Good morning, and welcome to the Toll Brothers Fourth Quarter and Fiscal Year End Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. [Operator Instructions] Please note today's event is being recorded. I would now like to turn the conference over to Doug Yearley, Chairman and CEO. Please go ahead sir.

Thank you, Rocco. Welcome and thank you for joining us with me today are Bob Toll, Chairman of Emeritus, Marty Connor, Chief Financial Officer, Rob Parahus and Jim Boyd, our new Chief Operating Officers overseeing Toll East and Toll West respectively, Fred Cooper, Senior VP of Finance and Investor Relations, Wendy Marlett, Chief Marketing Officer and Gregg Ziegler Senior VP and Treasurer. Before I begin I ask you to read the statement on forward-looking information in our earnings release and on our Web site. I caution you that many statements on this call are forward-looking based on assumptions about the economy, world events, housing and financial markets and many other factors beyond our control that could significantly affect future results. Those listening on the web can email questions to Investor Relations at tollbrothers.com. Fiscal 2019 ended on a strong note building on a steady improvement in buyer demand throughout the year. Our fourth quarter contracts were up 18% in units and 12% in dollars, and our contracts per community were up 10% compared to one year ago. Through the first six weeks of fiscal year 2020's first quarter, we've seen even stronger demand than the order growth in fiscal year 2019's fourth quarter. This improving demand should positively impact gross margins over the course of fiscal 2020. We reported fourth quarter home sales revenues of $2.3 billion with a 21.9% adjusted gross margin and net income of $202.3 million or $1.41 per share diluted. Our fiscal year-end backlog was $5.26 billion and 6266 units which was down 5% in [Technical Difficulty] up 3% in units from last year. We are positioning ourselves for growth as we expand our luxury brand to new price points, product lines and geographies. Our land position supports this strategy and we believe provides a platform…

Thanks Doug. Before I address the specifics of this quarter, I want to note that a reconciliation of the non-GAAP measures referenced during today's discussion to their comparable GAAP measures can be found in the back of our earnings release. I also want to note that our guidance is subject to our normal caveats on forward-looking statements. Q4 home sales gross margin was 18.8% of home sales revenue. Adjusted home sales gross margin which excludes interest and inventory write-downs was 21.9% of home sales revenue. These numbers are consistent with our guidance at third quarter end and are reflective of the challenge sales environment a year or so ago, when we sold most of these just delivered homes. SG&A as a percentage of home sales revenues was 9%. Income from operations was 9.5% of total revenues. Other income from unconsolidated entities and land sales gross profit was $48.4 million. Our balance sheet remains strong. We ended fiscal year 2019 with 1.3 billion in cash and cash equivalents and had $1.7 billion available under our bank revolving credit facility. Benefiting from our strong reputation in the capital markets and favorable market conditions, in fiscal year 2019's fourth quarter, we increased our bank revolving credit facility from $1.3 billion to $1.9 billion and extended the facility's maturity to 5-years along with that of our $800 million bank term loan facility. During our fourth quarter, we also raised $400 million of 10-year 3.8% debt in the public capital markets a portion of which we later used to retire $250 million of more expensive maturing public debt. As we begin fiscal 2020, we have over $3 billion of liquidity through cash and undrawn bank credit facilities with no public or bank debt maturities in the next 24 months. Our weighted average debt maturity is…

Thank you, Marty. For the fifth consecutive year we were named World's Most Admired Homebuilder by Fortune Magazine. This honor is attributes to all of our Toll Brothers colleagues. We thank them for their tremendous hard work. Now let's open it up for questions. Rocco, we are ready.

Yes, sir. We will now begin the question-and-answer session. [Operator Instructions] And today's first question comes from Ivy Zelman of Zelman & Associates. Please go ahead.

Thank you, Rocco. Good morning and congrats on a solid quarter guys and environment that is definitely looking a lot more positive than where we were a year ago. So it's nice to hear good news. Maybe we could just dig in a little bit on where we've seen weakness and have started to see the reacceleration of demand a little bit more color around California, your orders were still down double-digits and in fact community count absorption, lot of concern Doug around salt and obviously you commented that you do have pricing power in communities. So, just maybe first question just drilling in on California roughly.

Sure. So just to give a bit of an update Southern Cal was pretty flat to last year Ivy. And it's running at about the company average for sales. And for the first six weeks so call it half of this quarter, the quarter that we're now sitting in. We're encouraged that deposits are -- call it low double-digit in SoCal. Northern Cal was down year-over-year and that was primarily driven by a number of cancellations that we had that came through in Q4 from a large community outside of San Francisco called Metro Crossing. And those cancellations occurred because of weather that led to construction delays. This is a significant multiyear condo townhome community that had construction cycle time of 14 to 20 months down with weather extended even as long as two years and we had about 250 or more homes in backlog. And because of the weather delays, we lost some of those contracts, thankfully many of those were lost earlier and the prices are actually up. But that issue is what led to a bit of a distorted drop in the California numbers because those cans came through pretty much in one quarter as the buildings are now delivering and they threw the numbers off a bit. Overall, we're encouraged by what we see in California. It feels a lot better. Our mix is a bit different as we mentioned where the price is down a bit. But I think for sure California feels better than a year ago even six months ago. So I hope that helps with a bit of an understanding of where we are in California. Other top markets, just to help more recently I would say Boise is doing really well. Northern Virginia, Denver, Orlando, New Jersey, Massachusetts, New York City, Living feels better, Las Vegas, Reno. Those sort of round out, I'm not sure I gave you ten but I gave you about ten. So they would be on top.

Well, thank you for the detail and just my follow-up and let others drill in on California if they'd like in more detail. That was really helpful I got what I needed. You guided for 10% community count growth over the next year which is stronger than even we were anticipating it's great to see the growth coming. Can you talk about the mix of how that business evolves in terms of these communities opening in terms of like smaller square footage, I think you guys have done an excellent job of keeping luxury but providing smaller square footage. So just trying to understand like what should we be thinking about absorption versus actual community count and how that breaks down by price point a little bit.

Sure. So we expect to open a 156 that's a very specific number, new communities this year. That obviously moves up and down with approvals and with new land we acquire. But obviously that's a huge number. There's many that are selling out. So obviously that's not the net number but that's a lot of activity. And that also helps explain Marty's commentary on SG&A and how that can get out ahead of revenue coming in. In terms of locations, the top locations for those 156 new openings are Arizona which for us is Phoenix, Philadelphia, Denver, Jacksonville, Seattle. There's many others that could hit the list but I'm just giving you the top five. Price-point, it will continue to get wider and wider we are fully committed to MainStreet and Mainstreet selling luxury, first second move up with the opportunity to truly customize your home. And that is a major part of the Toll Brothers business. However, there is more and more 3 series BMW affordable luxury focused on a little bit older more affluent millennial plus some move ups and frankly some move-downs that aren't going to reach quite as high as the typical Toll House, but it's still chasing affordable luxury. So I think what you'll see is a modestly higher percentage of lower-priced communities that will have higher sales velocity because they're lower-priced and faster turns with less customization and smaller homes we can build them more efficiently and faster. And so that will get mixed in, but it is incremental. We've been at this now for a couple of years, it is accelerating, but it is really just supplementing the core business of the traditional luxury move-up.

Another point I would make on our community count is that it's going to happen over the course of the year I think in other of these calls we've cited that as back-ended. This is a bit steadier over the course of the year.

Great and just making sure I understand that sounds awesome just with respect to absorption growth, you're looking at the existing business. Are you comfortable saying that you can grow same-store on top of the community count at this time based on what you guys see today?

Based on what we see today with our commentary on how the first six weeks of Q1 are even better than the sales growth we saw in Q4. Yes, but we don't have that crystal ball as to how the balance of the year plays out but right now the macroeconomic environment is encouraging. Our land positioning is very encouraging. Our geographic growth is exciting our price points and product line diversity is strategic and exciting. So right now we feel very good about the business.

Awesome and a special shout to my buddy Bob happy holidays. Great to have you on the call.

Thank you, Ivy. Happy holidays to everybody.

Thanks Ivy.

And our next question today comes from John Lovallo of Bank of America Merrill Lynch. Please go ahead.

Hey guys thank you for taking my questions. The first one is on gross margin. Understanding that you did say that it's going to improve throughout the year and you don't want to give a full-year look, but is it unreasonable to assume that as we trend through the year that we could exit the fourth quarter at somewhere closer to that 23.5% or 24%?

John, I don't think we're going to get into any particular numbers but that one feels a bit aggressive.

Okay. Understood. And then just looking at the West and the South which obviously performances were very good from an order standpoint. Can you just help us understand some of the drivers there maybe some of the key markets that help support that growth?

Sure. In the south where sales were up. 49% that was primarily driven by Orlando, Jacksonville, Raleigh and of course the acquisitions of Sharp in Atlanta and Sabal in three markets in South Carolina. And in the West which was up 46% in units that was driven by Boise and Denver. And then number three would be phoenix. And remember we entered Salt Lake City and Portland which also contributed.

Okay. That's helpful. If I could squeeze one quick one in here on the land sales $87 million it seems like it came in at a fairly low margin. Could you just give any color on that?

Yes. I think you'll see that in our income statement in the future. It really relates to finding joint venture partners for our apartment. So we will often by the apartment land. A few months before we find a partner and the accounting rules are that we reflect that as land sales revenue and land sales costs when we sell it. Sometimes we sell it for a gain, but oftentimes we'll sell it at our cost into the joint venture. And that's what happened in that quarter.

Got it. Thank you, guys.

You're welcome.

And our next question today comes from Mike Dahl of RBC Capital Markets. Please go ahead.

Thanks for taking my questions and for the helpful information so far. Marty just a quick clarification on the community count, growth comment. You said it'll be a bit steadier, is that in terms of the year-on-year growth rate steady each quarter around the 10% or a steady sequential build in the number of communities throughout the course of the year.

The 10% will happen evenly over the course of the year.

Okay. Thanks for that. And the second question just on Metro Crossing I guess now that the project is starting to deliver on some of these buildings gets a little surprised to see cancellations come through understanding that there has been significant delays, but it's still supply constrained market. And that's a pretty prime location. So pricings I would imagine up over the course of the life of the community so far as you've been selling. What have you heard as far as the rationale for the cancellation at this stage in the game? And then, are you finding success maybe in these first six weeks of the first quarter at reselling some of the cancelled units, any additional color you could provide there would be great.

Sure. So Metro Crossing is in Fremont. It's right next to the Tesla plant is at a new BART station, it is a spectacular location. And we are building 800 plus or minus condos and townhomes and what feels like a village with multiple product lines within that high density community. And when we opened for sale we were incredibly hot and we quoted 18-month delivery. And because of significant weather delays that occurred in Northern Cal that I think we're all familiar with from last year, those buildings took 24 months to deliver. We lost six months. There were a number of buyers where their lifestyle changed, where they needed to move, where they wanted to move within the timeframe that we quoted and they asked to get out. It is a small percentage of the 250 plus in backlog that we had right around 10%. And we have backfilled many of those with new sales in some cases at higher prices because the community has seen significant price increases over those 24 months. So that's the extend of it. And thankfully that market is still very strong. We are now delivering and prices are up.

Okay. That's helpful. And just seems like the distortion is really just because its low volume, selling period and 25 or so cancellations actually makes difference. Thanks.

You're welcome.

And our next question today comes from Matthew Bouley of Barclays. Please go ahead.

Hi. This is actually Christina Chiu on for Matt today. My first question is regarding the first quarter gross margin guidance and commentary that 1Q margins with the bottom for the year. Is this just attributed to a timing of deliveries from the first half or what's giving you confidence in margin improvement?

Sure. It generally takes us a nine to 12 months to build a home. So the deliveries in the quarter we just had and the quarter that we're in are associated with sales that happened approximately a year ago. And that was the most challenged sales environment that we have seen in quite a while. And that results in a little lower price maybe a little bit more incentive and thus lower-margins. As the world has gotten better over the balance of 2019 and here into the first six weeks of 2020, we don't face those same market challenges and it gives us optimism on gross margin.

Got it. And then on the California margin differential versus the remainder of your homebuilding business. How does the differential this quarter given the mix down in California that you mentioned earlier compared to what you've previously seen?

The California marketplace a year-ago was hit a bit harder than many of the others. And so the margin there is down a couple of 100 points compared to where it has been in the past. But it is still higher than company average and as we outlined on the first question we are encouraged by California.

Got it. Thank you.

And our next question today comes from Susan Maklari of Goldman Sachs. Please go ahead.

Thank you. Good morning, everyone.

Good morning.

Good morning, Susan

My first question is just around the land strategy. Can you talk to any changes that we should expect in there especially as you do pursue this kind of shift to a wider ASP and a wider product range. Is there anything in terms of maybe optioning more lots are pursuing other means of kind of land acquisition that we should be aware of?

Sure, Susan. So as we talked about in our opening comments we're very focused on capital efficiency. And with that comes how you structure a land by trying to get optioned over owned land with a land seller where you can have a purchase money mortgage and pay for land overtime. On occasion, we've gone to third-parties to land bank land to increase the capital efficiency. And you will continue to see more and more of that from us. When we bought the expensive land at the corner of Main and Main, it is more difficult at times to do that. When we buy land for lower-priced luxury communities, affordable luxury that maybe in master-planned communities. For example where there are developers that will feed you finished lots on an as-needed basis. There is more opportunity to do that. Those lower-priced affordable luxury homes will also returned faster. We should have more sales because of the price point. And of course that returns capital quicker. And that also leads to more capital efficiency. So over time you will see us with more diversity of land at more different price points which generally means more lower price points. And those deals structured with more options and less owned. In the fourth quarter, 32% of the lots that we put under option had a base price -- proposed base price of homes under $500,000. So I think that is fairly consistent with our strategy. That number has been like that for several quarters now. And I just think it shows as a supplement to our traditional Main and Main strategy more and more affordable luxury that will be more capital efficient.

That's a base price of 500,000 doesn't include options or lot premiums et cetera.

Okay. Great. That's very helpful. And then just as a follow-up, can you talk a little bit to what you've seen on the cost side of things in terms of labor and materials it seems like lumber prices have come up a bit lately. How are you thinking about that heading into next year.

We're encouraged in that costs in the fourth quarter for both labor and materials were flat. And tariffs have not had an adverse impact.

Okay. Thank you.

You're welcome.

And our next question today comes from Truman Patterson of Wells Fargo. Please go ahead.

Actually it's [indiscernible]. First I was wondering if you could give us any color on the active adult demand in the quarter. And if the impeachment proceedings were weighing on that buyers sentiment?

Active adult in Q4 was steady. It's a very important part of our business. And it's doing very well and it's expanding as we've talked about we're moving it into many new markets. We have a number of very exciting active adult communities coming one of which is in LA County and other very large one is in Phoenix. And no, I have not heard that the impeachment proceedings are weighing on that buyer. That's nothing that has gotten to me from anyone in the field. And sales results would not reflect any added concern from that demographic.

Or any par of the segment, we haven't heard the impeachment proceedings and till Bob just raised it.

And if you look at the results we've been talking about for the last 4.5 months, if those proceedings have been ongoing and they don't appear to have any adverse impact whatsoever.

As you look to improving your inventory returns -- inventory turns to improve your returns. Is there anything you could do on the vertical capital side and increase the efficiency there, that is a also benefit.

We're looking at that all the time. As you know we have five panel and trust plants that very efficiently help us build houses in the Northeast Mid-Atlantic and Midwest. There's no new technology or extraordinary innovation that we have yet found in the industry. We're very involved in tracking all of that and even investing in some of that innovation that's coming to homebuilding but for us it's to continue to refine our architecture and make it as efficient as possible to have a very robust purchasing group that works very hard at driving prices down by having organized job sites when contractors show up, the houses ready. They can get in and get out and make their money. And of course, taking advantage of the balance sheet to make sure we pay religiously every other Friday. And we will continue to build on those disciplines and hopefully drive costs down.

Thank you. One real quick one, is there any purchase accounting in the 1Q gross margin guide?

Very modest, Paul.

Okay. Thank you.

You're welcome. Thank you.

And our next question today comes from Jade Rahmani of KBW. Please go ahead.

Thanks very much. I think in your opening remarks you commented that City Living or perhaps there was in response to a question that City Living was seeing an up tick. I was wondering if you could comment on how you see things in the New York City condo market some of the brokers have indicated sales seem to have picked up in November.

Yes. We're active in Hoboken, Jersey City and Manhattan. We're under beginning construction in Philadelphia for an exciting high-rise. We have a small mid-rise building in LA and we're about to begin a new high-rise in downtown Seattle. So right now the revenue is coming out of New York and the gold coast of New Jersey. And as I remind you we're not in the super luxury towers. We are focusing on plus or minus $2000 per square foot in Manhattan and $1000 per square foot on the Jersey side that is relatively affordable in the New York City market. And we like that niche and we've done pretty well as an example. We have a building at 77 Charlton which is in -- we call it West SoHo. And that building at about $2000 a foot took 20 sales in the fourth quarter. And in the Hoboken Jersey City side we continue to sell well at a $1000 a foot. We had 14 sales and a building in Jersey City. We're ten sales and a building in Hoboken during that fourth quarter. So New York's not back to where it was four or five years ago but it's better. And I very much like where we positioned ourselves at these price points and locations I've described.

Thanks very much. Secondly, can you give the percentage of deliveries that came from quick delivery homes and how that maybe compared with the year-ago period.

Gregg is looking that up for us.

In Q4 of '19, it was approximately 15% and you asked about a year-ago. Let's see. So Q4 of '18 it was about 13.5%. So not much of a difference, if you look over that's pretty much in line with our long-term averages as you look at this over time.

Thanks very much.

Thank you.

And our next question today comes from Stephen Kim of Evercore ISI. Please go ahead.

Hey guys. This is actually Trey Morrish on for Steve. So the talk about the affordable luxury place, it's something that we greatly appreciate. Moving down the price point being more open and appealing to the more millennial buyer. But how big do you ultimately think this accented part of your business can get and how do you view the general margin profile on these types of homes relative to the traditional Toll home?

So affordable luxury absolutely focuses primarily on the millennial. And of course, we talked about the 75 million millennials which is the same size as the boomers. We've also recognized now that we have a bunch of it out there that we have move-up buyers that are just looking for a bit more affordable luxury home and we have active adults and empty nesters that want to move down to a bit more affordable home. When you put that all together again driven primarily by the millennial as I mentioned, 37% I think I said a third in my prepared comments but 37% of our communities have an opening price. That's base price that's under $500,000. That's not all starter home and that's some of that again is affordable move up and affordable move down. But I think that gives you some indication where we're approaching 40% of our communities have at least an opening price under five. Now you add a lot premium and you add some finishes and some structural changes to the home and certainly that house can get to [six] [ph]. But we have other communities that are opening a 375 as an opening price or 399 in places like Phoenix and Houston and Los Vegas and other and Jacksonville and Boise. So I think it's probably fair to consider that number 35%, 40% as accurate but understand we're not defining affordable luxury as a segment. Our segments are, move up move down, first time, in our case it will be more luxury first time. So we're not going to be delivering sort of an affordable luxury segment to you. But it's important that you all -- I can tell you all get it that we are more and more focused on having a greater diversity of locations price points and product lines.

This comes to us from rather depending upon what vantage point you look at the result the price. Three, four, five years ago, we did a lot of luxury stuff, took our average price way up.

California?

Yes, yes.

Average price in Southern Cal 2 million, right average price in Northern Cal 1.6 million.

We have one [indiscernible] average price was 2.4 million per house. That will got up about the same as the $800,000 to $900,000 house.

In Phily?

No. Little less. So you have to step back and look at this from a vantage point, 1 million ceilings [indiscernible]. You've got here just difference in mix that's occurred. We are rediscovering what made Toll Brothers this is the Toll Brothers market. And then when we got into 2 and 3 million in the average surprisingly up and now we're just slightly more Toll Brothers product.

And we have this demographic coming. That is very large and are settling down later buying their first home later and therefore are more affluent and discerning and just as their first car, I'll give out you plug can be the A-4. Their first home can be Toll.

Got it. But the margin on these homes I would imagine they're probably a little bit lower given -- little bit smaller of a footprint. But turns will be faster. So the return focus that you guys have been talking about for a few quarters is probably in line to a little bit better than the traditional products, is that is that a fair way to think about it?

I think that's very fair and we think the gross margin will be a little bit less and the ROE will be higher.

Okay. And then lastly, you talked about how you expect JV and other income this year to be in that $100 million to a $150 million range what are the things happening in any given year that can end up on the low-end versus the high-end of that.

Well as you know in that line item is 50 million to 60 million of kind of routine other income from our security business, from our title business, from our mortgage business, from our interest income, on our cash balance and various other components. The balance is apartment sales some commercial pieces of ground sales, the retail sales under some of our buildings in Manhattan, the golf business we sold, the sale of accumulated pile of customers in the security business, various pockets that we can pull some income from. I think as we move forward part of the strategy and our apartment business is to generate more and more of that JV income from disposition of apartment buildings. And we're enthusiastically looking at 2020 as a sizable year for our apartment starts and JV formations. And then, you also have gains on land sales that can occur either through those JV formations or through some of our master plan communities where we sell lots to other builders.

Okay. Thank you very much guys. I appreciate it.

Thank you. You are very welcome.

And our next question comes from Jack Micenko of SIG. Please go ahead.

Good morning. Marty, I wanted to touch on the 2020. You guys have the cycle time nine to 12 months you talked about it in the opening comments, what you sold last year you delivered this fourth quarter. So it seemed like you've got a lot of 2020 visibility. The reticence around lack of a full-year I guess would be I mean are we thinking more quick delivery homes as you shift the product set or cycle time at Toll going to compress. As the product changes, is there more maybe attached product? Help us sort of understand the gap between your -- visibility historically and why 2020 a little different from as we think about deliveries and margin and mixing the business.

I think you touched on a couple of the points there. How much quick delivery have compressed by cycle times get as we move to some of these affordable luxury price points. It also factors in the pretty wide range we have in our pricing. We're selling homes between $300,000 and $3 million in a few less at the $3 million range can really impact not only margin but expected revenue. So we're going to carefully study this particularly in light of the pretty rapid expansion in sales we saw in the fourth quarter and we hinted at in the six weeks into the first quarter and how those that increase in business is going to be able to be delivered. And whether that's going to happen in the traditional nine to 12 months period or in a 6 to 9-month period instead. Or even if this rapid growth comes up that continues what it might do to the labor availability.

There are a number of communities that can deliver homes that sell in the traditional spring selling season. Right of late to January to mid-April is when this industry sales most homes. And we have communities that can sell at least in the early part of that spring selling season and still deliver by October. So, with as Marty said the pretty significant improvement in orders over the last 4.5 months and as we're about to approach that spring season, I think it's prudent for us just to take a little more time to understand the full-year.

Jack in the second quarter for example of '19, our average delivered price was $895,000. Nine months later here, we're projecting it at $810,000. That gives you some view on how rapidly things can change for us.

But that's mix

Yes.

That is not.

That's all mix.

That's not the price of a same-store. That is just mix.

Right.

Sure. Okay. And then you had an active quarter on the debt side. I think on the reported margin, I think you were what 2.6% of interest, is that a tailwind some of the things you've done this quarter on the debt side, does that a tailwind to reported gross margin in 2020 versus 2019.

I don't think it happens as rapidly as a year. We capitalize interest into our inventory and it could take 18 to 36 months before the benefit flows through the income statement.

But, net benefit non-punitive?

Non-punitive correct.

All right. Great. Thanks guys.

You're welcome. Thank you.

And our next question today comes from Michael Rehaut of JPMorgan Securities. Please go ahead.

Hi, this is a [indiscernible] on for Mike. First I just was wondering if you could share your order contracts growth by month for 4Q? And then, any more color on what you've seen so far in the first six weeks of 1Q in particular and your regions where you're seeing particular strength or weakness of foreign 1Q or any changes since 4Q besides just overall being stronger anything more in particular. Thanks.

So, every month of the fourth quarter was better than the prior year's month. And that trend continued even more so in November and the first half of December. And then in terms of the first quarter, the areas where we've been hottest without getting into specific since we haven't given you specifics on the six weeks except the general commentary would be Austin, Jacksonville, Northern Virginia, South Western Florida, Phoenix, Orlando, Salt Lake City, Denver, Boise.

Very consistent with the fourth quarter.

Those are all on my list and they are fairly -- that's right. I think New Jersey was on the fourth quarter and maybe something else we have Massachusetts maybe but yes it's fairly consistent.

Great. Thank you. My second question just on incentive levels. So, overall, they've been improving throughout the year. And I was wondering where incentive levels are in the market now. And in particular if you could share your incentive percentage this quarter compared to last year in 4Q '18. And also anything to call out incentive trends in the market or anything special by region. Thanks.

Incentives are flat. They have been flat for some time. There is no specific market trend worth noting. We are encouraged with recent sales activity that is giving us some pricing power.

And just to clarify you mean flat sequentially?

Flat. That's correct.

Thank you.

You are welcome.

And our next question today comes from Ken Zener of KeyBanc. Please go ahead.

Good morning everybody. So hear about the asset turns and stuff. I just want to start with California where you -- Doug seem to be saying 25 units came out of the Metro Crossing. That would put California down about 7% year-over-year adjusted for that as -- I assume Southern California flat northern California was still weaker.

The improvement maybe it's not as dramatic but yes somewhere in that ballpark, yes.

Okay. So and the reason I ask is the margin in -- I don't have the fourth quarter by EBIT, but northern California is still represents just on California that Northern about just under half of your guys segment EBIT? If you guys are moving down in price points broadly, but also in California. I assume. How should we think about FY, while the first quarter's price as the benchmark for all of next year FY'20 .And then does the mix of California's EBIT for the year to just under 50%. I mean is that something that we should think about next year or is that going to really kind of change because condo units and Metro Crossing, obviously guys have built that place. So you're still going to close them which it seems like that would be margin accretive. There's a couple of different questions here but I'm going to kind of California's concentrated. But, FY'20 in your opinion as was 19% of EBIT. And your ASP I mean is first-quarter is ASP really what it's going to be for FY'20.

So Ken, I think when we look at EBIT from California in 2019, we think it's in the upper thirties. And for 2020 I think we would expect it to come down to the lower thirties as a percentage of total. We expect margin around the company including California to improve through the course of the year, compared to the first quarter.

Okay. And then, the SG&A you said for FY'20, it's going to be modestly above FY'19, was that correct Marty?

Yes, it is.

That's excluding the 10 million you called out in the first quarter?

It includes the 10 million I called out.

And then what percent, I guess on an annual basis of your SG&A described as fixed versus variable? Thank you.

So I think the asset is mostly variable and we would expect that to be around 40% of the total SG&A.

Thank you very much gentlemen.

Our next question today comes from Jay McCanless with Wedbush Securities. Please go ahead.

Hey, good morning and thanks for taking my questions on. The first one I had could you all breakout in the order growth in 4Q that came from the acquisitions versus your organic growth.

Okay. [Indiscernible] through a lot of pages. Okay. So we have pretty small -- pretty small. That's right.

One sec Jay. We're getting there, Sharp was 44 contracts in the quarter and Sabal was 35 contracts in the quarter. Sabal was about a half a quarter of owned by Toll.

Thank you for that. And then, I'm sorry I know you all discussed it before but I didn't hear the answer in terms of incentives. How did those compare year-over-year for the fourth quarter and then maybe for 3Q versus 3Q'19?

Incentives were flat from 4Q to 3Q. Year-over-year, let's see, hold on, Gregg is going to pull that out. It looks like incentive peaked in the second quarter despite a little. They just ticked up ever so little. And then they were flat in the third and the fourth quarter of '19. Do you have another question, while our file loads?

Yes, absolutely. So just maybe asking Jack's question a different way. If you guys are moving to a smaller price burner smaller square footage, at what point does that start to impact the cycle time and when should we expect that to contract a little bit or is that not going to happen it's just the product it's going to be a 9 to 12-month cycle times.

More affordable luxury homes will be -- they should cycle faster, for the reasons we gave which is they're smaller and they have less options. It will be incremental over time.

Jay, it's real tough to tell you that six months from now we'll have a better and a final mix of product type. It's going to vary. It should just go down.

The incentives compared to a year ago or basically flat. That's the same answer, same answer Q4 to Q2 and Q4 to prior Q4, plus or bucks minus a $1000, within the same range.

Great. Thanks again.

You're welcome.

Ladies and gentlemen, today's final question comes from Mark Weintraub of Seaport Global. Please go ahead.

Thank you. I was hoping if you could just give us your feel for recognizing how complex this question is. If we look at the adjusted gross margin guidance for the coming first quarter and we think of three variables at play one timing-related to the health of the market which sounds like that's the biggest factor in as you pointed out health and market is getting better. But to you also would have geographical mix shifts. And three, we have the shift to the more affordable product. And again recognizing this is complex, but if you were to guesstimate the impact of those three variables on Delta in expected margins for this year versus last year's first quarter. What percentage might fall in those buckets?

I don't think I can give you percentages, but I think the geographic mix is going to skew with less California. And then the marketplace is obviously a positive to margins. And then the mix will have the least -- I'm sorry the price point mix will have the least impact on things.

Right. Well, markets are negative for the first quarter, but then we will become a positive going forward just to clarify.

Yes, correct. That's correct.

Right. And then, one other quick follow-on if I could, you also referenced labor availability one of the variables that makes it trickier to forecast 2020. And I guess there are two different ways that could play was, wanting to understand which one you were focusing on. One is, it the ability to get all the homes you would want to get versus the cost of building those homes.

We have the labor to build homes and we are encouraged that labor and material costs in the fourth quarter were flat to the third quarter. And we have not been able to say that in some time.

Okay. I'll leave it there. Thank you.

Thank you.

Thanks Mark.

And this concludes our question-and-answer session. I would like to turn the conference back over to Doug Yearley for any closing remarks.

Rocco, thank you very much. You did a great job. Thank you everybody for your interest and support. And have a wonderful holiday season.

Thank you, sir. Today's conference has now concluded. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.