Toll Brothers Inc. (TOL)

TOL 
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Toll Brothers Inc. (TOL)

F4Q12 Earnings Call

December 04, 2012, 02:00 am ET

Executives

Douglas Yearley - CEO

Bob Toll - Executive Chairman

Marty Connor - CFO

Fred Cooper - SVP of Finance, International Development and IR

Joe Sicree - Chief Accounting Officer

Kira Sterling - Chief Marketing Officer

Mike Sneider - Chief Planning Officer

Don Salmon - President of TBI Mortgage Company

Gregg Ziegler - SVP, Treasury

Analysts

Joshua Pollard - Goldman Sachs

Nishu Sood - Deutsche Bank

Dan Oppenheim - Credit Suisse

Ken Zener - Keybanc

Joel Locker - FBN Securities

David Goldberg - UBS

Jade Rahmani - KBW

Michael Rehaut - JPMorgan

Adam Rudiger - Wells Fargo

Alan Ratner - Zelman & Associates

Will Randow - Citi

Susan Berliner - JPMorgan

Desi DiPierro - RBC Capital Markets

Alex Barrón - Housing Research Center

Joel Locker - FBN Securities

Presentation

Operator

Good afternoon. My name is Patrick, and I will be your conference operator today. At this time, I’d like to welcome everyone to the Toll Brothers Fourth Quarter and Year-end Earnings Conference Call. All lines have been placed on mute to prevent any background noise. (Operator Instructions)

Thank you. I would now like to turn the conference over to the CEO, Mr. Douglas Yearley to begin the conference. Sir.

Douglas Yearley

Thank you, Patrick. Welcome and thank you for joining us. I’m Doug Yearley, CEO. With me today are Bob Toll, Executive Chairman; Marty Connor, Chief Financial Officer; Fred Cooper, Senior VP of Finance, International Development and Investor Relations, Joe Sicree, Chief Accounting Officer; Kira Sterling, Chief Marketing Officer; Mike Snyder, Chief Planning Officer, Don Salmon, President of TBI Mortgage Company; and Gregg Ziegler, Senior VP, Treasury.

Before I begin, I ask you to read the statement on forward-looking information in today’s release and on our website. I caution you that many statements on this call are based on assumptions about the economy, world events, housing and financial markets, and many other factors beyond our control that could significantly affect future results. Those listening on the web can email questions to rtoll@tollbrothersinc.com.

As has become our regular practice, we are going to limit our prepared remarks to provide more time for Q&A. Since our detailed release has been out since early this morning and is posted on our website, I’m sure most have read it, so I won’t re-read it to you.

Fiscal year 2012 ended October 31. Fourth quarter revenues rose 48% in dollars and 44% in units; contracts rose 75% in dollars and 70% in units; and backlog rose 70% in dollars and 54% in units compared to fiscal year 2011 fourth quarter. Our fourth quarter pretax income was $60.7 million and net income was $411.4 million.

Pent up demand, rising home prices, low interest rates and improving customer confidence motivated buyers to return to the housing market in fiscal year 2012. As household formations accelerated and unsold home inventories dropped to record lows, the industry took further steps towards a sustained housing recovery.

We enjoyed resurgent activity across all of our product lines and in most of our geographic regions. The momentum that began in our first quarter of fiscal year 2012, built throughout the year. Sequentially over the four quarters of 2012 the value of net signed contracts rose 45%, 51%, 66% and 75% compared to fiscal year 2011 same four quarters.

Our net contracts per community same store sales, which increased 33% and 60% respectively versus fiscal year 2011 full-year and fourth quarter were the highest for fiscal year since fiscal year 2006 and the highest for fourth quarter since 2005.

Now five weeks in the fiscal year 2013, our contracts are up 34% versus fiscal year 2012 same period. Our large increase in contracts was achieved primarily through an increase in per community sales. Fiscal year 2012 contracts per community of 18.2, while up 33% from fiscal year 2011 were 36% below our annual pace from 1987 to 2006 of 28.6. Therefore as the economy strengthens, we believe there is great potential to increase sales paces per community.

We have been positively surprised that the growth in contracts, because traffic has been relatively consistent with recent years, meaning weak. We're experiencing our highest converging ratio from visitor to agreement in the history of the company, as the quality of the traffic is superb and visitors are very serious about buying. When traffic returns to normalize levels, we believe there is strong possibility of significant increases in absorptions and therefore pricing power.

We believe that publicly traded home building companies are growing market share. As the only national home building company focused on the luxury market, we are particularly well positioned. We ended fiscal year 2012 with approximately $1.2 billion of cash and marketable securities, $814.9 million available under 12 bank credit facility, and a net debt-to-capital ratio of 23.6%.

Our financial strength gives us a competitive advantage over the small and mid-size private builders in our luxury niche whose access to capital and land remains constraint. Our financial strength also gives us an advantage in buying land, as sellers know we have the appetite in capital to close transactions quickly.

Since the start of our fourth quarter, we have been seeing great deal flow in some excellent locations. Our philosophy has always been to acquire exceptionally located sites on the corner of Main and Maine. In contrast of just in time model with some land wide builders, we often take this land through the approvals, while we have an under option and then improve it. This helps increase our profit margin and enable us to position the company for the future, as we put land under control today that may translate in the revenue starting several years later.

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