Toll Brothers Inc. (TOL)

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Toll Brothers, Inc. (TOL)

F3Q 2011 Earnings Call

August 24, 2011 2:00 PM ET

Executives

Douglas Yearley – CEO

Martin Connor – CFO and Treasurer

Robert Toll – Executive Chairman

Don Salmon – President, TBI Mortgage Co.

Analysts

Joshua Levin – Citigroup

Ivy Zelman – Zelman & Associates

David Goldberg – UBS

Robert Wetenhall, Jr. – RBC Capital Markets

Joel Locker – FBN Securities

Joshua Pollard – Goldman Sachs

Stephen East – Ticonderoga Securities

Jade Rahmani – Keefe, Bruyette & Woods

Megan Mcgrass – MKM Partners

Jason Marcus – JPMorgan

Ken Zener – KeyBanc

Rob Henson – Deutsche Bank

Adam Rigger – Wells Fargo Securities

Daniel Oppenheim – Credit Suisse

Michael Smith – JMP Securities

Alex Barron – Housing Research Center

Jay McCanless – Guggenheim

Presentation

Operator

Good afternoon. My name is Tamika and I will be your conference operator today. At this time, I would like to welcome everyone to the Third Quarter 2011 Earnings Conference Call hosted by Doug Yearley. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question and answer session. (Operator Instructions) Thank you.

I will now turn the conference over to Mr. Doug Yearley, CEO. Sir, you may begin.

Douglas Yearley

Thank you, Tamika. Welcome and thank you for joining us. I am Doug Yearley, CEO and with me today are Bob Toll, Executive Chairman, Marty Connor, CFO; Fred Cooper, Senior VP of Finance, International Development and Investor Relations; Joe Sicree, Chief Accounting Officer; Kira Sterling, Chief Marketing Officer; Mike Synder, Chief Planning Officer; Don Salmon, President of TBI Mortgage Co.; and Greg Ziegler, Senior VP Treasury.

Before I begin I’ll 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 you will 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 you have all read it. So I won’t re-read it to you.

The past’s result indicate some continued stabilization in the upscale housing market albeit at the label dramatically below historical levels for the fifth consecutive quarter on a pre-impairment basis. In fact this quarter we also achieved modest pre-tax profit after impairments as well. We reported fiscal year 2011 third-quarter net income of $42.1 million or $0.25 per share. Fiscal year 2011 third-quarter included a net tax benefit of $38.2 million due to the reversal of previously accrued state and federal taxes.

Fiscal year 2011 third-quarter pre-tax income was $3.9 million; excluding write-downs and debt retirement charges of $20.2 million fiscal year 2011’s third-quarter pre-tax income was $24.1 million. These were all improvements over our results of one year ago.

Fiscal year 2011 third-quarter revenues and homebuilding deliveries decreased 13% in dollars and 14% in units compared to fiscal year 2010 third-quarter results. Fiscal year 2011 third quarter net signed contracts rose 2% in dollars and units compared to 2010’s third-quarter. However, they were still well below our historical third-quarter paces. The average price of net signed contracts was $570,000, approximately the same as 2010’s third quarter.

Fiscal year 2011 third quarter end backlog increased 8% in dollars and 9% in units compared to fiscal year 2010’s third quarter end backlog. We end the quarter with nearly $2 billion of liquidity including $1.18 billion of cash and marketable securities and $778 million available under our $885 million 12 bank credit facility which matures in October of 2014.

Our net debt to capital at third quarter end was 13.9%. Our strong financial position and the value of our brand distinguish us in the luxury market as nervous buyers are exhibiting the flight quality and dependability. Our large presence in the Metro DC to Boston corridor and our high rise business in Metro New York City region give us a strong position in some of the most promising U.S. markets. Our buyers generally have very strong financial profiles which have enabled them to secure mortgage financing.

We closed on about $75 million of land this quarter, nearly half of which was for a great site at 22nd Street in the Gramercy Park area of Manhattan, which we bought at the bankruptcy auction. We are seeing some attractive land, loan and portfolio buying opportunities, however, the flow of deals is not occurring at the pace we would have expected this long into a down cycle.

On the portfolio side, Gibraltar Capital and Asset Management, our subsidiary focused on acquiring the managing portfolios of the stressed real estate loans and properties produced $4 million of profits this quarter. It is really too soon to access the ramifications of the financial volatility of the past few weeks on the housing market. While late summer is generally not the best time to sell homes, in the short run, the stock markets’ gyrations, the budget impasse and the U.S. government bond rating downgrade are certainly not helping consumer confidence. Surprisingly, gross agreements for the first three weeks of August were basically flat to last year, while trust traffic was actually up about 5%.

Gross deposits have been down about 18% for the most recent three weeks, but these were likely reduced in part by the very successful summer sales event we held over the last week in July which pulled some activity forward. There is no question our buyers’ confidence at the moment has been shaken and they maybe waiting to see what’s the next weeks or months hold. Maybe that family with the now 80 pound yellow lab, remember that dog was a puppy in 2006, will continue to delay their move to a bigger Toll Brothers home. But they like many others are becoming more and more anxious to buy when the market settles down.

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