Doug: Gregg Ziegler, who will be assuming additional responsibilities as head of Investor Relations.
Doug: Greg should be a familiar name to all of you.
Doug: He has been with the company for over 20 years and is our senior VP and treasurer.
Doug: He will be taking the reins from Fred Cooper, who has been our distinguished head of IRR since he joined the company over 30 years ago and 1993.
Fred is transitioning to the new role of senior VP of strategic partnerships.
Doug: We are excited that we will be able to continue to benefit from Fred's wisdom, while he concentrates on developing and expanding the many relationships. He has helped foster with our debt equity and other partners over the years, congratulations to both Greg and threat.
Operator: Now, let's open it up to your questions. Yes, sir. We will now begin the question and answer session. As a reminder, the company is planning to end the call at 9: 30 when the market opens. During the Q&A, please limit yourself to one question and one follow-up. To ask a question, you may press star, then 1 on your touch-tone phone.
Doug: Now, let's open it up to your questions.
Doug: Rocco.
Speaker Change #117: We will now begin the question and answer session.
Speaker Change #118: As a reminder, the company is planning to end the call at 930, when the market opens.
Speaker Change #118: Turning to the Q&A, please limit yourself to one question and one follow up.
Speaker Change #118: To ask a question you May Press Star then one on your Touchtone phone.
Operator: If you are using a speakerphone, please pick up your handset before pressing. To withdraw your question, please press star then. Today's first question comes from Stephen Kim with Evercore ISI; please go ahead. Yeah, thanks very much, guys. Appreciate all the color.
Speaker Change #118: If you are using a speakerphone please pick up your handset before pressing the keys.
Speaker Change #118: To withdraw your question. Please press Star then two.
Speaker Change #119: Today's first question comes from Stephen Kim with Evercore ISI. Please go ahead.
Stephen Kim: As always, congratulations to Greg and Fred and to the rest of the team. I wanted to ask a couple of questions related to, I guess, your growth and your margins. Let's start with the margins. You mentioned in your opening remarks that the spec homes that you build tend to be built on home sites with lower lot premiums, I think you said, and as a result, the gross margin is somewhat lower, as well as the fact that you also will incentivize them sometimes more.
Stephen Kim: Yeah. Thanks, very much guys I appreciate all the color as always congrats to Greg and Fred.
Stephen Kim: To the rest of the team.
Stephen Kim: I wanted to ask a couple yes, I wanted to ask a couple of questions related to.
Stephen Kim: Yeah, I guess your growth and your margins, let's start with the margins.
Stephen Kim: You mentioned in your opening remarks that the spec homes that you build.
Stephen Kim: Tend to be built on home sites with lower lot premiums I think you said and as a result.
Speaker Change #120: Margin somewhat lower as well as the fact that you also will incentivize them, sometimes more but I was wondering if you could disaggregate that for us because if you are building homes.
Stephen Kim: But I was wondering if you could disaggregate that for us, because if you're building these specs on home sites with lower lot premiums, even if you didn't build them on a spec basis, they would probably still generate a somewhat lower margin, is what I'm thinking. So curious, how much is spec building for you actually driving a lower margin on an apples-to-apples basis, do you think, taking out Yes, let me start at the beginning of your question and just take you through the business model.
Speaker Change #121: On home sites with a lot premiums bulk that even if you didn't build on a spec basis, they would probably still generate a somewhat lower margin is what im thinking so I'm curious how much.
How much is spec building for you actually driving a lower margin on an apples to apples basis do you think.
Speaker Change #121: Looking out that that that issue.
Speaker Change #121: Okay.
Speaker Change #122: Yes, So let me let me let me start at the beginning of your question and just take you through the business model. So.
Douglas C. Yearley: Right now, we're running at about 50% spec, as we've talked about. I think long-term, particularly if rates come down and the resale markets open up a bit, you know, we've kind of targeted 40 to 50% as a long-term appropriate business model for the percent that will be spec. We define spec as a foundation in the ground.
Speaker Change #122: Right now we're running at about 50% spec as we've talked about I think long term, particularly if rates come down and the resale markets open up a bit.
Speaker Change #122: Kind of targeted 40% to 50% as a long term appropriate business model for the percent that will be spec.
Speaker Change #122: We define us back as a foundation in the ground its a little earlier than many other builders, we sell about a third of our stack.
Douglas C. Yearley: It's a little earlier than many other builders. We sell about a third of our SPEC... Up until when the house is framed, we sell another third of the spec, between framing and when the finishes go in, and then the final third of the spec we sell when it is completed. The higher incentive tends to be on the completed spec. We are not incentivizing nearly as much.
Speaker Change #122: Up until when the houses framed we sell another third of the spec between framing and when that finishes go in and then the final third of the specs we sell when they are completed the higher incentive tends to be on the completed specs. We are not incentivising nearly as much in fact, it's quite similar to the bill.
Douglas C. Yearley: In fact, it's quite similar to the build-to-order incentive when the home is sold either as it's being framed or between drywall and the finishes. And we think that's a good business model because there are a lot of people that want to move in sooner, and we now have the inventory for them. We also strategically plan when we start the specifications, thinking about when they will be completed and when the buyers want the house.
Speaker Change #122: The order incentive when the home is sold either as it's been framed or between dry wall and the finishes.
Speaker Change #122: And we think Thats a good business model because there's a lot of people that want to move in sooner and we now have the inventory for them. We also strategically plan. When we started this back thinking about when they will be completed and when the buyers want perhaps so there are more specs that get that gets started in time to be <unk>.
Douglas C. Yearley: So there are more specs that get started in time to be completed in the summer and early fall months because we know many buyers, particularly those with kids, and most of our buyers have kids, want to move in in the summer and early fall as schools are opening. So that's all part of the strategy.
Speaker Change #122: Completed in the summer and early fall months, because we know many buyers, particularly those with kids in most of our buyers have kids want to move into the summer and the early fall as schools are opening so that's all part of the strategy and so we've always expected and we discussed that we would be a bit more spec.
Douglas C. Yearley: And so we've always expected, and we've discussed, that we would be a bit more spec heavy in the second half of the year than in the first half in terms of delivery, and those homes have a little bit lower margin. The reason they have a lower margin is because of three things. One, we tend to build them on the generic lot, the less valuable lot. So an average spec may carry a lot premium of $25,000, where the build-to-order business has a lot premium of $50,000 or higher. We also put less in the house in terms of upgrades.
Speaker Change #122: Heavy in the second half of the year than in the first half in terms of deliveries and those homes have a little bit lower margin. The reason they have a lower margin is because of three things one we tend to build them on the generic launch the less valuable lot. So spec may carry an average spec may carry a lot premium.
Speaker Change #122: 25000, or the build to order business has a lot premium of 50 or higher.
Speaker Change #122: We also put less in the house in terms of upgrades and as you know our upgrade business through our design studio is accretive to margin, we get about a 40% margin out of the design studio, but we're cautious we don't want to overload a spec.
Douglas C. Yearley: And as you know, our upgrade business through our design studio is accretive to margin. We get about a 40% margin out of the design studio. But we're cautious.
Douglas C. Yearley: We don't want to overload the specification and be outside or above the market. So that is part of the strategy. And then the third reason is that if the House gets to completion, we do incentivize it a bit more. But we have built in, we think, very conservative incentives. For the balance of homes, SPEXA, we need to sell and still deliver by October. And there are about 6,000 deliveries between now and the end of the year.
Speaker Change #122: And be outside or above the market. So that is part of the strategy and then the third reason is that the house gets to completion, we do incentivize it a bit more.
Speaker Change #122: <unk> built in we think very conservative incentives for.
Speaker Change #122: For the balance of homes, we need spec, so we need to sell and still deliver by October.
Speaker Change #122: And there's about 6000 deliveries between now and the end of the year half of call it 11000, plus or minus.
Douglas C. Yearley: Half of them, call it 11,000, plus or minus. And about a quarter of those, or 1,500, are unsold specifications that are being constructed right now. Some will sell in the next few months with a modest incentive, but some may be sold when they're completed late in the summer, and we are budgeting for a higher incentive. We don't know where that incentive will be.
Speaker Change #122: And about a quarter of those or 1500, our unsold specs that are being constructed right now.
Speaker Change #122: We will sell in the next few months with modest incentive but some may be sold when they are completed late in the summer and we are budgeting for higher incentive we don't know where that incentive or it could be higher than our budget. It could be lower than our budget. We are encouraged by the start to may which has been very strong we are encouraged by rates coming down.
Douglas C. Yearley: It could be higher than our budget. Or it could be lower than our budget. We are encouraged by the start to May, which has been very strong. We are also encouraged by rates coming down. So we are certainly hopeful that we won't use all the incentivized or all the budgeted incentives, but we'll just have to see how that plays out. As to your main question, which is, "Aren't we just substituting a spec home with the same margin as a build-to-order?"
So we are certainly hopeful that we won't use all the incentivized or all the budgeted incentive but we'll just have to see how that plays out as to your main question, which is arent, we just substituting.
Speaker Change #123: Spec home with the same margin as a build to order.
Douglas C. Yearley: Not quite, because I think we are being more conservative than the market would be when they step up and get to the design studio, and they fall in love with all the finishes, and they put more into the house that we are putting in because we want to make sure we sell that spec and we don't overdo it. So it's a fair point. There is certainly a lower margin in lower lot premium lots because the lot premium is 100% of the margin.
Speaker Change #123: Not quite because I think we are being more conservative than the market would be when they step up and they get to the design studio and they fall in love with all the finishes and they put more into the house that we are putting in because we want to make sure we sell that spec and we don't overdo. It so.
Speaker Change #124: It's a fair point, there is certainly lower margin and lower lot premium lots because a lot premium is 100% margin and theres lower margin when you put less upgrades and a home because of the accretive nature of the upgrade business, but I think our spec.
Douglas C. Yearley: And there's a lower margin when you put less upgrades in a home because of the accretive nature of the upgrade business. But I think our spec strategy is to be a bit more conservative, then the client buys a bill to order on that line. Great. Yeah, so what I'm hearing from you is that, you know, the apples to apples comparison, it's probably less than the 200 to 250 basis points lower gross margin versus BTO that you've talked about on a pure apples to apples basis, but it is still lower, for sure. Yeah, that's probably a fair way to say, okay, good. All right.
Speaker Change #124: <unk> strategy is to be a bit more conservative.
Speaker Change #125: Then the client.
Speaker Change #125: Buying a build to order on that one.
Speaker Change #126: Great Yeah, So I mean, what I'm hearing from you is that.
Speaker Change #127: The apples to apples, it's probably less than the 200 to 250 basis point lower gross margin versus bto that you've talked about.
Speaker Change #127: On a pure apples to apples basis, but it is still lower for sure.
Stephen Kim: So my second question relates to the M&A landscape. I'm curious if you could give us your assessment of the M&A landscape, specifically as it relates to, you know, Toll Brothers and your growth plans, how it fits in. We're hearing that private builders are finding it tougher and tougher to compete with the likes of, you know, public builders such as yourself. But also, the pool of prospective buyers is pretty robust right now, particularly with Japanese interest. And at the same time, you have been talking about moving more, you know, land light and having that be, you know, an integral part of your strategy going forward.
Yes, that's probably a fair way to say, okay, alright, So second question relates to the.
Speaker Change #128: M&A landscape I am curious if you could give us your assessment of the M&A landscape, specifically as it relates to toll brothers and your growth plans, how it fits and we're hearing the private builders are finding a tougher and tougher to compete with the likes of public like such as yourself.
Speaker Change #129: But also the pool of prospective buyers is pretty robust right now, particularly with the Japanese interest.
And then at the same time, you have been talking about moving more land line and having that be an integral part of your strategy going forward. So with all of those those three major pieces I'm curious if you could give us your general assessment of.
Douglas C. Yearley: So with all of those three major pieces, I'm curious if you could give us your general assessment of the M&A landscape. How interested are you in tapping the M&A pool to grow geographically or grow across different price points and things of that nature? Sure, so what we're actually seeing more from the smaller builders who are facing some capital crunch is land deals. They have land tied up, they've processed approvals on, they've thought about building homes on, and they're having a hard time finding the regional bank to finance them.
Of the M&A landscape.
Speaker Change #130: How interested are you in tapping the M&A pool to grow geographically or grow across different price points and things of that nature sure. So.
Speaker Change #131: What we're actually seeing more from the smaller builders, who are facing some capital crunch.
Speaker Change #131: Is land deals.
Speaker Change #131: But they have tied up they've process approvals on a thought about building homes on theyre, having a hard time, finding a regional bank to finance them.
Douglas C. Yearley: And while they can't make the full profit they would have made had they built homes, they can make a fair profit by flipping the land. So we're seeing quite a few deals like that out of the smaller, more local and regional builders.
Speaker Change #131: They can't make a full <unk>.
Speaker Change #131: Profit they would've made has a built homes. They can make a fair profit by flipping the land us and so we're seeing quite a few deals like that out of the smaller more local and regional.
Douglas C. Yearley: In terms of M&A, it's very active. There are a lot of deals out there. We're in the action.
<unk> in terms of M&A, it's very active there is a lot of deals out there.
Douglas C. Yearley: We look at every deal. We have a seasoned team that's dedicated to M&A. That's all they do. There's nothing to report.
Speaker Change #131: We're in action, we look at every deal we have a seasoned team that's dedicated to M&A. That's all they do is.
Speaker Change #131: Nothing to report frankly, there is nothing that exciting to us, we're really happy with the geographic footprint.
Douglas C. Yearley: Frankly, there's nothing that's that exciting to us. We're really happy with the geographic footprint, really happy. There are very few new markets we're looking at. We're growing this company by getting bigger with wider price ranges in the markets we're in, where we know we're underserving most of the markets we are in. You pay a premium to buy a builder.
Speaker Change #131: We're really happy Theres very few new markets. We're looking at we're growing this company by getting bigger with wider price ranges in the markets. We're in where we know were under serving most of the markets. We are in <unk>.
Speaker Change #131: You pay a premium to buy a builder.
Douglas C. Yearley: It's a lot harder to pay that premium when you're in a market with a brand, with employees, with land, with contractors, with realtor relations, and you're cooking. You pay that premium when you want to enter a new market. We did it 15 times in this company over the years as we were on a geographic growth mode. But right now, we love the footprint.
Speaker Change #131: A lot harder to pay that premium when youre in a market, where the brand with employees with land with contractors with reorder relations and you're cooking you pay that premium when you want to enter a new market. We did 15 times in this company over the years as we are on a geographic growth mode right now.
Speaker Change #131: Now we love the footprint, we're getting bigger where we are this doesn't mean M&A is off the table, but it's going to be much harder to pencil and we're going to be more careful.
Douglas C. Yearley: We're getting bigger where we are. It doesn't mean M&A is off the table, but it's going to be much harder to pencil in, and we're going to be more careful. Thank you. And our next question today comes from John Lovallo at UBS. Please go ahead.
Speaker Change #132: Thank you and our next question today comes from Jon <unk> with UBS. Please go ahead.
John Lovallo: Good morning, guys. Thank you for taking the time to answer my questions. The first one, and I may have misheard this, but so please correct me if I'm wrong, but I think you may have talked about gross margin settling in the kind of the 27 to 28% range. And if so, I'm just curious about what's contemplated in this. You know, I expect deliveries to increase here; a lot of prices are going up. What are sort of the positive offsets from the fiscal fourth-quarter exit rate of, we'll call it, 27.4? Yeah, John, I think it's that range we're comfortable with the 27 to 28 long term.
Speaker Change #133: Good morning, guys excuse me. Thank you for taking my questions. The first one and I may have misheard. This so please correct me if I'm wrong, but I think you may have talked about gross margins settling in the kind of the 20% to 27% 28% range.
Speaker Change #133: So I'm just curious kind of whats contemplated in this.
Speaker Change #133: Spec deliveries increase here lot prices are going up what are the positive offsets from the fiscal fourth quarter exit rate of call. It 27 four.
John: Yes, John I think it's that range, we're comfortable with the 27% 28 long term.
Douglas C. Yearley: We think this is the right range for our business model. Remember, we're building houses faster. Our SG&A is coming down.
John: We think is the right range for our business model.
Speaker Change #134: Remember bill.
Speaker Change #134: Building houses faster.
Speaker Change #134: Our SG&A is coming down so.
Douglas C. Yearley: So don't lose sight of the operating margin, which is going up, even with a gross margin in that range, and that's obviously very important to us. Um, you know, we've been on this strategy of widening the price point. Coming down with more affordable luxury, focusing on the affluent, first-time millennial, doing more and more active adult things, and building more spec, particularly at some of the lower price points. That strategy has now been with us for several years. It's pretty much fully implemented.
Speaker Change #134: So they don't lose sight of the operating margin, which is going up.
Even though the gross margin in that range and that's obviously very important to us.
Speaker Change #134: <unk>.
Speaker Change #134: We've been on this strategy of widening price point comes.
Speaker Change #134: Coming down with more affordable luxury focusing on the affluent first time millennial.
Speaker Change #134: Doing more and more active adult.
Speaker Change #134: Building more spec, particularly at some of the lower price points that strategy has now been with us for several years.
Speaker Change #134: It's pretty much fully implemented so while we think average delivered price may come down a little bit more we think it is going to settle in the low nine hundreds we think gross margin should settle in the 27 to 28 range.
Douglas C. Yearley: So while we think the average delivered price may come down a little bit more, we think it's going to settle in the low 900s. And we think gross margins should settle in the 27 to 28 range. And, you know, we're just very comfortable with that business model. The spec business is allowing us to capture a bigger part of the market, not just in terms of price but in terms of buyers that want to move in faster.
Speaker Change #134: And we're just very comfortable with that business model.
Speaker Change #134: The speck business is allowing us to capture a bigger part of the market not just in terms of price, but in terms of buyers or want to move in faster.
Douglas C. Yearley: And it's giving us an opportunity to build houses faster. And so when we combine that at a slightly lower margin with the build-to-order business that is still driving very high margins for all the reasons we are giving, we think that allows more growth.
Speaker Change #134: And.
Speaker Change #134: It's giving us opportunity to build houses faster and so when we combine that at a slightly lower margin with the build to order business that is still driving very high margins for all the reasons we are giving.
Speaker Change #134: We think that allows more growth.
Yes.
Douglas C. Yearley: John, gross margin is obviously a very key metric for us, but we can't ignore the fact that we're trying to generate a high return on equity. There is a balance between gross margin and revenue growth. We'll achieve that balance. An example is a land-backed arrangement, where the cost of that land ultimately is a bit higher, thus putting a bit of downside pressure on gross margin for that community, but it allows us to grow revenue and have more capital to allocate to new deals, buybacks, debt repurchase, dividends, et cetera.
John: John gross margin is obviously, a very key metric for us.
John: But we can't ignore the fact that we're trying to generate high return on equity.
John: And if.
John: There is a balance between gross margin and revenue growth, we'll work that balance and example is our land banking arrangements, where the cost of that land ultimately is a bit higher thus, putting a bit of downside pressure on gross margin for that community.
John: But it allows us to grow revenue and have more capital to allocate to new deals buybacks debt repurchase dividends et cetera.
Douglas C. Yearley: So it's a balancing act, and I think we've done a nice job of balancing here as we've been able to continue to maintain pretty high industry, leading gross margins while also generating very strong return on equity. Okay, that's helpful.
So it's a balancing act and I think we've done a nice job of <unk>.
John: Balancing here as we've been able to continue to maintain.
John: Pretty high industry.
John: Leading gross margins, while also generating very.
John: Very strong return on equity.
John Lovallo: And then maybe just sticking on the cost side, which was very strong in the quarter. I mean, SG&A as a percentage of sales is expected to tick up about 20 basis points quarter over quarter. Despite the slightly higher revenue, what's driving the sort of the uptick here in SG&A? And how should we sort of think about that as we move forward?
Speaker Change #135: Okay. That's helpful. And then maybe just sticking on the cost side.
Speaker Change #136: Which was very strong in the quarter SG&A as a percentage of sales I think is expected to tick up about 20 basis points quarter over quarter. Despite the slightly higher revenue, what's driving sort of the uptick here in SG&A and how should we sort of think about that as we report.
Douglas C. Yearley: Yeah, some of it's just inflationary pressures. Some of it's incentives on some of our spec homes that are given to the brokerage community. And we see more brokers involved in the spec home sales than we do in the build-to-order sales. So there's an additional cost in marketing right now. And I think that's the basis.
Speaker Change #137: Yes, some of it just the inflationary pressures some of its incentives on some of our spec homes that are given to the brokerage community.
Speaker Change #137: And we'd see more brokers involved in the spec home sales than we do in the build to order sales.
Speaker Change #137: <unk>.
Speaker Change #138: There is additional cost in marketing right now.
Speaker Change #138: And I think thats.
Speaker Change #138: The basis.
Douglas C. Yearley: We also have quite a few communities that will be opening in the second half of the year. There's always up-front community opening costs where communities have not yet generated revenue, and so I think part of it, Marty, is that also. Thank you. And our next question today comes from Alan Ratner with Zelman & Associates. Please go ahead. Hey, guys, good morning.
Speaker Change #138: We also have quite a few communities that will be opening in the second half of the year.
Speaker Change #138: Theres always upfront community opening costs that were communities have not yet generated revenue.
Martin P. Connor: And so I think part of it Marty is that also absolutely.
Speaker Change #139: Thank you and our next question today comes from Alan Ratner with Zelman <unk> Associates. Please go ahead.
Speaker Change #140: Hey, guys. Good morning, Congrats on a great quarter and thanks for all the helpful.
Alan S. Ratner: Congratulations on a great quarter and thanks for all the helpful followers so far. First question, Doug, I was listening to your comments on some of the market commentary there, and I think one market you left out was Florida. And I know we've seen, at least in some of the markets in Florida, some pretty decent increases in resale inventory off of the trough levels of late. So I'm curious, you know, specific to Florida, but I guess across your entire footprint in areas where resale inventory has begun to rise, how is that impacting your business? Are you seeing the need for additional incentives? Are you seeing absorption slow at all?
Speaker Change #141: Color so far.
Speaker Change #142: First question Doug.
Doug: I was listening to your comments on some of the market comp.
Speaker Change #143: Commentary, there and I think one market youll have that with Florida, and I know we've seen at least in some of the markets in Florida pretty decent increases in resell inventory off of the trough levels of late so I'm curious.
Speaker Change #144: Can you say like the Florida, but I guess across your entire footprint in areas, where retail inventory has begin to inflect higher how is that impacting your business are you seeing the need for additional incentives are you seeing absorption slow at all.
Douglas C. Yearley: Just talking to that trend would be great. Sure. Every one of our markets in Florida is in the top half of our list on rating performance. I didn't highlight Florida in my opening comments because there are not any top five markets at the moment, and I tried to limit my comments to the best of the best. Florida East, which is small for us, called the Fort Lauderdale to Vero Beach Corridor, is very good.
Just talk to that trend would be great.
Speaker Change #144: Sure.
Speaker Change #145: Every one of our markets in Florida is in the top half.
Speaker Change #145: Of our list on rating performance.
Speaker Change #146: I Didnt highlight Florida in my opening comments because.
Speaker Change #146: They're not top five markets at the moment and I tried to limit my comments to the best of the best.
Speaker Change #146: Florida East, which is small for us.
Speaker Change #146: Called the Fort Lauderdale.
Speaker Change #146: Zero Beach corridor is very good we are encouraged because may has been very strong throughout Florida. We are keeping an eye on inventory it has increased modestly.
Douglas C. Yearley: We are encouraged because May has been very strong throughout Florida. We are keeping an eye on inventory. It has increased modestly in some of our markets, Jacksonville and Orlando are two examples, but we don't see it impacting our business. So, I would grade Florida a B+. I wouldn't give it an A, but I wouldn't give it a B-.
Speaker Change #146: Modestly and some of our markets Jacksonville Orlando as two examples, but we don't see it impacting our business. So.
Speaker Change #146: I would grade, Florida, a b plus.
Speaker Change #147: I wouldn't give it us, but I wouldn't give it a b minus I think it's a solid good market.
Douglas C. Yearley: I think it's a solid, good market, and you know, we're going to keep growing down there. And like I said, the last three weeks have been very good. So, no worries about what's going on down in the sunshine.
Speaker Change #147: And.
Speaker Change #147: We're going to keep growing down there and like I said the last three weeks have been very good so.
Speaker Change #147: No worries about what's going on down in the Sunshine State.
Speaker Change #148: Got it I appreciate that that info there.
Alan S. Ratner: I appreciate that info there. Second, on kind of the NAR settlement and, I guess more broadly, your relationship with the brokerage community right now, can you talk about, you know, how you view the relationship there? What percentage of your transactions are used in a co-broke? You know, do you think of that brokerage community as a vehicle to attract more traffic? Do you kind of flex commission rates there to any extent? And where do you see that going forward post-settlement?
Speaker Change #148: Secondly on kind of the <unk>.
Speaker Change #149: Our settlement and I guess more broadly your relationship with the brokerage community right. Now can you talk to how you view the relationship there what percentage of your transactions are used in a co broke.
Speaker Change #149: Do you think of that brokerage community as a vehicle to attract more traffic do you kind of Flex commission rates there to any extent.
Speaker Change #150: And where do you see that going forward post settlement.
Alan S. Ratner: Sure, so about 65% of our sales involve a Realtor, or a broker. The brokerage community is very important to Toll Brothers. We take great care of them. We market to them regularly. I think they like coming, bringing their clients to our communities.
Speaker Change #151: Sure so about 65%.
Speaker Change #151: Our sales involve a.
Speaker Change #151: Reorder a broker.
Speaker Change #151: The brokerage community is very important to toll brothers.
Speaker Change #151: We take great care of them.
Speaker Change #151: We market to them regularly.
Speaker Change #151: I think they like coming bringing their clients to our communities.
Douglas C. Yearley: The business is changing. Co-ops are coming down, industry-wide. We're just beginning to see it. We're not going to be a leader.
Speaker Change #151: The business is changing.
Speaker Change #151: Co ops are coming down industry wide, we're just beginning to see it we're not going to be a leader we're going to be a follower.
Douglas C. Yearley: We're going to be a follower, but we are already bringing brokerage commissions down in many markets around the country. We think that will continue. But we will not be an outlier. Right now,
Speaker Change #151: We are already bringing brokerage commissions down in many markets around the country, we think that will continue.
Speaker Change #151: But we will not be an outlier.
Speaker Change #151: <unk> right now.
Douglas C. Yearley: The brokerage commission for us around the country is in the range of two to two and a half percent. You know, it was two and a half to three percent. There are some markets that are going to flat C. I think the industry, you're going to see more and more builders moving to flat fees and getting away from a percentage.
Speaker Change #151: The brokerage commission for us around the country is in the range of two to two 5%.
Speaker Change #151: It was two 5% to 3% there.
Speaker Change #151: There are some markets that are going to flat fee.
Andrew: I think the Andrew see Youre going to see more and more builders moving to flat fee and getting away from a percentage.
Douglas C. Yearley: So it's very fluid, but it is definitely a tailwind on the S component of SGNA, and we're just in the early stages. Thank you. And our next question today comes from Mike Dahl with RBC Capital Markets. Please go ahead. Morning, congrats to Greg and Fred. Thanks for all the comprehensive. So far, just back on the gross margin.
Andrew: So it's very fluid, but it is definitely a tailwind.
Andrew: <unk>.
Andrew: On the yes component of SG&A and we're just in the early stages.
Speaker Change #153: Thank you and our next question today comes from Mike Dahl with RBC capital markets. Please go ahead.
Michael Glaser Dahl: Good morning, Congrats correct.
Speaker Change #153: <unk>.
Speaker Change #154: Thanks for all the comprehensive information.
Speaker Change #155: So far just.
Speaker Change #155: Back on the.