Q1 2025 Toll Brothers Inc Earnings Call
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After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad and to withdraw your question. Please press Star then two the company is planning to end the call at 930, when the market opens during the question and answer session. Please limit yourself to one question and one follow up please.
Speaker Change: This event is being recorded I would now like to turn the conference over to Mr. Douglas yearly.
Oh. Please go ahead Sir.
Douglas: Thank you Chuck.
Yeah.
Speaker Change: Welcome and thank you all for joining US with me today are Marty Connor Chief Financial Officer, Rob Powerhouse, President and Chief Operating Officer, Wendy Marlett, Chief Marketing Officer, and Gregg Ziegler Senior VP Treasurer and head of Investor Relations.
Speaker Change: 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.
Speaker Change: Our statement on forward looking information in our earnings release from last night and on our website to better understand the risks associated with our forward looking statements.
Speaker Change: Last night, we reported first quarter deliveries of 1991 homes at an average price of $925000 for home sales revenues of $184 billion.
Our adjusted gross margin was 26, 9% or 65 basis points better than guidance and our SG&A expense as a percentage of home sales revenue was 13, 1% or 40 basis points above guidance.
Speaker Change: While our net income and earnings per share came in below our expectations. This was due primarily to impairments and a delay in the sale of a stabilized apartment property in one of our joint ventures.
Speaker Change: Our core homebuilding operations met expectations in the quarter.
Speaker Change: From a demand perspective, we signed 2307 net contracts for $2 $3 billion in the first quarter up 13% in units and 12% in dollars.
Speaker Change: <unk> to last year's very strong first quarter when contracts were up approximately 40% in both units and dollars on a per community basis contracts were up 2% compared to last year.
Speaker Change: We also continue to see a very healthy deposit conversion ratio in the first quarter with 82% of our deposits converting to sales significantly higher than our five year average of 70%.
Speaker Change: The average sales price of orders in our first quarter was approximately $1 million, which was essentially unchanged compared to the fourth quarter of 2024.
Speaker Change: On average net pricing after incentives was flat in the first quarter compared to the fourth quarter of 2024.
Speaker Change: Geographically first quarter demand was strongest in our north and mid Atlantic regions.
Speaker Change: From Boston to Atlanta, as well as Houston, Dallas, Boise, Denver, Las Vegas, and all of California.
Speaker Change: Among our buyer segments, both move up and first time luxury.
Speaker Change: We're up on a per community basis with a slight decline in empty nester.
Speaker Change: Although demand was solid in our first quarter, we have seen mixed results. So far this spring selling season, while demand has remained healthy in many of our markets and particularly at the higher end.
Speaker Change: Affordability constraints and growing inventories in certain markets are pressuring sales, especially at the lower end.
Speaker Change: However, all that being said we are somewhat encouraged by our sales activity this past week.
Speaker Change: Against this box backdrop, we are carefully monitoring our pricing incentives and spec inventory on a community by community basis.
Speaker Change: To match to best match, local selling conditions and to appropriately balance pace and price with a view towards generating higher returns than our overall business based on our first quarter results. The gross margin embedded in our backlog and the mix trends that we are seeing early in the spring selling.
Speaker Change: We are maintaining all of our key homebuilding guidance for the full year, including deliveries average price adjusted gross margin SG&A margin and community count growth.
Speaker Change: We continue to see the long term outlook for the new home market to be very positive, particularly for our luxury niche demand for our homes continues to be supported by our affluent customer base over 70% of our business is luxury move up empty nester, which serves a wealthy cohort that.
Speaker Change: <unk> benefited from years of home price in stock market appreciation.
Speaker Change: The remaining 25% to 30% services more affluent first time buyer many of whom are older millennials buying their first home later in life, when they have higher incomes and norm more financially secure.
Speaker Change: Consistent with the past several quarters, approximately 26% of our buyers paid all cash in the first quarter and the Ltvs for buyers who took a mortgage was approximately 68% also consistent with recent quarters.
Speaker Change: Our contract cancellation rate in the first quarter remained low at two 4% of beginning backlog.
Speaker Change: This industry low cancellation rates speaks to the financial strength of our buyers as well as the sizable deposits they make and how emotionally invested they become as they personalize their homes.
Speaker Change: At our design studios.
Speaker Change: In the first quarter, our spec homes represented approximately 55% of sales and 52% of deliveries and we had approximately 3200 spec homes in inventory at quarter end.
Speaker Change: Overall, we are comfortable with this level of specs in our inventory and their stage of construction.
Speaker Change: As I mentioned, we are actively managing our spec starts and we'll adjust them on a community by community basis based on local market conditions.
Speaker Change: This will mean fewer starts in some communities where inventories are building and May mean increased starts and other communities where demand has been strong. However on a net basis, we do expect to reduce overall spec starts in the near term.
Speaker Change: Remember, we sell our specs at various stages of construction from foundation towards a finished home one third of our spec Sal before framing is completed so the risk profile and margin for these homes is not all that different from build to order homes.
Speaker Change: In addition, many of our spec buyers have the opportunity to visit our design studios and personalize their homes with finishes that match their case.
Speaker Change: This benefits our margins as design studio upgrades tend to be highly accretive.
Speaker Change: In the first quarter design studio upgrades structural options plus lot premiums averaged $200000 or 25% of our average base sales price as compared to the long term average of about 21%.
Speaker Change: At first quarter end, we were operating from 406 communities slightly below the <unk> 10 that we guided to last quarter.
Speaker Change: Continue to target, 8% to 10% community count growth in fiscal 2025.
Speaker Change: Which would put us at 440 to 450 communities by fiscal year end.
Speaker Change: In the quarter, we saw modest improvements in our construction cycle times.
Speaker Change: We continue to focus on increasing production efficiency.
Speaker Change: We have not seen any immediate supply chain impacts from tariffs or labor shortages due to changes in immigration policies. Although we are monitoring developments closely and we'll pivot as necessary to deal with any issues that arise.
Speaker Change: We have all learned valuable lessons from the supply chain shocks, we navigated through a few years ago with the pandemic.
Speaker Change: Turning to land in the first quarter end, we owned or controlled approximately 77700 lots, 56% of which were options.
Speaker Change: We are pleased that we continued to make progress in the quarter towards our goal of 60% optioned at 40% owned.
Speaker Change: Our solid land position provides us flexibility and allows us to be highly selective and disciplined as we assess new land opportunities.
Speaker Change: Our underwriting standards for the new land.
Speaker Change: Continue to incorporate stringent thresholds for both margins and returns and we continue to seek out land acquisition and development opportunities that allow us to be more capital efficient, including through increased use of option arrangements land banks joint ventures, and similar structures that allow us to defer payments.
Speaker Change: And lot takedowns.
Speaker Change: Our balance sheet is very healthy we have increased liquidity.
Speaker Change: Low net debt and no significant debt maturities this fiscal year.
Speaker Change: As announced last week, we recently extended the maturities of our credit facilities to February 2030, and Upsized, our revolver to $235 billion.
We also continue to expect strong cash flow generation from operations this year and reaffirm our $500 million of targeted full year share repurchases.
Speaker Change: We expect to continue investing in the growth of our business, while simultaneously returning excess capital to our shareholders.
Speaker Change: With that I will turn it over to Marty.
Marty: Thanks, Doug.
Marty: First quarter net income was 177 7 million.
Marty: Our $1 75 per share diluted.
Marty: These results were below expectations due to impairments and lower than projected joint venture land sales and other income.
Marty: The missile and joint venture and other income was mainly due.
Marty: She was a delay in the sale of a stabilized apartment building from one of our joint ventures.
Marty: We now expect this sale, which is under contract to close in the second half of fiscal 2025.
Marty: Positively our core homebuilding operations met expectations.
In the first quarter, we delivered 90 191 homes.
Marty: At an average price of $925000 and generated home sales revenue of 184 billion.
Marty: The average price of homes delivered in the quarter was at the low end of our range due primarily to mix as we delivered more homes in our mountain region and had fewer deliveries in the north and Pacific regions than we had projected.
Marty: And as Doug mentioned, we signed two 307 net agreements for $2 3 billion in the quarter.
Marty: This was up 13% in units and 12% in dollars compared to the first quarter of fiscal year 2024.
Marty: The average price of contracts signed in the quarter was approximately $1 million.
Marty: Which was essentially flat compared to both the fourth quarter of fiscal 'twenty four and the same period last year.
Marty: Our first quarter adjusted gross margin was 26, 9%.
Marty: 65 basis points better than our guidance of $26 two 5%.
Marty: Q1 gross margin exceeded our guidance due primarily to mix increased operating efficiency and slightly better margin from cell and settle spec homes compared to what we had projected.
Marty: All regions and all property segments project product segments exceeded our expectations.
Based on our first quarter results the.
Marty: The gross margin embedded in our backlog and the mix trends that we're seeing early in the spring selling season, we are maintaining our full year adjusted gross margin guidance of 20, 725%.
Marty: We expect our second quarter adjusted gross margin to also be 27, 5%.
Marty: Yeah.
Marty: Write offs in our home sales gross margin totaled $16 4 million in the quarter.
Marty: $3 9 million of these impairments were associated with pre development cost on deals we are no longer pursuing.
Marty: And the remaining $12 $5 million was related to a handful of operating communities in various markets around the country.
Marty: We also had $1 $8 million of land sale impairments and $4 4 million of pre development write offs in other income related to apartment projects, we are no longer pursuing.
Marty: SG&A as a percentage of revenue was 13, 1% in the first quarter.
Marty: Third to our guide of 12, 7%.
Marty: Note that our SG&A margin in the first quarter is always higher as it is generally our lowest revenue quarter and includes an accelerated employee stock based compensation expense that only hits in that first quarter.
Marty: The 40 basis point SG&A Miss relative to our guidance was due to the loss of fixed cost leverage.
Marty: Due to lower than anticipated homebuilding revenues.
Marty: As well as due to higher than anticipated selling and marketing expenses in the quarter.
Marty: Our tax rate in the first quarter was 19, 7%.
Marty: We're about 230 basis points lower than the guidance due entirely to the accounting benefit of stock compensation deductions on a lower base of pre tax income.
Marty: Yes.
Marty: These stock compensation deductions will not repeat in the balance of the year.
Marty: We ended the first quarter with over $2 $3 billion of liquidity.
Marty: <unk> approximately $575 million of cash and $1 8 billion of availability under our revolving bank credit facility.
Marty: We've added $400 million to that subsequent to the quarter end.
Doug: Doug mentioned we.
Doug: We increased the capacity of our revolving credit facility and we also extended the maturities of both our revolver and our $650 million term loan due February 2030.
Doug: We thank our banks for their continuing support.
Doug: Our net debt to capital ratio was 21, 1% in first quarter and.
Doug: Down from 21, 4% one year ago, we have no significant maturities of our long term debt until fiscal 2026, when $350 million of notes come due this November.
Doug: Our community count at quarter end was 406 compared to our guide of 410.
Doug: Now, let me turn to our forward guidance, which is subject to the usual caveat regarding forward looking information.
Doug: We are projecting fiscal 2025 second quarter deliveries of approximately 2500 to 2700 homes with an average delivered price between 940009 hundred $60000.
Doug: For full fiscal year 2025, we are maintaining our projected deliveries to be between 11000 211600 homes with an average price between 945000 and $965000.
Doug: As I noted earlier, we expect adjusted gross margin to be 20, 725% for both the second quarter and the full year.
Doug: We expect interest and cost of sales to be approximately one 2% in the second quarter and for the full year.
Doug: We project second quarter SG&A as a percentage of home sales revenues to be approximately 10, 3%.
Doug: For the full year, we continue to expect it to be nine 4% to nine 5%.
Doug: Other income income from unconsolidated entities and land sales gross profit in the second quarter is expected to breakeven.
Doug: We continue to expect $110 million.
Doug: For the full year, which includes the sale of several stabilized apartment projects in the second half.
Doug: As noted earlier, we had planned to close one of these apartment sales in the first quarter sale.
Doug: The sale is under contract and the transaction is now expected to close in the second half of the year.
Doug: We project the second quarter tax rate to be approximately 26% and the full year rate to be approximately 25, 5%.
Doug: Based on land, we currently own or control, we expect to grow community count by 8% to 10% by the end of fiscal 2025 and are targeting 440 to 450 communities.
Doug: We expect to be operating from 415 selling communities at the end of the second quarter.
Doug: Our weighted average share count is expected to be approximately 101 million shares for the second quarter and $100 5 million shares for the full year.
Doug: This assumes we repurchased and targeted $500 million of common stock for the full year with most of that occurring later in the year aligned with our anticipated higher cash flows.
Doug: Now, let me turn it back to Doug.
Doug: Thank you Marty before I open it up for questions I'd like to thank our toll roads employees for their hard work dedication and commitment to our customers their talent and constant focus on our business as the driver of our long term success.
Doug: Okay, Chuck let's open it up to questions.
Doug: We will now begin the question and answer session.
Doug: As a reminder, the company is planning to end the call at 930, when the market opens during.
Doug: During the question and answer session. Please limit yourself to one question and one follow up too.
Doug: To ask a question you May Press Star then one on your Touchtone phone.
Doug: If youre using a speakerphone please pick up your handset before pressing the keys.
Doug: And to withdraw your question. Please press Star then two.
Speaker Change: And our first question will come from Stephen Kim with Evercore ISI. Please go ahead.
Stephen Kim: Yeah. Thanks, very much guys I appreciate all the all the color.
Stephen Kim: I guess I wanted to start off by just talking about your inventory you your.
Stephen Kim: You talked about the fact that your spec levels, where you were comfortable with them as well as the stage of construction.
Stephen Kim: And we can see that your specs actually came in a little lighter than we were expecting so that all seems.
Stephen Kim: Positive.
Stephen Kim: That being said your inventory did rise a lot, particularly the construction in progress number rose pretty significantly and I was curious if you could talk about what drove that.
Stephen Kim: Was it was there something about the land or the land on which you're building these homes, which have a greater value where are you. Just naturally are you at a later stage of construction, but you are just comfortable with it just if you could help us understand sort of whats going into the the much higher inventory number that we saw this quarter.
Stephen Kim: Yes, Steven I think.
Stephen Kim: You hinted at it and I think we have more specs under construction and they are at a little bit further stage of completion stage of spend than they had been in prior years or more recently and that's with an eye towards having the inventory to hit our 11400 delivery guidance for this year.
Okay.
Speaker Change: And I thought you were going to continue there because you also had talked about the fact that you were looking to maybe slow down a little bit on your specs.
Speaker Change: As you headed later this year and later in the year is this something that we should just is this kind of a natural cadence that we should expect to see from you.
Speaker Change: From this point forward as we go into the spring just carrying more specs in that sort of thing and then sort of bringing that down as we go later in the year.
Steve: Steve we definitely focus on.
Steve: Seasonality when most suppliers are in the market when most buyers want to move in which is generally the summer months and we try to time.
Steve: The start and the construction and of course, then the completion of our spec inventory. So it lines up with seasonality and I think thats, what youre seeing right now we have 3200 spec homes that are at the beginning of framing.
Steve: Or or forward, so so framing and beyond and then we have.
Steve: About 1000 specs that are sitting that foundation. Some of those are on hold at foundation, where we haven't yet released them for framing and then we have about 1600 specs that are sitting that permit that have not been released yet for foundations to go in and this is all strategic it's all based on the timing of the.
Steve: A year, we're very comfortable with where the level stand.
Steve: We do this on purpose to set up for the spring and for the summer delivery.
Steve: Over time short over short term timing, we do expect to cut back a bit on the new spec starts. So when I tell you that there are 1600 at permit but they have been held and are not authorized to go to foundation, we're keeping an eye on that closely when I would tell you there's a thousand and foundation that haven't yet.
Steve: Been released for framing.
Steve: That's all strategic and intentional it is all decided by market. There are some markets that are performing very well, where we are actually increasing our spec activity in those other markets as we've talked about that have had more mixed results lately, where we are being more tempered and so.
Steve: This is the analysis we do.
Steve: But at the moment, we are leaning more towards less spec starts than you've seen in the past.
Steve: Just to add to that Doug that it's even more specific than by market. Its by community. Although the the mentality often applies by market.
Steve: Yeah.
Speaker Change: That's very helpful and it kind of leads into the next question that I have which is about the spring selling season. So you made the comment about it being mixed and I think that that is something that we've been hearing from a number of folks I guess, what I really wanted to understand is what is the company's posture relative to your production pipeline.
Speaker Change: And your anticipated land spend over the next year or two in light if the spring selling season continues to be mixed is this an environment, which will cause you to have to pivot in some way.
Speaker Change: If so what kind of pivot or nudging, the dial one way or the other should we be expecting if the spring selling season remains mixed.
Speaker Change: If the spring selling season remains mixed.
Speaker Change: Overall land spend.
Speaker Change: We'll come down we will become more conservative in certain markets and the underwriting of new land.
Speaker Change: As you know and as we brag about all the time, we have a terrific pipeline of owned and optioned land.
Speaker Change: We're in great shape, and all of our markets, we have the opportunity to be very selective while we haven't guided the 26 community count growth I can tell you that our land. We control today provides the opportunity to continue growing communities as we have the last few years without running out and finding any more land.
So.
Speaker Change: It's a very local business.
Speaker Change: We will still be active in the land buying business, but overall the land spend would come down.
Speaker Change: The next question will come from John Lovallo with UBS. Please go ahead.
John Lovallo: Good morning, guys. Thanks for taking my questions as well, maybe just starting off on the gross margin second quarter gross margin outlook would seem to imply sort of steady fiscal year <unk> gross margins to achieve that full year target of <unk> 27 to five so I guess the question is how are you thinking about incentives in that.
John Lovallo: Forecasts are you assuming pretty fairly stable levels with what we saw in the first quarter.
John Lovallo: Sure so.
John Lovallo: The second quarter gross margin with our guy jumping up to 2007 to five.
John Lovallo: Is because we expect to have more Pacific.
John Lovallo: Which is higher margin, we expect to have more luxury which has higher margins and a bit less affordable luxury and empty nester or age targeted so the mix aligns with that increased guide when you look to the second half of the year and obviously.
John Lovallo: It needs to be modestly above 2000 2075.
John Lovallo: Modestly comment that it's pretty steady as a pretty good because the first quarter only had 2000 deliveries. So the 26 nine.
John Lovallo: It is off of a smaller part of it is not a quarter of the year, it's less than that.
John Lovallo: We continue to see in the second half of the year.
John Lovallo: Pretty much what I, just described which is.
John Lovallo: More and more specific more north and.
John Lovallo: In North has been very high margin as the northern region. As we talked about has been very strong and we have more luxury than we have affordable and.
John Lovallo: H targeted.
John Lovallo: With respect to your question about.
John Lovallo: Our confidence level in how we have budgeted because we do recognize there are a number of sales that haven't occurred yet we do have 6300 homes in backlog. We have delivered 2000 homes in the first quarter. So that that is 8300 of the 11, four I mean, I'm not saying every home in backlog delivers.
John Lovallo: But most of that delivers but.
John Lovallo: But we do recognize that there are some homes that still have to be sold many of those are spec.
John Lovallo: I will tell you is we have a great level of confidence and the conservatism, we have brought to the pricing the incentivizing that needs to occur commute.
John Lovallo: Community by community market by market.
John Lovallo: To complete the year with a balance of those sales and still hit the guided margin.
John Lovallo: Great.
John Lovallo: I'll add to that John.
The specs, we have with roughly 1000 of them complete and.
John Lovallo: And so the cost there is no there is no variable variability in that cost in.
John Lovallo: And the specs, we have under construction, which is another 23 or 'twenty 400 behind that are contracted for and so the costs are pretty well locked down there.
John Lovallo: Gives us further confidence in terms of what we will sell and settled from this point forward through the balance of the year and we base. Our estimates based on what we're seeing in the market. Most recently for the balance of the year with some conservatism.
Speaker Change: Okay, So you're not assuming any relief from rates or any pullback in and incentives is what I was trying to get at.
John Lovallo: No.
John Lovallo: That's helpful and then on the lower some of the lower priced inventory negatively impacting sales I'm curious what price points, specifically that you were seeing some of that competition what markets, you're referring to I mean, we've heard from some of the more entry level focus folks that the inventory at the very low level is still fairly limited.
John Lovallo: I'm, just curious where you guys were seeing that.
John Lovallo: That that real competition intensified.
John Lovallo: Sure. So yes, when we go down in price.
John Lovallo: It's not nearly as low as.
John Lovallo: Many of the other builders and what many define as a starter market.
John Lovallo: Our 25% to 30% of our business that is a first time buyer is still the affluent luxury end of the first time buyer, they're a bit older late thirties.
John Lovallo: They may have a combined family income of 200000, and they can afford a $6 $7 $800000 home.
John Lovallo: Even in todays rate market. So we rarely go down into the territory.
John Lovallo: Where I think there's been the most pain and there is the most affordability pressure.
John Lovallo: I mentioned in my prepared comments, our stronger markets the softer markets in the first quarter included Jacksonville, Tampa, San Antonio Phoenix.
John Lovallo: Phoenix.
John Lovallo: Reno Salt Lake City, and Portland, which are very small for us.
John Lovallo: But I will say based on the last week or so of activity.
John Lovallo: And it's very early.
John Lovallo: This is a very fluid market, we are a bit encouraged by what's happened in the last week or so in several of these markets that were soft in Q1. So I would if it was one week you asked me about I'd, probably take Jacksonville Tampa.
John Lovallo: And even Phoenix off the list, but again I'm not going to be all that bold because its one week.
John Lovallo: But those would be the places where.
John Lovallo: We're feeling the most pressure, particularly as you come down a bit in price.
Speaker Change: The next question will come from Trevor Allinson with Wolfe Research. Please go ahead.
Speaker Change: Good morning, and thank you for taking my questions first following up on the geographical question thinking about southern California, and Washington D. C demand in those markets Southern California, with the wildfires and then D C with the Doge impact on potential employment. There have you started to see.
Speaker Change: Any impacts to either of those markets either from the wildfires or have just from overall employment uncertainty in D C.
Speaker Change: Now <unk>.
Speaker Change: Washington D C.
Speaker Change: Which for US is Maryland, Northern Virginia strong southern Cal strong.
Speaker Change: Okay, Great that's good to hear and then.
Speaker Change: Second last fall, we consistently heard of buyers postponing home purchases expecting rates to come down in 2025 and for your buyer, who generally is not battling qualification issues.
Speaker Change: The rates not moving lower here are you starting to see a shift where some of those buyers that were may be waiting before for rates to come down are starting to get back into the market and transact here and then if not can you talk about maybe what's holding them back is that still an expectation for rates to move lower or anything else to call out.
Speaker Change: I think in some markets we are seeing what you described.
Speaker Change:
Speaker Change: Our buyers are fluent.
Speaker Change: Nobody loves the six and $700 right, but they can afford it.
Speaker Change: And they've been waiting a long time and I think if anything they recognize now that rates are probably not going to move significantly lower this year.
Speaker Change: I think thats, where.
Speaker Change: The indications are and it's time to move on with their lives.
Speaker Change: The kids have hit Middle schools time to get a bigger house in a more prestigious town with a better School district.
Speaker Change: <unk>.
Speaker Change: They're going to move forward.
Speaker Change: Now that's not everywhere. If it was then it wouldn't be the mixed market that I have described so in those areas, where we're buyers are a bit more hesitant I think its number one those areas have had more significant price appreciation through the COVID-19 years than other areas. So instead of a 40% to 50% price increase over the last five.
Speaker Change: Five years, maybe there they are in a market where theres been 60, 70, 8100% price increase and that includes Florida.
Speaker Change: Primarily.
Speaker Change: Austin, Texas as an example, where we've seen prices up dramatically and I think.
Speaker Change: That can.
Speaker Change: Cause some concern to people that or they just missed it the prices up so much that goes to affordability. There is markets where inventory levels are growing a bit and so the resale market is not feeling as strong as it had in the past and there are some fears about the ability to sell my home.
Speaker Change: And they do they want to contract for new move up home when they're not as confident in selling their existing home as quickly or at the price that they thought.
Speaker Change: They could sell it at a lot of this growing inventory in existing markets is not.
Speaker Change: With used homes coming on the market, it's with more new spec inventory hitting the market from the builders and so those markets, where you have more national builders.
Speaker Change: There may be more inventory that those national builders have put on the market one of the reasons.
Speaker Change: Boston down to Atlanta, and particularly Boston down to the Carolinas has been so strong for us is because the resale market does not have a lot of the new home spec sitting on it because the big builders don't build there and so the resale market tends to be the older traditional.
Speaker Change: Resales and there aren't a lot of those on the market and its tight and the opportunities to go now and so that's one of the reasons. The northeast mid Atlantic is so strong so it's a really mixed story.
Speaker Change: But part of it is what you described where there is our people are ready to move but in other areas. There is a bit of it hasnt C. And we're just we're managing through all of it. However that the one thing I would add to Doug's comments since you mentioned rates.
Speaker Change: Is that 26% of our buyers pay all cash so the rate equation is of less relevance to them and that is a really strong number for us.
Speaker Change: And the LTV at 68% it means people have the ability.
Speaker Change: Because of their financial strength.
Speaker Change: To take a bit less mortgage at a higher rate and still make the move.
And since we're selling here, let's not forget mom and dad right. They are affluent.
Speaker Change: And they are wanting to help their kids.
Speaker Change: Move up in life and support down payments or whatever else. They can do through gifting.
Speaker Change: To lower the mortgage amount.
Speaker Change: The next question will come from Mike Dahl with RBC capital markets. Please go ahead.
Mike Dahl: Good morning, Thanks for taking my questions.
Speaker Change: Alright.
Speaker Change: So at the risk of asking you.
Speaker Change: Rapidly, where none of us really want to extrapolate a day a week a few weeks.
Speaker Change: Given your comments on kind of both the mix, but then.
Speaker Change: And then the more recent weak can you just help level set.
Speaker Change: What quantify some level of trends quarter to date, because typically you would be up very significantly.
Speaker Change: So in terms of quarter pace.
Speaker Change: How are you stacking up compared to that what are you thinking in terms of <unk> kind of pace you are tracking.
Speaker Change: Yes, as you know, Mike we're hesitant to give sales guidance, but I will tell you that.
Speaker Change: We believe.
Speaker Change: That we will hit we can hit the market is there to hit.
Speaker Change:
Speaker Change: With the margin, we've talked about and we balance pace and price.
Speaker Change: We are not margin proud we want to drive returns, but we're also.
Speaker Change: Yes.
Speaker Change: We have a good mix and it's working really well and we're going to continue to execute upon this strategy to stay in the middle Lane between price and pace and we think we will hit 3000 contracts in Q2, which is two four agreements per month.
Speaker Change: And.
Speaker Change: There you have it.
Speaker Change: Alright Marty.
Speaker Change: Yes, I think.
Speaker Change: That's an achievable number without much move.
Speaker Change: And the pricing of the homes correct.
Speaker Change: Okay.
Speaker Change: <unk> quo okay.
Speaker Change: Got it.
Speaker Change: In terms of then the spec dynamics Marty I think you mentioned kind of modest upside the spec margins as a driver for <unk> and <unk>.
Speaker Change: Give us an update and I know you've got kind of mix adjusted number is like for like there's a lot of things that go into the spec spread when you consider which specific last year Youre building on can you give us an update on kind of where that where those margin spreads are on the spec versus build to order right now.
Speaker Change: Now.
Speaker Change: Mike I'll take this one.
Speaker Change: Spec margin is still running as we've talked in the past about.
Speaker Change: 200 to 250 basis points below average.
Speaker Change: We're comfortable with that.
Speaker Change: We did a little better in the first quarter, which is why the margin was up and when we look at our our spec that is now in our backlog that will be delivering at.
Speaker Change: At some point here.
Speaker Change: One of the reasons, we're comfortable with our with our guide going forward is because it's still in a bit better than that on a related subject, which also includes spec.
Speaker Change: Let's talk about incentives a little bit.
Speaker Change: The average incentive in Q4 of 24 was $68000.
The average incentive in Q1 of 2005 was $62000. So it came in by 6000.
Speaker Change: We ended Q1, 'twenty five or started.
Speaker Change: Q2 dollars 25.
Speaker Change: With it with the incentive that 55000.
Speaker Change: So it had come down another 7000 from the average in Q1.
Speaker Change: And.
Speaker Change: With the mixed market, we have described in some markets.
Speaker Change:
Speaker Change: Were raising prices and cutting incentives, but in other markets. We know we will be giving back.
Speaker Change: Some of that improvement to.
Speaker Change: To take it back to what might have been the average in Q1.
Speaker Change: And we have all of that built in plus some additional cushion when we talk about.
Speaker Change: The returns we expect over the balance of the year.
Speaker Change: So that's where things stand right now.
Speaker Change: The next question will come from Michael Rehaut with Jpmorgan. Please go ahead.
Michael Rehaut: Great. Thanks for taking my questions.
Speaker Change: Good morning, everyone.
Speaker Change: I just wanted to circle back to your comment of mixed results and I think there was a question about.
Speaker Change: If those mixed results were to continue how would that affect you.
Speaker Change: The rest of the year end.
Answer that you gave me was interesting in that.
Speaker Change: And then you know.
Speaker Change: It appeared that.
Speaker Change: A reiteration of our full year guidance is in some ways I guess kind of CT.
Speaker Change: Cooperating the current state of mixed results in other words.
Speaker Change: Kind of reflecting where we are today. So I wanted to know if that.
Speaker Change: Kind of my take on that is.
Speaker Change: Accurate.
Speaker Change: In other words with maybe the <unk>.
Speaker Change: And state where you just described maybe raising prices in some communities raising incentives than others.
Speaker Change: If that current state again.
Speaker Change: And some of the mix of pricing actions here.
Speaker Change: Anticipating.
Speaker Change: In response to that mixed results type of dynamic.
Speaker Change: That's all kind of incorporated into your current guide.
Speaker Change: Yes, we are anticipate with the guidance, we have given for the second quarter and the full year, we have assumed.
Speaker Change: A continuation of.
Speaker Change: Of this mixed market.
Speaker Change: Right Okay.
Speaker Change: That's helpful and I think important just to.
Speaker Change: Obviously stayed explicitly.
Speaker Change: Okay.
Speaker Change: I think it's also important to.
Speaker Change: So remember our backlog is two thirds of what we have left to go.
Speaker Change: So we're really talking about.
Speaker Change: The other 3000 3300 homes.
Speaker Change: That we haven't sold and settled yet that have I'll say variability and potential to impact positively or negatively our margin guidance.
Speaker Change: Right.
Speaker Change: That's fair as well and I guess.
Speaker Change: It was very helpful. Doug in terms of walking through the dollar per center the dollars of incentives.
Speaker Change: <unk> and where you stand today, which is which is pretty impressive all the.
Speaker Change:
Speaker Change: Yeah.
Speaker Change: I guess just to level set that what was the average incentive in fiscal 'twenty four.
Speaker Change: And.
Speaker Change: I guess with any kind of forward looking view on land cost inflation.
Speaker Change: How are you thinking about land cost inflation this year and perhaps next year.
Speaker Change: Yeah.
Speaker Change: Q1 of 'twenty four.
Speaker Change: Gregg Ziegler tells me our incentive was $55000.
And I'm, sorry, Mike I was focused on that number trying to get it for you what was the other land cost inflation.
Louise: Thanks Louise Thank thank you apologies.
Speaker Change: <unk>.
Speaker Change: Very happy with deal flow.
Speaker Change: We continue to find good action with our with our strict underwriting.
Speaker Change: Of a combination score of gross margin and IRR.
Speaker Change: It's modest I would say low.
Speaker Change: The mid single digit.
Speaker Change: If I had that that's where I think it is Mike it's something I'm very.
Speaker Change: I am very pleased we've had very unique opportunities lately.
Speaker Change: In the land game.
Speaker Change: A lot of suburban office.
That is half occupied and is better suited to be torn down and rebuilt as residential with Townsend bracing that because they don't want to look at a blighted.
Speaker Change: Half empty shop.
Speaker Change: Office building anymore, with the weeds growing and they'd rather have some vibrancy and some and some people and we are seeing a lot of cool deal flow around that which is more infill in the entitlements are a bit easier and more predictable and the margins have been great. So that's just one example, but there's a lot of that going on and we're really well.
Speaker Change: Suited for those kind of unique deals.
Speaker Change: With the way, we go about it and as attractive as toll brothers is to many municipalities.
Speaker Change: So I am very pleased in the land side and the inflation as well.
Speaker Change: And Mike since we've focused a lot about our projections for this year that load.
Speaker Change: Inflation cost is not relevant to our projections for this year. The land we have in the projections for this year is already known is not going to be impacted by inflationary pressures.
Speaker Change: And next year for the most part it is.
Hard to turn raw land into houses.
Speaker Change: In less than 18 months.
Speaker Change: The next question will come from Jesse Letterman with Zelman and Associates. Please go ahead.
Ivy: Actually it's Ivy good morning.
Speaker Change: So I think with Michael B heart, and others might be trying to get too just to.
Speaker Change: Circle back to guidance is that going into the year.
Speaker Change: At the end of your fourth quarter, and giving guidance for <unk>.
You didn't know the market was going be mixed and now the market is mixed but yet your outlook for earnings did not change and I guess the question is what were you incorporating as you gave that forecast for the original guidance I think that's a disconnect but I think Marty maybe you explained it because this year is only going to have one quarter that could be at risk.
Speaker Change: So is that the framework that we should be thinking about just to circle back there and then I have a follow up.
Speaker Change: Sure.
Speaker Change: Great to hear your voice IV, if you guys remember back in the fall.
Speaker Change: We were hinting towards that 27 50.
Speaker Change: Gross margin in 'twenty five and then when we gave more definitive guidance in December.
Speaker Change: We cut that back modestly by 25 points to the 2725.
Speaker Change: So there was a little bit of conservatism and in December when we were thinking about.
Speaker Change: Where the market was we felt better in December.
Speaker Change: But we had a bad we'd had a bad September and October as rates have jumped up and as we were heading into the election. So I wouldn't say we were euphoric in December we were still cautious.
Speaker Change: And we were hopeful and.
Speaker Change: Now that we sit here in mid February the results have been a bit more mix than we thought but we were still doing okay, and we're outperforming frankly, our spec pricing has been a bit better.
Speaker Change: Theres more luxury coming in the second half of the year as we've talked about there's more north in Pacific coming so.
Speaker Change: Yeah.
Speaker Change: The.
Speaker Change: We're just feeling good about where we are it's all I can tell you and part of that might have been a little bit of.
Speaker Change: A little bit of a conservatism that we built into what we said in December which I'm glad we did.
Speaker Change: Got it no that's helpful and I think going back to the last question on land just well I don't know if you can quantify for us how much land still remains.
That would've been purchased pre COVID-19.
Speaker Change: And if in fact, there is a decent amount still that you will be able to go vertical on at low cost low cost basis.
Speaker Change: I think we like to term contracted for rather than purchased Ivy just to be.
Speaker Change: Cleared because some of it might have been purchased.
Speaker Change: More recently, but based on a price that we set.
Speaker Change: <unk>.
Speaker Change: Pre pre COVID-19.
Speaker Change: We use December of 2020 as our.
Speaker Change: As our pre and post Covid and we think it's approximately 30% of our land bank right now is still priced pre COVID-19.
Speaker Change: 50% of what we owned and 40% of what we settled.
Speaker Change: The next question will come from Rafi Josephs with Bank of America. Please go ahead.
Rafe Josephs: Hi, Good morning, it's Rafe thanks for taking my question.
Speaker Change: Alright.
Speaker Change: Yes.
Speaker Change: Just kind of following up on the.
Speaker Change: Comment about the kind of current absorption pace and the demand trends have been a little bit more mixed if we see sort of the absorption pace.
Speaker Change: Stay like this over the intermediate term or over the next few quarters.
Speaker Change: You still think that.
Speaker Change: You'll be able to hold that this 27% gross margin range or if the absorptions sort of stays at this level.
Speaker Change: Mentioned that Youre not margin proud would you kind of push it being a little bit more and to incentives.
Speaker Change: Well, we're not going to guide beyond 25, we're very confident in what we've given all of you.
Speaker Change: For the second quarter and the balance of the year.
Speaker Change: You say at this market sticks I think of this market stick since we already said we were assuming it sticks with the guide we've given than we are confident in this range of margin.
Speaker Change: However to take it to the next level if the market.
Speaker Change: It's better youre going to see better margins out of us because we're.
Speaker Change: We love to take we love raising prices.
Speaker Change: Nothing no better way to create urgency than price increase coming next Monday.
Speaker Change: And.
Speaker Change: And if the market was to soften.
Speaker Change: Not going to see.
Speaker Change: Stand proud and not sell homes and try to hang onto a margin that's not attainable, we're going to manage our business, which means there will be an intelligent thoughtful locals.
Speaker Change: Decision being made between pace and price.
Speaker Change: And that's how we go about it.
Speaker Change: We are encouraged I talked about how the the incentive had come down as we started Q2 and how.
Speaker Change: We're able to keep that incentive down in submarkets, but we might have to give some of it back in others.
Speaker Change: We've already begun doing a little bit of that and we are encouraged with the elasticity of demand, meaning as we throw a few more bucks at it buyers are responding and that is certainly a good sign there is nothing worse than the inelasticity or it doesn't matter. What you do you know the buyers are on the sidelines.
Speaker Change: So we are encouraged.
Speaker Change: By by what we're seeing in those markets that have required a little bit more of an incentive.
Speaker Change: Thank you that's helpful. And then just on the SG&A you called out that it was higher in the first quarter. Some of it just has to do with lower deliveries.
Speaker Change: Higher selling expenses.
Speaker Change: And then you still have deleverage in the second quarter as well, but then leverage in that.
Speaker Change: Leverage in the second half of the year can you just talk about what's driving it higher in the first half because sort of where does the leverage come from in the second half and how we think about just the SG&A dollar inflation going forward sure.
Speaker Change: Sure. The biggest driver we had a little bit of a creep in sales and marketing expenses, but the biggest driver is just the leverage off of revenue in the second half of 2025.
Speaker Change: We expect $6 $6 billion of revenue in the second half of 2024, we.
Speaker Change: We had $6 billion of revenue. So we have $600 million more revenue in the second half of 'twenty five 'twenty.
Speaker Change: <unk> 24, and the SG&A was eight 6% in the second half of 'twenty four and so we believe it's going to be in the low eights for the second half of 'twenty five based off of leverage with that additional revenue I just described.
Speaker Change: And that what that is what brings home the full year guide.
Speaker Change: Yeah.
Sam Reed: The next question will come from Sam Reed with Wells Fargo. Please go ahead.
Sam Reed: Yeah.
Speaker Change: And we can hear you <unk> your line is muted.
Speaker Change: Our next question will come from Alex Barron with housing Research Center. Please go ahead.
Alex Barron: Yes, Thank you and good morning, guys.
Speaker Change: Good morning.
Speaker Change: I wanted to ask about your specs.
Speaker Change: I think mainly concentrated in your lower price points are they across.
Speaker Change: All price points.
Speaker Change: They are across all price points.
Speaker Change: But they they lean a little bit towards the affordable luxury size side because we.
I think where.
Speaker Change: We're more comfortable speaking $800000 houses and then we are 2% or $3 million houses, but we have it's across the board, but it leans a little bit.
Speaker Change: To the more affordable end.
Speaker Change: Got it and.
Speaker Change: In terms of you guys stepping on the brakes.
Speaker Change: On new permitting or or do you expect I think that makes.
Speaker Change: A lot of sense.
Speaker Change:
Speaker Change: Other builders are starting to.
Speaker Change: Do that as well and can you quantify.
Speaker Change: Are you guys just talking about.
Speaker Change: Elaine.
Speaker Change: What you've already sort of spectrum started.
Speaker Change: How can we get our arms around.
Speaker Change: Stepping on the brakes would mean for you.
Speaker Change: We may be pumping the brakes, a little bit I don't think we're stepping on the brakes, but we are.
Speaker Change: Fair comment and.
Speaker Change: Alex I don't think we have enough.
Speaker Change: Intelligence in the field yet to.
Speaker Change: To be able to give you a definitive answer on whether the other builders are.
Speaker Change: Similarly pumping the brakes I.
Speaker Change: I am encouraged by some builders.
Speaker Change: Comments.
Speaker Change: On earnings calls or elsewhere that they too are being a bit more cautious in their spec starts.
Speaker Change: This concludes our question and answer session I would like to turn the conference back over to management for any closing remarks. Please go ahead.
Speaker Change: Thank you very much thanks, everyone for your interest and support as you all know we are always here.
Speaker Change: To answer any questions you may have individually.
Speaker Change: And stay.
Speaker Change: Stay warm I think we're 24 degrees in Philadelphia today.
Speaker Change: I hope, you're somewhere where it is warm.
Speaker Change: Take care. Thank you.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Speaker Change: Okay.
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