Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Robert Toll – CEO

Joel Rassman – CFO

Greg Zeigler – VP Finance

Analysts

Nishu Sood - Deutsche Bank

Michael Rehaut - JPMorgan

Analyst for Ken Zenner - Macquarrie

Joshua Pollard - Goldman Sachs

Ivy Zelman - Zelman & Associates

Daniel Oppenheim - Credit Suisse

Stephen East - Pali Capital

David Goldberg - UBS

Arjan Shamar - Analyst

Joel Locker - FBN Securities

Megan McGrath - Barclays Capital

Alex Barron - Agency Trading Group

Analyst for Bose George - KBW

Analyst for Ivy Zelman - Zelman & Associates

Jim Wilson - JMP Securities

Toll Brothers, Inc. (TOL) F4Q09 Earnings Call December 3, 2009 2:00 PM ET

Operator

Good afternoon. My name is [Latanji] and I will be your conference operator today. At this time, I would like to welcome everyone to the Toll Brothers fourth quarter earnings conference call. (Operator Instructions). Thank you. Mr. Toll, you may begin your conference.

Robert Toll

Thank you, Latanji. Welcome and thank you for joining us. With me today are Joel Rassman, Chief Financial Officer; Doug Yearley, Executive Vice President; Marty Connor, Assistant CFO; Fred Cooper, Senior Vice President of Finance and Investor Relations; Joe Sicree, Chief Accounting Officer; Kira McCarron, Chief Marketing Officer; Mike Synder, Chief Planning Officer; Don Salmon, President of TBI Mortgage Co.; and Greg Ziegler, Vice President of Finance, who really supports all of the above people with the answers.

Before I begin I’ll 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 and knowledge that could significantly affect future results. Those listening on the web can email questions to rtoll@tollbrothersinc.com.

As I mentioned on our November 11th preliminary results call, please note that starting in fiscal year 2010, we are getting out of the pre-release business and will do just one investor conference call each quarter, which will be our quarterly earnings call.

Today we reported results for our fourth quarter ended October 31, 2009. Since our detailed release has been out since early this morning and is posted on our website, I will just hit certain highlights.

In fiscal year 09’s fourth quarter, we reported a net loss of $111.4 million, or $0.68 per share diluted. The loss included $85.5 million of non-cash pretax inventory write-downs, a pretax charge of $11.6 million due to early retirement of debt, and a $14.6 million non-cash expense for deferred tax asset valuation allowances. Excluding write-downs and charges of early retirement of debt, fiscal year ‘09’s fourth quarter pretax loss was $9.6 million.

For the full fiscal year 2009, we reported a net loss of $755.8 million or $4.68 per share diluted, which was impacted by non-cash pretax inventory and other write-downs totalling $476.7 million, a pretax charge of $13.7 million related to the early retirement of debt, and a $458.3 million non-cash expense for deferred tax asset valuation allowances. Excluding inventory and other write-downs and charges for early retirement of debt, fiscal year 09’s full-year pretax loss was $6.1 million.

We ended fiscal year ’09 with a net debt to cap ratio of 7.4%, our lowest ever, compared to 12.6% at fiscal yearend 08. At fiscal year-end 09, we had $1.91 billion of cash and marketable U.S. treasuries compared to $1.63 billion at fiscal year-end 08. At fiscal year-end 09, we had $1.38 billion available under our $1.89 billion 30-bank credit facility, which matures in March 2011.

Our fiscal year 09’s fourth quarter net signed contracts of 765 units and $430.8 million rose 42% in units and 62% in dollars compared to fiscal year 08. Fiscal year ‘09’s fourth quarter totals also exceeded fiscal year ‘07’s fourth quarter net signed contracts by 17% in units and 18% in dollars. These increases were achieved despite having fewer selling communities. During fiscal year ‘09’s fourth quarter, we averaged 215 selling communities, down 26% from 290 in fiscal year 08’s fourth quarter and down 32% from 315 communities, our fourth quarter peak in fiscal year ’07.

Fiscal year 09’s average fourth quarter net signed contracts of 3.56 units per community exceeded fiscal year 08’s fourth quarter average of 1.86 units per community by 91%. They also exceeded fiscal year 07’s fourth quarter average of 2.08 units per community by 71%. Fiscal year 09's average was also 4% above fiscal year 06’s fourth quarter average of 3.42 units per community but still well below our 20-year fourth quarter average of 6.16 units per community.

Fiscal year 09's fourth quarter homebuilding deliveries and revenues of 860 units and $486.6 million declined 20% in units and 30% in dollars, and our fourth quarter end backlog of 1,531 units and $874.8 million declined 25% in units and 34% in dollars compared to fiscal year 08’s fourth quarter.

For the full fiscal year 09, net signed contracts of 2,450 units and $1.3 billion declined 16% and 19% respectively compared to fiscal year 08. Our fiscal year 09 homebuilding deliveries and revenues of 2,965 units and $1.76 billion, declined 37% in units and 44% in dollars compared to fiscal year 08.

We are entering the fifth year of this severe housing recession. Last year at this time, Lehman Brothers had recently collapsed, paralyzing the financial markets. Now one year later, after massive government intervention, the debate about whether the economy and the housing industry seems no longer to be focused on whether we have seen the bottom but rather when and how quickly the economy and the housing market will recover. Our declining cancellation rate and improved pace of contract signings provide some signs of recovery.

From elevated levels ranging from 18% to 39% over the prior 12 quarters, our cancellation rate has improved dramatically to 8.5% in our third quarter and to 6.9% our historical average in our fourth quarter.

We are also encouraged by the improved pace of net contracts signed per community this fourth quarter, which although well below our historical averages, exceeded fourth quarter paces dating back to fiscal year 06. A number of factors continue to weight on the housing market. The nation’s unemployment rate in October reached 10.2%, the highest in 26 years. Although the rate for college graduates, our primary demographic, was in a much lower 4.7%, having declined from the previous month. That number, however, is still highly elevated.

Recent news reports indicate that one in four Americans have mortgages that exceed the value of their homes, which certainly restricts their ability to sell and move to another home. On the other hand, affordability hovers near an all-time high. Mortgage rates are near historic lows and home prices, although down to 2003 levels, have improved sequentially over the past two quarters according to the most recent Standard & Poor’s Kay Shiller home price index. And although the volume of home sales continues to be near record lows, inventories of unsold homes are declining nationally.

The choppiness in demand that began after Labor Day following a stronger period for late March through late August, has continued. Since the holiday season is not typically the time to be purchasing or selling homes, we suspect the housing market may be following seasonal buying patterns. We believe it may take some time for Americans to regain confidence in our economy, their job status, and the benefits of home ownership. Currently we anticipate a gradual recovery in housing, similar to the one that occurred over several years coming out of the last recession in the early 90s.

Now, to do further numbers, Joel.

Joel Rassman

Thank you, Bob. Fourth quarter home building cost of sales before interest and write downs as a percentage of home building revenues was 81.6% compared to 76.6% in 2008’s fourth quarter. The differences are principally a result of higher incentives and the sale of more quick delivery homes in the fourth quarter of 2009. This compares to 82% cost of sales in the third quarter of 2009.

Fourth quarter interest expense included in cost of sales was 4.8% of revenues, about 30 basis points lower than 2009’s third quarter numbers. The fourth quarter pretax write-downs of approximately $85.5 million included $81.3 million attributable to land and operating communities, of which approximately one-third were attributable to communities in Nevada. Approximately $4.2 million of the write-downs were attributable to options and none were attributable to joint ventures. Of the write-downs, approximately $2 million of them were attributable to the previously announced dispositions of non-strategic assets.

Including interest --

Robert Toll

Equity.

Joel Rassman

Equity interest, I’m sorry -- fourth quarter SG&A at approximately $79.3 million was higher than the $72.1 million in the third quarter of 2009 and down from the $96.8 million in the fourth quarter of 2008. Included in this fourth quarter SG&A is approximately $2.6 million attributable to writing off capitalized marketing costs related to the non-strategic assets we sold and approximately another $2.6 million attributable to writing off other capitalized marketing costs in communities where we are changing product. In the fourth quarter, average qualifying inventory for the purpose of capitalizing interest, was again lower than our average debt, resulting in the direct expense of about $6.2 million of interest. In addition, the company expensed $11.6 million of costs attributable to the early retirement of debt.

Fourth quarter other income and income from joint ventures was approximately $9.8 million, including approximately $3.8 million of retaining deposits.

We have recently been asked a lot of questions about taxes by analysts and investors. In the future, if the company reports income in any period, a portion of the valuation allowances we previously established will reverse, which will eliminate some of our tax expense. Since we currently reserve all new deferred tax assets set up, there is effectively no tax benefit accrued for any losses for book purposes. In addition, in each quarter normal provisions for interest penalties and the release of exposures under FIN 48 and other miscellaneous adjustments to previously accrued taxes will occur. Our tax expense in the fourth quarter is principally attributable to these items.

On November 6, 2009, the President signed a new law which allows a one-time carry-back of losses for five years instead of two years. For us, we can choose either to use it in 2009 or 2010. Since we can carry back most of our 2009 losses already, we will probably elect to use it in 2010. If we choose to use it for 2009, we could probably get another $15 million.

During 2010, we will attempt to estimate what the benefit will be for the full year. This estimate will require a reversal of a portion of the previously reserved deferred tax assets, triggering income during the year.

The average number of shares to use to calculate earnings per share was approximately 163.1 million for the three months and 161.5 million for the full year.

Recently Standard & Poor’s reaffirmed our investment grade corporate rating and upgraded our outlook to stable. Since April 2009, we have extended the average term of our public debt maturities from 3.5 to 6.1 years and now have no public debt maturing for our fiscal 2013.

We have raised $650 million in long-term debt in the public markets and retired $543 million of public debt with shorter term maturities, including most recently the remaining $48 million or outstanding senior subordinated notes just last December 1st.

Subject to our normal caveats regarding forward-looking statements in today’s release and in our SEC filings, we offer the following limited guidance -- we ended 2009 with a backlog of 1531 homes, which was 25% lower than 2008. And since it takes us approximately nine months on average to obtain permits and build a home after a contract was signed, we expect that deliveries in 2010 will be lower than deliveries in 2009. We currently estimate deliveries for fiscal 2010 between 2,000 and 2,750 homes.

We estimate the average delivered price per home between $540,000 and $560,000. We believe that primarily due to incentives, fewer deliveries and lower average sales prices, our cost of sales before interest and write-down as a percentage of revenues will be higher in fiscal 2010 than in 2009.

Excluding directly expensed interest, we continue to estimate a reduction in absolute dollars expended for SG&A in fiscal 2010 compared to 2009. However, since we currently expect lower revenues in 2010 than 2009, we would expect SG&A without interest as a percentage of revenues will be higher in 2010.

Although we are not providing quarterly guidance, we normally deliver fewer homes in the first and second quarters than in the third and fourth quarters. This will probably continue in 2010.

Further, many of you use backlog conversion ratios to determine closings for the next quarter or two. I’m not sure the normal relationship that we have had in the past still applies since we have a higher number of quick delivery homes that we will probably have in the first and second quarter, so using that information you can do your own quarterly estimates.

At this point, I’ll turn it back to Bob.

Robert Toll

Thanks, Joel. In the past few months, we’ve been seeing and competing for a greater number of attractive land acquisition opportunities from financial institutions and other sellers. With our strong cash position, our record low net debt to cap ratio, and our demonstrated access to liquidity, we believe we can take advantage of opportunities that arise from the current state of distress in our industry.

As has happened in previous downturns, we believe there will be further consolidation in our industry. Many of the small and mid-sized private builders who historically have been our primary competitors in a luxury niche are facing serious capital constraints among other problems, and are either hobbled or no longer in business.

The other major public homebuilding companies remain focused primarily on the lower end of the housing market rather on the luxury niche. Facing fewer competitors and supported by a strong balance sheet, our diverse product lines, our broad geographic footprint and our brand name reputation for dependability, value, quality, and service, we believe we are now well-positioned to gain market share as the housing market gradually recovers.

Now let’s open it up for questions. Latanji.

Question-and-Answer Session

Operator

(Operator Instructions) You first question comes from the line of Nishu Sood of Deutsche Bank.

Nishu Sood - Deutsche Bank

Joel, I wanted to ask you about -- you were talking in terms of the turnover ratios for the first half of 2010 to expect that to be affected by higher percentage of quick move-in homes. I was a little surprised to hear that. I mean, you guys obviously don’t do any spec building, so your quick move-in homes are mostly the result of your cans. And you’ve had obviously two terrific quarters in terms of low cancellations, so how much longer are the quick move-in homes going to be a big part of your closings?

Joel Rassman

We have a number of high density [mid-realized] product that is principally completed or close to being completed, so we would think that that would continue at least through the second quarter -- into the second quarter.

Operator

Your next question comes from the line of Michael Rehaut with --

Robert Toll

Latanji, let me just -- I’m sorry, Joel wants to go further on that.

Joel Rassman

I think if you looked at the last five or six years or maybe even the last 10 years of conversion ratios based on our backlog at the end of the year to the first quarter, you would end up with a number of someplace between 335 and 500, and I’m not sure that based on the number of quick delivery homes that 335 at the low-end is even reasonable. I would expect it to be much higher than that on the low-end. That’s what I’m really saying.

Operator

Your next question comes from the line of Michael Rehaut with JPMorgan.

Michael Rehaut - JPMorgan

First question, just on the gross margins, you said in the limited guidance that you expected fiscal 10 to be below fiscal 09, and just wondering when you look at the performance near 22% in the first half of 09 and closer to 18% in the back half, looking at that back half number, is it reasonable to think that that is a number that can continue or maybe even slightly rise from here and that the difference on an annual basis is more driven by the first half? I guess what I’m asking also in another way is the margins and backlog, would you characterize them as similar to what you have put out in the last couple of quarters or different?

Joel Rassman

You are right. The first two quarters of last year 2009 had before write-offs of interest had a 74% and 76% gross -- cost of sales, which is much lower than the last two quarters, which were 82% in the third quarter and 81.6 I think in the fourth quarter, and so when you look at the whole year, I don’t expect to get back to those numbers of 76% and 74% based on what I have in the backlog, or what I can sell in the first quarter and still deliver for the year.

We would expect that the effect of incentives through the year maybe in the fourth quarter will start to improve because as we indicated in the last conference call, the offered incentives went down a significant amount between the end of the third quarter and the fourth quarter, but there is a very big effect of mix and we don’t know yet what that mix will be for the fourth quarter. So I can’t give you that for certainty.

Michael Rehaut - JPMorgan

Okay, and similarly with SG&A, obviously to a good extent being driven by volume and revenue in terms of the leverage there, as a percent of sales though, I’m sorry, not as -- in terms of absolute dollars, where would you say you are in the spectrum in terms of being able to adjust to a still lower volume in 2010? In other words, do you think SG&A can go over 20% or are we looking more at sort of the high-teens that you’ve done recently?

Robert Toll

We have room to further constrict G&A. For the time being, we have stopped lopping headcount and have decided to stick with the organization, the team that we’ve got, until we get through first quarter and a half fiscal, or calendar first quarter. If we see the business pick up substantially, certainly we’ll stick with the overhead we’ve got. If we continue to see choppy waters in January and February and part of March, then we’ll go back into the business of lessening headcount, which will lessen G&A to some extent.

Joel, do you want to add to that?

Joel Rassman

Yeah, I think if you looked at it, I think we at least try to give you an idea that the fourth quarter had a little bit extra of stuff that we wouldn’t expect to repeat, which is why we gave you the deferred marketing costs write-offs. That’s not a normal thing for us, so when you look at that and then you say that if they took that away, maybe that’s a more reasonable amount of money per quarter, that’s probably true if you look at the prior quarter as well. So although we are not giving you that number because we can’t, we don’t know how much we’ll sell, we’ll do for advertising and other marketing costs, for example, and we don’t know what the headcounts will be, that gives you a pretty good idea.

Operator

Your next question comes from the line of Ken Zenner with Macquarrie.

Analyst for Ken Zenner - Macquarrie

This is Rodney on for Ken. I have an interest on your interest on COGS. As a percent of sales, we’ve noticed it rising from 300 to --

Robert Toll

I’m sorry, you’re breaking up for some reason. Try it again but speak slower and perhaps we’ll overcome the break-up.

Analyst for Ken Zenner - Macquarrie

Is this better?

Robert Toll

Yes, it is.

Analyst for Ken Zenner - Macquarrie

All right. Just a quick question on interest in COGS -- as a percent of sales, we’ve noticed it rising from 350 bps in the first quarter of this year to about 480 bps in this quarter, so on a lower sales base in 2010, would you expect your interest in the cost of sales to continue rising?

Joel Rassman

It’s kind of very much subject to which specific inventory closes and it’s kind of unique in that it is affected by how much of [the lot] are capitalized, if it has some delayed tax issues involved, so I don’t really know how to answer your question, other than it went down 30 basis points from the third quarter to the fourth quarter, and would probably fluctuate some place in those neighbourhoods for a while until either inventory goes up, as we acquire more lots, or we open more communities or inventory goes down.

Robert Toll

Thank you. Latanji.

Operator

Your next question comes from the line of Joshua Pollard with Goldman Sachs.

Joshua Pollard - Goldman Sachs

I have a quick question and a follow-up -- I estimate that you could spend about $1.7 billion on land that would earn solid returns on capital and still be at a 40% net debt to capital ratio sort of inline with your longer term average. When you think about your cash chest today, how much of it would you be willing to spend on land and how quickly do you think investors could expect Toll to be delivering let’s say 15% or 20% of its homes on newer priced land parcels?

Robert Toll

Well, I certainly don’t envision us selling -- using $1.7 billion to go purchase land right away. That seems just impossible. It was where we were once upon a time and we did great business but having gotten whacked coming through the last four years, at least until our memory fades and we get greedy again, for the next couple of years we don’t expect to use all of our cash.

So far, we’ve seen four or five pretty good offerings, of which we’ve only gotten one and we’ve missed the others, so it’s not dam the torpedoes, full speed ahead. We’re very careful of the torpedoes. We want to make sure that we don’t repeat past errors in over-paying.

How long will it take before we see the profit benefits out of that ground -- the ground that we acquire depends upon the state of the ground. The one we bought is ready to go and I would think that we will probably not market there until February or March. We want to wait for the best of the seasons to be upon us, and then you would start to see profits out of that nine months thereafter to 12 at the outside.

Joel, anything to add? That’s about it, Josh.

Latanji, I have a question -- are you with me, Latanji?

Operator

Yes, sir.

Robert Toll

Good. I have a question from Steve Sullivan -- he asks can you talk about recent sequential trends in incentives and the magnitude of the change that you were seeing?

I can do it from memory and approximate, but somebody has written an answer down here. Is that you, Greg, the answer man? You did, Joel? That’s your handwriting? Yeah, go ahead.

Joel Rassman

We talked about the fact that incentives offered had increased and as of the other day when we looked at it, incentives quarter over quarter have decreased about $13,000, so on product we expect that will be sold in the next 12 years -- 12 months, rather. That includes estimates for job by job, unit by unit of what we would expect to sell going forward. So that’s sequentially.

We had 10,000 year over year. If you looked at a year ago, we were roughly the same incentives offered as we were today. Incentives increased for the first two quarters and then started to decrease in the third and fourth quarter, so we are back to where we were a year ago in terms of incentives being offered.

Robert Toll

And you say Greg didn’t give you that a

-- Laughter

Latanji.

Operator

Your next question comes from the line of Ivy Zelman with Zelman & Associates.

Ivy Zelman - Zelman & Associates

Good afternoon, everybody.

Robert Toll

Whoa -- did you hear that, Ivy?

Ivy Zelman - Zelman & Associates

I don’t think it was me.

Robert Toll

That’s a bad connection, I’m sorry. Ivy, would you re-dial in, please and maybe we’ll lose that echo.

Operator

Your next question comes from the line of Daniel Oppenheim with Credit Suisse.

Daniel Oppenheim - Credit Suisse

I’m wondering about the comments in terms of the trends in traffic and if you could provide a little color around it in the sense that thinking about it in terms of pricing and incentives, given that you are viewing this as a slower time of the year for sales, how does this affect your view of what [to do with incentives?] That is, if there isn’t the traffic, does it make sense to use incentives if it doesn’t really bring in more sales that way? How are you looking at that relative to what you would do in January or February in terms of responding to slower traffic at that time?

Robert Toll

I think you’ve got the answers in the question and you would make an excellent CEO of a homebuilding company.

Daniel Oppenheim - Credit Suisse

Thanks very much.

Robert Toll

You’re very welcome.

Daniel Oppenheim - Credit Suisse

Second question for you -- so the second question, wondering about the -- if we look at the write-downs for the quarter, the $45 million of write-downs on the owned/operating communities, I think the operating communities includes not just the active communities for sale but also some of the mothballed communities. How much of that relates to the open communities versus impairments on mothballed communities?

Joel Rassman

I think most of it is open communities.

Robert Toll

Yes.

Joel Rassman

I’m not sure -- I thought most of the stuff, because now it’s going to be in there more than a year --

Robert Toll

Excuse me, guys. I’m fairly certain that the impairments that we are taking are not on mothballed communities because when we mothball the community, we would have taken an impairment, generally. We wouldn’t come back and revisit a mothballed community and say that it is further sinking in value because practically we wouldn’t be tipped off to such a thing, not being active in the field in marketing.

Joel Rassman

We look at them every quarter, Bob, and there are times -- like say for Nevada, where there’s an issue, where the market is going down where we may make an adjustment. But in general I think the $45 million was exactly what we said, which was [in operating communities].

Robert Toll

Thanks. Does that answer it?

Operator

Your next question comes from the line of Stephen East with Pali Capital.

Stephen East - Pali Capital

Bob, if I could circle around on the cash balance again and maybe ask a little bit different question than what has been asked so far -- you’ve got about $1.9 billion in unlevered, [taking by] you know what today’s ASPs, I’m calculating something like 11,000 lots. You’ve already got 26,000 owned, but interest expense is running about, total interest expense about 6% of sales, so when I look at this huge cash board and you can now tap the capital markets, whether it’s debt or equity, et cetera. Does it really make sense to sit on this much cash and given your land base already to save it for land acquisitions, or does it make more sense to try to figure out a way to get your profitability up by reducing some of that debt, that interest expense that you have sitting out there?

Robert Toll

That’s a very good question. I’ve thought the same thing and the answer is obviously I am not sure or I would have done something. But we are thinking about this and -- but your question is a very good one. Thank you.

Stephen East - Pali Capital

Okay. Just a second thing I had, Joel, what did you all spend on land and development in 2009? And I know you never have a good hard number for the future year but as you look at, you know, if you can at least talk qualitatively, what you think will happen in 2010 versus what happened in 09?

Joel Rassman

Well, we have three categories -- we have land, we have soft costs or pre-development costs expended and for improvements. We spent about a quarter of a billion dollars, a little less in 2009 off of that.

Stephen East - Pali Capital

Combined?

Joel Rassman

Combined for all three, yes. And -- if that helps you. I don’t know if there’s a follow-up to that, but we spent about a -- a little less of a quarter of a billion.

Operator

Your next question comes from the line of David Goldberg with UBS.

Robert Toll

By the way, Latanji, if Ivy calls back, please put -- move her up. I don’t want her to get any madder than she is.

Operator

Certainly.

Robert Toll

Thank you.

David Goldberg - UBS

That’s a good intro.

Robert Toll

You’re welcome.

David Goldberg - UBS

I wanted to maybe go back and revisit this question of incentives and maybe ask the question in a little bit of a different way and Joel and Bob, thank you for the details on the timing for the incentives and the reduction of incentives, but what I am trying to understand is my understanding is, and tell me where we might be off but about six months ago or so, you guys reduced incentives in about 60% of your communities and that seems to have stuck pretty well in terms of improvements in the market. And so Joel, when you talked about -- and I think the number you gave was $13,000 less incentives year over year today, was that kind of a gradual reduction over that time period of the last -- let’s say six or eight months? Or was that kind of a -- we reduced incentives and we haven’t done it again?

Robert Toll

Well, of course it’s a gradual thing. You don’t get up in the morning and say all right now, the whole company is going to take all of its communities and reduce incentives by $8,000. You do this on a week-to-week basis, on a community-to-community basis as you review the sales every week. Does that help?

Joel Rassman

If I can, that 13,000 number was a quarter over quarter, third quarter over fourth quarter, so that’s primarily --

Robert Toll

Right, year over year we said was 10, right. Does that help?

David Goldberg - UBS

And I guess the question then is when you think about deliveries as you look toward fiscal 10, how do you think about the split between homes that have had reduced incentives relative to where we are versus homes that haven’t had that level of reduced incentive, or maybe they are having slightly more, or maybe it’s hard to get clarity but I’m just trying to understand why there’s not some more margin benefit coming through from that reduction of incentives when you look at the numbers.

Robert Toll

Joel. Where’s the beef, is the question.

Joel Rassman

I think the question was -- the answer was in the question that was asked earlier, which is we had a very high margins in the first and second quarter off of prior sales, which when you look at an average for the year, we will not get that back for a while and in deliveries because if we look at both what’s in my backlog and what we expect to sell in the next three months or so that we can deliver by the end of the year, we don’t expect to reach those earlier margins of 76 or 74% before taxes or --

Robert Toll

Doesn’t it have to do with the relationship of overhead to volume?

Joel Rassman

There is a relationship of overhead to volume but we are still doing deliveries at a slower pace than -- with no improvement yet.

Robert Toll

Right, right. Latanji.

Operator

Your next question comes from the line of Ivy Zelman with Zelman & Associates.

Ivy Zelman - Zelman & Associates

Bob, thank you so much for making me last. I really enjoyed that, and I certainly wasn’t mad but to ask a question, I wanted to drill into a comment you made about the choppiness that you saw at the end of the quarter and I was curious if this was due to seasonality or if you are concerned that there is a slowing beyond seasonality and also have you seen a nice bump yet from the tax credit from the move-up buyers yet?

Robert Toll

I don’t think we’ve seen a tax bump. How about you guys? No, you’re talking about for second-time move-up -- I mean, for a move-up, you’re a second-time home buyer, you’re talking about 6500. Our average single family home is probably 7, 7-and-a-quarter. The [MOPIs] are about 450 and on average -- so I don’t think we are going to see in our line of work much of an inflection due to the tax credit.

Unidentified Participant

It makes it easier for their buyers.

Robert Toll

It does make it easier for their buyers, but we haven’t felt it. With respect to choppy waters, you just have to bite the finger, be patient, and wait until you see what comes out in the latter part of January, all of February, and the early part of March. We can’t tell, things are not clear enough now for us to state that it is anything other than seasonality. We note that other industries are having a little bump-up, trucking stats are a little better, retailers are a little better, back and forth, especially in the electronics and in the Internet, it’s gotten a little better. So that might point to better times for us when the focus goes to housing as opposed to the season to be jolly. We don’t have an answer. I wish we did, Ivy, but see me the end of January, February, March and we’ll definitely have an answer by then.

Operator

Your next question comes from the line of [Arjan Shamar].

Arjan Shamar - Analyst

Just going back to something that you guys were talking about earlier with gross margins, just a little clarity on the issue -- you said that you expect gross margins in 2010 to be lower than 2009 in a full year basis, but just a little more clarity on how we should be expecting to see gross margins trend in a quarter to quarter basis in 2010? Do you think that gross margins will generally trend up from here or is it hard to say?

Joel Rassman

I can’t give you that information. I don’t know yet.

Arjan Shamar - Analyst

Okay.

Robert Toll

Thank you. Latanji, we have a question from Dave Crossman, subject: liquidity; how much balance sheet liquidity is enough for you? Oh, we got asked this question, didn’t we? Will you at some point consider a share buy-back program or dividend?

Yes, we will at some point consider share buy-back -- a dividend is unlikely -- or debt buy-back. And as we said to the previous questioner, right now obviously we don’t know but we are thinking about all of our options. Latanji.

Operator

Your next question comes from the line of Joel Locker with FBN Securities.

Joel Locker - FBN Securities

Just on the breakdown of your owned lots, do you have three buckets of finished lots, partially developed, and just completely raw?

Robert Toll

We said Greg was the answer man.

Greg Zeigler

The finished lots were 10,800.

Robert Toll

Finished are 10,800.

Greg Zeigler

-- and the rest would be various --

Robert Toll

So the rest are in various states, says Greg, who generally knows. Thank you, Greg, and thank you. Latanji.

Operator

Your next question comes from the line of Megan McGrath with Barclays Capital.

Megan McGrath - Barclays Capital

I wanted to drill down a little bit on your ASP guidance for the year.

Robert Toll

What’s all the drilling, by the way?

Megan McGrath - Barclays Capital

We like to drill.

Robert Toll

The girls want to drill -- Ivy’s drilling, you’re drilling.

Megan McGrath - Barclays Capital

Construction, you know, I’m just trying to stay topical.

Robert Toll

I thought we were in the energy business or something.

Megan McGrath - Barclays Capital

Your guidance for the full year is lower than you came in for the average in the fourth quarter, so just curious -- is that because you are expecting to lower base prices as the year progresses or are they lower in your backlog or it’s more of a mix issue getting to that low number?

Joel Rassman

We have to kind of keep on reminding everyone that about three years ago, we started talking about a change in mix to more [MOPIs] and more [inaudible], which are lower priced homes. That mix change will continue at least through 2010 is our guess, and so what you are seeing is the effect of that mix change, primarily, and some difference in incentives.

Megan McGrath - Barclays Capital

And then a quick follow-up just for modeling purposes on the taxes -- when you talked about a potential reversal of your valuation allowance, is it a fair interpretation to say that at minimum, you will reverse $50 million and that could be higher if you intend to use it in 2010?

Joel Rassman

Well, at a minimum, I would reverse -- I would pick up $15 million of income because that’s about what I estimate that I have in excess losses in 09 that I can’t carry back, so that would be 15 -- one-five -- would be the minimum. If I believe as I get through the year that it’s likely that my taxable loss, because remember for tax purposes, I don’t get the benefit of write-downs whereas for books, I do, that my taxable loss will be higher than that, then my -- then I would end up using it in 2010 and that should be a number higher than $15 million or I would have used it in 2009. So the answer is 15 is my minimum and I would guess it’s a higher number than that.

Operator

Your next question comes from the line of Alex Barron with Agency Trading Group.

Alex Barron - Agency Trading Group

My first question was do you have a better breakdown of the inventory between like work in progress, meaning just homes versus land, the $3.2 billion that you guys show there?

Joel Rassman

We will be issuing our 10-K in a couple of weeks. You’ll have all of that data in the 10-K.

Alex Barron - Agency Trading Group

Okay, great. My second question was more having to do with I think in the preview call a couple of weeks ago, you guys mentioned you had several communities that had never been opened and I’m just trying to get a sense for the impairments on those parcels of land and the mothballed communities versus the ones that are currently open. So I guess it’s kind of a two-part question -- are you more likely to sell that land to maximize the deferred tax asset and can you give us a sense of how much that land has been impaired since it never even opened?

Joel Rassman

The answer to both of those questions is I don’t know. We will obviously look at it. If the market continues to improve, I don’t think it would be like massive amounts of land sales because we will be then able to open communities that we had previously closed. If the market doesn’t, then we may look to sell some of those assets to get cash in the coffers but right now it’s too early for us to make any decision on whether we have excess land or not having excess land to do that and we obviously there’s a bit of spread difference if you have to sell land and there are no buyers and so it depends on where the land is. If you looked at where we were in write-offs, we picked up $2 million of losses on the land compared to what we have previously written it down to but we had previously written it down to what we thought the bid was in those cases which is not necessarily on a going concern value, because if you build it out, you [inaudible], we would make more than that.

So I can’t answer your questions.

Robert Toll

But it took a while.

Joel Rassman

Well, I wanted to give him the understanding why.

Robert Toll

Just kidding you -- Latanji.

Operator

Your next question comes from the line of Bose George with KBW.

Analyst for Bose George - KBW

This is [Jade Ramani] on for Bose George from KBW. Just a quick clarification -- your comments mentioned $50 million of estimated carry-forward tax losses. Is this in addition to the $162 million income tax receivable on your balance sheet?

Joel Rassman

Yes. What happened is we triggered a lot of tax losses through the normal operations of the company and the land sales that -- which generated $161.8 million of an expected refund in 2010. In addition, based on our current estimate, we believe that when we file our tax return, which will be done sometime in 2010, for 2009 we will have excess losses that we will carry forward of $50 million. If you use the 35% tax rate, roughly that gets you to the $15 million that we said that we could receive back from the government, were we to choose to carry back five years instead of two.

Robert Toll

Latanji.

Operator

You do have a follow-up question from Nishu Sood with Deutsche Bank.

Nishu Sood - Deutsche Bank

I wanted to ask about cycle times -- when you were talking about what we should expect for 2010, you mentioned the kind of average cycle times of nine months, so clearly we’ve gotten back some of the -- you know, cycle times have come down because of kind of deep, less bottlenecks in the labor supply, but that kind of sounds like it is roughly in line with your historic average.

Now, if we contrast that with the lower end builders, they have obviously been squeezing their cycle times less and less and simplified products and stuff so I wanted to understand the cycle times, reducing the cycle times, how much of a focus is that for you folks, or is it something that because of the more customized nature of your product just isn’t an area that would benefit from greater focus?

Robert Toll

Pretty much the latter -- to stay in the business that we are in, serving the clients as we have in the past, you can’t reduce the cycle time much below where we are. We spend a good bit of the time after contract with the client before we begin the home outlining the foundation changes, the add-ons, the special requests and that once we have that settled, then we have to go for a permit because it’s not a production, repetitive product coming off the line, every permit we go for is a major deal to most townships and counties. Our average time today for a permit is probably 2.5 months, so there’s not a lot of room for reducing cycle time in the true luxury niche business. Thank you.

Latanji.

Operator

Your next follow-up question comes from the line of Joshua Pollard with Goldman Sachs.

Joshua Pollard - Goldman Sachs

My question is on write-downs. In the company over the last call it six to nine months has been lifting prices and/or -- effectively lifting prices or raising incentives in 40% to 60% of the communities. We’ve seen better absorption rate --

Robert Toll

Excuse me, Josh, that’s decreasing incentives.

Joshua Pollard - Goldman Sachs

Decreasing incentives, excuse me -- so with the higher absorptions, lower cancellations, and decreased incentives, I’m trying to get a sense of what you guys are thinking for write-downs in 2010?

Robert Toll

No way. I’ll let Joel give you the long answer.

Joel Rassman

We can’t give you guidance. If we knew, we would have already written it down.

Robert Toll

That’s for sure the answer. Sorry.

Thank you, Josh. Latanji.

Operator

Your next follow-up question comes from the line of Michael Rehaut with JPMorgan.

Michael Rehaut - JPMorgan

I just wanted to circle back to a topic we were discussing a couple of weeks ago in your now final order preview call, which is land and the land market and obviously aside from deciding what to do with the $2 billion -- roughly $2 billion cash position, I think you mentioned that obviously more land deals in the market today to look at, maybe you are not -- you’re bidding more, maybe you’re not successfully closing on as many, just given that there’s some level of competition but from a geographic standpoint, I was hoping you could give us your view on which markets today, perhaps at least in terms of what is being offered from a price standpoint, do you think you are closer to doing more deals at and which are further away in terms of what is coming out there is still being relatively unattractive in terms of the ask?

Robert Toll

I think all the markets are available and the asks are not so far away from reality any longer. I think rather it’s just got to do with what markets do you want to spend your money in, rather than what markets are dislocated in terms of price to value.

Latanji.

Operator

Your next question comes from the line of Ivy Zelman with Zelman & Associates.

Analyst for Ivy Zelman - Zelman & Associates

It’s Alan. Ivy had to hop but she was just going to ask you just, Bob, kind of your thoughts thinking about the mothball land positions that you have and how you go about weighing that versus returns and what you think the ultimate return profile of the business should look like because obviously the longer those assets sit in mothball status they are going to weigh on your return, so kind of how do you counteract that, what do you think the returns should be kind of in the normal business cycle and what else can you do to improve that, assuming the land remains mothballed for quite a while?

Robert Toll

Well, we don’t feel a constraint, a push to take land out of mothball earlier than we would to try and maximize the returns from that land. As a matter of fact, we just this Monday I can recall I looked at one that had been mothballed in around the Washington, D.C. market and we decided to go to market with it because we thought we could get a pretty good return out of it. We studied and discussed the comps that we were looking at in the market and the traffic and what others had been doing in that market and decided it was worth taking this out and opening up shop and seeing if we couldn’t get a return.

We don’t look at it in terms of this has been sitting with us and the longer it sits, the worse it gets or the more it hurts our overall company and we ought to try and move it so that we can get something fresh. Our land is not fungible. For the most part, it’s in a pretty desirable location and if we don’t think we can get the fair return on it because of market conditions, we are not going to push the market, we’re not going to race the market to the finish line. We are going to wait for the market to come and then we are going to come to the market with our land.

Operator

Your next follow-up question comes from the line of Alex Barron with Agency Trading Group.

Alex Barron - Agency Trading Group

I think you guys mentioned the sale of strategic facets, which I am assuming is land, but I don’t see any revenue breakdown so can you give us a sense of how much in revenues we are talking about?

Joel Rassman

I think we discussed it in the third call but I don’t remember the numbers.

Robert Toll

Anybody recall how much we sold?

Joel Rassman

$35 million or -- there wasn’t a lot of cash money. It was just -- there wasn’t a lot of cash money, it was the fact that we didn’t really think that those markets would be able to absorb that land for a long period of time and --

Robert Toll

Long period of time, right and so we thought we’d take the tax write-off.

Joel Rassman

It made sense for us at this point to dispose of it and try to redeploy that money and so I think that it wasn’t a lot of money. It didn’t add to my coffers.

Robert Toll

Sorry, that’s the best we can do for the moment on that. Latanji.

Operator

Your next follow-up question comes from the line of Joel Locker with FBN Securities.

Joel Locker - FBN Securities

Just on the -- a couple of quarters ago you gave the year over year community count growth in contracts for the four week period and the eight week period and I was wondering if you had those for the latest four week and eight week period.

Robert Toll

Actually, I don’t have contracts. I have deposits on a per community basis, we are up in the last four weeks 30% over last year; in the last eight weeks, we are up 58%; in the last 12 weeks, we are up 45%, so what you can see is we were doing very well, we were doing warp speed, and then we came back in the last four weeks to only be doing very good. But that is consistent with what we have been saying all along. We had this good period up through Labor Day from March through Labor Day and then from Labor Day to the present, choppy waters, so that’s why the last four weeks are only up 40% as opposed to up 58% on a -- I’m sorry, 30% as opposed to 58% on a per community basis.

Operator

Your next question comes from the line of Jim Wilson with JMP Securities.

Jim Wilson - JMP Securities

I just have one question -- as you’ve talked about easing the incentives that you had to offer, could you give a little color on where it’s been easiest to back down or to kind of a better pricing environment in the country, some of the better markets?

Joel Rassman

Can I just comment on that?

Robert Toll

Sure, Joel.

Joel Rassman

Okay. Well, part of the easing is we had more cancelled contracts, quick delivery homes earlier that had better discounts on them and so part of that difference is a reflection of the fact that we expect that we will be selling less quick delivery homes going forward and therefore -- or with less incentives.

Robert Toll

I think the question is rather what markets are you -- do you have pricing power.

Jim Wilson - JMP Securities

Yeah, that’s a better way to put it.

Robert Toll

Yeah, and we saw it in Massachusetts, we saw it in Connecticut, we saw it in the New York suburbs. We saw it in the City Living product in both Jersey City, Hoboken, and in Manhattan and Brooklyn. We saw it in the State of New Jersey. We saw a little bit of it in Maryland. We’ve had some pretty good action recently in Florida but we are still a little slow to pull that gun from the holster, so -- although we see a stronger market there recently, I’m afraid it’s still anecdotal and I don’t want to make any judgments with respect to pricing just yet until it follows through a little more. There you have it.

Jim Wilson - JMP Securities

How about the western half of the country? Not much change or what you have seen?

Robert Toll

Well, I answered your question, not having heard from the western half of the country -- logical mind would deduce that it’s just not that strong. We actually have done fairly well after introducing some pretty decent incentives on the multi-family product, East Bay, San Fran, but it took a price correction in order to get things moving. Vegas is -- death takes a holiday; Phoenix is still very slow. California is spotty -- great spots are doing well; anything less than great is not doing well at all. Chicago is still a very, very slow market and I think that’s enough of the bad report. Let’s get back to some other questions. Thank you.

Latanji, that’s your cue.

Operator

Yes, sir. At this time, there are no further questions.

Robert Toll

That’s great. Thank you very much, Latanji, and thank you, everybody, for listening. Have a great day. Goodbye.

Operator

This concludes today’s conference call -- you may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Toll Brothers F4Q09 (Qtr End 10/31/2009) Earnings Call Transcript
This Transcript
All Transcripts