Q3 2020 TRI Pointe Group Inc Earnings Call
Greetings and welcome to the Tri Pointe Group third quarter 2020 earnings Conference call.
At this time all participants are in listen only mode. A brief question answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
Now my pleasure to introduce your host David Lee Tri Pointe General Counsel. Please go ahead.
Good morning, and welcome to Tri Pointe groups earnings Conference call earlier.
Earlier this morning, the company released its financial results for the third quarter of 2020.
A few minutes detailing these results, including a slide deck under the presentations tab are available on the <unk>.
Are available on the company's Investor Relations website at <unk>.
Www Dot Tri Pointe group Dotcom.
Before the call begins I would like to remind everyone that certain statements made on this call, which are not historical facts, including statements concerning future financial and operating performance are forward looking statements that involve risks and uncertainties.
A discussion of risks and uncertainties and other factors that could cause actual results to differ materially are detailed in the companys SEC filings.
Except as required by law the company undertakes no duty to update these forward looking statements.
Additionally, reconciliations of non-GAAP financial measures discussed on this call to the most comparable GAAP measures can be accessed through Tri Pointes website and in its SEC filings.
Hosting the call today are Doug Bauer, the Companys, Chief Executive Officer Glenn.
Glen Keeler, the company's Chief Financial Officer, Tom.
Tom Mitchell, the Companys, Chief operating officer, and President and Linda May the company's Chief marketing officer with that I will now turn the call over to Doug.
Thanks, David and thank you for joining us today to go over our results for the third quarter of 2020.
Disgust strategic initiatives and provide some color on our company's outlook.
Before we discuss our third quarter results I like to express your ongoing appreciation and out.
And admiration for the frontline workers, who are working around the clock.
Yeah, We hope you and your families are saying well.
I don't think any of US thought this pandemic would last as long as it has and despite that we have a lot to be thankful for.
Our industry is thriving as a desire for new homes continues to grow.
And as a result, Tri Pointe group delivered strong results for the third quarter of 2020.
Driven by combination excellent housing fundamentals.
He highly desirable product profile and great execution by our team members.
We generated earnings per share of 61 cents for the quarter, representing 39% improvement over last year.
Thanks to an 11% increase in homebuilding revenues.
The 110 basis point expansion.
Our pre tax margin.
Home sales gross margin came in at 22.1% clip.
Eclipsing the high end of our stated guidance range.
Well as <unk> as a percent of home sales revenue improved 180 basis points to 9.8%.
These results demonstrate the success we've had.
So many price increases to offset cost inflation.
And the effectiveness of the cost cutting initiatives, we implemented earlier this year.
Net orders for the quarter increased 50% year over year on a 65% improvement.
Order pace to 4.8 per community per month.
The order improvement was broad based across a number of demographic segments and geographies.
38% of our buyers representing the millennial cohort.
Well the historically low interest rate environment is clearly fueling a portion of the man we are seeing.
We believe there are demographic shifts and lifestyle changes that are occurring in this country.
How many positive long term impact on our industry.
Millennials are increasingly embracing the notion of home ownership well.
Well Americans of all ages have placed a greater emphasis on the home due to the current pandemic.
As we continue to take advantage of the growth that's occurring in our industry.
We are laser focused on five ways to improve our returns.
This is an area of infant emphasis for our company as we have scaled our operations and one that should continue to improve.
Thanks to the progress, we're making on a number of fronts.
The first area of opportunity, we see for better returns comes from several of our projects associated with our long term, California assets.
During our 2016 Investor day, we highlighted the earnings potential of our assets located in Santa Clarita, and the inland Empire, but.
But also emphasize that our returns would be depressed in the near term due to the.
Due to the upfront investment needed to bring them to market.
Over the next several years, we set about putting the necessary infrastructure and amenities into these communities to maximize their appeal.
Fast forward to today.
We're realizing positive returns on these investments with several communities generating sales paces above the company average and healthy profits.
The second Avenue, we see for better returns through the maturation of our early stage divisions like Dallas Austin.
Austin, the Carolinas and Sacramento.
We have established a foothold in these markets but.
But as is the case with any new venture. It takes time to scale the operations to a level, which profitability is achieved on a more consistent basis.
We have made the necessary investments in these markets to move past the start up phase for these divisions.
We expect their contributions to our profitability and return profile to improve over the next few years.
Our third lever to increase inventory turns.
We made a conscious effort to increase the number of lots controlled via option over the last few years and that number now stands at 30% as of the ended the third quarter of 2022.
Compared to 16% two years ago.
We are continuing to grow our option lot percentage by appropriately structuring land deals with late with sellers as well as utilizing financing transactions to control more loss in a capital efficient manner.
Based on our current projections, we believe we can get our option lot count up to 40% in it.
And improve our inventory turns to onetime annually by 2022.
The fourth way in which we can specifically improve our return on equity is through our share repurchase program.
So far this year, we have repurchased 164 million in stock from our 200 million authorization.
We intend to utilize the remaining amount of our current authorization in the fourth quarter.
And going forward, we continue to be committed to a programmatic annual stock repurchase program.
Based on our strong cash generation and low debt levels. We believe we can continue to utilize a portion of our capital.
To repurchase stock without sacrificing growth in our homebuilding operations.
The final initiative, we are focusing on to drive better returns is our ongoing commitment to operational and process improvements across our organization.
As we seek to increase efficiencies company wide and anticipate trends in home buyer behavior, we have.
We have evolved into a technology driven company.
Over the past 18 months, we have upgraded our accounting system.
Our CRM solutions and implemented a new construction manager platform that has made us more streamline in our field operations.
This is giving us the ability to centralize certain back office functions that will.
That will improve efficiencies and lead to DNA savings.
We have also implemented a new option selection software program for an overall improved customer experience.
And made enhancements to our virtual sales content as we stay in stride with the consumers desire to shop for Mt.
Along with technological efficiencies, we will focus on product simplification going forward.
Which will reduce cycle times and generate cost efficiencies, while providing the same personalization that our company is known for.
Kevin These initiatives.
I'm excited to announce that we have made the strategic decision to start operating nationally as one unified brand.
Hi, Pointe homes.
This change will drive more operational efficiency and performance.
Allowing us to concentrate all our functional efforts around one brand instead of six.
It will also create stronger national awareness for the company with the goal of further improving our financial results and driving shareholder value.
The merger with Rico that we completed in 2014 was transformative for the company and the multiple brand approach. We inherited has served us well over the past six years.
During that time, we successfully establish an overarching vision and culture across Tri Pointe group six brands well.
Well fostering the long standing trusted relationships.
Our local leadership teams have forged over the years with land sellers and trade partners.
That pillar of operating is the best the big and small with local expertise.
And relationships backed by our own financial resources and.
And powerful technology platforms will continue to define who we are as we look to the future and continue to broaden our geographic footprint.
Well, we've all been in ways that will make us more efficient and key operational strategies in a head of consumer trends.
The pillars that had been central to our success will continue to differentiate us.
Along with being the best the Big and small we are a customer driven company and consider ourselves in the life changing business.
As a premium lifestyle brand, we place a high priority on innovative design and craftsmanship across all price points.
All this is possible because of the passionate culture that permit AIDS all aspects of our business.
Empowers our people love, what they do and motivates them to perform at the highest levels.
We're excited to move forward as Tri Pointe homes.
And take the company to the next level through the.
Through the end of this year, we will continue to operate under our existing brands and will begin transitioning to our new Tri Pointe homes brand across the country early in the first quarter of 2021.
Finally, I wanted to say I am very proud of how we have grown as a company.
The team for undertaking all these strategic initiatives to put Tri Pointe in a position for success for many years to come.
With that I will turn the call over to Glenn to provide more details for the quarter.
Thanks, Doug and good morning, everyone I'm.
I'm going to highlight some of our results and key financial metrics for the third quarter, and then finish my remarks, with our expectations and outlook for the fourth quarter and full year 2020.
At times, I will be referring to certain information from our slide deck that is posted on our website.
Six of the earnings call deck provide some of the financial and operational highlights from our third quarter.
As Doug mentioned demand was robust in the third quarter with net new home orders, increasing 50% year over year, driven by our highest ever quarterly absorption rate of 4.8 homes per community per month.
Man was broad based but especially strong at our California markets, which reported an absorption rate of 6.6 homes per community per month.
California performance was led by the inland Empire well the self pay some over nine homes per community per month, resulting from our strong entry level product offerings with sales prices from the mid or from the high two hundreds to the mid three hundreds.
We are fortunate to have a long land supply suitable for entry level product in the inland Empire with these.
With these assets. We're also mindful of the potential affordability challenges for the entry level buyer. So we're focusing on pay silver price.
Conversely that some of our higher average selling price divisions, such as Seattle, and San Diego, where supply for both new and existing homes is low and demand is strong we have been pushing price more aggressively and as a result, both of those divisions have seen in over 200 basis point improvement in gross margins year over year.
So far in October we have recorded 326 orders based.
Based on the strong demand we have experienced over the past several months, we are closely managing new phase releases to allow construction and sales to be in sync. We're also monitoring increased input costs largely due to lumber to make sure we are pricing new homes appropriately to offset those input costs.
While we continue to see strong housing fundamentals and all of our markets. We expect to see some slowing of our sales pace as we head into the end of the year due to normal seasonality and the factors I just discussed.
Due to the strong sales we have experienced we have closed out of more communities. This year than previously expected for the quarter. We opened 13, new communities and closed out of 32 <unk> and.
Ending the quarter with 126 active selling communities.
For the fourth quarter, we expect expect opened seven new communities and closed out of 15, which would result in an ending active community count of 118.
In 2021, we're planning to open 70, new communities 22 of which will be in the first quarter and the rest equally distributed throughout the year.
Depending on the timing of community Closeouts, we asked.
We estimate ending 2021 with 135 active selling communities, which would represent a 14% increase over our projected year end 2020 community count figure.
For 2022, we currently have 80 planned new community openings.
Turning to deliveries for the quarter, we delivered 1303 homes, which was a 10% increase year over year.
This resulted in home sales revenue of 826 million, which wasn't a 11% increase year over year on an average selling price of 634000.
As we grow our communities outside of California, and especially in our early stage divisions, which focus more on the entry level and first move up segments. We are expecting our average selling price as a company to come down over the next few years.
We anticipate our full year average selling price to be approximately 585000 in 2021 and 550000 in 2022.
Our homebuilding gross margin percentage for the quarter was 22.1%.
50 point, a 50 basis point decrease year over year. The decrease in gross margin was due to the lower mix of the long term, California assets in the quarter.
We were encouraged by the strength of our margins. Despite a lower mix of long term, California assets in the quarter, which we believe demonstrates the progress we have made an increase in our profitability outside of California, and we feel will lead to more consistent quarterly results going forward.
That's DNA as the next.
<unk> expense as a percentage of home sales revenue was 9.8% 180 basis point improvement year over year.
As a result of the leverage gained from the increase in revenue and savings from some of the efficiency initiatives that Doug mentioned earlier.
Net income for the quarter was 79 million or 61 cents per diluted share, which was an increase of 39% compared to the prior year.
Excluding charges related to the early extinguishment of debt that I highlighted on last quarter's call earnings per diluted share was 63 cents for the quarter.
At quarter end, we owned or controlled approximately 32000 lots of which 30% were under option.
A detailed breakdown of our lots owned will be reflected in our form 10-Q, which will be filed later. This week. In addition, there was a summary of lots owned or controlled by state on page 22 in the slide deck.
Looking at the balance sheet at quarter end, we had approximately 3 billion of real estate inventory. Our total outstanding debt was 1.3 billion, resulting in a ratio of debt to capital of 37.8% at a ratio of net debt to net capital of 27.6%.
Year to date, the company generated $338 million and positive cash flow from operations and ended the quarter with over 1 billion of liquidity consisting of 494 million of cash on hand, and 533 million of availability under our unsecured revolving credit facility.
Now I'd like to summarize our outlook for the fourth quarter and full year.
For the fourth quarter of 2020.
The company anticipates delivering between 1400 and 1500 homes at an average sales price of 625000 to 635000.
Homebuilding gross margin is expected to be in the range of 20.5% to 21.5% and SGN expense as a percentage of home sales revenue is expected to be in the range of 9.8% to 10.3% for the fourth quarter.
Lastly, the company expects its effective tax rate for the fourth quarter of 2020 to be in the range of 25% to 25.5%.
As a result for the full year, we anticipate delivering between 40 905000 homes at an average sales price of 625000 to 630000 homebuilding gross margins are expected to be in the range of 21% to 21.5% for the full year, while our SG <unk> expense as a percentage of home sales revenue is expected to be in the range of 10.
1.8% to 11.2%.
Finally, the company is forecasting its effective tax rate for the full year to be in the range of 24% to 24.5%.
I will now turn the call back over to Doug for some closing remarks.
Thanks, Glenn I'm very pleased with the progress we made this quarter.
I'm looking forward to this next phase I try Pointe homes' evolution.
We've come a long way from our humble beginnings as a homebuilding startup in the depths of the housing recession, just over 11 years ago.
Over that time, we have rapidly grown our business into in a profitable manner and diversified our operations, both the product and geographic standpoint.
We're now in a great position to leverage our size and scale to produce better returns for our shareholders.
Well continue to grow our operations in a disciplined manner.
We believe this is a prudent approach to the cyclical nature of our industry and is a discipline, we are witnessing from our competitors as well.
This mindset is a departure from the growth at all costs operating strategies, a previous cycles it shouldn't be.
It should result in a more rational consistent operating environment over time.
Given this dynamic along with the strong demand trends, we're experiencing and changes that were implemented at our company I am as excited as ever for the future our Tri Pointe homes.
Finally, I would like to express my gratitude to the hard working men and women of this organization.
Together, we are building something special it is.
It is due in large part to your entre to permit entrepreneurial spirit your dedication and your tireless work ethic.
I appreciate your contributions are getting us to where we are today and setting us on a path to where we're going in the future.
That concludes our prepared remarks, and now we'll be happy to take your questions. Thank you.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad a confirmation total indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your head.
Before pressing the star keys.
Our first question comes from Ivy Zelman, What's Zelman <unk> Associates. Please go ahead.
Thank you good morning, guys congratulations on a great great quarter. So.
So that's a big picture question that I've been getting from investors I'd like you to maybe think through how to respond well since the great financial crisis. You know we've had on a relative basis has answered no clearly have not quite as fast as they stand prior cycles and more recently I've been told yeah My forecast for 2000.
Hi, one is too conservative at a million one family starts and why can't get back to my seven or 10 million.
And I certainly can answer, but I'd love to hear your answer if you think it can and if not why not and maybe help the industry or the <unk>.
Yes, that's helpful.
Yeah.
Our land about that's quite chain things of that nature and a lot of hear your views.
Hi, Ivy its I think I was a little broken out, but I think your question was around why the industry you can't get back up to what I would refer back to 2006 levels is that right.
Yes, the peak about 5 million yeah, Yeah, two to 2005, yeah, I mean, it even before the pandemic or I think the key a key phrase I use is is the impediments to housing starts and permits nationally to grow is weighing.
Labor and the regulatory environment and you go down kind of a channel on all all of those as you look forward into the future, but we have a kind of a natural buffer would those supply chain. So.
Supply inhibitors, when do you think about the labor.
The land environment in the regulatory environment, and all of which are going to probably.
Probably get a potentially get more aggressive and the regulatory environment, depending on on the political views that you have so but that that's been true for the housing market before the pandemic and after and the larger builders are well capitalized to take it.
Manage their market position to be able to get trades in like ourselves to complete homes. When some supply chain is is is a tough right now because of the pandemic. So those are that's the primary.
Those are the primary inhibitors to that.
<unk> growth that we saw in 2005.
And recognizing that well the big guys are predominantly doing self develop that and correct me if I'm wrong, but that gives you the advantage where yeah, while the public's your 40% of the market you know many of the small guys just aren't really challenge to get land. What can you do as an organization to increase.
Though the supply of lots and curtail some of the impediment or recognizing its just local municipalities that are really listening to their clients to their constituents and saying you know no growth in my backyard as it is it just a straight enough that you know even with yourself development.
There are no real impediments to growing any faster than you currently are.
Well I think this business had been doing it for 31 years.
It did the land business has always been a challenge and the regulatory environment over 30 years continues to be a challenge, but it really comes down to having a the right team to manage true that environment I would challenge anyone to to look at California, which has probably the biggest regulatory.
Firemen and we've been here for a long time, and we can navigate that that regulatory environment as well or is probably the one of the best in the business and that's why we create the value that we create in our California assets.
We as a company.
Because the land environment is tough, but do look to do more self develop.
Transactions and and anecdotally I've come across some smaller builders that have actually called me and said listen we're we're actually going to shrink our business. We just cannot get the trades to come work for us like the bigger builders can so I think you're going to see a market share issue.
Increase of the top 10 or 15 builders for the next several years.
No.
That's really helpful. Doug. Thank you and good luck I appreciate it thanks.
Thanks Ivy.
Next question comes from Jay Mccanless with Wedbush. Please go ahead.
Hey, Thanks for taking my questions and.
And Paul just from Miss this but could you talk about or or I guess elaborate more on the pricing power comments you had in the release today and talk about what percentage of your communities you are able to raise price during Q3.
Yeah, Jay we we were able to increase price, which is both a combination of price and or decreasing incentives and an over 90% of our communities.
And then the second question I had.
I guess, Doug when you when you were talking about the five ways to improve the returns and the first one you highlighted was yes. She discussed in 2016 those have finally come to fruition.
I mean are all of those assets you all highlighted in 2016 up and running now the the way you want it or is there a longer runway for those assets than than just what we're seeing right now.
Well, there's a longer.
Longer runway, because there's thousands of lots that we own and control in California. So that's that's actually the blessing that we have we set a path out in 2016, a that we would put those assets into play Santa Clarita inland <unk> inland Empire. For example, we have thousands of lodge and know what.
He can touch as far as our price points and basis out there. So we'll continue to build homes out there for years and what that does is generate very healthy profits and cash flow for us to implement all the other strategies that we outlined in the call.
And then one more quick one Glenn could you tell me what the authorization was remaining at the end of Threeq.
Yeah, it's about a $36 million between 36, and 38 million if I remember it.
Okay, great. Thanks for taking my questions. Thanks.
Thanks Jay.
Next question comes from Truman Patterson with Wells Fargo. Please go ahead.
Hey, good morning, guys nice results and thanks for taking my question you know one of the bigger questions that I think a lot of people have is your ability to convert you know, 50% order growth and actually you know closings and get the homes constructed a you know it is your construction cycle extending it I'm really thinking about it.
Two different areas. One are you seeing outright just labor shortages or where you can't get labor and having issues getting you know those starts on the ground and then also on on the product side are there any categories that you are having difficulty actually finding the product to complete the homes.
Hi, Germany as Doug no on both both accounts a there's we have absolutely zero problem getting the labor to art or trades and and none of those are <unk> or factories right. Now I will tell you that our cycle times that probably drifted up 5% to 10%, which is primarily due to.
Do the pandemic can kobin related instances, where.
Cities. There are suppliers have had impacts from the pandemic. So that that's been the supply chain elongation, but it's been 5% to 10%.
Okay, Okay, that's great, but no issues on the labor side I think is no no pretty encouraging is varying Bakken well when I talked about labor at the beginning.
What when you look at the macro picture as Ivy and I were talking about the.
The labor situation in the U.S. the average age of a plumber electrician.
So on and so forth there in their mid Fiftys and our industry is is aging and the construction field and that is the macro limiting factor is it a limiting factor for the top.
10 or top.
15, 20 builders no because we have the access to the labor we have the access to the supply chain are there are disruptions because of pandemic, yeah, but that's where I think the top 10 or 15 are going to increase market share. Despite.
Those supply chain and labor inhibitors that are out there.
Okay. Okay. Thanks for that through Merry go ahead.
This is Tom just as a clarification because we don't want you thinking there are not challenges out there in the supply chain, India every week, we're dealing with challenges just like every other builder, but we have been successful in coming up with creative solutions to overcome those challenges relative to product availability. So you've heard about.
All the the one that you know are continually.
Our continually happening and we've experienced that as well, but it is certainly not causing any closing delays or any missed opportunities for our deliveries this year.
Okay. Okay. That's extremely helpful. Also just following up on the pricing comment that you know, what's allowing you to stay ahead of the input cost inflation.
Could you just walk us through the moving parts of the fourth quarter gross margin decline. If you look at it you know sequentially.
And then you know <unk> lumber is up a lot. We're hearing some other you know fairly significant inflation on interior doors windows flooring roofing et cetera.
How should we think about you know these costs ended 2021 and are you seeing enough.
Pricing in the market you know either currently or what you think is happening moving forward to really offset these costs.
Hey trim and its Glenn.
The the really the the slight decrease in the gross margin guide for the fourth quarter is really just mix for us there's slightly less deliveries in the long term, California assets in the fourth quarter, which is impacting that that I think the impact of lumber will more be felt in Q1 and Q2 of next year versus Q4.
Sure, but I don't know Tom if you want to elaborate on that a little bit more.
Yeah, I mean fundamentally a we've had a a big spike in lumber costs and and for those Q1 Q2 deliveries that will be felt for full.
Fully but our expectation is that lumber as the mills are able to generate additional supply the lumber will begin to move off of its all time highs. So we expect that.
Price to come down and we still see a very strong demand profile, which gives us pricing power. So we expect to be able to continue to pass on those cost increases to the consumer.
Perfect. Thank you guys and good luck on the upcoming quarter.
Thanks, Jeremy.
Next question comes from Mike Dahl with RBC capital markets. Please go ahead.
Hi, Thanks for taking my questions.
Probably ask you some variation or of this almost every call and I know the answer is going to be at least in large part it community by community, but thinking about your absorption pace you've continued to push this higher and there are certain areas. You you highlighted like England Empire, where you can go and continue to push.
Oh pace, but it seems like you're tracking closer to.
I mean potentially close though for a month for the full year and historically I think your peak has been kind of three to so just from a mix standpoint, when you look out to your mix of communities and geography is next year and your your view changed at all in <unk> in the current environment and on what.
What a sustainable monthly pace would be for for you guys.
Yeah, I think our view going into 21 and 22 is very positive we as a company see our average U.S.P. going down a therefore, we see our absorption paces a company going up on him on a macro basis. So.
Basis. So you know, we're very bullish about the housing business for the next couple of years.
It's it's really a very great situation that our company is in in many of the other companies. It's all really about getting new communities in the ground. We've had tremendous demand the summer sales season really hit us or the spring sales season really had this in this late summer early fall.
And as I look into 21 and 22, yes, our overall company absorption rate should be.
On average slightly higher than previous years, because our product mix is going more to entry level premium first move up.
And we view the housing business is is going to be the silver lining to the economy for the next couple of years. So.
I'm excited as ever it's really comes down to CIS opening more communities, which we outlined we've got tremendous community growth over the next two years and hopefully we can be the multiplier effect to the economy that is going through a lot of suffering.
Good good to hear it makes sense and then related Lee.
And on the margin side I think if you you highlight that Fourq is largely a function of mix I think if we look at the sales strength regionally on on the order side. It would seemingly suggests that the long term assets and this is consistent with your strategy to but long term assets would contribute more to revenues.
And 21, and then 20 is that fair and should we then think about that is yes. There's these moving pieces on certainly lumber and other costs inflation, but as that should we look at that as setting the stage for an upward margin gross margin trajectory and 21.
I think we haven't given the margin guidance yet for 21, but I think one thing to think about from a long term assets is I think percentage of deliveries will be higher next year, just because we have higher communities open.
But our ASP is coming down because there's got to be less of the higher end long term, California assets and the mix next year or so less Pacific Highlands Ranch, specifically, but again.
But again because of the pricing power like Tom mentioned, you know, we think we do have the ability to fully offset you know somebody's labor price increases that we've we've seen the other the other.
The thing to think about for margins as as we mentioned we're opening about 70 communities next year and so we're turning over a good portion of our communities and so that you know that does have some impact to margin as well just based on pure products.
Yeah, I would add like our our strategy as we you know we laid out a strategy in 2016 and putting all the long term assets of a meeting and in motion, which we have so we now are at a point as we outlined a strategic path.
In in really all that can be summarized as we need we will have all 14 15 divisions operating in a very consistent manner over the next 12 to 24 months and what I mean by that is their consistently we have 'em entre here. It's it's the Mitchell line. The 2010 line [laughter], but we're we will be a very.
Just then a generator of both revenues and profits from all divisions, and and you're seeing that happening outside of California.
Okay got it thanks, Doug good.
Next question comes from Stephen Kim with Evercore. Please go ahead.
Thanks, very much guys first question relates to price you talked about raising prices in over 90% of your communities I was curious what's the majority of this price action taken later in the quarter or what do you feel like that was sort of evenly spread throughout the quarter those pricing actions and.
Somewhat related are you seeing increased option and upgrade spend from your customers in general.
And how much.
Hey, Stephen it's Tom and I would say that Uh huh.
Pricing increases are really began to take hold early in the quarter and were fairly consistent throughout the quarter and then or options you know slightly ticked up from a year over year basis, and we're consistently running in the 11 to 12.
Percent range for for options.
As a percentage of our overall revenue.
Yep, Okay got it that's helpful.
And then when you talk about the moves to the one brand Tri Pointe, which I think makes sense at this point can you talk about what you anticipated costs, if any we might see a that will bring a and then similarly they are there longer term savings that you could quantify for us as a reason.
No.
Hey, Stephen it's Glenn good question.
Some of that or actually a majority of that was contemplated in the reduction in force that we took that took place in Q2 of this year there will be some incremental marketing saving sense will be supporting only one brand versus six going forward [noise], but.
But the majority of that was contemplated in the 33 million of annual savings that we discussed last quarter.
Right.
Helpful. And then lastly, I wanted to talk to you a little bit about theoretical capacity.
Deliveries for your company I know that I'm always very difficult to predict demand.
But I would imagine that if we are trying to think about an annualized Max production capacity figure for you guys.
First place that I would look would be your orders that you took this quarter you mentioned that your cycle times didn't really extend you're not having some of that as much of the labor issues as maybe some of the some of your other national competitors are experiencing.
So would it be reasonable to think that once you're talking orders this quarter, maybe on an annualize that number maybe you know times four or something like that is kind of like that's a theoretical capacity number for you right now because you wouldn't have taken the orders. If you didn't think you're going to deliver him in a reasonable time, but by the same token you also probably didn't leave any orders on a table either you're probably booked everything that you could sell it.
Fair way of thinking about your Max production cut paper <unk> capacity right now.
Well I'll look at that in a couple of ways first of all.
All all the builders, including US are always battling labor in the supply chain. So if I said that we're a unique company that doesn't have any labor supply chain issues all stand corrected.
Number two I guess I I don't really deal in theoretical ideal with what the market is providing in the market is providing an excellent backdrop for the housing business as you know and you've you've kind of talked a lot about that then it really just comes down to the ability to.
To put the new communities in place and get them up and going and selling and so we see a tremendous growth pattern in our existing platform not only in our early stage divisions, but several of our existing <unk> divisions also have a lot of growth.
Whether it's a the inland empire, whether it's a arizona parts of a Colorado, so on and so forth. So that's how we look at the business is really how we can become a top 10 in market share in each one of our marketplaces.
Yeah, Okay, great well, thanks very much.
Next question comes from Jack Micenko with energy. Please go ahead.
Hi, Good morning, guys I wanted to talk.
I wanted to talk a revisit the backlog conversion a little bit obviously.
Obviously, we have the the pandemic and lets me hopefully call that a temporary.
Issue. This year, you are mixing into faster turn lower price point.
Perhaps arguably a little more spec or spec ish type.
Inventory is it is it safe to assume that you know some of the.
Slow down that backlog conversion this year may rebound.
In 21 and beyond for for the reasons mentioned.
I think a Jack this is Glenn I think you're going to see some rebound I don't think its going to get all the way back to some of the historical levels.
Let me just because we've we've had such a strong you know sales growth in the back half of the year versus the normal spring selling season that you know there's a lot of you know and started homes being sold and it just takes some time to work through those.
That conversion and our spec count is really low we only have 109 completed specs at the end of the quarter, usually that numbers between three and 400, so you're not seeing those sale in close within the same quarter that that benefits. Obviously your backlog conversion. So well we think it will improve when you compare for core for Q next year versus Fourq you this year.
Obviously, but it'll take a little bit of time for it to get back to what has been historically normal.
Okay and then.
On the on the cost or the labor.
Pricing sort of dynamic so you've got the you've got the mix of underlying assets land assets long term, California than you've got you know.
Brecken stick I guess is it can you share with us square footage in price increase for square footage cost increase over the last year.
But it's a we will get that number two we don't have it right in front of us a Jack so instead is shooting from the hip but we'll get back to you on it okay, you're talking a ballpark thanks guys.
Next question comes from Carl Reichardt with BTI G. Please go ahead.
Thanks, when you guys.
Steve Kim got my branding question. So I just have one so it doesn't make who anybody Carl you you won the booby prize.
Didn't didn't she mentioned one brand last call, yes, I did [laughter], but he got my question on cost I wanted to ask about your your goal for inventory turns that to get to one time by 22, and you talked about that being a function of options or moving to options, but if I look at this if you've got the WRECO land.
That youve held for a long time, beginning to burn off you're moving to markets, where it's easier to get options, you're moving to a more efficient mix of lower in homes I mean isn't it feasible that your inventory turns over that time could could in crude by more than that because there's a lot of levers to pull here can you just kind of build me a bridge between how you get from.
I think its 0.8 now or whatever it is to to one by 22 and is it drivers are there drivers beyond just moving to a greater option mix.
No I think you've hit on all the levers, but it does take a little bit of time, because there's still a lot of lots in that long term, California asset pipeline and so as as like you said, we continue to move through those and add communities in more efficient capital efficient markets like Texas and the Carolinas in some of our newer markets.
You know, we we will get to that one goal, but I think that that I think that's still a reasonable timeline and Carl I would add I mean, it really is setting up for a perfect backdrop for us when we put all those assets in play back in 2016 that we talk about general.
Generating significant cash flow and profits to be able to implement those strategic objectives that we have outlined for the street. So it's it's really it's it is Glen pointed out those assets still are out there, but still generate great cash flow and profit so.
We'll use those to reinvest in those higher returning assets and and we also pointed out a lot of simplification yeah that we're we're looking to achieve in a in our plan execution.
We're still going to offer our personalization approach, but still as you know as you get more simplified in your plans and your execution what technology. Today, we think we can get even more simplified those those cycle times in produce better.
Produce better <unk> turns as well so there's a myriad of factors going on there, but the long land is is a great backdrop for us going forward as we look to achieve those type of returns okay and does that does that the focus on turn slashed returns impact your thinking on acquisitions at all.
Acquisitions will land or acquisitions of companies builders right. The idea, though bill there's okay. Okay did you.
Okay. Yeah, we'll consider it can continue to be opportunistic on the M&A front. So it doesn't change.
Change our thinking we have significant amount of capital available but.
But our primary focus is is what we outlined in the earnings script and by the way I should mention one clarification inherent need script I talked about the net orders.
Carl <unk>, increasing about 50%.
And our broad based or demographic segments and geographies. The interesting fact, and I noted that 38% of our buyers are the <unk> mint millennial coal coal heard it's actually 48% said tell it gives you a little a sneak preview into the demand that we see in this industry for the next couple of.
Years.
Great. Thanks, a lot.
Thanks.
Our next question comes from Alex Barron with housing Research Center. Please go ahead.
Yeah, Thanks, guys and great job on the quarter.
Thanks, Yeah, I guess, we saw that the Carolinas delivered the first orders this quarter can you expand on on that region and when can we expect the first closings is that going to be next quarter or not till 2021, and you know.
You know how many communities or you guys have going and where where do you see that going over the next year.
Great question, Alex Thanks that we will get closings, our first closing on the board this year and Caroline I'm very excited.
Great shell has done a tremendous job of putting the team together there, it's really a model or organic startup we have well over 2000 actually well over 2500 lots that we own and control and we have upwards of eight to 10 more new communities open.
I mean actually in the Carolinas next year.
So we're very excited Charlotte and Raleigh is on a significant growth pattern and by the end of 22, they will be operating at a very strong level. So great question and thanks for setting that up.
And can you expand more like what's the target you know buyer base. There is it more entry level more move up operating more innospec bases or built water. Just you know if you can give us some sense there.
Yeah. They are our strategy there is to stay in the core top.
Top 10 core sub markets in both Charlotte and Raleigh, but we're focused a in the what I would call first the first.
The first time premium and first move up.
And that's been the entire focus for both Charlotte and Raleigh, So that will reflect in.
A more production production oriented environment, where you have more specs on ground.
C or some really attractive townhome product that we're bringing on so yes, you'll have a lot of production going on there both on a to be built but also on a spec level.
Okay, and if I could ask one more on the repurchase so you said you're going to finish up.
Finish up the the B capacity next quarter, but how.
How do you see the the balance I guess, given where the stock prices that doesn't seem the market's giving you enough credit for the growth that's coming how do you see the balance investing into your stock versus land at this point.
Well as I as I mentioned in the in the earnings call. We're going to you know look to utilize the remaining portion of our current authorization Glenn. It's I think it's about 34 $37 million 36 up and then going forward. We are committed to a programmatic a stock repurchase program as.
As one of the.
Four or five leverage that we outlined to increase returns to shareholders. We the combination of all those levers.
Will yield a a much stronger shareholder value going forward in the next couple of years, that's for sure and you know I'm very proud of the team we laid out a path in 2016, where we said returns would be flat to two week, but we put those assets in play and now we're going to reap the benefits of the <unk>.
Profits and cash flow to be able to not only be programmatic about our stock repurchase program, but also expand in our early stage divisions in and throughout the company in a more efficient return oriented environment all under one brand.
Okay, great well best of luck for those changes thanks.
Thanks, Alex.
Next question comes from Alex Reichardt with B. Riley FBR. Please go ahead.
Thank you good morning, gentlemen.
Hey, Alex.
Quick question can you talk about the virtual sales process and how that's changed your cost structure or gross margins at all.
Hello This is Linda.
Digital sales process and is contributing more and more of our sales every quarter in Q3, 50% about sales came through our online sales program.
And in terms of cost there.
A number of factors and Oh.
Obviously, there is a bigger investment in Chile fit for the online shopping process that we certainly are finding that we can be much more efficient. Once we are in contact with those time shopping going through an online prophase converting to a sale.
And then ultimately Alex I'd, just add that over time, we think we're going to be able to decrease our spend in models and model merchandising because of the virtual process. So ultimately we think so there will be savings there.
Excellent and then lastly up what was your kids or cancellation rate in the quarter.
It was 9% 9.5.
Great. Thank you.
Thanks, Alex Thanks, Alex.
No further questions I would like to turn the floor over to talk about her for closing comments.
Well, thank you for joining us today, and we wish all of you and your families are safe and healthy [laughter] healthy holiday season. Thank you very much and I look forward to talking you next quarter.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.
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