Stephen Kim: Great. Yes, I appreciate that. I didn’t hear the backlog turn comment, I don’t think, in terms of where we could see that going, but — so I don’t get cut off. I want to make sure I ask my second question, which is about gross margins and SG&A and basically operating margin. You’ve given a rubric for this year or you’ve given guidance this year for effectively a 17% operating margin with an SG&A rate that’s kind of in the high-9s. So I wanted to sort of think about that in the same kind of context like kind of how you think about business longer term? When we look back at your margin history, we’ve had a lot of changes over the last couple of decades. And so — as we look ahead at how you seek to operate your business, should we be thinking that 17% is kind of like a normalized level for you?
Or do you think that the normalized level be meaningfully different? And if you could unpack sort of would that be the difference? Would that be more on the SG&A side, maybe opportunities to get that lower or in the gross margin side relative to your guidance for the full-year?
Marty Connor: So Stephen, I think operating margin is very important to us. Returns are very important to us. I think the numbers you are seeing are pretty close to where our long-term expectations might be. 17% that you mentioned is a really good number, maybe as high as 18% we’re looking for upper teens to low-20s return on equity. I want to throw in a shout out there for JV other and land sales as it relates to generating returns as well because it is something we have a history of doing. Gross margins feel very good right now at this level. They feel relatively sustainable at this level, and we’ll continue to work on reducing our SG&A with our technology investments and efficiencies that we can try and generate.
Douglas Yearley: Yes. Stephen, I think we have a long-term strategy to continue to maintain a gross margin in the 27%, 28% range. We have an SG&A around 9, which generates the operating margin at or above your 17 number.
Operator: Our next question comes from Mike Dahl from RBC Capital Markets. Please go ahead with your question.
Mike Dahl: Thanks for taking my questions. A lot of helpful color and context around how you’re thinking about the business. Maybe just to draw back to kind of a little more near term. As you’ve seen the demand progress favorably through the last couple of months. Can you talk more specifically about what you have seen and done on pricing. Our sense is you’re still kind of hub pricing relatively flat. But can you talk about what you’ve done on kind of net pricing and how you’re balancing pace price incentives given the rebound in demand here?
Douglas Yearley: Sure. So in the first quarter, we had price increases in about two-third of our communities. We also had a modest increase in incentives that was because the spec sales went up to 50%. And as I’ve already talked about on a prior question, we do — we have seen modestly higher incentives on the specs, so overall, I’d say the pricing has been flat. When you combine the modest price increases in two-third of communities, with the modest increase in incentives on the spec sales, we have seen flat pricing. As we enter the spring season, a month ago, as we do in most spring seasons, we take the first month or so to monitor where the market is because the beginning of the spring season is very important for us. to feel how much momentum and how much pricing power we may have through the spring.
As we talked about, we’ve had a terrific four weeks. This is about the time when we’re in a good spring season, that we begin to have price increases around the country. They will be modest because we’re being careful, rates while they came down, they’ve ticked up a little bit. And so we are still being cautious. We want to continue to drive sales. We have the capacity, as we talked about, particularly with the spec program to deliver these homes. And so there will be starting right around now modest price increases as we head further into the spring season.
Mike Dahl: Got it. Okay. Yes, that’s a follow-up in terms of how you were thinking about that relative to the more recent uptick in rates again. So I appreciate that. I guess, just secondly, on the updated other joint venture land sales, you outperformed in the quarter, you’ve got the new guide in there that’s attributable to the one-off large parcel. It seems like ex that you didn’t increase the guide by the full amount of this land sale. So maybe can you just talk through what some of the other moving pieces are in that line, whether it’s kind of some of the delayed JV interest sales or anything that kind of got pushed out into fiscal ’25.
Marty Connor: Sure. At the beginning of the year, like JV land sales and other included a placeholder of $40 million to $50 million for that land sale. We didn’t want to count on all of it as there was very little deposit up and such deposit was not hard, but we also didn’t want to fully discount it. So we had handicapped it at 25% to 35% likelihood of occurring. And so we included $40 million to $50 million from that in our JV and other. So when we increased the guidance, it’s not just being increased for the $175 million. It’s being increased a little less than that for the land sale, but some other things as well that are puts and takes. The important part is our guide was $125 million, and it’s now $260 million. And a lot of that $260 million has occurred as we sit here today.
Mike Dahl: Yes, got it. That’s great, thanks.
Operator: Our next question comes from Rafe Jadrosich from Bank of America. Please go ahead with your question.
Rafe Jadrosich: Hi, good morning. Thanks for taking my question.
Douglas Yearley: Good morning, Rafe.
Rafe Jadrosich: Marty, can you just help bridge us between the first quarter gross margin of 28.9% and the second quarter guidance of 27.6%. I know there’s a mix impact in there. but you are guiding to flattish delivery ASP. So I just wanted to understand, like how much was the unexpected mix benefit to 1Q? Is that the full 90 basis points? And then what is the sort of reversal of that or normalization in the second quarter.
Marty Connor: Yes, I think the majority of the 90 basis points was driven by the acceleration of high margin mix. And so there will be an inverse effect from that in the second quarter. Another component of our outperformance in the first quarter, Doug touched on earlier in that our QMI gross margin came in a little better than we expected — I’m sorry, the spec — excuse me, the spec QMI is our internal term for quick move in home. Spec is what you guys understand. In the first quarter, it came in a little better than we thought. As we look at our second quarter we expect less Pacific and high-margin Mid-Atlantic deliveries. We also expect more QMIs as a percentage of total — specs, excuse me, as a percentage of total, then happened in the first quarter.
Douglas Yearley: Let’s not get too hung up on quarter-to-quarter because the full year gross margin guide has been increased by 10 basis points.
Marty Connor: And another 10 basis points on interest in cost of sales.
Rafe Jadrosich: Got it. Okay. Yes. That’s helpful and that makes sense. And then just longer term on the increased mix of QMI or spec. There’s been this strategy change. It’s been successful. What has changed from the perspective of the market or from Toll’s positioning where this makes more sense now than it has maybe like historically, is this temporary because sales — the retail market is really tight. What should we expect spec to go up or down over time depending on what’s going on in the market. Or is this something where structurally so much changed at Toll where this makes sense that it hasn’t historically to run spec at a higher percentage?
Douglas Yearley: Yes. What triggered it was the historically tight resale market, and we realized there was a void there that we could fill. But I do think this is long-term, it’s structural for a number of reasons. I mentioned the age of the resale home, the condition of that 45-year-old home, we have a number of people sitting around this table here that have taken themselves out of the market because they can’t find a home of decent quality out there on the resale market. We’ve also expanded our geographic footprint. We have come down in price. While we’re building spec, as I mentioned, in all of our different price points, — there is — I think, the confidence we got from having more affordable luxury communities that naturally would have more spec opportunities, also helped us move this strategy along.
So I think it’s here to stay. I can’t tell you that it will be 40% to 50% at all times, but it started because of the tight market. And now we’re rolling. We’re very confident in it. And we define a Spec as foundation forward and we have a strategy in place to put houses on the market at different stages of construction, allowing the client in many cases, as we talked about, to still take advantage of one of the real pillars of Toll, which is choice. We have 35 design studios around the country. The buyers go in there and they pick all their finishes. And for us to still offer that, but do so with a faster delivery because the house is partially built when they buy it. I think it’s here to stay.
Marty Connor: I think there’s been some change in consumer preference. Our homes are really good and attractive and well decorated and well-appointed and well designed for today’s lifestyles and interests. The resales that are out there, many of them need work. you have to get somebody to do that work. You have to have the money to pay for that work after buying the house. And so I think the consumer is gravitating to new, as Doug mentioned, and what we offer is pretty attractive.
Douglas Yearley: The cycle times are down a couple of months. There the spec business is driving higher IRR when we open a community now, we may have five to 10 spec homes that have already been started. So when you come in to the sales center opening weekend, you don’t just have to think a year out for a build to order home, but there’s some inventory homes that are in various stages.
Marty Connor: We get the revenue quicker that way, too.
Douglas Yearley: So I think we are confident that this will continue to be a big part of our strategy as we continue to obsess with being America’s luxury homebuilder and to focus on the brand. We will not let the spec strategy in any way bring down quality or take away choice or the special sauce of Toll Brothers.
Operator: Our next question comes from John Lovallo from UBS. Please go ahead with your question.
John Lovallo: Good morning guys. Thanks for taking my questions. The first one is, if we look 2015 to 2019, so it’s a pre-covid absorptions increase, call it, 60% to 65% on average from the first quarter to the second quarter. You guys have talked about better than normal seasonality going on right now. So just curious how you’re thinking about that potential step up this year.
Douglas Yearley: So I mentioned that January had outsized sales to December and November, looking at past trends and February is following normal seasonality that we have seen looking back at historic trends, our traffic in the last week was the highest week of foot traffic into our model homes since February of ’22. Our web traffic is up dramatically. We have great optimism for what’s coming this spring with a really good start in January and February. I think that’s the best answer I can give.
John Lovallo: Okay. That’s helpful and encouraging. If we look at the first quarter or actually the first — I guess, the delivery ASP that you guys are talking about slightly north of $1 million here in the coming quarter. And if we think about sort of the full year guide of $940 million to $960 million, that would imply a pretty good step down, you guys did talk about mix. Is that the largest driver here? Or are we missing something?
Douglas Yearley: It’s all — it’s the entire driver. Our strategy from a few years back come down in price to pick up bigger market share is now in place and is coming through in deliveries. So we are celebrating this drop in price because the strategy is working. And so that’s it. It’s 100% mix.
Marty Connor: And that mix shift is more south, more Mid-Atlantic, a little bit more affordable luxury and a little bit more age-targeted age restricted than the first half of the year.
Operator: Our next question comes from Michael Rehaut from JPMorgan. Please go ahead with your question.
Michael Rehaut: Thanks. Good afternoon, everyone. Thanks for squeezing me in before the end of the hour. First, I just wanted to circle back on the comments around gross margins where you said that you think gross margins can be sustainable going forward at 27%, 28%. Obviously, a lot of builders have kind of been working through or in the process of working through maybe a little bit of a reset from slightly higher priced land over that was purchased, perhaps also some higher development costs over the last couple of years and seeing a little bit of normalization, your comments would kind of suggest kind of staying at this higher level versus prior years, maybe a little bit of slippage, if you kind of say 27% to 28% and you’re still at 28.4% for fiscal ’24?
I just want to make sure we’re thinking about that right. And really, what’s driving this higher level of gross margin, maybe a little bit of slippage in ’25 to the midpoint of the range, perhaps. But what’s driving that higher level of gross margin today versus prior years? And could you have any risk of slippage to more similar to your peers?
Douglas Yearley: Mike, I think we’re in a unique position when it comes to land buying, and I know we’re in a unique position when it comes to our underwriting thresholds, 50% of our own land was contracted for before December of 2020. And as we — our underwriting is fairly simple. And we do a combo score, we call it, between IRR and gross margin. That combo score, depending on the market and the performance of the team and whether the lots are improved and therefore, have less land development risk, whether there’s a long entitlement process, and therefore, the deal may be a bit more speculative or expensive to get to the finish line. That ranges from the low to mid-50 combo to 60-plus combo. And by that, I mean you’re adding up IRR plus gross margins, and we see deals regularly.
In fact, we require deals regularly to have gross margins north of 25% and IRRs north of 25%, and we’re still seeing good deal flow. And we are conservative in our underwriting. We don’t build home price appreciation into the model. We have big contingencies on land development costs because we know land development costs are still running away from the industry a bit. And I think the main reason for it — not only do we have great land teams around the country who are incredibly hard working and diligent. But we generally, at the corner Main and Main, where we build do not compete with the large publics and privates that are well capitalized and are accepting significantly lower returns to grow their companies. We compete at our price point in our locations with small local and regional builders who have lost their banking relationships with the regional banks who are undercapitalized, who cannot write the big check and we have an easier time finding the land and that’s just proven out by the 20 to 25 land deals I get every Sunday night, that I still review that have good, solid returns.
That’s what gives us the comment.
Marty Connor: We have 70,000 lots. So maybe we don’t have to be as aggressive in the next lot as some others might have to.
Douglas Yearley: And remember, there’s $150,000 of upgrades being put in these houses by our clients, and that — those upgrades are highly accretive to our company’s gross margin. So we are driving, now that goes in the underwriting. Of course, as we buy land, we know we’re going to sell those upgrades. But that is driving an added margin because choice deserves an added margin. It’s more difficult. It takes longer, more can go wrong. So we expect and we deserve that higher margin.
Michael Rehaut: Right. And I think you’ve said before that the combo IRR and gross margin that you’re looking for has increased roughly 10 points over the last few years. Maybe, Marty, you can just touch on that as well. But I wanted to — the second question, just going back to the ASP question, you kind of kept the $940 million to $960 million for the full-year. you’re doing $1 million in the first-half that would suggest something around low-9s in the back half. And I just want to kind of think — make sure we’re thinking about it correctly without giving guidance for 2025. But that low 9s, call it, maybe $920 million, maybe a little adjusted because of higher revenues, if that’s the right kind of starting point that we should be thinking of for fiscal ’25.
Douglas Yearley: Yes. As I mentioned, I think our strategy to move into affordable luxury is now fully in place. So I think the drop you’re seeing in the second-half of ’24 to the low-9s is reflective of the future business at Toll.
Operator: Our final question today comes from Buck Horne from Raymond James. Please go ahead with your question.
Buck Horne: Hey I’ll be brief. I appreciate the time. Just wondering, we have seen a little bit of a maybe unusual seasonal uptick in resale inventory in a couple of markets, particularly Southwest Florida and Texas. And just curious if you could speak to those regions in particular, if you think some of the addition to resale inventory there is having any noticeable impact on the business through the early part of spring selling?
Douglas Yearley: Texas has been terrific. We’re in 4 markets in Texas, Austin, San Antonio, Dallas, Houston, just terrific. We’ve been thrilled with the business there. There’s a lot of new homes in Texas. There’s a lot of competition. We have a great brand there. We’ve been in the state a long time. And I’m very optimistic about our future there. Land is relatively easy to find. The risk is less because there are land developers that feed us lots which makes the business easier. We can have just-in-time lots provided to us, which, of course, can drive the IRR. I wouldn’t read too much into Southwest Florida. We’re very small there. It’s one of our smaller markets in the state. But Florida, we call Florida West, which is really Naples up through Fort Myers.
And that is having a really good February. In fact, Florida East, which we call Fort Waterdale up through Stuart is also having a really good February. As the snowfalls in the north and the Midwest, the planes head south, and we’re taking advantage of that.
Buck Horne: That’s fantastic. All my other questions are answered. So congrats great quarter.
Douglas Yearley: Thanks very much. I think is that a wrap Jamie, how are we doing?
Operator: Yes, sir, that will conclude today’s question-and-answer session. I’ll turn the floor back over to you for any closing remarks.
Douglas Yearley: Jamie, thanks. You’ve been great. Thanks, everyone, for your interest and support. As always, great questions. We’re always here offline to answer any follow-ups you may have. And thanks again. Take care.
Operator: And with that, ladies and gentlemen, we’ll conclude today’s conference call and presentation. We thank you for joining. You may now disconnect your lines.
