Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  
TRANSCRIPT SPONSOR
Better Than AdSense

Toll Brothers, Inc. (TOL)

F1Q07 Preliminary Earnings Results Call

February 8, 2007 2:00 pm ET

Executives

Robert Toll - CEO

Joel Rassman - CFO

Greg Ziegler - AVP of Finance

Analysts

Michael Rehaut - JP Morgan

Nishu Sood - Deutsche Bank

Joel Locker - FTN Securities

Myron Kaplan - Private Investor

Wayne Cooperman - Cobalt Capital

Timothy Jones - Wasserman & Associates

Alex Barron - JMP Securities

Mike Dhillon - Banc of America Securities

Ken Zener - Merrill Lynch

Darin Fierstein - Wachovia Securities

Steve Fockens - Lehman Brothers

Johanna - Citigroup

Greg Gibernet

Neil Borski

Todd Vencil - BB&T Capital Markets

Laurie Wilcker

Randy Raisin

Presentation

Operator

Good day, everyone and welcome to the Toll Brothers' First Quarter 2007 Outlook Conference Call. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only-mode. At the request of the company, we will open the conference up for questions and answers after the presentation.

I would now like to turn the call over to Mr. Robert Toll, Chairman and Chief Executive Officer. Please go ahead, sir.

Robert Toll

Thanks Kimberly, and welcome everybody and 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; and Greg Ziegler, Assistance 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, financial markets, weather, and 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 try to answer as many as possible.

I hope you guys don't hear the strange noise that I do, I apologize for it. I have no idea where it's coming from.

We've just reported preliminary first quarter result of fiscal year '07. We will report final results when announce earnings on February 22nd. First quarter homebuilding revenues were approximately $1.09 billion, down 19% versus our first quarter record of $1.34 in fiscal year '06. Fiscal year '07's first quarter-end backlog was approximately $4.15 billion, a decline of 30% compared to our first quarter record of $5.95 billion in fiscal year '06. Fiscal year '07's first quarter net signed contracts were approximately $749 million, a decline of 34% versus fiscal year '06's first quarter total of $1.14 billion. We signed 1,463 gross contracts before cancellations in fiscal year '07's first quarter, a 14% decline from the 1,695 signed in fiscal year '06's first quarter.

Net of cancellations, first quarter contracts totaled 1,027 units, down 33% from 1,544 units in first quarter of fiscal year '06. It appears that the pace of cancellations is starting to abate. First quarter fiscal year '07's cancellations totaled 436 versus 585 in fourth quarter of fiscal year '06 and this quarter's cancellation rate of 29.8% was lower than the 36.9% cancellation rate last quarter. However, we are still well above the company's historical average of about 7%.

We saw an uptick in demand in a number of markets in January and the first week in February compared to December, but seasonally, this is supposed to happen, even so, this activity definitely feels encouraging. A few markets, such as Hoboken and Jersey City, Manhattan, Brooklyn and Queens, are quite strong. In the past few weeks, both Northern and Southern California have been strong. Some markets such as Detroit, Minneapolis, Chicago, Reno, and parts of Florida have not shown signs of recovery. We continue to monitor communities in these and other markets for potential write-downs.

And, Joel, would you spend a couple of minutes to discuss write-downs, please?

TRANSCRIPT SPONSOR

Better Than AdSense

What if there was a way to promote your company to a perfectly targeted group of potential customers, partners, acquirers and investors? What if you could tailor your pitch to them at the moment of maximum interest? And what if you could do this for a no-brainer price?

This is exactly what Seeking Alpha is offering with transcript sponsorships.

Seven types of companies are sponsoring earnings transcripts on Seeking Alpha:

1. Company sponsors its own earnings call transcript (example).

2. Company sponsors partner's transcript (example).

3. Company sponsors competitor's transcript (example).

4. Issuer-sponsored research firm sponsors client's transcript (example).

5. Investment newsletter sponsors transcripts of successful stock picks (example).

6. IR firm sponsors transcript of micro-cap company (example).

7. Consulting company sponsors company's transcript in sector of interest (example).

Your company's name and promotion could have been on this transcript! Learn more, or email Zack Miller for details.

Joel Rassman

Thank you, Bob. We are still in our initial stages of evaluations, since our quarter just ended and evaluations are done on a community-by-community basis. We have about 32o selling communities, and about 80 communities, which are either sold-out but still delivering or getting ready to open to south. In addition, we have approximately 300 predevelopment communities.

We review a 100% of our predevelopment communities every quarter, any active communities, which may be problematic, and most communities located in soft markets. In order to complete these evaluations, we need information that first becomes available or is prepared during the month of January, and sometimes in the beginning of February.

Remember that write-downs are two-part test. If we have $1 of profit, no write-down is needed. If on the first test, we have $1 of loss, we have to go back and revaluate the community to determine the timing of revenues and cost paid in order to appropriately discount them to determine the amount of loss. A $1 loss on the first test, if they turn out to be a 10 or $20 million loss as to present, valuing everything. This is especially true in the very large master plan communities, which run 7 to 10 years.

We have looked at most of our predevelopment communities this quarter, and some of the active communities, and are continuing the evaluation process to determine actual write-downs. It will take us about a week and a half to finish this evaluation of the remaining communities.

Given that our initial reviews indicated that write-downs will likely be $60 million or more, we felt it appropriate to provide that guidance to investors rather than wait until our earnings release in two weeks. Bob?

Robert Toll

Thanks Joel. I may spoke; we have reservation pre-opening interest expressions in Queens, Long Island City specifically. We haven't opened that up for sale yet. So, forgive me for misspeaking about the markets of Queens, when I mentioned Manhattan and Brooklyn.

We ended the quarter with 320 communities compared to 300 at fiscal year '06 and 258 at first quarter end of '06. We've continued to purchase sites that we believe are good buys, even in today's reduced home sale paces and prices. The parcels we are acquiring have recently received entitlement safe to being under option in our approval pipeline for several years. Because some deals don't make sense on the current market conditions then it come at the write-offs and impairments.

We have continued to trim our lane position. We ended the quarter with approximately 70,000 lots under control compared to our peak of 91,200 at 2006's second quarter end and 73,800 lots at fiscal year-end '06.

We continue to believe that buyer confidence is the key to a turnaround in the new home market. It appears that the media sentiment towards the housing market is becoming more balanced, and the message is they are making customers aware that in the current climate of attractive interest rates, motivated sellers, and a generally healthy economy, now is a goodtime to buy a home. With many potential buyers still on the sidelines, we believe there is growing pent-up demand that will come into the market once buyer's sentiment improves because many builders are abandoning lots on their option. We expect land developers are being less aggressive in pushing new lots through the approval process. This could result in a shortage of available home sites once demand re-bounces.

Now, let's open it up for questions.

Question-and-Answer Session

Operator

Thank you, sir. The question-and-answer session will be conducted electronically. (Operator Instructions). We will take our first question from Michael Rehaut with J.P. Morgan.

Michael Rehaut - JP Morgan

Hi, good afternoon.

Robert Toll

Hi, Michael.

Michael Rehaut - JP Morgan

First question was on the order ASP, it looked like you were down about 1% year-over-year and last quarter you were flattish year-over-year. And it seems, perhaps some of it due to mix, but also that perhaps you have taken a less aggressive approach on volume-driven pricing. So I was wondering, if you had any change to your approach in pricing strategies in the last few months relative and if you've seen other builders become more aggressive, that’s the first question?

Robert Toll

Joel, would you take a shot at this.

Joel Rassman

Yeah. There are a couple of things going on at the same time. We would have expected I mean even greater decrease in the average agreement of sales signed this quarter because of our expected mix. But if you look at the mix that was signed, we probably had more slippage in the lower priced stuff than we did in the higher priced stuff. So that -- it ended up bringing our average up more than we would have thought it would have been in this quarter. There were some increases in incentives during the quarter, which we think were reflected in the agreements, on average, probably about $8,000 more in incentives than they were last year.

Robert Toll

With respect to what other developers, builders are doing with regards to incentives, it appears to us that they are cutting back in the average markets. Of course, those markets that are doing poorly, they are still keeping incentives high. But, in general, it appears as though they are bathing word for the day, I apologize, on average. I have an email from Steve and it says, Mr. Toll, would you please comment on the current state of your condo projects specifically in Hoboken, Bethesda, and in Philadelphia in Naval Square. The answer is, we are hot in Hoboken, and in Bethesda, we are not, we are struggling. And in Philadelphia, we are doing okay. We are hot in New York as well, New York City and both -- as I mentioned both in Brooklyn and in Manhattan. And I think that covers it. Kimberly?

Operator

Thank you. Moving on we will go to Nishu Sood with Deutsche Bank.

Nishu Sood - Deutsche Bank

Thanks. Good afternoon.

Robert Toll

Hi.

Nishu Sood - Deutsche Bank

My first question was about -- you were talking about selective purchases of land, converting our options into own land, that sounds like moving land on within your pipeline. How about putting land in at the beginning of the pipeline? Have you begun to pickup activity on that end too?

Robert Toll

Just slightly we have. If I understand your question, I think what you're asking is, is our land acquisition team beating the bushes and busy doing what it frantically did before the drop in the market, which is scout for deals and get us into the approval process, which takes generally several year's before we take the land down from -- we are clawing at the option. It's an agreement of sale with the down payment. And the answer is, as I just said, yes, we're picking up that activity as we see the housing slump coming to an end in some markets.

Nishu Sood - Deutsche Bank

Right, so which market is there anything that standout in terms of where you picked up activity more than others?

Robert Toll

Yeah. Activity is picked up in California, both North and South, activity in New York, exurb, suburbs, and of course in the urban stuff. We picked up some activity in Pennsylvania, Raleigh, Charlotte. Actually, the market is not -- it doesn't seem to be recovering as fully as some of the others. Arizona, we've recently looked at some deals.

Nishu Sood - Deutsche Bank

Okay, great and moving on to cancellations. Last quarter, you said that significant number of your camps were just in few markets. I think one of them was in the Northern Florida and Northern California.

Robert Toll

It wasn't Northern Florida. I believe it was Central, the Orlando market.

Nishu Sood - Deutsche Bank

Orlando, okay. How does it look this quarter, were they spread out or were they concentrated here?

Robert Toll

I know we were -- I know we had a bunch in Orlando still, Joel do you remember?

Joel Rassman

Yeah, most of the areas seem to get better relative to where they were before, although Orlando still has a higher percentage of cancellations than its percentage of our business. And there was a little pick up in cancellations in a particular community in Northern California. The rest of this -- and a little bit worsen the West Coast of Florida. The rest of the markets were pretty much -- were better.

Nishu Sood - Deutsche Bank

Okay and finally, where these incremental impairments going to be?

Robert Toll

We're not going to comment any more than we did. When we get a better handle on what the number is, we will give you that in depth, but if you take a look at this -- the areas that we said appear to be not turning around or not stabilized yet, you will get a pretty good idea of where we would probably be.

Joel Rassman

Thank you.

Nishu Sood - Deutsche Bank

Okay thanks.

Robert Toll

You're welcome. Kimberly?

Operator

Thank you. Joel Locker with FTN Securities will have our next question.

Joel Locker - FTN Securities

Hi, guys. Just the breakdown of the 70,000 lots, how many of those are owned and how many of those are options?

Joel Rassman

About 60% owned and 40% options at this point.

Joel Locker - FTN Securities

60% owned and 40% options. And just on the impairment test, just to double check, that include only gross margin not including SG&A. So as long as your gross margin is--

Joel Rassman

It includes everything, pretty much everything, except certain excluded costs which we have that some other people may not have like a project manager. But everything else is pretty much included.

Joel Locker - FTN Securities

Right. All right. Thank a lot.

Robert Toll

You are welcome. Thank you.

Operator

Moving on, we will go to [Myron Kaplan] who is a private investor.

Myron Kaplan - Private Investor

Hi, guys.

Robert Toll

Hi, Myron.

Myron Kaplan - Private Investor

Hi, I was going to ask about impairments, but I won't. The other question I have is in these various markets. How important are you finding the kind of theoretical boundary, which is the affordability to the selling rates that you are experiencing?

Robert Toll

It doesn't appear to be that noticeable to us, except that we do note that the average LTV. Mortgages has gone up from 70% to somewhere in the 72% to 76% range. So, people are borrowing a little more, that might has to do with affordability, probably does. It could have to do with taking advantage of one of the last grade tax breaks, which is your deduction of interest on a mortgage.

Myron Kaplan - Private Investor

Right. Also they are receiving less for the houses they sell you think?

Robert Toll

It makes a lot of sense. So, they have less to put off, so that would drive the LTV from the average 70%, which we have seen over the past 40 years to 72% to 76% depending upon various communities.

Myron Kaplan - Private Investor

So does this pose any kind of a problem to you?

Robert Toll

I don't think so. We haven't heard of it.

Myron Kaplan - Private Investor

Right. Okay. Thank you.

Robert Toll

Thank you, Myron.

Operator

Moving on, we will go for Wayne Cooperman with Cobalt Capital.

Wayne Cooperman - Cobalt Capital

How are you doing?

Robert Toll

Good. Thank you, Wayne.

Wayne Cooperman - Cobalt Capital

I don't know if this is a billion dollar question or what, but we know things are bad, but we know they are going to stabilize and eventually they will get better. When things do get better, could you guys just comment on where you think the company could be as far as in the number of units delivered and where your margins might settle out on a normalized basis? I mean

Robert Toll

Yeah. I understand the question. I'll turn that one over to Joel. When things get better Joel, where is your number?

Joel Rassman

When you look at the world and thinks of good, you can never think about what can go wrong. And when you look at things like they are right now and they are slow, you could never think of what can go good. But having -- putting the answer in that context, we put on our website all of our historical data, which shows where we have been from 1986 through last year. Margins have gone from the mid 20s to 34 or 35 during that period of time. And I guess some place in the middle was a good place to figure out [where you'd be].

Robert Toll

You know how we were 200 more schools…

Wayne Cooperman - Cobalt Capital

You do anything differently in that like going forward that would probably prevent you from hitting those high margins and growing as much as you did some of the years?

Robert Toll

No. As they taught us in law school, it pays your money and takes your chance. Take a look at our annual, you will see each year, as Joel just stated, led out for you, 50 years that you think represents the norm and…

Wayne Cooperman - Cobalt Capital

I was just trying to get what your view?

Robert Toll

Our view is, we don't know.

Wayne Cooperman - Cobalt Capital

That's a fair answer. Thank you.

Robert Toll

You are welcome.

Operator

Thank you. Moving on, we will take Timothy Jones with Wasserman & Associates.

Timothy Jones - Wasserman & Associates

Hi, Bobby.

Robert Toll

Hi, Tim.

Timothy Jones - Wasserman & Associates

Just a bit of housecleaning, you said that the cancellation rate went up sharply 29.8% versus 8.8. I computed the difference of the numbers you gave and I got a number like 21%. What am I doing wrong? It looks like your cancellations went from 421 to 436 and 421 on [1965] is 21.9.

Robert Toll

Yeah, I know. I think we've got some numbers mixed up. Greg, have you got it?

Greg Ziegler

A year ago they were 151.

Robert Toll

Can you hear Greg? Are you close enough so that…

Joel Rassman

I think he picked up the wrong quarter. You were comparing the fourth quarter to the first quarter. Bob talked about the first quarter to the first quarter. If you look a year ago, we were about 8.8% for the quarter compared to what we are now, which is 29 something. And from the fourth quarter to the first quarter we went down as a percentage of total business signed from 36 something to 29 something.

Robert Toll

Thank you.

Timothy Jones - Wasserman & Associates

I think repeated on the offline I bet. So, I won't hold up anything up. What is your assumed discount rate on projects that you are writing down?

Robert Toll

Good question. Joel?

Joel Rassman

I am sorry. We are not going to disclose. We look at each project individually.

Timothy Jones - Wasserman & Associates

Give me a range, Joel. I mean, even if as low as [top role], but as high as tidy. Give me a number.

Joel Rassman

Yeah. I mean, whether I put interest in, we don't put interest in on the calculation and we will -- when we disclose that, we will make a determination to disclose that. But right now, I am not.

Robert Toll

Okay.

Timothy Jones - Wasserman & Associates

Okay. Thank you.

Robert Toll

Thank you, Tim.

Operator

Moving on, we will go to Alex Barron with JMP Securities.

Alex Barron - JMP Securities

Yeah, thanks. How are you guys doing?

Robert Toll

Very well, thank you.

Alex Barron - JMP Securities

I wanted to ask about your condos in Florida, are you guys already starting to close those or what's the status of those?

Robert Toll

I do not believe we have stored--

Alex Barron - JMP Securities

The high-rises, is what I am talking about.

Robert Toll

Yes, I know exactly. I understood you to be distinguishing from the low-rise garden type condos. Just checking to see we delivered anything. How we got -- I don't think we haven't, but…

Joel Rassman

No, I think scheduled start is in second quarter.

Robert Toll

Should start pretty soon to make deliveries. And how we are doing where the one building is sold out, and the second building has 21 units open for sale.

Alex Barron - JMP Securities

Okay. And kind of given the work you see in that market after you guys close these, do you see yourselves doing some more or not really?

Robert Toll

No, I definitely see us doing some more. But I wouldn't rush to the market if I had the ability to, which I don't, because we've got to go through approval process. And in the meantime, a construction takes you at least nine months for your construction drawings after you receive everything. So, even if I had something lined up, I couldn't be in the ground in less than a year and a half right now. So, we won't be rushing to it, but now I do see us doing more.

Alex Barron - JMP Securities

Okay. I got it. What were you guys saw -- why don't you see this quarter end in various markets in Texas at year-end?

Robert Toll

In Texas, hold on, I'll give you a review of that as soon as I can find the [Ts], there you go. Texas was -- no I did, I did them separately, good for us. Texas, Austin rate that margin as a C plus. We raised prices in last couple of weeks in two of our five communities in Austin. San Antonio, we rate that as a C minus. We've taken pretty good deposits in the past week, but the week before that, the week before that, and the week before that were just chopping it best. Dallas, we rate as a C plus market. There we raised prices recently in two communities. That's within the last two weeks, two out of ten though. And with respect to deposits and agreements, we're doing okay. It's better than average just by a hair. So, it's a C plus market for us. Those are the markets in Texas.

Alex Barron - JMP Securities

Okay, great.

Robert Toll

Thank you.

Alex Barron - JMP Securities

Can I ask one more?

Robert Toll

Yeah, sure. Go ahead.

Alex Barron - JMP Securities

So, you guys said LTV has moved up a little bit?

Robert Toll

Yes, it has.

Alex Barron - JMP Securities

Is that inclusive of all second mortgages and whatever you're getting or is that just first mortgage?

Robert Toll

That's inclusive of everything.

Alex Barron - JMP Securities

Okay. Thanks Bob.

Robert Toll

You're welcome. Kimberly?

Operator

Yes sir. Next question Dan Oppenheim.

Mike Dhillon - Banc of America Securities

Hey guys, this is actually [Mike Dhillon] for Dan.

Robert Toll

Hi Mike.

Mike Dhillon - Banc of America Securities

Hi. When we're thinking about sales per community, where -- the two 2.8 this quarter, where are we versus your goal? Are there any communities that you're actually reaching your targeted absorption? And kind of what are the steps you're planning on taking in those communities that you are not quite there yet?

Joel Rassman

Can I just, the 2.8, I guess, you got by dividing the total number of agreements divided by the number of 220 or something?

Mike Dhillon - Banc of America Securities

Yes.

Joel Rassman

Okay. First of all a lot of those communities obviously open up at the end of quarters, what they did this quarter anyway, so.

Mike Dhillon - Banc of America Securities

Okay.

Joel Rassman

So, be little careful when you do the mathematics and I think part of it comes by what type of community you have, because you sell more homes and multi-family on average per community than you do in single-family on average per community, but then I don't know if you have any other comments, Bob?

Robert Toll

We began to reach capacity in one, two, three, four, five; five communities in Northern California, that's out of 19. Two communities in Southern California, but that's out of eight, and so on and so forth. What we plan to do in areas where we have not reached capacity is continue to do what we were doing, which is to emphasis the marketing and to work as hard as we can to stay up as late as we can making phone calls, sending out for the hires and specifically targeting the advertisements, calling on brokers offices and doing all the things which you do in the soft market and in an attempt to make sales.

Mike Dhillon - Banc of America Securities

Okay. Are we at a point where we're kind of willing to cut prices a little further in order to reach our goals in some markets?

Robert Toll

Pretty much no.

Mike Dhillon - Banc of America Securities

No, okay. Thank you guys.

Robert Toll

Thank you. Kimberly, we have an enquiry from [John Cole]. Our cancellations are a function of Toll's customer inability to sell existing homes; to some extent, yes. That’s used -- I think it's about 30%. Do you have the numbers because we recently served --

Greg Ziegler

15 to 20%. Yes, between 15% and 20%.

Robert Toll

15 and 20. You have the other reasons, some of them were historical.

Greg Ziegler

About 15 to 20% are people who are -- say now that they were investors who weren’t investors when they signed up for us, but refused to close and just [purely] refused to close.

Robert Toll

Do you have the sheet, because I did have that analyzed recently, Greg. Mike Snyder gave it to us. Well I remember that there was a general category, financial reasons.

Greg Ziegler

That we broke that out.

Robert Toll

-- which was large, about 40%.

Greg Ziegler

40%.

Robert Toll

And there were mortgage problems which really amounted to the same as financial, and then there were family problems and medical problems.

Greg Ziegler

About 6% of the people.

Robert Toll

Amazing how many people get sick when prices fall, that’s about it. Kimberly?

Operator

(Operator Instructions). Next question will come from Ken Zener.

Ken Zener - Merrill Lynch

Afternoon.

Robert Toll

Hi, Ken.

Ken Zener - Merrill Lynch

I am down here at the build. So, in a interesting way, you talked about the sales people and some of the broader forums. The sales people are focusing on our expected traffic to be of the higher quality. So, if it's down 40%, they do expect their conversion ratios of that traffic to be a lot better. Are you seeing this and/or could you quantify this deal?

Robert Toll

I can't quantify it, but we're seeing it. And it's just a natural phenomenon. When a market comes back, those people that come to the samples to the model homes are generally, initially going to be more serious than when a market is at its average or hitting a good clip in which case you get a lot of those who are just looking for entertainment as they give the models, which is fine, because we do it [at sum]. So, of course, we don’t resent but we appreciate it.

Ken Zener - Merrill Lynch

So, I guess, okay. I guess then the lower or the higher average sales price that you achieved this last quarter, you talked about fewer lower price homes converting in the orders. Was that largely a function of Florida or was that widespread across all markets?

Robert Toll

Joel?

Joel Rassman

It was a combination of lower price units in Florida and in California and in (inaudible)

Ken Zener - Merrill Lynch

Okay. And then I had one more question. The percentages Bob that you just broke out about why people were cancelling, does that tell you because if only 15% or 20% were investors and 30% couldn’t sell, does that indicate something about a structural change in your buyer relative to three or four years ago when they didn’t have financial issues?

Robert Toll

Three or four years ago, we didn’t see investors to the extent that we did in finally '05, in '04 and '05. Otherwise I can't say.

Joel Rassman

I think it will have us appreciate. When they were appreciating you get people who close and then will look for reasons not to close. And when you get times like this when people are nervous, they have all kinds of reasons which may not turnout to be their real reason.

Ken Zener - Merrill Lynch

Right. So, it doesn’t indicate a greater level of distress on the potential buyer.

Robert Toll

The one area of distress that we are fairly certain of is that they can't sell their home. And that certainly is distress because they want to buy the new home, but they can't own two homes. And so, they've got to either deposit with us and stay where they wish they can move from.

Ken Zener - Merrill Lynch

Yeah. And I guess there was an interesting article today in News Journal, there was one comment of FICO scores not being a good indicator of buyers' financial means. I don't know if you saw that article, if you'd like to comment on that quotes?

Robert Toll

No. I haven't seen the article. What was the first part, FICO?

Ken Zener - Merrill Lynch

FICO -- FICO scores.

Joel Rassman

Well, not a good indicator buyer quality in a low interest rate environment. That's it, thank you.

Robert Toll

No idea, thank you. Kimberly?

Operator

Yes. Next we will take our question from Darin Fierstein.

Darin Fierstein - Wachovia Securities

Hi guys.

Robert Toll

Hi.

Darin Fierstein - Wachovia Securities

First of all, can I get the total number of spec units at the end of the quarter?

Robert Toll

Anybody know that here? 1600 is what my number is.

Darin Fierstein - Wachovia Securities

So, can I get say, ex the condos?

Robert Toll

One second, we'll get it for you.

Darin Fierstein - Wachovia Securities

In the meanwhile you're looking for that, I was wondering in California the improvement that you saw there, is that on a gross basis or net basis?

Robert Toll

Net.

Darin Fierstein - Wachovia Securities

Net?

Robert Toll

It's the only thing that counts.

Joel Rassman

We have a total of 476 single-family quick delivery homes, 645 multi-family, 466 homes in high-rises where we have not yet sold the unit. We have 2 condo converts with 354 homes not sold and (inaudible) of 112 for a total of 2053.

Robert Toll

Thank you.

Darin Fierstein - Wachovia Securities

Okay, thanks guys.

Operator

Next, we'll take Steve Fockens.

Steve Fockens - Lehman Brothers

Hi, good afternoon guys. Bob, in the release you talked about and on the call that while seasonally it's not surprising to see a little pick-up in January and February, it still feels encouraging.

Robert Toll

Yes.

Steve Fockens - Lehman Brothers

Is that in terms of our year-over-year net or gross improving relative to the last few months, or what are the things beside -- once you strip out seasonality, what are the things that are making you feel a little better near-term?

Robert Toll

I didn't have the success in California. On a seasonal basis, they weren't [knocking the state] last year. Let me think of the other markets. We definitely didn't have the limited success that we are having in Pennsylvania, the county surrounding Philadelphia, Maryland, and Virginia, around Washington DC, last year that we are having this year. So, in those markets that are getting better, they are getting better not just seasonally, but also on a year-over-year basis, which gives us some encouragement.

Steve Fockens - Lehman Brothers

And to follow-up on that quickly. Specifically, on DC, what are you seeing there now versus I think you talked about or you just mentioned it, versus the last few months, but also year-over-year?

Robert Toll

Yeah, it's not so great. And I think my characterization in the last call was dancing off the bottom -- on the bottom or slightly low off the bottom. I would say we are at the beginning of the comeback trail. So we are doing better, but I don't want to get excited yet about it. It's still not back to C market. I wonder how I rated it. Hold on. Maryland is a B market and I rated the Washington DC, Northern Virginia market as either C minus or D plus, plus. So that gives you an idea of our take on the market.

Steve Fockens - Lehman Brothers

Okay. Thanks very much.

Robert Toll

You are very welcome.

Operator

Next, we will take Stephen Kim.

Johanna - Citigroup

Hi this is Johanna for Stephen Kim. All questions have been answered. Thank you.

Robert Toll

Thank you very much.

Operator

We will go to [Greg Gibernet]

Greg Gibernet

Good afternoon gentlemen.

Robert Toll

Hi Greg.

Greg Gibernet

Most of my questions have been answered, but I wonder if you could talk about what you are doing to defend your backlog that may be improving your cancellation rates. Now you can more aggressive in going back to people or wavering, offering them a little bit more incentives?

Robert Toll

No. We began that program probably about 9 months ago and we haven't increased it. If anything we have decreased that on average.

Greg Gibernet

Okay. That's all I needed to know. Thank you.

Robert Toll

We will take the house and the deposit.

Greg Gibernet

You take the house. Yeah. How much did you taken in revenues from just walk away during the quarter. Does Joel have that number?

Joel Rassman

Not yet.

Robert Toll

Doesn't have it, yeah, but we should have it.

Greg Gibernet

Okay.

Robert Toll

Thank you. Kimberly.

Operator

Next, we go to Michael Bressler.

Neil Borski

Hi, this is [Neil Borski] in for Michael Bressler. Bob, you referred earlier to the phenomenon of builders lowering their land inventories -- pretty much the opposite over the last couple of years when --

Robert Toll

So, that’s for sure.

Neil Borski

Builders would brag about how years of supply they have and --

Robert Toll

Now you are talking on one.

Neil Borski

You suggested that this may reverse again in the couple of years when they find themselves short land. Could you just elaborate on that, particularly what you are doing and how you see the ebb and flow of how much land for your business is an appropriate amount? And do you really think that in a year or two that other builders will be cut short?

Robert Toll

I think that the market will be cut short. I don't want to speak specifically to the top 10 or the top 20 public homebuilders. But, I think the market will be cut short. The reason you had such tremendous run up in pricing, was not only because of the phenomenon of the false 10% to 15% expert demand occasion by speculation. That speculation began because it was initially a run up because of an imbalance of supply and demand with respect to the building lots, the capability of the industry to supply the initial demand, the owner occupied demand. And you've got to see that again when you are taking the consideration of the demographics of the country and we are adding people at a clip that is much greater than the ability to add supply in the homebuilding stream. In fact the supply has been stagnant since the 1970's and you've added -- we recently hit a 300 million mark as opposed to in the '70's probably just hit over 200.

Neil Borski

But with all this supply of land effectively going back to the market, one would expect that land prices are declining and that there might be some attractive opportunities. Yet, we don’t hear any of this sort of vulture purchases that we made quite about in the early 90's?

Robert Toll

Well, that’s we haven't had enough time, and I hope we don’t get it of course. You got to watch what you wish for. It generally would take 3 years to start to see the offerings from banks and bankruptcies or very despondent sellers who wanted to move off the farm and get some place else with their nest egg. And we've only been in this market since Katrina '05 that was Sept '05, so you have got, Sept '06 and then 4 or 5 months.

Joel Rassman

16 months.

Robert Toll

16 months, thanks Joel. So, we are only half way there to when you would see land start to be disgorged and I -- remember what I said previously about the difference between this downturn and any other one that I have ever witnessed, which is you've got a great economy, stock markets are roaring, interest rates relatively are very low, unemployment is very low. So, more than likely you won't get this time the way in coming to the market as you did the last time turnaround, which was 89, 90, 91, 92 things were still terrible.

Neil Borski

So should we expect Toll's inventory related to sales to rise in the next year or two or is this the same it will flow?

Robert Toll

I would love to find some great deals, but I probably won't and that will probably be where it is now and on a number ratio.

Neil Borski

Okay. Thank you.

Robert Toll

You're welcome.

Operator

And we'll take Todd Vencil.

Todd Vencil - BB&T Capital Markets

Thanks very much. Most of my questions have been answered. I did want to maybe drill down in some of the other Southeastern markets outside of Florida and just I see what you're seeing there?

Robert Toll

Southeastern markets other than Florida for us is what guys

Todd Vencil - BB&T Capital Markets

North Carolina, South Carolina

Robert Toll

North Carolina, South Carolina. South Carolina we have couple of projects off Island Hilton Head and that market is pretty soft for us right now. Let me find it out. We analyze this anticipating the question of what’s doing in what market. Charlotte is -- in the last four weeks for us a C minusmarket. Raleigh is a B market for us. We have even raised prices recently. South Carolina apparently is indexed under another name having trouble finding it. Here we go, South Carolina, yeah they had all [final] market right now. And for the past four weeks has been a D for dog kind of market. Now, seasonally, this is not the season. The season begins in the spring, but still we are not encouraged when we have a D kind of market. And that's the south, the only southeast stuff that we have for you.

Todd Vencil - BB&T Capital Markets

Okay. Thank you.

Robert Toll

You are welcome.

Operator

Next we'll take Michael Rehaut.

Michael Rehaut - JP Morgan

I assume that's me. It's Mike Rehaut. I had a couple of follow-up questions. One, I just wanted to be -- to drill a little bit in terms of the pricing. You said that you've decreased your efforts to combat against the cancellations. And between that and saying that you don't see the need for further aggressive pricing. I was wondering if you could kind of go market-by-market and -- or at least the major ones that you operate in and talk about which markets may be you are seeing pricing flat, down, or still declining or even some modest gains?

Robert Toll

I can give you our ratings of the market. But I don't think I can take the time to start to analyze every one of them with respect of price gains, moderation or neutral stances.

Michael Rehaut - JP Morgan

We will take your rating system.

Robert Toll

Arizona right now, we rate as C minus. Palm Springs -- California, Palm Springs, we rate as a C. Northern California, we have an A minus. And Southern California, we have as an A. Colorado is C minus for us right now. Connecticut is a B minus. Delaware is a C minus. Maryland Shore is an F for Flunk. Florida's Central Market is hard to quote. It's a B on deposits and agreements, but it's a D on closings because we appear to be renting the homes more than which we are selling them. People buy them. Drop $20,000 or $30,000 deposits and walk away and we sell them again. So, it's a difficult market to rate right now.

Part of Florida, Eastern Coast is a D, for dog, plus. Florida North, Jacksonville market is a C minus. Florida West Coast is a D, for dog, and note that multifamily product there is absolutely dead. Illinois is a D market and Michigan is an F market. Minnesota is an F market for us. Las Vegas is a D plus. It feels a little better to me, but stats just still have it as a D plus. The Reno market is an F. Massachusetts, New England is a C market. New Jersey is very choppy. If you rank the state as a whole, it's a C minus. If you go and look at the Princeton area, recently it's an A minus or a B plus. As I have said many times, all of our urban towers in Hoboken are an A, New York City, Manhattan and Brooklyn is A plus. New York suburbs all the way up to Dutches County is an A. Charlotte and I gave recently you C minus, Raleigh B. Pennsylvania C plus.

It feels a little better than that because it's an improving market. The Pocono market which don’t confuse with vacation homes for skiing and summer fun, it's a bedroom area for those who normally couldn't afford along Route 78 coming out of lower Manhattan going through Clinton and all the way over to Pennsylvania. So, you are primarily talking about people that are trying to buy homes for less than they would have to pay in New Jersey. Now that you got to pay at market or a very slow market in Western New Jersey, the Pocono market is not doing well and that's a D. Hilton Head I give a D. Austin, C plus. San Antonio C minus. Dallas C plus. We've already spoken about those. And Maryland a B and Washington DC we've already spoken about its being either C minus, minus or D plus, plus. And there you have our ratings on those markets. Thank you.

Michael Rehaut - JP Morgan

Thank you.

Robert Toll

You're welcome.

Operator

Next we'll go to Alex Barron.

Alex Barron - JMP Securities

Yeah, thanks for taking my follow-up. I wanted to ask you about, may be this is for Joel. Joel, how many communities have you guys taken write downs on, not including this quarter but just in previous quarters, how many communities have you guys already written down?

Joel Rassman

I don't have it Alex, I am sorry.

Alex Barron - JMP Securities

Okay. But I think I recall you guys saying most of the previous, may be this was just land options, may be you can clarify it was in California? So, I am trying to compare that comment versus what you guys just said, those are A minus rated markets.

Joel Rassman

We had write downs in California and write downs in Michigan. The areas that I remember being the biggest write downs of geographic regions and we had a little bit in Florida or a little bit in some other areas around the country as the areas I recollect.

Robert Toll

With respect to the second part of the question, as has been famously said, it depends on what the definition of it is. If you are in a market that you have no sales and you have no pace and it's been that way for a while for a long enough period of time that you have to take an impairment on your ongoing product. Well, the accounting requirements are that you -- and it's good judgment also I believe. I think the accounting requirements are proper you write that down. If that market comes back then you start to make profits.

Alex Barron - JMP Securities

I mean would it be appropriate to interpret then the reason you are rating it an A now. You are seeing better sales is because you took the write down and so you are basically able to offer more affordable prices?

Robert Toll

No, I don't think so. That is a possibility. I have noticed that. We've come back in some places where we were doing no business or just a little bit. We've taken impairment. We write it down. We pass that one to the divisions because you don't want to play game where you never informed your division as to what you've done and what the basis is of their holdings at this point. Based upon that, they say, well, let's offer more affordability and so things pick-up a little bit. But that's generally on stuff, it's bouncing back. It's certainly not the reason for a region going to an A. I'd hope never on a business basis, write down that far that things all of a sudden are A markets because we have reduced prices. That's not going to happen, not here.

Alex Barron - JMP Securities

And just to understand your rating system. An A, like I guess in your mind like what is the sales pace per week or per month for communities that you would call something an A?

Robert Toll

When you went to school, they rate them A, B, C, D, or did you have another system?

Alex Barron - JMP Securities

Well, I had that system and I had a system that went from 1 to 10, but anyway I am just trying to understand like, in your mind, if you sell one a week, is that an A, or two a week? Like what makes --- how do you view that?

Robert Toll

Yeah, if we are selling one a week or two a week, our average -- guys.

Joel Rassman

Single family communities are about 25 a year. So, that would be one every other week.

Robert Toll

Right. So, if you have an average of 25 on single family communities. I think was a little lower actually guys. And you are geared up for that kind of production and you get demand for double or even more, I would call that an A.

Alex Barron - JMP Securities

So the 25 per year is what B, like an average grading?

Joel Rassman

Not if you are geared up to do 25, certainly it would be better than average, you would be doing -- you would be in a B market.

Alex Barron - JMP Securities

Okay, alright. Just wanted to put things under perspective.

Joel Rassman

In perspective, certainly.

Alex Barron - JMP Securities

Yeah. Thanks Bob, thanks Joel.

Robert Toll

You're welcome. Kimberly we have an inquiry from Kit Bradshaw. Specifically, I hate questions that start off with specifically. Specifically, what is the view on the South Florida properties, in particular to Jupiter Country Club property in Jupiter, Florida, which is just coming online?

Kit, is there a possibility we can get you to the sample home and give you a specific view of it. Our view is that we have a neat property right on an exit of I-95 that is very close to an exit of the Turnpike as well. It is about 4 minutes north of Frenchman's Reserve, which is a very successful community for us that we are selling out now, which is just a little north of Mizner Country Club, a successful community that is now sold out. So this is the next generation of Golf Club Community, a master development's for Toll Brothers. We would hope that it's well received, we think we got a spectacular golf course. But, right now the East Gold Coast of Florida is best characterized as a quiet market and the rating that we gave it was D plus. So, what is the view, the view is great expectations, but we are in a D plus market and it's behaving in a D plus manner. Kimberly?

Operator

Yes sir. [Laurie Wilcker] will have our next question.

Laurie Wilcker

Hi guys. I have a question and it suits -- maybe a little unclear to me. Back in your prepared comments you had discussed the selling communities and you suggest 320 selling communities and 80 of that are either sold out or are getting ready to open. Is the 320 inclusive of that 80?

Robert Toll

No, no. 320 and 80 would be 400.

Laurie Wilcker

Okay. And then the 300 that you have in predevelopment, can you discuss what areas those are in and also the ones that are opening. What areas those are in?

Robert Toll

I -- it's the -- on just Monday I have the communities to open and April -- in January and February. Now, it's a Mike Schneider --

Joel Rassman

But this is a summary.

Robert Toll

By the way could be -- so -- you think -- you think have it --

Joel Rassman

In second quarter, this is all of an opening and closing by each --

Robert Toll

No that won't -- well, go ahead read your material.

Joel Rassman

Okay. The major areas in the second quarter that will have a increases that -- Florida will be up about 3 communities, North Carolina will be up about four communities and Nevada up about4 communities and Colorado down about 2 and everything else are one [Gs].

Laurie Wilcker

Okay, and all of these communities that are opening are -- these are pretty much now definitely going to open. What you just said?

Joel Rassman

We believe that.

Laurie Wilcker

Okay. Alright, thanks so much for the clarity guys.

Robert Toll

You are very welcome.

Operator

We have a follow-up question from [Randy Raisin].

Randy Raisin

Hey, how you doing? Can you guys -- just getting back to the comments that were made in some more questions, one some of the land -- when you make the comment that there are could be some areas where you see builders short, can you may be give a little more specificity around what areas --?

Robert Toll

To be more specific.

Randy Raisin

Yeah, where -- where do you see shortages going forward?

Robert Toll

No, I don't believe I said, that I can see specifically the builders were short with land, it was a general statement that in a down market such as we've had, and especially in this one where there has been so much impairment and write-downs, that you have much slower, if not dead, stopped, developed enough land, pushing land through the approval process. And therefore, logically I reason that you will have a shortage at sometime in the future when you get even the equilibrium of demand and supply that you had back in the mid 90's and certainly when you return to much better times that began around 2000.

Randy Raisin

Okay. Thanks.

Robert Toll

You are very welcome.

Operator

And our final question is a follow-up from Timothy Jones.

Timothy Jones - Wasserman & Associates

Hi again. If I take your beginning backlog last year and add the spectra 151. I get 8641 which is 39 units greater than your deliveries. If I add the backlog with the 436 cancellations this year, I get roughly [3237], at least 6200. Is 6200 a good ballpark number for your deliveries for this year given the fact that other than the cancellations you have two specs and you -- it takes you about 12 months to go through units.

Robert Toll

Joel?

Joel Rassman

We have not updated our guidance from the last guidance which is a range of 6300 to 7300 with 6800 as the midpoint. We will do so in February as we get a chance to evaluate the delivery times of the remaining backlog. And what we have in product lines that may have quicker delivery time such as our multis.

Timothy Jones - Wasserman & Associates

I understand. Thank you.

Robert Toll

Thank you. Kimberley, thank you very much.

Operator

Thank you sir. I would like to turn the call back over to you. We have no further questions.

Robert Toll

Well, there you have it. Thank you very much, Kimberley. We will just talk to everybody in a couple of weeks when we come out with earnings. Thanks for your attention. Good bye.

Operator

Thank you. Ladies and gentlemen, this does conclude today's Toll Brothers Incorporated conference call. We'd like to thank everyone for their participation. Have a wonderful rest of your day.

Robert Toll

Good bye.

TRANSCRIPT SPONSOR

Better Than AdSense

What if there was a way to promote your company to a perfectly targeted group of potential customers, partners, acquirers and investors? What if you could tailor your pitch to them at the moment of maximum interest? And what if you could do this for a no-brainer price?

This is exactly what Seeking Alpha is offering with transcript sponsorships.

Six types of companies are sponsoring earnings transcripts on Seeking Alpha:

1. Company sponsors its own earnings call transcript (example).

2. Company sponsors partner's transcript (example).

3. Company sponsors competitor's transcript (example).

4. Issuer-sponsored research firm sponsors client's transcript (example).

5. Investment newsletter sponsors transcripts of successful stock picks (example).

6. IR firm sponsors transcript of micro-cap company (example).

7. Consulting company sponsors company's transcript in sector of interest (example).

Your company's name and promotion could have been on this transcript! Learn more, or email Zack Miller for details.

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 F1Q07 (Qtr End 1/31/07) Preliminary Earnings Results Call Transcript
This Transcript
All Transcripts