Toll Brothers Earnings Call Insights: Pricing Metric Outlook and Margins Analysis
Pricing Metric Outlook
Stephen East – ISI Group: Bob, I’m glad you find our survey helpful. I think it’s – I would agree I think it’s one of the best surveys you will find out there and it gives a good reflection of what the big builders are doing. Can you just help us understand a little bit, Doug, maybe when you look at pace versus price today and compare it to how you were thinking about it a quarter or two ago, and where do you think the pricing metric goes over the next several quarters?
Robert I. Toll – Executive Chairman: Well, we of course focus very much on backlog when we decide on price increases. That’s what we spend most of our Mondays doing and of course when the backlogs are bigger and the next home sold takes longer to deliver, we’re more aggressive with pricing. So we don’t raise price by market, we raise price by community, based on the action in that community. The best sale season of course is January through April. So when you talk about looking back a quarter or two, we have just come through some terrific times where we’ve had great sales and we’ve had significant price increases. If you ask where it goes for the next few quarters, we will continue to raise price. We don’t see anything getting in the way of that. Backlogs are growing, but we are heading into the summer. So, the sales through the summer are generally not as strong as the winter, but based on what we are seeing right now in late May, I think you can expect us to continue to raise price and business will be – is and will be good.
Stephen East – ISI Group: And then if you look at…
Robert I. Toll – Executive Chairman: I want to add to the remarks started by your question. The other builders, big, small, large also have backlog slots that they look to fill, and I would guesstimate that they have filled their backlog slots as we have filled ours, which means that the next house that a guy sells is not the 10th house he’s got to produced, but the 20 or the 25th house that he’s got to produce, because he is in a situation where you can’t deliver those in less than a year, he, she or us or we say to ourselves, why not raise the price on this 26th house or this 27th. So, I think we’re in a situation where as Doug said, although the summer is slow traditionally, you probably will see price increases greater than you did a summer ago or two summers ago or even back when times were good, not when times were silly but when times were good…
Stephen East – ISI Group: If you look at – Doug, you mentioned what’s in your backlog and how long it takes you to run through it. What type of gross margin do you all have embedded now in the backlog and just sort of relate that to, I know, last quarter, you talked about the cost inflation you were seeing wasn’t giving – versus your pricing – wasn’t giving you much of a bump and sort of how that dynamic is changing, some type of magnitude there?
Martin P. Connor – CFO and Treasurer: Steven, it’s Marty. I think the margin in our backlog, we’ll say, is better than the margin we are delivering today, but I don’t want to get into the specifics. I think we’ve given some commentary on what we have raised prices in the quarter from the beginning to the end of the quarter. We want to caution that that doesn’t mean we’ve raised prices $26,000 on every house in the backlog. First, we raised prices on average $2,000, then $5,000 and then $10,000. So through the course of the quarter, we have homes that we have homes that we have contracted for that are less than that $26,000 increase, just to give you an order of magnitude. In terms of cost increases we are seeing, which is the second piece of that question, this quarter, things moderated a bit. They were only up around $700 a home. We saw lumber go up dramatically and start to come down. It’s still about half of that $700 that is lumber-related price increases. I’m sorry, is that right? No, I was looking at labor, excuse me. Lumber is even, labor is about half of that. Those are my 49-year old eyes.
Stephen East – ISI Group: I feel your pain on that one. Thank you, guys. Great quarter.
Ivy Zelman – Zelman & Associates: Doug, you mentioned that the margins, or maybe Marty, it was you, that sequentially your guidance – you actually did better than you guided for the 100 basis points sequential decline and maybe it was that you had lower margin deliver in the mix. What I guess I would wonder what happened there, obviously those homes are in backlog. It wasn’t as if you raised prices on them and should we expect that that negative mix is going to be impacting third and fourth quarter and then we’re broadly when you think about the legacy communities where you have lower margins, or you expect that those are going to be lower margins? What percent of the, I guess, next 12 months of order activity would you say is that an overhang or a better way to think of it that your active inventory?
Douglas C. Yearley, Jr. – CEO: Smart. Let me address the first two-thirds of that Ivy if I can. We’ve sold and delivered more townhomes and condos in the quarter than we had expected. Some of those condos and townhomes are in our urban product and have higher margin. So that was the good news. The other good news which turns into bad news is that some of our lower margin deliveries slid from the second quarter into the third quarter. So they will hurt the third quarter, but that is factored into the margin guidance I’ve given and their hurt on the third quarter, which is a higher revenue quarter than the second quarter, is less than it would have been in the second quarter. In terms of lower margin older communities, I don’t think we study that, but they are naturally going to be a lesser percentage of the total as we sell out of some of those and the margins we see from our more recent openings are starting to gap more positively than they had in the past from the margins in the older communities…
Ivy Zelman – Zelman & Associates: And then just broadly, your community count is kind of flat and Doug, you mentioned you expect to see community count growth in ’14. Is there delays that you’re experiencing that’s causing community count to remain flat? And then just a second part question to that, your pace when pace you talk about going back to ’03 to ’06 pace and recognizing that April and the spring has been very good for the industry, Doug, can you talk to what you think a normal pace per community per year you could expect to achieve because you’ve got higher than you normally have been and there’s been a slower pace historically versus your peers which we would expect, but you actually got closer to your peers’ pace in this recent quarter than you’ve been to before. So I kind of just want to understand what your expectations are and should that gap continue to narrow or what is the annualized pace that you’re most comfortable guiding to?
Douglas C. Yearley, Jr. – CEO: Sure. On the community count question, we are selling out of communities faster than we had anticipated because of the hot market. So we’re opening communities but the net number has stayed flat. But as Marty mentioned in his comments, the fourth quarter we see as the quarter where we begin to grow net community count and that accelerates through 2014. On pace, we have some room to go to increase pace; again it’s very community specific. We are ramping up construction teams, we can handle it. Are we bridging the gap with the others? Well, our homes are a lot more expensive, a lot more complicated. We put $100,000 of upgrades into an average house. So, I don’t think we will, and I don’t think we want to – I know we don’t want to ever get to the absorptions of the others. Remember, our mix has changed. We have more multifamily now. We’ve more townhomes. We have more urban and when you get into the higher density multifamily, you tend to have higher paces. So, be careful not to compare today’s pace with historic numbers when we were a very different company.
Ivy Zelman – Zelman & Associates: So what do you think the right pace is that we used to talk about the number of homes that you could do on an annualized basis that’s normal? And so I think that that number might not be applicable today that you’ve spoken with me about in the past. What do you think the right bogie is on an annualized basis per community with the mix changing to more attached product?
Douglas C. Yearley, Jr. – CEO: I think it’s mid-20s. Maybe with more attached it could get into the high 20s. But remember, we have communities in Florida that sell $2.5 million homes that can probably handle 12 a year. And we have jewel box active adult communities where we can handle 60 or 80 a year. So, it’s an average of many different parts of our business that are not similar but I think mid to high 20s is a good bogie.
Ivy Zelman – Zelman & Associates: Let me sneak in one more, but that was a great answer. And maybe this question is for Bob, but a lot of people that I mean where they are always talking about the fact that we are having an ageing population that soon who want to downsize and leave their large homes or go to something in a condo or even go into assisted living and we are looking at the peaking of baby boomers and concern about that impact. We certainly don’t see it in the near-term, but how are you preparing for that as a company. Is that the mix strategy that you are employing right now and continue to expect that you will move more to the mix of attached and condo living because of that phenomena?
Robert I. Toll – Executive Chairman: I don’t think it’s because of the phenomena, I think it’s because of the opportunities that are presented to us. But there is no doubt after discovering the urban business that we are doing (indiscernible) offering that is geared to not just the young professional hedge fund manager, master of the universe, but is also geared to the people that have made it and decided they want to go back to the city. And therefore, the answer to your question is we are not following what we see to be the change in the demographic. But we don’t turn down any opportunities on that basis to do large single-family luxury homes or even the executive size of the single-family home.
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