This summary is based on the second quarter fiscal 2008 earnings call conducted by Toll Brothers, Inc. (TOL) on June 3, 2008.
Management:
Chairman of the Board, Chief Executive Officer: Robert I. Toll
Chief Financial Officer, Executive Vice President, Treasurer, Director: Joel H. Rassman
President of TBI Mortgage Co.: Don Salmon
Key Investors Issues
- EPS loss was 59 cents a share compared to profit of 22 cents a share last year.
- The net loss was $93.7 million compared to net income of $36.7 million in the year-earlier period.
- Revenue fell to $818.8 million from $1.17 billion last year.
Second Quarter Highlights
The company generated a net loss of $93.7 million, or 59 cents per share.
- This included pre-tax write-downs of $288.1 million, $85 million of which was attributable to joint ventures. After-tax write-downs totaled $174.6 million, or $1.06 per share. Excluding write-downs, earnings were $81.3 million, or 49 cents per share.
- For comparison, fiscal year 2007 second-quarter net income was $36.7 million, or 22 cents per share, including pre-tax write-downs of $119.7 million, $72.9 million, or 44 cents per share after-tax. Excluding write-downs, 2007’s second-quarter earnings were $109.6 million, or 66 cents per share.
Total revenues of $818.8 million were 30% lower than fiscal year 2007’s.
- Backlog at second-quarter-end of $2.08 billion was 50% lower than fiscal year 2007’s and 13% lower than fiscal year 2008’s first-quarter-end backlog.
- Gross contracts of $730.5 million and 1,237 homes were 49% and 39% lower respectively than fiscal year 2007’s.
- The company had 308 cancellations totaling $234.1 million, compared to 384 cancellations totaling $274.7 million in fiscal year 2007’s second quarter.
- Net contracts after cancellations totaled 929 homes, or $496.5 million, which were lower by 44% in units and 58% in dollars than fiscal year 2007’s.
- The average price per unit of gross contracts signed was $590,000 compared to $711,000 in 2007’s second quarter and $634,000 in fiscal year 2008’s first quarter.
- The lower average price was due to a combination of factors: higher incentives; a product mix which included a higher percentage of contracts from active adult and other lower priced communities; and fewer sales in high-priced markets such as California, where the market has slowed significantly, and Manhattan, where the company is temporarily sold out of available inventory.
- The average price per unit cancellations was $760,000. The effect of these cancellations, coupled with the factors above, was to reduce the average price of net contracts in fiscal year 2008’s second quarter to $534,000 per unit. This compared to $580,000 and $557,000 respectively in fiscal year 2008’s first quarter and fiscal year 2007’s fourth quarter, and $710,000 on year-ago in fiscal year 2007’s second quarter.
- The company ended with 51,800 lots owned and optioned compared to 91,200 at peak at the end of the second quarter of fiscal year 2006. The company ended 2008’s second quarter with 300 selling communities compared to 315 at 2008’s first quarter end and peak of 325 at fiscal year 2007’s second quarter end. The company expects to be selling from 290 communities by fiscal-year-end 2008.
- The company finished this second quarter with a 22.7% net-debt-to-capital ratio, and over $2.5 billion of available capital comprised of over $1.23 billion of cash plus over $1.27 billion available under bank credit facility, which expires in 2011.
- Demand continues to be weak in most markets as clients worry about selling their existing homes or entering the market before prices stabilize.
Home-building cost of sales as a percentage of traditional home-building revenues before interest and write-downs was 75.2%.
- This was higher than 2007’s second quarter cost of sales of 73.1% and higher than 2008’s first quarter at 74.6%. The decrease in margins or the increase in cost of sales from the first quarter was principally a result of higher incentives and product mix.
- Interest expense was 2.8% of revenues, which is 30 basis points higher than 2008’s first quarter and principally a result of inventory turning less quickly while there is less inventory under construction over which to spread all of the interest costs. Interest expense as a percentage of revenues will probably continue to trend up for the rest of the year.
- The pretax write-downs were $288.1 million, which included $85 million of write-downs attributable to joint ventures and $7.2 million attributable to options as the company continues to reevaluate, renegotiate, and in some cases walk away from options.
- Approximately two-thirds of the second quarter write-downs, or $194 million, were in Nevada, Florida, and California.
- SG&A was $108.7 million, approximately 13.3% of revenues, down from the $121.3 million or approximately 14.4% of revenue expensed in the first quarter of 2008, and the $130.4 million, or approximately 11.1% of revenues expensed in the second quarter of 2007.
- Other income was $60.1 million, including approximately $40.2 million attributable to the proceeds of a condemnation judgment, $9.7 million of retained deposits, and $7 million of interest income.
Year-to-Date Financial Highlights
- The company generated a net loss of $189.7 million, or $1.20 per share, which included pre-tax write-downs of $533.6 million, $112.8 million of which was attributable to joint ventures. After-tax write-downs totaled $324.9 million, or $1.98 per share. Excluding write-downs, earnings were $138.6 million, or 84 cents per share. 2007''s six-month net income was $91 million, or 55 cents per share, including pre-tax write-downs and a $9 million first-quarter goodwill impairment, together totaling $225.6 million ($137.4 million, or 84 cents per share, after-tax). Excluding write-downs, earnings were $228.4 million or $1.39 per share.
- Total revenues of $1.66 billion were 27% lower than 2007''s same-period total of $2.27 billion.
- Net contracts totaled 1,576 homes, or $871.5 million, a decline of 41% in units and 55% in dollars, compared to 2007''s same period results of 2,674 net contracts, or $1.92 billion.
Key questions from the second quarter earnings call conducted by Toll Brothers, Inc. on June 3, 2008.
David Goldberg (UBS):
What the competitive dynamics are at the high-end of the market, what you are seeing from your competitors, small or private builders?
