Q2 2021 Toll Brothers Inc Earnings Call

May 26, 2021

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Excuse me. This is the conference operator, thank you for holding the conference will begin shortly please continue to hold thank you.

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Good morning, and welcome to the toll brothers second quarter earnings Conference call.

All participants will be in listen only mode.

Would you need assistance. Please signal a conference specialist by pressing the star key followed by zero.

After todays presentation, there will be an opportunity to ask questions.

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The company is planning to end the call at 930, when the market opens.

During the Q&A, please limit yourself to 1 question and 1 follow up.

Please note this event is being recorded.

I'd now like to turn the conference over to Douglas yearly CEO. Please go ahead.

Thank you Jerome welcome and thank you for joining us.

With me today are Marty Connor, Chief Financial Officer, 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 last night and on our website.

I caution you that many statements on this call are forward looking based on assumptions about the economy world events housing and financial markets. The impact of the pandemic interest rates inflation and many other factors beyond our control that could significantly affect future results.

I am very pleased with our second quarter results as we beat our guidance on nearly every metric we delivered 2271 homes for our record second quarter homebuilding revenue of $1.84 billion. Our adjusted gross margin of 24, 4% increased 150 base.

This points year over year, and was 100 basis points above our guidance.

SG&A as a percentage of homebuilding revenue was 11, 9% on improvement of 190 basis points year over year, and 110 basis points better than guidance.

Pre tax income of 169, 8 million and EPS of $1.01 per share increased 66% and 71% respectively compared to the prior year period.

Contracts and backlog in both dollars and units were all time records our backlog at quarter end was valued at $8.7 billion on 10104 units up 58% in dollars and 57% on units compared to last year.

We signed 3487 net new contracts for $3.1 billion in the quarter on.

On a year over year basis, our net signed contracts in the second quarter were up 85% on units and 97% in dollars.

As a result of our excellent results in the quarter and based on our significant visibility. Our backlog provides we are raising our full year guidance on nearly all key metrics.

We are increasing our full year 2021 projected home deliveries by 100 units to 10300 at the midpoint.

And we now project return on beginning equity of 14, 5% for fiscal year 2021, representing a 570 basis point improvement over 2020.

Our strong order growth, coupled with significant and consistent price increases sets the stage for meaningful revenue earnings margin and ROE growth in fiscal year 2022.

While we are not providing formal guidance for 2022 at this point, we believe our 2022 return on beginning equity is expected to exceed 20% and that our gross margin for 2022 will significantly exceed fiscal year 2021 gross margin.

Demand remains very strong we continue to raise prices in nearly all of our communities during the second quarter and into the start of our third quarter.

We also continue to strategically moderate sales paces by limiting monthly lot releases to 2 to 4 lots per community.

We have steadily expanded this allocation strategy to now cover about 2 thirds of our communities up from about 1 third in January 2021.

For communities that are on allocation, we raise prices as well as we release lots to a priority list of high interest buyers or through a competitive sealed bid process.

This allows us to maximize price and therefore margins.

And align our sales pace to a manageable level of production.

We are very pleased with the effectiveness of this strategy.

3 weeks ended May 23, nonbinding reservation deposits were up 19% over the comparable period last year. The market did not dictate is 19% deposit growth. We did we will continue to evaluate the number of communities on allocation the balance.

Profitability and growth.

We believe the housing market is positioned for sustained strength driven by the long term supply demand imbalance, resulting from the past decade of underproduction of new homes low interest rates, a tight resale market favorable demographics, especially as millennials enter their home buying years Mike.

Ration from higher cost metropolitan markets into attractive more affordable markets enabled by the remote work trend and the greater overall appreciation of one's home that has emerged over the past year.

And an improving economy.

All of these tailwind should be here for some time and sustain a strong housing market.

Although this customer specifically are also benefiting from the strong stock market and rising existing home prices are buyers, who have a home to sell our confident they can sell it quickly and at on appreciated value.

We are seeing an increase in demand in markets like Boise, Reno Vegas, Austin, Phoenix, Denver, and all of Florida from buyers, who are migrating out of higher cost coastal markets. These relocating buyers are not experiencing affordability issues as we raise price.

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The shift to more permanent work from home arrangements means our customers increasingly want to personalize their homes to fit their evolving lifestyles. The design choices. We offer is a distinct competitive advantage.

This quarter, our buyers added on average $162000 or approximately 24% of the base price and lot premiums options and upgrades. This is up from our long term average of about 21%.

These features and upgrades are generally accretive.

The gross margin.

While the strength in the housing market has been well documented so 2 of cost increases from materials, such as lumber and copper.

To date, we have been able to more than offset these cost pressures with price increases and our gross margin projections for this year and next reflect our confidence in our ability to continue managing costs.

At quarter end, we owned or optioned approximately 74500 lots our strong land position provides a firm foundation for outsized growth.

For the next several years and we are currently benefiting from the significant percentage of our land that was put under control at pre pandemic prices.

Notwithstanding our 85% order growth this quarter, we met our Q2 guidance of 320 communities at quarter end and while we project community count dropped to $3.10 at the end of our third quarter due simply to the timing of certain community sellouts and openings. We continue to project 340 <unk>.

<unk> at fiscal year end.

We also reaffirm our guidance for 10% community count growth in fiscal 'twenty 2.

And this guidance is based solely on the land that we already control today.

Our strategic expansion into new markets and products, especially the affordable luxury niche has positioned us well for growth.

Now operating over 50 markets in 24 states with communities in both high growth and high barrier to entry markets.

We offer the widest variety of homes and the industry appealing to growing families and affluent customers with our luxury move up homes as well as to millennials and first time buyers with our expanding affordable luxury business.

And for Baby Boomers are active adult communities.

This product and market expansion has helped fuel the increase in our backlog to record levels. For example in the 12 months ended April 32021.

Nearly 16% of contracts were for.

From markets, where we had no presence 5 years ago.

This is up from approximately 6%.

In the comparable period last year.

First time homebuyers, who are primary buyers on our affordable luxury market.

Accounted for 30% of our deliveries this quarter compared to 25% 1 year ago.

We have also seen our active adult segment strengthen with the rollout of vaccines orders in our active adult segment were up 135% compared to the second quarter of last year.

With our increased focus on capital efficiency, a record backlog and expanding gross margins, we are projecting ROE growth this year and next.

With fiscal year, 2022, ROE expected to exceed 20%.

We believe this growth is sustainable due to actions we have taken in many aspects of our business. It starts with the structural and permanent changes we have made to how we acquire and develop land.

As we have discussed over the past 18 months, we have totally revamped our land underwriting standards to require higher risk adjusted returns.

We have also increased the amount of land that we acquired through more capital efficient structures like land banks joint ventures seller financing and other strategies that allow us to option more land.

Our second quarter and the percentage of lots that we option versus owned grew to 49% from 46% at the end of the first quarter and 40% 1 year ago.

Since we have just about met our previously announced 50.50 target. We are now updating our target to 60% optioned land and 40% owned.

Our focus on on ROE also includes our expansion into more affordable luxury homes, which can be built more quickly and efficiently on less expensive land.

Additionally, we are improving ROE by returning capital to shareholders through share repurchases and dividends since fiscal 2016, we have bought back approximately 1 third of the outstanding shares at an average price of $37.20.

And in April we increased our quarterly dividend by 55% to 17 cents per share.

These actions reflect our confidence in the sustainability of our substantial cash flows moving forward.

We project approximately $750 million in cash generated from operating activities. This year, our highest priority for capital allocation continues to be investment in the growth of our business, whether through disciplined land buying or strategic homebuilder acquisitions, followed by returning capital to shareholders and we do.

Using our leverage as.

As we enter the second half of our fiscal year, which historically has been when we generate the majority of our excess cash flow, we expect to be more programmatic and our stock repurchases.

We are also committed to improving the capital efficiency and earnings consistency of our city living in department living businesses.

With respect to our city living urban condo business. We are very pleased with the renewed demand coming out of New York City, where we signed 44 contracts on our second quarter <unk>.

Including 27 at 77, Charlton and West Soho.

Up from 33 total for all of the city living business in the first quarter of 2021.

Now moving forward, we intend to develop most of our city living buildings off balance sheet and joint ventures with project level financing. We expect this to significantly reduce the amount of capital committed to the city living business and improved return on equity.

Our apartment building.

Our apartment living platform is performing very well, we recorded a $10.7 million gain on sale this quarter and expect more through the balance of the year.

While we recognize that this business can also be an inconsistent contributor to earnings and thus our Roe.

As we have mentioned before we are monetizing some of our land in this business through joint venture formation.

And going forward, we intended to FERC closing on any new land for the apartment business until third party equity and debt capital is committed.

Additionally, we are likely to increase the number of projects that we sell at stabilization versus holding longer term.

These new strategies should make earnings more consistent and improve our Roe.

Now, let me turn it over to Marty.

Thanks, Doug good morning, everyone.

We had a terrific quarter.

Our business continues to fire on all cylinders, especially our production teams out in the field.

We delivered 271 homes at an average price of approximately $809000 generating record second quarter homebuilding revenue of $1.84 billion.

Deliveries were up 18% units and 21% in dollars compared to 1 year ago.

Our second quarter pretax income was $169.8 million.

Compared to a $102.1 million from the second quarter of 2020.

Net income was $127.9 million or $1, 1 per share diluted compared to $75.7 million and <unk> 59 per share diluted 1 year ago.

It's important to note that our second quarter pretax and net income included a $34.2 million pretax charge from <unk> 20 per share after tax related to the early redemption of debt.

Without this 1 time charge earnings per share would have been $1.21.

Second quarter adjusted gross margin was 24, 4% compared to 22, 9% in fiscal year 2022nd quarter.

100 basis points better than projected.

The outperformance was due primarily to pricing power.

Margin option sales.

Ruble mix operational efficiencies and cost controls.

Looking forward, we are now projecting adjusted gross margin for the full year 2021 of 24, 6% up 30 basis points from prior guidance.

Despite recent increases in material and labor costs led by lumber prices. We are confident in our adjusted gross margin projection for the second half of fiscal year 2021 and.

And our ability to further expanded in fiscal year 2022.

With new home demand far outstripping supply, we have been able to push prices, which is more than offset cost increases.

We are intensely focused on our construction budgets and managing building costs.

Before we build any of our homes, we have contracts in place for substantially all of our components on trades.

And we developed conservative budgets that included significant contingency on top of our contracted cost.

When input costs rise and our trades request price increases our first priority is to protect the margin and the homes on our backlog.

Our sales prices have already been set.

And to postpone negotiating those cost increases to the next home sold.

We've generally been successful with this strategy to our due to our strong relationships with our trades and our operating scale.

I would also point out that our expansion into affordable luxury has made us a better more efficient builder at all price points.

Patiency required to compete in at lower price points, that's driven us to optimize the designs of our homes and adopt more streamlined construction processes.

We've taken these practices and lessons learned to all of our product loans, which has made us a leaner more efficient production focused building.

Importantly, as we have optimized our plans and refined choice for our customers we have improved their customer experience.

In addition, we have been fine tuning our strategy related to our spec homes.

On average, 15% to 20% of our deliveries each year are built on spec.

Our strategy is now to delay selling these homes until we reach at least 50% completion.

Allowing us to maximize the price at which we sell these homes.

All of these factors give us confidence in the gross margin in our backlog on our projections for the remainder of this year and into next.

Turning back to our second quarter results as Doug mentioned SG&A as a percentage of revenue in the quarter was 11, 9% of revenues.

190 basis point improvement over the prior year period.

110 basis points better than our guidance, we attribute this primarily to leverage resulting from higher revenue and continuing impact of the cost savings initiatives taken in 2020 <unk>.

Reductions in advertising spend and our relentless focus on controlling overhead.

Joint venture land sales and other income was $21.5 million from the second quarter compared to $16 million from the same quarter last year, and our projection of $7 million.

The better than expected performance here was due to the sale of an apartment building in suburban Atlanta that had been had been projected for our third quarter.

In addition, our mortgage and title operations were more profitable than projected.

Our balance sheet remains strong.

We ended our second quarter with approximately $2.5 billion of liquidity, including $715 million of cash and $1.79 billion available under our $1.9 billion revolving bank credit facility.

In the second quarter, we invested approximately $430 million in land.

And acquisition and development.

We also redeemed $250 million of our 5 and 5 <unk> percent notes due in 2024% in the quarter, which resulted from the $34 million charge I noted earlier.

Total in the first half of fiscal year 'twenty..1 we retired approximately $440 million of debt and have reduced our debt to capital ratio at quarter end to 42, 2% on a gross basis and 35, 6% on a net basis compared to 43, 8% to 35, 8% respectively.

At the end of the first quarter of fiscal year 2021.

We continue the targeted net debt to capital ratio in the high 20% range by fiscal year end.

We also continue to project approximately $750 million on cash generation from operating activities in fiscal year 'twenty 1.

As Doug noted, we will continue to use our cash to invest in the growth of our business with excess cash returned to shareholders and used to further reduce our financial leverage.

<unk> repaying $410 million of our 5.875% public notes that are due in February 'twenty, 2 when they become callable at par in mid November 21.

As we look forward to the second half of fiscal 'twenty..1 we are increasing our guidance for nearly all key metrics.

Now expect full year deliveries of between 10000.210400 units was approximately 2600.75 to be delivered in the third quarter.

Our third quarter deliveries guidance reflects the slow COVID-19 impacted sales environment.

Mid March to the end of May.

In 2020.

We estimate an average delivered price for the full year of between $805820.5000 per home. This is up $15000 at the midpoint compared to previous guidance.

Average delivered price for the third quarter is expected to be between $820800.40000.

As I mentioned earlier, we project adjusted gross margin of 24, 6% for the full fiscal year.

Up from our previous projection of 24, 3%.

We expect adjusted gross margin to be approximately 24, 8% in the third quarter.

Which implies a fourth quarter margin of 25, 4%.

We expect our gross margin to grow further from Q4 and fiscal year 2022.

As Doug said, we have increased our projected return on beginning equity for fiscal year 'twenty 1.

By 570 basis points to 14, 5%.

And we expect it to exceed 20% in fiscal year 'twenty 2.

We expect full year interest and cost of sales to.

To be approximately 2.4%, which is also what we expect in the third quarter.

Versus 2.5% in fiscal 2020.

Excuse me.

As a result of debt reductions on discussed earlier, we expect this interest expense to continue to decline in fiscal 2022 and beyond.

We expect SG&A as a percentage of revenue to be approximately 11, 8% for the full year and 11, 6% in the third quarter.

In addition to revenue leverage and the ongoing benefit of past cost saving actions, we expect to benefit from lower sales commissions.

We are now paying to outside brokers.

We expect community accounts to be $3.10 at the end of our third quarter.

$3.40, a fiscal year end with an additional 10% growth in community count by fiscal year end 2002.

Our full year guide for other income income from unconsolidated entities and land sales gross margin.

It is now a $110 million for the full year up $30 million from our prior guidance with approximately $20 million projected for the third quarter.

The increase was primarily due to greater profitability in our mortgage and title operations along with gains we are projecting from the sale of additional apartment living project. This year.

Now, let me turn the call back to Doug.

Thank you Marty.

To wrap it up we continue to believe that with our strong land position our plans to grow community count This year and next and the wide variety of homes that we offer in 24 states in 50 markets we.

We are very well positioned to capitalize on the extraordinary demand we are seeing in the housing market.

And with the structural changes, we have made and continue to make and how we operate including our relentless focus on capital efficiency returns and internal operating efficiencies. We believe that our results will continue to improve in both the short and long term.

Before I open it up to questions on I want to remind all of you of our upcoming virtual analyst and Investor day that we will be hosting next Wednesday June 2nd starting at 11, a M eastern time.

We will showcase many of our team members products and our communities and you will become much more familiar with our operations and our culture and we hope you will come to understand what makes toll brothers, such a special company and how much we have evolved in the past decade.

I'm really looking forward to it and I hope you'll be able to join us on Wednesday.

I'd also like to encourage you to take a look at our recently released ESG report, which is now available on our website.

This is our first report and it includes important information regarding the many initiatives we have taken with respect to ESG.

And finally I'd like to thank all of our toll employees for their contributions to our great results this quarter.

Couldnt have achieved these results without your hard work dedication and commitment to providing our customers on experience unmatched in the homebuilding industry.

With that drew let's open it up for questions.

We will now begin the question and answer session.

As a reminder, the company is planning to end the call at 930, when the market opens.

During the Q&A, please limit yourself to 1 question and 1 follow up.

To ask a question.

You May press Star then 1 on your Touchtone phone.

If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then 2.

At this time, we will pause momentarily to assemble our roster.

The first question comes from Mike Dahl with RBC capital markets. Please go ahead.

Hi, This is Chris kalata on from Mike Thanks for taking our questions.

First question's just on the assumptions behind the greater than 20% ROE expectation for 'twenty 2.

Obviously, the strength in sales and margins are driving much of that improvement but.

Are you assuming any benefit if at all on.

Buybacks or benefits from balance sheet repositioning.

I think there is modest benefits assumed from that the big drivers of that.

That expansion in ROE.

Our revenue growth and gross margin.

Understood.

And I know you guys said you didn't want to provide.

'twenty 2 guidance, but I know last quarter, you guys spoke to expecting gross margins above 25% in the first half of the year given the strength in the exit rate is expected. This year any update you'd be willing to provide on what you're expecting specifically for the first half on gross margin.

I think in the prepared remarks I mentioned.

That are the math leads you to 25, 4%.

Gross margin for our fourth quarter and.

And we expect it to be higher than that.

In 2020.

And on I'll refer you Chris back to my comment.

In my prepared remarks, when I said, our gross margin for 2022 and overeating.

We will significantly exceed 2021.

Understood Fair enough. Thanks to my questions. Thank you.

The next question comes from Stephen Kim with Evercore ISI. Please go ahead.

Yeah. Thanks, guys I appreciate all the color.

Exciting times out there on a lot of changes in terms of the way builders are.

Pricing given the scarcity of supply and you all have obviously got a lot of experience with selling scarcity to your customer base.

But.

The auctions on the field bids.

We've kind of been hearing about as well as some builders putting in escalators for potential increases in cost.

1 of the things that I've gotten from builders when they talk about the strategies that they are concerned.

About the customer service.

Low back that implementing some of these things may generate I've got my own views on that but I would be curious.

If you could explain how you think about.

Any net potentially negative ramifications from changing altering the way in which you price.

Versus the past and then specifically with respect to escalators.

Cost escalators on your sales contracts.

That's something that you guys actually are.

Are doing or would consider doing or not.

Great question Steve.

I look forward to the days when we are able to sell everybody who wants a home 1 of our beautiful homes, but that is not today's market and.

There is precedent set of course in the resale market when.

When things are hot for.

The 5 year view of made an offer by Tomorrow night at 5 o'clock, we need your final invest in an envelope and so that occurs in and the housing market.

<unk>.

We had as I mentioned have now gone on allocation in 2 thirds of our communities because of.

Just significant significant demand that far exceeds.

Our our ability to.

Salary or our desire to sell frankly.

We want to manage our growth.

With 58% up in backlog.

And our construction teams are doing a fantastic job out there, but it is time to start taking price and managing.

Managing operations, managing demand and managing growth and so what we have done in our communities that are on allocation is basically 2 things.

Some communities have been taking a list and by the way that people on that list have been prequalified for a mortgage and they are ready to go and if we've given people a number on the list.

Mr and Mrs. Smith, Theres 20 on the list in your number 7.

And at the pace, we're going we think we're going to get to you in the month of July.

Or whatever it may be.

That's 1 way and then every couple of weeks when we offer a couple of lots we raise the price.

And we may raise at 50000, it just depends on the community.

The way, we've now migrated not in all cases, but in many.

As those people on the list that our number 712.2030 to say what the heck.

You've taken my Destiny out of my hands, you've taken the opportunity for me to buy a home away because youre not going to get to me for so long how about the resale market give me the chance like they do to give you a sealed envelope with a number.

And we actually have seen more people accepting of that because they can control their destiny.

And then the people that are further down on that list and we may not get to them for a while it's a balancing act and I'd say, it's probably right now 50.50 between working off of the VIP list in a particular order and going to final invest sealed bid now you may ask with 80% of your business.

Beans beans to be built how do you do that it's easy when you have you just put the house on the market give a base price and tell them that.

To give you an envelope.

We figured it out.

If we're going to open up 2 or 3 lots on a weekend we.

We have our price sheet.

Base price of all of the homes that you can buy from US we have the price of the the structural upgrades and of course, we have a design studio where you can go on by your finishes.

We bid a lot premiums we tell the clients.

2 lots are opening up this Saturday.

Minimum lot premium is 25000.

And put in your price for the lot premium and if you win.

You can then still have all of the choice and the special sauce of toll brothers. Because you can then pick your home off of our price sheet at our base price and you can then go through your upgrades.

Program and so that's how we're doing it.

I am confident we are treating the client well we are communicating with the client.

And it's working and it's maximizing price and its controlling growth is we want to as to your question about escalators no. We are not adding escalator provisions to our contracts sorry for the long answer, but I know, it's an important question and I wanted to give a detailed answer for you.

That's great really appreciate that Doug.

Second question on relates to margins and in.

Particularly what I'm talking about is not margin on the third quarter, but really what the margin opportunity is as you look forward assuming that the current environment doesn't anticipate very rapidly for whatever reason.

When I look back in history.

I look at the left.

The 2003 to 2005 period, which is probably the most analogous time to today in terms of pricing obviously the bone structure was much worse back then than it is today, but you know pricing back then and the industry was call. It you know.

Got the 15%, we're now running 25% year over year on the retail market. So we're running much hotter than we were even then in that period of time. Your gross margins went up about 670 basis points. So I think people may have forgotten that.

And I know that there are some things that would.

Work against you from achieving something like that over the next couple of years.

1 is that come to mind are youre, increasing affordable luxury focus.

As well as the material cost inflation that you're fighting against but probably still incurring to some degree and possibly.

Change in your land.

Investment just sort of trying to go to a more just in time. So as we think about what you saw during that period of time in terms of pricing on the margin impact.

And you assess these 3 things that I laid out that are sort of drags to your margin can you dimensionalize some of those for us.

And help us understand how significant some of these headwinds theoretically might be to margin expansion versus the opportunity from price.

Sure.

Let's start with land, yes, as you can tell by our prepared comments and what we've been talking about lately we are.

Structurally changing how we buy land we are very very focused on ROE I know its shining through and we're proud of it and it will continue and it's permanent.

Right now those 70000, plus lots that we control and I mentioned it most of those lots for control were put under contract pre pandemic.

Before prices ramp so we're in a really good position, where we can we can be selective.

And how we grow the land bank.

And I think that is not maybe the <unk>.

Headwind you suggested as much as it would appear for that reason.

Affordable luxury which is a growing part of our business and we thought would be lower margin than our luxury business is not.

Because of the strength of that market.

Because of the $70 million plus millennials coming out.

The affordable luxury margins are right there with our with our core luxury business are moved to the south are moved to the mountain States.

<unk> health has been a tailwind to margin.

Because those are growth areas in this country, we have had pricing power.

And while 1 would think.

Tampa to Jacksonville, you go to Atlanta.

You're going to have a little margin compression not the case because of the strength of those markets on how this country is migrating and the Pacific, California, Oregon and Seattle.

This 40 million people on California, Theyre not all leaving we are has seen tremendous.

Growth, 80%, plus 85% order growth Q2, coming out of California with significant pricing power. So I'm not going to comment historically on what happened to gross margin. Thank you for being with us for that length of time I remember those good old days.

But we are certainly feeling.

A strong tailwind.

I'm not going to speculate on where lumber goes but Marty talked at length about how we are fully budgeted with contingencies for the building costs that have been rising.

We are also we also pushed back with our trades, if a plumber want the price increase.

Not fair that he asked for it on a house in backlog, we sold that house to that client with that plumbers contract in place and he will honor that contract for that price. If we need to talk about on increase on the next home sold that weekend, then properly budget for that may be a fair conversation, we fight hard to.

That backlog and it's working.

That makes a lot of sense. Thanks, Doug by the way I Miss spoke it was 670 <unk> on the operating margin not the gross that's what I meant but thanks for the fulsome answer I really appreciate it.

Very welcome thanks.

The next question comes from Michael Rehaut with Jpmorgan.

Please go ahead.

Hi, Thanks, good morning, everyone and congrats on the results.

Okay.

Hi.

So yes.

I wanted to.

My first question I guess.

It really is around.

The relocating buyers.

Yes indifferent.

That helps.

<unk>.

Consumer except from our price increases.

Perhaps coming from higher cost the lower cost per day.

Sure.

Coastal and inland.

I was curious.

New craft any of that.

For example out of state buyers from Florida.

Or have you.

Sure.

In our western markets relative to California.

And how that might have changed.

Changed over the last year or 2.

Sure we do track it.

We can.

And.

And those markets that are seeing more and more.

The northeasterners in the Californians and that's not the only migration rate, but those are the 2 big ones.

<unk> got the Boston to Washington, DC corridor.

That is.

That's moving south.

Moving west and <unk> got the Californians, who are.

We're moving east somewhere.

No where to go west.

<unk>.

Yes.

We're at about.

40% of our sales.

And those accepting markets.

Are people coming from what I just mentioned now.

There's some markets that are 50%, 60% theres, others that may be lower but thats call. It about almost half branches just shy of half of the buyers are.

Coming from out of state.

And its the phenomenon is fascinating we've never seen migration like this.

It obviously caught wind early in the pandemic when people thought they would be.

Working in their sweat pants from there.

Their kitchen table forever.

But its continuing as people now realize that well maybe I'm not at my kitchen table every day of the week.

But Austin, Texas, a pricing in Austin, which is.

The pricing power of Austin, which is number 1 in the country is driven by California.

Plain and simple the pricing power of Boise, Idaho of Reno, Phoenix or Vegas of Florida.

We're in Charleston, we're in Greenville, South Carolina, Atlanta, Raleigh, Charlotte, we need answers, it's the obvious market Denver I mean, this can go on and on this I need to cut it off here. So.

They they're moving from areas that are very expensive that homes are expensive that taxes are high.

And.

It's giving us more power to raise the price without affordability issues been.

Apparently the traffic is holding up yes, a year ago could the California have gotten 1 of our homes in Boise for 400 and as it now 600, yes, but it's a million dollar house. They are trading out of in California, or maybe it's 1 million to now and it was $1 million a year ago and so there is and there.

Monthly payment is so much less because of the tax structure. So.

We are.

We're very happy and we're benefiting from these migration patterns from expensive to less expensive.

Alright.

That's helpful Doug.

So really fascinating pattern, but I think it's accelerated into euro as you're pointing out.

I guess, secondly, I just wanted to shift a little bit to Roe.

And.

The goal that you have set for 2002.

You mentioned earlier, Marty that yes, the big driver.

Our improvement drivers will be revenues and gross margin.

You also mentioned earlier at some point.

In the past that.

In your prepared remarks that you.

Become more programmatic.

On your stock repurchases.

Just wanted to get a sense if possible what you mean by programmatic demand.

No.

On stock repurchases.

The prior couple of years the boom.

Somewhat sizable.

1 quarter, then more modest prior and subsequent quarters.

Yes.

Thinking about maybe 1 or 2 million shares on a quarter here.

Something on that type of a run rate or any type of rough overall spend on type of directional guidance.

Would be helpful.

Sure.

Mike We are focused on return on equity and shareholder value now more than ever before.

On the rough magnitude you outlined over 1 million to 2 million shares.

Probably probably a good entry point.

Particularly as we look at I'll say quarters other than the first or second when we're generally using more cash in operations.

And Conversely, Q3, and Q4 is when we generate a lot more cash so we're going to maintain some flexibility we've been opportunistic in the past, we're going to be more programmatic in the future.

Great. Thank you very much.

Youre very welcome Mike.

The next question.

<unk> come from Alan Ratner with Zelman Zelman and associates. Please go ahead.

Hey, guys. Good morning, Thanks for taking my questions.

Doug.

First I'd love to maybe just expand a little bit on the out of state by your topic.

So very interesting the data you gave there.

First I'm curious I might have missed it but the 40% 50% number you gave kind of where where that's running at today, what was that pre COVID-19 and I guess the follow on to that would be.

I'm sure, it's a little bit difficult to look at this on a.

Weekly or monthly basis, but now that offices are starting to open back up in the northeast and schools are not going to be remote and the fall have you heard any chatter about that.

Slowing any bid on the margin more recently.

So on your first question.

About 30% pre Covid and in Florida assets from these markets I mentioned.

That have been for some time accepting out of.

<unk> because of the fact that it was more it was lifestyle in Florida by places like Austin would've been tremendous job growth.

So, let's let's call. It 30 to just shy of 50 is probably the move from pre COVID-19 to today.

And.

You would think.

Now, we would see less from migration for the reasons today.

9 months ago for the reason you just described that we are not.

And I don't I don't have a great.

Answer as to why that is.

Think people.

For example, an IDE.

Now I'm on the age where you start thinking about where is that whereas the retirement home going to be and I. Just know so many people that are doing that earlier and they're doing that while they are still working because they want to set it up at 55 instead of <unk> 63.

And they know they don't have to be in.

And on Wall Street every day of every month and they can figure out it's going to be a week in Florida on fly back for the next week, but I'm going to begin to set up the next phase of my life.

So I think part of that as.

As why this continues to sustain itself.

Even as people go back to work I know our company.

While we are going we believe we are better when we are together and thats become a tagline of toll brothers that we begin to come back together. We of course will be flexible, we're not going to be able to hire people and retain people unless we show some level of flexibility and so I think people recognize that.

In most.

And.

And therefore, I think this migration pattern to live where you want.

And not where you're tethered is.

Is continuing.

I also think Alan Youre seeing more.

Companies move their operations to lower cost of operations areas.

The migration of corporate headquarters to Texas is well documented and I think Youre also seeing companies, while they may not move the headquarters.

See where the people are going and they'll move of back office for our support.

Function to that area. So people can be in an office if not the headquarters office as part of their work day.

Okay got it.

I appreciate those thoughts.

Second I'd love to drill on a little bit more on the shift in your spec strategy. Because I think this is going to be something that's really interesting to track over the next few quarters. So I know you are not a expect building to begin with but even kind of delaying the sales of some of those homes I would imagine at some point later this year youre going to have more specs coming to them.

Market that are closer to completion.

The shift is probably been even more dramatic from some other builders I mean, some builders that are primarily built to order builders have completely shifted their sales strategies.

Our effectively building up spec homes, and we'll release those later in the year.

And in addition, you guys are talking about 10% community count growth between now and the end of the year on other builders are as well so.

I'd love to hear your confidence on your thoughts about.

What the pricing power will be later this year when it seems like as this shift in sales strategy unfold and you haven't.

More inventory coming to the market.

Recognizing that there is a ton of demand today, but do you think the pricing power will still be as strong as it is today once all of.

These new communities and specs ultimately get listed for sale.

Yes.

Right.

Youre not going to see what you describe is a larger number of finished specs coming to market later in the year, we actually had <unk> hundred spec.

And we define a spec actually we don't hate that word around here to <unk> quick move in.

We had we had 500 <unk>.

Last year, and that's defined as framing has begun and we have a thousand today, so because of how hot the market is.

No we are actually under supplied at the moment, but we are catching up because we are foreseen.

And requiring all divisions to build <unk> into their backlog.

Every month, and so I think it will be fairly consistent.

And I am not worried about all of a sudden a lot on.

Finished homes come to the market and overlay I hope the market is still in good shape.

I think it's formulaic I think it's progressive and I think it's fairly.

On consistent and the number that we're starting the number that we're selling.

We just we would sell.

We sell a spec in frame.

But not today because to sell our second frame. The market is so hot somebody that truly wanted a new home custom designed well if all they can get at the house had frame where they can't do the custom designed on the structural changes. They can only go to the design studio for the finishes they're going to grab it.

And we would rather.

Have those people wait their turn to buy the new home and.

And save that spec home until it is beyond drywall.

Obviously, we know every single cost at that point without any issue I mean, I already gave the story of how we pushed back on the plumber that once the price increase on backlog, but the house gets beyond dry wall. We're in fantastic shape. When it comes to cost, but more importantly, we're riding on appreciating market and we will make more money drive.

More margin improve Roe.

By selling that house a bit later at a higher price.

And that strategy has been in place now for a while we're just.

A bit more obsessed about it and it's mandatory now that you have to hold us back until that point.

Understood. Thanks, a lot.

Welcome. Thank you.

The next question comes from Deepa Raghavan with Wells Fargo. Please go ahead.

Hey, good morning, everyone great quarter.

Can you Doug.

Thanks, Doug can.

Can you talk about.

Yeah luxury expense versus active level, you mentioned from abroad, but also some of the trends you're witnessing there.

Just talk about how youre actually level category for example, which is pretty strong.

How do you think that trend this year and next new year's and curious how that could benefit your margin on your balance sheet.

Sure so when I break down on the 85% order growth in Q2.

Portable luxury was up 103% luxury was up 48%.

Each targeted empty nester.

Baby Boomer crowd was up 135%.

As a smaller city living operation was up 171 so.

Portable luxury.

We'll be the fastest growing part of toll brothers as we focus more on more on the $400 to $6.50 price point.

For the 35 year old millennial.

<unk>.

Youre going to see you're going to see that.

That grow fastest.

And as I mentioned earlier, the gross margin out of that business.

Is now matching our traditional luxury business. So we're very very pleased with that we knew would have higher Roe.

Because the land is less expensive and we turn houses faster because they are smaller we just.

Obviously delighted that the gross margin.

<unk> has been higher than we had thought so going forward.

We're not giving up on luxury and as those millennials age more and more they're going to be buying their second and third home, it's not that far away when.

We've got the 42 year old millennial who is.

Who is ready to move up and so and then we worked hard on this brand and I Hope you all join US next Wednesday, because I am sure based on how hard we're working here you are going to be blown away by some of the product videos and photography and presentations by our management team and just how we do.

Do it and so affordable luxury with number 1 grower, obviously east targeted empty nester without boomer crowd is doing better and better because they are on the sidelines for a long time through COVID-19.

In the next quarter or 2 the strongest performing segment.

Does it depend on lots of the low pace from a year ago correct.

Right, but.

I know, we talk about it but we do have the widest offering in the industry.

You can buy at $300000 House from toll brothers and you can buy a 5 million dollar houses and that why and offering and the wider geography.

With all these new markets we've mentioned.

Is what gives us such great confidence and excitement about the outsized growth that we can achieve.

Got it I'm definitely looking forward to your Investor day presentation.

On my follow up question is.

On.

On pricing mostly.

Little bit 2 parts what are your thoughts on keeping price.

When commodity start to moderate.

That's 1 part of the second part of the pricing question is right now you're tapping your orders per community.

When do you when do you expect to be caught up.

Appreciate it if you have any thoughts on when you expect to be caught up.

You know your lot position, what they're taking right now you're on takeaway you should probably have an idea.

When do you expect to be caught up.

So once you get to that equilibrium level.

This enables you to lift cash with pricing.

Then Phil.

Will pricing start to get confidence there would you start to think about probably low RIN price, especially when that commodity start to moderate.

A couple of points there, but I appreciate any thoughts there.

Sure. So we have never.

Based on the price of our homes from the cost to build them.

It's not the business model of toll brothers and I don't believe it's the business model.

Many builders out there we sell we do detailed market comps.

On.

How much can we sell the home for what will the market bear.

What are the other new home communities by other builders selling for what is the resale market selling for our business. We will drive this price as high as the client will pay.

If if cost moderate and.

And we still have the demand at the levels. We have today no. We're not stopping our strategy of allocation, we're not stopping our price increases are sealed bid process.

It is it is completely based upon market demand and market pricing with respect to when we get caught up.

Obviously, we're moderating sales right now as we have discussed the beauty is.

At the moment, we control how.

How much we sell so we have the levers in place to decide.

Hey, let's opened 5 this weekend.

It's all it's all right now, it's all internal and we can make those decisions and as this backlog.

Up 57% starts coming down a bit.

And we have a little bit less.

Pressure on production, where the next home sold can be delivered not in 13 months or not in 12 months, but in 10 months, then youll start seeing more and more of our communities open up.

As I said, the way I would like them to be but we can sell everybody out.

But the pricing decisions.

We will not be based on anything but the level of demand in the market comps.

And depot, our allocation decisions our community by community right now and coming off allocation will be community by community as well not overall company.

Evaluation right.

And the last questioner today will be Truman Patterson with Wolfe Research. Please go ahead.

Hey, good morning, guys and thanks for taking my questions I appreciate it so.

First I feel like I might be beating this to death, a little bit, but look and clearly lumber costs are a big topic of conversation.

It sounds like you all have a lot of confidence in your gross margins going out to 2022.

As of today spot lumber costs as of May labor et cetera et cetera.

You all have more than enough pricing in hand today to offset all of your costs at today's levels and then.

Given all of these bidding processes that you all have been talking about.

Excluding mix shift to the affordable.

Do you think core pricing was up in the quarter or year over year.

I think the best way that we look at the <unk>.

Pricing versus cost equation, which is where I think youre going Truman as overly simplify this we have an $800000 home are selling.

We have a 25% gross margin.

And we have around 25% of the costs that are associated with the land and improvements and so those have been paid for previously.

So.

It's a 2 for 1 kind of equation.

A 2% cost increase of 2% cost increase can be offset with a 1% price increase when youre looking at those cost increases from a labor and materials perspective.

Okay, Yes.

Yes.

I got that on the core pricing.

Quarter over quarter year over year do you all have that metric.

When you say price.

Sales price sales price, yes, the sales price.

Okay.

Alright, and on the affordable luxury I know its moved to 30% of your sales.

Is this rolled out nationwide are there any new metros.

Is there any additional expansion and where do you think you could ultimately take that too and Doug you made a comment I believe in the prepared remarks about the streamline construction process.

And possibly bringing these techniques.

To your other product segments could you just elaborate a little bit on that.

Sure. So affordable luxury is now rolled out nationwide that doesn't mean every single 1 of our 50 markets.

Has it but it is in place.

Around the country.

We have markets that are <unk>.

Primarily all affordable luxury Jacksonville, Boise as 2 obvious examples we have other divisions that sell 2 million dollar houses and they also have a significant affordable luxury.

Business example, Phoenix.

And Youll continue to see new markets that may be lower price..1 example, we're going to announce shortly that we're announcing today.

We're going to be reentering, San Antonio San Antonio was primarily on affordable luxury market.

Throughout as Jacksonville land.

But theres going to be other markets that we will enter that will be both luxury and affordable and you will see more and more affordable luxury in the existing footprint.

With respect to cycle time, our cycle time came down again from the first quarter to the second quarter by about 10 days that was a combination.

Of our operations teams.

Clicking and we have restructured how we operate in the field.

And more affordable luxury by by its nature, we turn those houses faster. So the things we are learning.

On the affordable luxury Marty talked a bit about optimizing our plants and we're going to talk more about this next Wednesday, we're not changing the buyer experience, we're not pulling the opportunity of choice the opportunity to upgrade your home out.

Just optimizing the plans, we're making them more efficient, we're making them better better can also be less expensive better can also mean, you can build faster and thats what optimization is all about so.

Even though we're hot and we're busy.

We are actually building houses faster than we ever have.

And it's a combination of all those things I just mentioned.

Perfect. Thank you guys for the time and good luck in the upcoming quarter.

Thank you chairman.

Just a reminder, the market is opening so this concludes our question and answer session I would like to turn the conference back over to Doug year Lee for any closing remarks.

Drew I. Thank you thanks, everyone for your interest and support I'm, sorry that we didnt get to every question, but next Wednesday, there will be plenty of opportunity during our 3 hour analyst and Investor day for Q&A, we have built Q&A and throughout the day and I'm really as I said excited.

Sure sure next Wednesday with all of you.

So proud of this company and just.

So proud of what we're going to be able to show you next week about how we operate and most importantly, the people.

Within this company that do all the work so well.

Hope you can join us and thanks again have a great balance of the weekend weekend and we'll see you next week.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Okay.

[music].

Good morning, and welcome to the toll brothers second quarter earnings Conference call.

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I would now like to turn the conference over to Douglas yearly CEO. Please go ahead.

Thank you Jerome welcome and thank you for joining us with.

I caution you that many statements on this call on forward looking based on assumptions about the economy world events housing and financial markets. The impact of the pandemic interest rates inflation and many other factors beyond our control that could significantly affect future results.

<unk> points year over year, and was 100 basis points above our guidance.