Toll Brothers Inc. (TOL)

F2Q12 Earnings Conference Call

May 23, 2012 2:00 PM ET

Executives

Douglas C. Yearley – Chief Executive Officer

Martin Connor – Chief Financial Officer and Treasurer

Robert Toll – Executive Chairman

Gregg Ziegler – Senior Vice President

Michael I. Snyder - Secretary and Chief Planning Officer

Fred Cooper – Senior Vice President of Finance, International Development and Investor Relations

Joe Sicree – Chief Accounting Officer

Kira Sterling – Chief Marketing Officer

Donald Salmon – President of TBI Mortgage Company

Analysts

Stephen East - ISI Group

Michael Rehaut – JPMorgan.

Joshua Pollard – Goldman Sachs.

Ivy Zelman – Zelman & Associates.

Megan McGrath – MKM Partners.

Joel Locker – FBN Securities.

Wayne Cooperman - Cobalt Capital Management

Stephen Kim - Barclays Capital

Jack Micenko – SIG

Adam Rudiger - Wells Fargo

Alex Barron - Housing Research Center

Sue – UBS

Daniel Oppenheim - Credit Suisse

Ryan O'Steen – KBW

Michael Rehaut – JPMorgan

Presentation

Operator

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Good afternoon. My name is Dawn and I will be your conference operator today. At this time, I would like to welcome everyone to the Toll Brothers Second Quarter 2012 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. (Operator instructions).

Thank you. Mr. Douglas Yearley, you may begin your conference sir.

Douglas C. Yearley

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

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.

As has become our regular practice, we are going to 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 most have read it, so I won't re-read it to you.

Today, we reported fiscal year 2012 second quarter net income of $16.9 million or $0.10 per share. Our second quarter included a $1.2 million net tax benefit, $2 million of pretax inventory write-downs and a $1.6 million recovery of prior joint venture impairments. Our second quarter revenues and home building deliveries of $373.7 million and 671 units rose 17% in dollars and 14% in units versus 2011.

Our second quarter net signed contracts of $754.7 million and 1,290 units rose 51% in dollars and 47% in units versus fiscal year 2011. The average price per contract was $585,000. We signed 5.61 units per community this quarter, the highest for any second quarter since fiscal year 2006.

Our second quarter-end backlog of $1.5 billion or 2,403 units increased 49% in dollars and 37% in units compared to fiscal year 2011. The average price of units in backlog was $624,000. This number was outsized due to the condo units in backlog, averaging $3.7 million from The Touraine, which is under construction on Manhattan's Upper East Side.

We ended the second quarter with 230 selling communities compared to 203 at fiscal year 2011 second quarter-end. We now expect to end fiscal year 2012 with between 230 and 245 selling communities, a slight decrease from our previous range of guidance. This is due to do the faster sell-out of certain communities than previously projected.

We ended fiscal year 2012 second quarter with approximately 39,500 lots owned and optioned, compared to approximately 35,900 one year ago. At second quarter-end, we had over $1.7 billion of liquidity. We had $927 million of cash and marketable securities as well as an $819 million available under our $885 million 12-bank credit facility, which matures in October 2014.

It appears that the housing market has moved into a new and stronger phase of recovery as we have experienced broad-based improvement across most of our regions over the past six months. The spring selling season has been the most robust and sustained since the downturn began. Even now, for the first three weeks of May, our non-binding reservation deposits, a leading indicator of future contracts, are running 39% ahead on a gross basis, and 23% ahead on a per-community basis, compared to last year's same May period.

The national data announced this week, which of course is always subject to revision, has been encouraging. Both new and existing home sales showed improvement and both the Census Bureau and the National Association of Realtors noted a significant reduction in supplier's inventory on the market compared to last year. In addition, the University of Michigan Consumer Confidence Index announced in mid-May climbed to its highest totals since January 2008.

We believe we are benefiting from the release of five years of pent-up demand and reduced competition in our luxury niche. Based on the experience of the past several years, we still believe buyer confidence, although improved, is fragile. Certainly, a better employment picture, encouraging housing data, more stories of multiple bidders competing for homes, and a generally positive economic tone, are helping. We believe our brand name, our well located communities and our demonstrated reliability during the downturn are enabling us to attract more buyers and grow at a faster pace than the housing market in general.

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