Toll Brothers, Inc. (TOL)
Q1 2009 Earnings Call
March 4, 2009 2:00 p.m. ET

Executives

Robert Toll – Chief Executive Officer
Joel Rassman – Chief Financial Officer
Frederick Cooper – SVP Finance, Investor Relations
Joseph Sicree – Chief Accounts Officer
Don Salmon – President of TBI Mortgage Co.
Greg Zeigler – VP Finance
Kira McCarron – Chief Marketing Officer
Mark Connor – Assistant CFO

Analysts

Evan Fox – (through e-mail)
David Goldberg - UBS
Kenneth Zener - Macquarie Capital
Dennis McGill - Zelman & Associates
Dan Oppenheim - Credit Suisse
Megan McGrath – Barclays Capital
Carl Reichardt – Wachovia Securities
Michael Rehaut – JP Morgan
Rob Stevenson – Fox-Pitt Kelton
Gordon Jones – (Internet)
Nishu Sood - Deutsche Bank
Timothy Jones – Wasserman & Associates
Joel Locker – FBN Securities
Garland Buchanan – Babson Capital
Buck Horne – Raymond James
Jim Wilson – JMP Securities
Paul Gusovsky(ph) -- Pali Capital
Stuart Friore – Hunter Global

Presentation

Operator

Good afternoon. My name is Jennifer and I’ll be your conference operator today. At this time I would like to welcome everyone to the Toll Brothers first quarter earnings conference call. (Operator Instructions) All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there’ll be a question-and-answer session. If you''d like to ask a question during this time simply press * then the number 1 on your telephone keypad. If you’ve already done so please press the pound sign now, then press “*1” again to ensure your question is registered. If you’d like to withdraw your question press the pound key. Thank you. Mr. Toll, you may begin your conference.

Robert Toll – Chief Executive Officer]

Thanks Jennifer, welcome everybody and thank you for joining us. With me today are Joel Rassman, Chief Financial Officer; Mark Connor, Assistant CFO; Fred Cooper, Senior V P of Finance and Investor Relations; Joe Sicree, Chief Accounting Officer; Kira McCarron, Chief Marketing Officer; Don Salmon, President of TBI Mortgage Co.; and Greg Zeigler, Vice President of Finance, who really keeps us all straight.

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 e-mail questions to rtoll@tollbrothersinc.com. We’ll do our best to answer as many as we can. Today we reported fiscal year ‘09 first quarter results. We had a net loss of $88.9 million or $0.55 per share diluted which included pretax write-downs totaling $156.6 million. This compared to fiscal year ‘08’s first quarter net loss of $96 million or $0.61 per share diluted which included pretax write-downs totaling $245.5 million. Excluding write-downs fiscal year ‘09’s first quarter earnings were $9.6 million, $9.55 million of which resulted from the net reversal of a prior tax provision, or $0.06 per share diluted. This compared to $57.3 million diluted or $0.35 per share diluted for fiscal year ‘08’s first quarter.

In fiscal year ‘09’s first quarter revenues were $409 million, backlog was $1.04 billion, and net after cancellations, signed contracts were $127.8 million. These totals represent declines of 51%, 56%, and 66% respectively in dollars and 45%, 51%, and 59% respectively in units compared to fiscal year ‘08’s first quarter results. We ended fiscal year ‘09’s first quarter with $1.53 billion in cash compared to $956.6 million at fiscal year ‘08’s first quarter end. Our cash position was down slightly from the $1.63 billion at fiscal year ‘08’s fourth quarter end principally due to the payment in ‘09’s first quarter of previously accrued taxes and the retirement of purchased money mortgages and other debt. In addition we had $1.32 billion available under our bank credit facility which matures in March, 2011. We ended 2009’s first quarter with a net debt to capital ratio of 14.5%, our lowest first quarter end level. This compared to 26.8% at 2008’s first quarter end. Stockholders equity at fiscal year ‘09’s first quarter end of $3.16 billion was down 2% compared to $3.24 billion at fiscal year end ‘08 and 7% compared to $3.41 billion at fiscal year ‘08’s first quarter end.

Faced with a plunging stock market, weak consumer confidence, growing job losses, challenging credit markets, and a hobbled economy, we continue to focus on maintaining a strong balance sheet and significant liquidity. With this capital we hope to take advantage of opportunities we believe will arise from the current downturn. We’re beginning to see some properties come to market at reasonable prices. We have not bought any yet, but we are getting closer. Ironically now is a very good time to buy a home with the decline in home prices and historically low mortgage rates. Home price affordability is at an all time high according to the National Association of Realtors. As a result in many markets inventory is starting to be absorbed by bargain hunters. We believe there are buyers on the fence. Our recent 3.99% mortgage promotion had a dramatic effect on our website activity. Visitors to our mortgage company website which is www.tbimortgage.com, grew from 84 a day to 1,617 a day. However we believe weak buyer confidence still impedes the market. We have not yet seen a pickup in activity in our communities, other than the ordinary seasonal increases for this time of the year, and now, to do the numbers, Joel.

Joel Rassman – Chief Financial Officer

Thank you, Bob. First quarter, homebuilding cost of sales before interest and write-downs, as a percentage of homebuilding revenues was 78.3%, which was higher than 2008 fourth quarter of 76.6%. The difference is principally a result of higher incentives, higher overheads per home as a result of fewer deliveries, and some mix issues. Our first quarter interest expense including the cost of sales was 3.7% of revenues which is 70 basis points higher than 2008’s fourth quarter principally a result of inventory turning less quickly and less qualifying inventory under construction over which to spread these costs, a trend which is likely to continue.

In addition, since qualifying inventory for purposes of capitalizing interest is now lower than debt, we have $800,000 of interest expense which is also included in G&A for the first time. First quarter pretax write-downs were $156.6 million which included $143.3 million attributable to communities or land owned, $6 million attributable to joint ventures and $3.7 million attributable to options as we continue to reevaluate, renegotiate and in other ways reduce option costs. First quarter SG&A excluding the $800,000 interest charge previously discussed decreased 12% in absolute dollars to $85 million, approximately 20.8% of revenues compared to the $96.8 million approximately 13.9% of revenues in the fourth quarter of ‘08 and decreased 29.9% in absolute dollars from the $121.3 million, approximately 14.4% of revenues in the first quarter of ‘08.

First quarter other income of $11.3 million included approximately $6 million of retained deposits and $4 million of interest income. The effective tax benefit rate was approximately 43.2% for the first quarter. The first quarter benefited from the expiration of the Statute of Limitations on some previous tax provisions. When income or a loss in the quarter is small, small changes in state allocations or small changes in the estimated ordered settlements or in the expiration of Statute of Limitations of previously accrued taxes can have a disproportionate effect on the effective tax rates. The average number of shares used to calculate loss per share was 160.7 million for the three months. The creation of projections is difficult at any time and the current climate is particularly difficult to provide guidance, given the numerous uncertainties related to the entire economy, employment, and to items such as sales prices, sales paces, mortgage markets, cancellations, consumer confidence, and the potential for future impairments.

As a result we will continue not providing full guidance. However, subject to our caveats outlined here and those contained in our statement of forward-looking information included in the release, and in our other public filings we offer the following guidance. We currently estimate that we will deliver between 2,000 and 3,000 homes in fiscal 2009. We currently estimate that the average delivered price for the year will be between $600,000 and $625,000 per home. For those of you who model quarterly, we expect that the average delivered price for the second quarter will be higher than the midpoint of the range and the average prices will decrease sequentially in the third and fourth quarters.

We still believe that primarily due to continuing incentives and slower sales per community, our cost of sales as a percentage of revenues before taking into account write-downs will be higher in fiscal 2009 than it was in 2008. Additionally we believe based on fiscal 2009’s lower projected revenues, our SG&A without interest although expected to be lower in absolute dollars in fiscal 2009 versus 2008, will be higher as a percentage of revenues.

We also expect that we will have increasing interest expense included in SG&A in each of the next three quarters. At this point, I’ll turn it back to Bob.