Toll Brothers, Inc. (TOL)
Q3 2008 Earnings Conference Call
September 3, 2008 2:00 pm ET

Executives

Robert I. Toll - Chairman and Chief Executive Officer
Joel H. Rassman – Chief Financial Officer
Joseph R. Sicree – Chief Accounting Officer
Donald Salmon - President of TBI Mortgage Co.
Greg Zeigler – Vice President of Finance

Analysts

Michael Rehaut - JPMorgan
Kenneth Zener - Macquarie Research Equities
Nishu Sood - Deutsche Bank
David Goldberg - UBS
Ivy Zelman - Zelman & Associates
Douglas Kass - Seabreeze Partners
Stephen East - Pali Capital
Josh Levin - Citigroup
Dan Oppenheim - Credit Suisse
Chris Hussey - Goldman Sachs
Buck Horn - Raymond James
Alex Barron - Agency Trading Group
Joel Locker - FBN Securities
Andrew Fenton - Cliffwood Partners
Harper Phillips - Inner Grid

Presentation

Operator

Good afternoon. My name is Nicole, and I will be your conference operator today. At this time, I would like to welcome everyone to the Toll Brothers'' Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. If you would like to ask a question during this time simply press star then the number one on your telephone keypad. If you have already done so, please press the pound sign now then press star one again to ensure your question is registered. If you would like to withdraw your question press the pound key. Thank you. Mr. Toll, you may begin your conference.

Robert I. Toll

Thank you Nicole. Welcome everybody. Thank you for joining us. With me today are Joel Rassman, Chief Financial Officer; Fred Cooper, Senior Vice President of Finance and Investor Relations; Joe Sicree, Chief Accounting Officer; Don Salmon, President of TBI Mortgage Co.; and Greg Zeigler, Vice President of Finance.

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.

Today we reported final results for our third quarter ended July 31, ''08. Since our release is posted on the Internet I will just touch on the key results. In the third quarter ''08, we generated a net loss of $29.3 million or $0.18 a share diluted. This included pretax write downs of a $139.4 million, excluding write downs fiscal year ''08''s third quarter earnings were $55 million or $0.35 per share diluted.

In fiscal year ''08''s third quarter revenues of $797.7 million were down 34%. Third quarter backlog of $1.75 billion was down 52%, and net contracts of $469.9 million were down 35% versus fiscal year ''07''s third quarter.

We ended our third quarter with over $1.5 billion in cash and over $1.3 billion available under our bank credit facility, which matures in March 2011. Our net debt-to-capital ratio at third quarter end was 18%, our lowest level. We have trimmed our land position by 47% to 48,500 lots owned and auctioned compared to 91,200 lots in our peak at fiscal year ''06''s second quarter end.

It appears that per community traffic and deposits at our sites over the past several months have been stabilizing, albeit at historic lows. It also appears that conversion rates from non-binding deposits to signed contracts have returned to more normal historic ranges this quarter, although absolute deposits are still very low. We also note that our 195 cancellations this quarter, although greatly elevated from our historic norms were the lowest in nine quarters.

I do not mean to suggest that things can’t get worse, but it is worth noting some sunlight during otherwise stormy conditions.

We observe that these indicators have occurred in the face of a particularly difficult year that has included explosive energy price increases, rising unemployment and severe mortgage and credit conditions. Even so, we believe that there is pent-up demand, when we have held promotions many more buyers than usually have come out and put down deposits. We are now completing the third year of the worst housing market since we started the business in 1967.

Weak consumer confidence has kept many potential buyers from taking advantage of the current buyers market. Tightened mortgage lending standards have sidelined others. Single family housing starts have decreased by approximately 65% from their peak in January ''06. Starts now stand at their lowest level since January 1991. We believe that most public builders have sold off most of their spec inventory, which eventually should help stabilize home prices. However, we currently have to contend with foreclosures as the new low price competition.

Once the supply of foreclosed inventory is exhausted, we believe that favorable demographics will kick in and the housing market in general will begin to recover. Unfortunately, we cannot predict when that will occur. These beneficial demographics include a projected continuing increase in household formations and the number of affluent households, baby-boomer demographics should provide a basis for greater demand for second homes. A maturing generation of echo boomers will be positioned to seek the American dream of home ownership, and continuing growth in immigration should contribute to the demand for housing.