Toll Brothers Inc. (TOL)

F3Q12 Earnings Call

August 22, 2012 2:00 pm ET

Executives

Douglas C. Yearley, Jr. – Chief Executive Officer and Director

Martin P. Connor – Chief Financial Officer and Treasurer

Robert I. Toll – Executive Chairman

Kira Sterling – Chief Marketing Officer

Gregg Ziegler – Senior Vice President

Joe Sicree – Chief Accounting Officer

Donald Salmon – President of TBI Mortgage Company

Analysts

David Goldberg – UBS Securities LLC

Ivy L. Zelman – Zelman & Associates

Rob Hansen – Deutsche Bank Securities, Inc.

Stephen East – ISI Group

Joel T. Locker – FBN Securities, Inc.

Stephen S. Kim – Barclays Capital, Inc.

Adam Rudiger – Wells Fargo Securities LLC

Joshua Pollard – Goldman Sachs & Co.

Jade J. Rahmani – Keefe, Bruyette & Woods, Inc.

Michael Rehaut – JPMorgan

Dan Oppenheim – Credit Suisse

Kenneth Zener – KeyBanc Capital Markets Inc.

Jack Micenko – Susquehanna International Group, LLP.

Buck Horne – Raymond James & Associates

Alex Barrón – Housing Research Center LLC

Desi DiPierro – RBC Capital Markets

Timothy Jones – Moloney Securities Co., Inc.

Presentation

Operator

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Good afternoon. My name is Jackie, and I will be your conference operator today. At this time, I’d like to welcome everyone to the Toll Brothers Third Quarter 2012 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. (Operator Instructions)

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

Douglas C. Yearley, Jr.

Thank you, Jackie. Welcome 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; Don Salmon, President of TBI Mortgage Company; and Gregg 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 been 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 announced results for revenues, contracts and backlog for our third quarter ended July 31, 2012. Our third quarter net income was $61.6 million, or $0.36 per share, compared to $42.1 million, or $0.25 per share in fiscal year 2011’s third quarter.

Our net income included pre-tax inventory write-downs of $3.1 million and a net tax benefit of $18.7 million, compared to pre-tax inventory write-downs of $16.8 million, a $3.4 million pre-tax loss from early repurchase of debt and a net tax benefit of $38.2 million in fiscal 2011’s third quarter. Pre-tax income was $43 million, compared to $3.9 million in fiscal 2011’s third quarter.

Fiscal year 2012 third quarter total revenues of $554.3 million and homebuilding deliveries of 963 units rose 41% in dollars and 39% in units versus fiscal year ’11. Net signed contracts of $674.4 million and 1,119 units rose 66% in dollars and 57% in units.

Backlog of $1.62 billion and 2,559 units rose 59% in dollars and 44% in units. We ended this quarter with $877.4 million of cash and marketable securities and $819.2 million available under our bank credit facility. Our net-debt-to-capital ratio was 27.5%.

While we have been opening on average 1.5 communities per week, we are selling out of existing communities and continue to see modest delays in some openings due to the complexities of the local land entitlement game. For these reasons we are modifying our community count projects and now expect to end fiscal year 2012 with between 225 and 235 selling communities, which is a slight decrease from our previous guidance of 230 to 245. Community count projections for fiscal year ‘13 will be discussed on our fourth quarter call.

We're enjoying the most sustained demand we've experienced in over five years. In the past three quarters, the values of our signed contracts were up 45%, 51% and now 66% compared to fiscal year 2011. Three weeks into our fourth quarter, our non-binding reservation deposits, a precursor to future contracts are up 59% compared to the same period in fiscal year 2011.

On a per community basis, our net signed contracts of 4.87 per community was the highest for the third quarter since 2006, up 39% versus 2011, 32% versus 2010, 37% versus 2009, 80% versus 2008 and 42% versus 2007.

In addition, the markets that we would expect to be recovering, such as New York City, the entire Boston-to-Washington DC corridor, Dallas and Huston, Texas, San Francisco, Silicon Valley and costal Southern California, we have also seen improvement in areas written off by [some for debt], such as Phoenix, the Florida Gold Coast, and even the Detroit suburbs.

The pace of our contract growth has far exceeded the national housing data as we are gaining market share. We attribute this to the strength of our brand, our excellent land position, our proven reputation for reliability and quality, our strong balance sheet and our seasoned management team.

Additionally, as the only national home building company focused on the luxury market we are facing limited competition from the capital constrained small and mid-size private builders, who are our primary competition.

This quarter we announced two exciting joint ventures, in late June, Mayor Bloomberg announced the team of Toll Brothers and Starwood Capital had been named to develop a luxury eco-friendly hotel in condominium community in Brooklyn Bridge Park on New York City East River.

This site will include a 200 room hotel, which will carry Starwood Capital's one hotel brand and 159 condominium residences marketed under the Toll Brothers City Living banner. The development will feature unobstructed views of Lower Manhattan, the Brooklyn Bridge, the New York Harbor and the Statue of Liberty. We expect to begin condo sales in the spring of 2014.

Also in late June, we announced the joint venture with Shea Homes to develop Baker Ranch in Lake Forest, Orange County, California. The project which is next to Irvine will be a highly amenitized size master-plan community with approximately 2,000 homes. Because it is a JV, the lots are not in our reported lot count. We expect to begin home sales in the spring of 2014.

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