This summary is based on the third quarter fiscal 2007 earnings call conducted by Toll Brothers, Inc. (TOL) on August 22, 2007.
Chairman, CEO: Robert Toll
President TBI Mortgage Company: Don Salmon
CFO: Joel Rassman
Key Investors Issues
- EPS decreased to 16 cents a share compared to $1.07 a share last year.
- Net income fell to $26.5 million from $174.6 million a year earlier.
- Revenue fell 21% to $1.21 billion from $1.53 billion a year ago.
Second Quarter Highlights
Net income was $26.5 million, or 16 cents a share, compared to fiscal year 2006 third quarter of $174.6 million, or $1.07 per share.
Net income was reduced by after-tax writedowns of $88.5 million, or 54 cents per share. In fiscal year 2006 third quarter after-tax writedowns totaled $14.6 million, or 9 cents per share. Excluding writedowns, fiscal year 2007's third quarter earnings were 70 cents per share, down 40% from the $1.16 per share in fiscal year 2006's third quarter.
Total revenues were $1.21 billion compared to fiscal year 2006's third quarter total revenues of $1.53 billion.
- Third quarter end backlog was $3.67 billion compared to fiscal year 2006's third quarter end backlog of $5.59 billion.
Net signed contracts were $727 million compared to fiscal year 2006's third quarter total of $1.05 billion.
The company signed 1,457 contracts before cancellations in fiscal year 2007's third quarter, a 17% decline from the 1,760 signed in fiscal year 2006's third quarter.
Net of cancellations, third quarter contracts totaled 1,110 units, down 23% from 1,443 units in the third quarter of fiscal year 2006.
Cancellations totaled 347 units versus 384 units and 436 units in the second and first quarters of fiscal year 2007, respectively and 585 units in fourth quarter fiscal year 2006. Cancellations were 23.8% as a percentage of current quarter contracts, and 6% as a percentage of beginning quarter backlog, compared to 18.9% and 6.5% respectively in the previous quarter and the highs of 36.7% and 17.3% respectively in the fourth quarter of fiscal year 2006.
The company continues to focus on managing conservatively during this downturn.
- The company ended the third quarter with over $770 million in cash and more than $1.17 billion available under bank credit facility, which matures in 2011.
- Net debt-to-capital ratio at July 31 stood at 28.6% compared to 36.8% one year ago.
- The company continues to renegotiate, and in some cases reduce, option lands positions.
- The company ended this third quarter with approximately 63,000 lots owned and optioned compared to approximately 91,200 at its peak in the second quarter end of fiscal year 2006.
- The company ended the third quarter with 315 selling communities, down from 325 at second quarter end, and expects to be selling from approximately 305 communities by fiscal year-end 2007.
The company continues to wrestle with the interrelated challenges of softer demand and excess housing supply in most markets.
So far, nearly two years into the current housing slowdown, the company has continued to remain profitable and increased stockholders equity.
- The company believes build-to-order operating model has helped. In single-family communities the company typically doesn’t start a home until it has a contract in place and a nonrefundable downpayment.
- In multi-family and high-rise communities, although the company does presell, it generally is neither feasible nor desirable to wait for 100% pre-sales before breaking ground.
- Even with these policies, during this downturn the company has experienced a much higher rate of cancellations than at anytime in 21 year history as a public company.
- While cancellation rates are at the low end of the range compared to the other major public homebuilders, they are still elevated.
As a luxury homebuilder the company tries to focus on great locations with excellent schools in established, affluent markets, where approvals are often difficult to obtain.
- The company believes that in the medium and long term locations have value that the company does not wish to sacrifice to generate short-term sales volumes and cash flow.
- With no major debt maturities before 2011, and the third quarter end leverage ratio low by historical standards, the company believes it has flexibility to operate patiently in the current downturn.
- The company is concerned about the dislocation in the secondary mortgage market. It maintains relationships with a widely diversified variety of mortgage providers, most of which are among the largest.
