托爾兄弟 (TOL) 2002 Q2 法說會逐字稿

Good afternoon and welcome, ladies and gentlemen, to the Toll Brothers second quarter 2002 earnings conference call.

At this time, I'd like to inform you that all participants are in a listen-only mode.

At the request of the Company, we will open up the conference for questions and answers following the presentation.

I will now turn the conference over to Mr. Bob Toll.

Please go ahead, sir.

Thank you, Deb.

Welcome, everybody.

There are about 120 signed up for this call, plus many more listening on the Web.

And we thank you all for your interest in Toll Brothers and in the home building industry in general.

With me today are Joel Rassman, CFO; Fred Cooper, Vice President, Finance;Joseph Creed, Chief Accounting Officer and Kearn McKaren, Vice President of Marketing.

Before I start, I ask that you read the statement on forward-looking information which can be found in today's release or on our Web site.

We caution you that many statements on this call are based on assumptions about the economy, world events, housing markets, weather and other factors whose performance is uncertain and could significantly affect future results.

Those listening on the Web can email questions to rtoll@tollbrothersinc.com.

We'll try to answer as many questions as we can.

We have just completed the best second quarter and first six months in our history.

Record second quarter earnings of 69 cents per share diluted increased 19% versus second quarter 2001.

Record net income of $52 1/2 million rose 15%.

Record second quarter revenues of $550.5 million increased 7%.

Record contracts of 902 million, a new single quarter record, grew 30%.

And our record second quarter backlog of $1.77 billion rose 10% versus second quarter 2001.

These statistics, I think, are amongst the most important stats that I'm giving you, because with the contracts adding to the backlog, since the first home from the contracts should not be completed until approximately 6 months - probably from today's call - and the last home completed approximately 13 months from today's home, you get an idea of the length of the future - - the length of the period that we can see into to forecast earnings and revenue.

And if we continue to sell, as we've been doing, it appears as though we are headed for some continuation of the good times that we've been doing.

For the six-month period, record earnings of $1.29 per share diluted grew 18%.

Record net income of $97.0 million rose 13%.

Record revenues of $1.04 billion grew 5%, and record contracts of 1.4 billion rose 21%, versus the same period of 2001.

Limited lot supplies and growing buyer demand in major metropolitan markets are a prescription for our continued prosperity.

Supply is constrained by no-growth sentiment and restrictive government policies.

Demand is propelled by population and household growth, by immigration and by the growing appeal of the new home as both the lifestyle enhancement and an attractive investment alternative to the financial markets.

Buyers who are finding little to get excited about in stock, bond and savings markets - except for those who invested in Home Builders - are finding stable appreciation in the value of their homes.

The favorable tax benefits of owning a home, both in the mortgage deduction and the treatment of profits upon resale, increase the investment appeal of home ownership.

Industrywide, the numbers remain strong.

Last week, the U.S. Census reported that the supply of unsold new homes - speculative inventory as it is called - is at about 3.4 months supply, which is near historic lows.

This is about half the supply on a monthly basis that was available in the early '90s when the nation emerged from the last recession.

We believe this is a reflection of the prudent and conservative way the major builders are managing their inventories, rather than building too far ahead of current demand.

This is always been Toll's strategy.

We view our land supplies a valuable and limited resource and we prefer to keep raising prices to ration our land supply and maximize profits rather than sell product faster and simply build volume in the immediate term.

This strategy has contributed to our industry-leading profit margins.

As the economy strengthens, employment increases and consumer confidence grows, this shortage of new home product could put additional upward pressure on the sale price of new homes and it should.

Since the large public builders are the ones with the land supplies, the capital and the resources to meet demand, this benefit should accrue disproportionately to the major builders.

The impact from lot shortages on rising home prices was illustrated in this morning's "New York Times' Business Section" on the San Francisco Bay area, which is one of the most restrictive areas in the U.S for getting land approvals.

Even as the Bay area colony remains in recession, housing prices are rising rapidly due to increasing population and shortages of new home sites.

A study based on projected population growth in the region by the Bay area council predicts a 40% shortfall in the production of new housing needed in the next 2 decades to meet expected demand.

With our strong capital base and the nearly 40,000 home sites under our control, we are prepared to benefit from the shortage of home sites in our affluent markets including the Bay Area.

Based on current demand and the pace of projected community openings, we believe we will produce record results in 2003 and again in 2004.

Our financial position continues to strengthen.

We ended the quarter with $115 million in cash and $485 million unused and available under our bank credit lines.

At quarter end, stockholders' equity grew to over $1 billion, up 22% from one year ago.

We also filed a new $750 million universal shelf registration which enables us to raise capital quickly and opportunistically in the public markets.

According to the U.S Census, Americans continue to seek larger and more amentized homes.

As the baby boomers continue to mature, and as the number of affluent households continues to increase, these trends and demographics favor further expansion of our luxury move-up, empty nester and active adult second-home product lines.

With our brand name reputation and 36 years of experience serving luxury buyers, we believe Toll Brothers is uniquely positioned to prosper from the growing demand for luxury homes in the united states during this decade.

Now aim going to turn it over to Joel Rassman, our CFO, to do the numbers.

Joel?

Thank you, Bob.

We just completed a tremendous second quarter.

Record earnings of 69 cents per share were up 19% over last year's second quarter results.

We had record home building revenues of $539 million up 8.4% over last year's second quarter.

Revenues exceeded the guidance we provided you, as terrific weather aided our building efforts allowing to us deliver over 100 homes more than we projected.

This was offset slightly by an average delivery price per home a little below our mid-point guidance.

Gross margins for the quarter were 27.9% compared to 25.9% last year.

A 200 basis point improvement.

We expected an improvement as price increases and mix flow to the bottom line.

However, this improvement was better than our guidance as a result of two major factors:

First, the favorable weather conditions meant we didn't incur our normal related winter expenses.

This positive impact was further improved because of the higher production I just described.

Lower costs and higher volumes means less overheads per home.

The impact of these two items together resulted in a 50 basis-point margin improvement.

In addition, for the second quarter, write-offs were $450,000 or approximately $2 million less than we included in our projections.

This resulted in about a 40 basis-point improvement in margins.

SG&A in absolute dollars was slightly higher than we had projected due to increased advertising expenses.

We believe that some of the additional closings in this quarter were accelerated from the third quarter as a result of the terrific weather conditions.

We believe that some of the additional closings in this quarter were accelerated from the third quarter as a result of the terrific weather conditions.

And some of the closings from the fourth quarter will be accelerated into the third quarter.

However, as you may remember, demand for housing had started to show some slowing in the summer of 2001, and then we had the tragedies of September 11.

As a result, we didn't sign a lot of contracts until late January 2002.

Accordingly, many of the agreements signed in January and during the second quarter were not signed early enough to deliver homes by October 31, the end of our fiscal year.

We noted that in a number of analysts models, the greater-than-projected revenues in the second quarter have not been offset by having fewer closings in the subsequent two quarters.

Based on the wonderful building weather we have enjoyed, we are raising the bottom end of our guidance for closings for the year from 45/50 to 41/60, while continuing to keep the top side at 4400 homes.

We believe we will deliver between 910 and 1,010 homes in the third quarter and between 1185 and 1335 homes in the fourth quarter.

Although the average sales price for the second quarter was approximately $496,000, we estimate that the average sales price for homes delivered in the fourth --- in the third quarter will be between $ 515,000 and $525,000 and between $525,000 and $535,000 in the fourth quarter as mixed issues and -- both geographically and by product type -- result in fluctuations quarter to quarter on the average price of homes delivered.

We believe the average sales price of homes delivered for the entire year will therefore be between $505,000 and $515,000.

These delivered prices are increases to the guidance we previously provided you.

Land sales are estimated at $8 million for the third quarter and $3 million in the fourth quarter.

The cost of sales for the land charges -- for land -- should be about 72% for the rest of the year.

The second quarter cost of sales for land benefitted from an unexpected sale of land at a very low basis, offset in part by a delay in the closing of another parcel.

We expect minimal, if any, joint venture income in the last two quarters.

And Other Income should be about 3 1/2 million for the third quarter and about 4 1/2 million in the fourth quarter.

Even though some incentives granted immediately post-9/11 show up in the third quarter, we expect the gross margins in the third quarter will be approximately equal to last year's third quarter, as price increases put into effect prior to 9/11 continue to flow to the bottom line.

Due to geographic mix issues and incentives as a result of 9/11, we estimate that gross margins for the fourth quarter will be 100 to 175 basis points lower than last year's fourth quarter.

This is slightly better than my previous guidance.

Accordingly that we would expect the gross margins for the year will be about 25 to 50 basis points higher than last year.

SG&A for the third quarter as a percentage of sales is expected to be approximately 160 to 220 basis points higher than last year's third quarter.

We believe SG&A for the fourth quarter should be slightly higher than last year's fourth quarter.

Accordingly, SG&A for the year is estimated to be between 50 and 100 basis points higher than last year.

We believe the tax rate of 37% is still appropriate for the third and fourth quarters.

The last components of earnings per share is the average number of shares outstanding.

The average number of shares outstanding for the second quarter. adjusted for the stock split. was 76, 237,000.

Based on our current stock price trading ranges so far this quarter and an improvement in price expected over the remainder of the year, we estimated that diluted shares should approximate 77,300,000 for the third quarter, and 77,700,000 for the fourth quarter.

We are looking forward to 2003 and 2004 with optimism.

We expect to increase the number of selling communities to 175 by fiscal year end.

Our current backlog already gives us visibility into the first and second quarters of 2003.

Based upon our backlogs, increases in community, and current demand, we estimate that we will deliver approximately 5,000 homes in 2003 with home building revenues of approximately $2.5 billion.

We project this should result in earnings per share of approximately $3.

Further based on land coming through the approval pipeline and the normal sales price per community, we believe we can deliver approximately 6,000 homes in 2004.

Bob?

Do you want to open it up for questions?

Thanks, Joel.

Deborah, we'll be pleased to take questions from the audience.

And Fred, if there is any questions from the Internet, we'll do our best to answer those.

Thank you.

The question-and-answer session will begin now.

If you are using a speaker phone, please pick up the handset before pressing any numbers.

Should you have a question, please press 1 followed by 4 on your push button phone.

If you would like to withdraw your question, please press 1 followed by 3.

Your questions will be taken in the order they are received.

Please stand by for your first question.

Thank you.

Our first question comes from Joseph Sroka.

Please state your affiliation followed by your question.

Hi. Joe Sroka from Merrill Lynch.

Hi, Joe.

Joel, I think you said on the last call that you started the quarter with 166 communities.

You started the third quarter at 166 communities and you're on pace for 175 by year end.

Do you feel you're kind of above or behind pace, and does that echo into your SG&A thinking?

I think that we're on pace with most of the net community openings taking place at the end of the fourth quarter.

Okay, and then there wasn't really any change to your EPS guide -- or, I'm sorry, your share count guidance maybe about 100,000 in the third quarter from the last conference call?

Can you just sort of refresh us on shares you've repurchased during the year, and sort of what your outlook or policy is towards share repurchase?

165,000 or 35,000 ; hold on, I'm checking the exact number for you.

I think it's 230 or 265,000, but one second; I'll check it for you.

235,299 were bought this quarter and we still believe a million plus or minus - plus, probably - plus or minus, is appropriate for the year.

235,299 in this quarter.

What was the first quarter, do you have that?

We didn't purchase anything in the first quarter.

Okay, perfect.

Thank you.

You're welcome, Joe.

Thank you, and

Our next question comes from Stephen Kim.

Please state your affiliation followed by your question.

Thanks.

Salomon, Smith and Barney.

Good performance here, gentlemen, again.

Thank you, Steve.

My question relates to the impact of September 11th.

Is there any indication that September 11th of the aftermath, I should say, immediately following September 11th, had any impact on this quarter?

No, I wouldn't think so.

There were a few houses that would have dropped out of the pipeline that may have closed, but no material effect.

Yeah, I forgot about that.

To the extent that we sold something and I picked up other income when we kept a deposit in a previous quarter, and we may have given an incentive that hit this quarter for that house,it could have a small effect but it's very small.

Steve, things are a little soft in July and a little softer in August.

So we were naturally inclined to be slower anyway.

Six months from then.

And then Sep. 11, of course, things went totally dead, actually not totally.

I speak as an analyst.

We dropped about 35% off our expected norm of sales from Sep. 11 through about the middle of November.

By sales, I mean initial deposits.

And then it took another month during December to gear up those into agreement.

So not until January were we cooking again.

So you have a hiatus.

And what Joel was referring to was we even had some agreements that cancelled and wanted deposits back.

I think we kept most of those deposits, actually.

Replaced them.

And that's what you are seeing now.

Great.

My next question relates to the impact of weather.

I think I had asked you this earlier about the potential impact of mild winter weather allowing us to have some benefit and margins this quarter. and you said I think you said 50 basis points this quarter from that?

Combination of higher volumes and lower overheads ended up being 50 basis points.

Well, I guess my question --

We had no snow plowing, nno heat, light and power to run the houses, to put heaters in the homes under construction, to take care of the streets.

There was a lot of savings in overheads.

Right.

Right.

I guess my question relates to the timing, though, of deliveries that would have benefitted most during a construction phase from a mild winter.

I would think that the houses that would benefit the most from a mild winter would be those that are sort of in the earlier stages of construction, and so therefore, you might see homes, let's say, in this upcoming quarter benefit the most from a mild winter.

In a sense, you'll be delievering more homes in this quarter due to the winter weather.

Mathematically, Steve, the overheads are spread into construction and progress during the quarter.

So, mathematically more overheads go to the houses closer to completion.

But I understand what you're saying, Steve.

And it sounds reasonable.

But as I reflect back, generally, the winter is through by the middle of March.

You can start to really kick it again.

You've got half of March, April, May, June and July, to kick into the deliveries.

So, yeah, it impacts somewhat, but not as much as this quarter.

This quarter we just were able to drive right through.

Great.

And my last question relates to the -- what you are seeing in the current environment as it relates to pricing and what kind of assumptions you have embedded, therefore, into your '03 guidance.

Since you are almost at the point where you are selling homes that are now hitting '03, have you assumed that the margins you anticipate getting on -- or that you are seeing right now in the orders you are booking is going to be the gross margin you are getting next year embedded in your $3.00 guidance, or are you anticipating or being conservative in taking a haircut to what you are currently booking today?

Definitely, the homes that we are selling now are the homes that will be delivered in '03.

It's almost impossible to sell a home now and deliver it in fiscal '02, which for us, as you know, ends 10/31.

With respect to the margin assumptions in the price increases assumptions, Joel?

We are trying to use the current estimated margins in the houses we are selling now for our guidance in '03.

And, you know, it's very difficult because we have a lot of new communities that will first deliver -- have not yet delivered homes to date that will be delivering in '02 and the rest of '02 and '03.

And we don't really have the historical information to keep that as accurate as possible.

So, we are doing the best we can with our estimates.

Okay.

And you have done a pretty good job recently as a sort of, being the conservative side of that.

So hopefully that will continue.

But in any case, great job, gentlemen.

And look forward to further quarters.

Thank you, Steve.

Deb, before taking another question from your audience, I have a question over the Internet from Todd Voight.

He says, "Please discuss the ability to find and purchase land at reasonable valuations.

Are sellers of land asking buyers to pay for next year's expected land depreciation?

If so, what is the ramification for future profit margins?"

Todd, we are always looking at land that is unreasonably priced with unreasonable valuations.

It's our job to convince the sellers of that.

We always believe that we are not finding land at reasonable valuations.

But we continue to find the reality is, I'm being facetious, we continue to find pretty good deals out there.

'Are sellers of land asking buyers to pay for next year's expected land appreciation? '

Well always, they are.

It's our job to talk them out of that.

If we can't talk them out of that, we don't buy it, because the way we evaluate the land that we buy is to crank in the price through our model that does not take into consideration any appreciation in home prices.

There is no inflation built in.

So, if the price for the land has built into it an increase in the price of homes, then it's not going to work under our formulations and we won't be able to buy that land.

The ramification for future profit margins would be lower margins, if we were willing to accept land on the basis that the price is going to appreciate on the homes to such an extent that you can afford to pay more than you would pay today for land, were it to be underneath homes that you are selling today.

But as I said earlier, we don't play that game.

We won't evaluate on that basis.

Then, Todd goes on to ask, "What was the deferred marketing expense capitalized in inventories during the quarter?"

Yeah.

Yeah.

The -- we added about $7 million of deferred marketing, but it's not really deferred marketing in the sense that you believe by looking at advertising expenses.

It's really model home furnishings and entrance ways to our communities that get expensed as each home is sold.

But it's not a marketing sense of advertising in the sense that you believe by looking at advertising expenses.

It's really model home furnishings and entrance ways to our communities, which get expensed as each home is sold.

So, it is not a marketing sense of advertising.

It's really a hard asset.

Okay.

Todd asks, "Why is deferred marketing expense growing quicker than total inventory?"

I don't know that it is.

If it does, it's just because we opened more models when we have multifamily homes, we'll have more models per community on a multi-family home than we will than we do on a standard community and therefore model home furnishings go up.

That's one of the biggest components of it.

"Are incentives ever included in the capitalized item?"

No.

No.

What is --- In this market by the way there is not too many incentives around.

"What is the reason for the $11 million increase in accuded expense for last quarter?"

Anybody know?

Higher debt.

Higher debt?

We -- I don't know.

We did a debt settle offering in November.

Debt offering in November., Joseph Creed suggests.

Just normal payment of bills.

Okay.

Thank you very much, Todd.

Deb?

Our next question comes from Simon Wahlberg.

Please state your affiliation followed by your question.

Hi, Great quarter, guys.

Thank you, Simon.

Just to follow up on Todd's Internet question; if deferred marketing costs are not actually marketing costs, where do you put marketing costs on your balance sheet, and why do you call it deferred marketing costs in your, you know, at all?

Why wouldn't you call it hard assets or something else?

It's very deceiving when you see your deferred marketing costs under your inventory --

We call it inventory and we tried to explain it, and obviously since I have had a couple of questions in the last two quarters, I may have to rename it as something else.

And all marketing costs basically go in SG&A

So real marketing costs.

They are expensed in the current period in which incurred so not capitalized at all.

The only capitalized is if we have a brochure, there's some capitalization of brochure expenses, but that's it.

Thanks a lot.

You're welcome.

Our next question comes from Greg Meshma , please state your affiliation followed by your question.

Good afternoon, Bob.

Greg Meshma with Deutsch Bank.

Bob, you made a comment at the opening with regard to your buyers possibly or -- in the market at large buyers arbitraging between the equity market and perhaps buying homes.

That would seem to be more applicable to your buyer profile than of that your peers.

Are you seeing any solid evidence that that's happening based on exit interviews or is it more anecdotal?

Thanks for your question, Greg, and for participating.

And the answer is yes.

From exit interviews, we are finding factual, absolute evidence that people are making a decision, especially in the lifestyle communities, to buy second homes instead of leaving money in the equity markets.

The reasoning is that the equity markets are bouncing around so, and have shown no appreciation for quite a while.

And, you can make zilch on a savings account.

Bonds are paying next to nothing.

From their --- our buyers' perception.

And they believe that they have greater chance in appreciation in real estate.

And so it's becoming a real alternative.

It has become, in fact, a real alternative for the investment dollar.

And it's further enhanced by the fact that they get to live in their investment, and further enhanced by the fact that thers is a very favorable tax policy.

And, therefore, we believe this is a real thing.

We picked up on this about a year -- time flies when you're having fun -- maybe a year and a half ago.

And we didn't have an explanation, ourselves, as to why traffic was down and sales were up.

That's no longer the case.

Now traffic is up and sales are up.

But for a while, we had slower traffic and more sales.

And we began doing exit interviews to find out what was going on.

And it seems as though that's the reality; that people are really buying an investment.

Any evidence, Bob, you know, we've heard a lot and read a lot about intergenerational wealth transfer.

You know, that it will take place over the next 10 to 15 years.

But obviously it's taking place as we speak.

Any evidence to suggest that that -- that intergenerational wealth transfer is a big prop or support mechanism under the market today?

I haven't got the evidence myself, just theory and an influence in my reasoning from what I read.

As a matter of fact, I think Ed [Heim] and Nancy [Lazzar], ISI, put out today a page that said -- or yesterday that said, "Don't forget that this intergeneration will transfer of wealth is having a definite impact on consumer ability to continue to buy."

Because one of the questions is what's going on here?

Where's all the money coming from?

If people are so concerned with unemployment, which the [pundents] believe they should be because the statistics continue to be written of the continual unemployment, which is a strange one for a recovery as opposed to initial claims unemployment, if people are concerned, as they should be, then where's the money coming from?

And this may be the answer.

But I have no direct evidence of that.

But I believe it is so.

We haven't done the interview process to say, "Is this your dough or your parents'?"

Except if we need that information to qualify somebody for a mortgage, there we haven't -- it hasn't been reported to me that we have any increase in those we are requiring gift letters from.

You know what I mean by this?

Yes.

Okay.

Great.

Two other mechical questions.

Is the option percentage relative to the base price of the home going up appreciably, or is it remaining, you know, relatively stable?

Any trend that you can discern in -- with regard to that component?

It's going up, not appreciably, but it's going up pretty much in proportion to the price of the home.

That is to say, people buying $300,000 put in x%, let's suggest that percentage is 20%.

People buying $500,000 may be puting in 25% in option money.

So the more expensive a home, the more customizing that takes place.

This is especially so for flooring variables and other decorative kinds of items.

But it's also true, I think, for some of the hardscapes that's being put in, pools, et cetera.

When you negotiate, Bob, your national purchase contracts, can you negotiate, the option categories as aggressively as, you know, the non-option categories?

In other words, is there an initiative specifically to target the option elements that people typically order from you, in terms of potential cost savings?

I believe the reality is that there is not an opportunity to negotiate that stepped-up product as strongly as you are able to negotiate the base product.

I believe that's because the manufacturers recognize -- I mean, this is not to say that we don't try -- but when you buy the baseline dishwasher, you get a spectacular price.

And then when you buy the dishwasher with all the bells and whistles, same thing for ranges, et cetera, et cetera, the price, I think, is disproportionately higher to the builder as well as to the retailer, because I think the manufacturer recognizes that there is a capability of collecting more for this product, so they ask a little more.

None of what we are talking about, however, do I feel for the builders is a meaningful topic of conversation.

It may be meaningful for you in your analysis of building supply companies.

One final question, and I'll turn it over.

I think, Joel, you mentioned that you anticipated the inventory reserve in the quarter to be around $2.5 million, and it turned out to be just under $500,000.

What was the reason for that difference or change relative to your expectations?

We always -- we anticipate every quarter $2.5 million and some quarters were higher and some quarters were lower.

We have been lower the last two quarters.

And it was a good market, land is appreciating, it's more likely for us to have some deals that even if we made a little error or there was a little hiccup, would still go forward because there's--

This is on write-downs.

This is on writedowns.

I think we -- another answer might be that we wrote down beforehand and we are left with the good stuff.

So in terms of the forward guidance for the balance of this year and then fiscal '03, are you continuing to assume a $10 million run rate in providing that guidance?

2.5 million a quarter.

Right.

Okay.

It's probably appropriate, Greg, because who knows -

-- the shadow knows whether something is going to jump out and bite you and you have to walk away from something that you have spent predevelopment costs on or non-refundable deposit option money, et cetera.

Great.

Thank you.

Greg, thank you very much.

Thank you.

Our next question comes from Myron Kaplan.

Please state your affiliation followed by your question.

Hi, guys.

Hi.

Great quarter.

Thank you, Myron.

Will you run down, please, any -- the relative strength of your markets and I guess itemize some that are, let's say, lacking in vibrancy?

Okay.

Well, let me pull out the recap.

The Arizona market -- I'm sorry, call that Phoenix.

Take it back.

The Phoenix market had been soft, and that was during the time period when it should not have been, January, February, March, at the upper end.

And then in April picked up quite a bit and seems to have returned to normal demand for us; which is, or course, in the more expensive product, the luxury home.

California, Palm Springs market has been strong all along throughout the past quarter.

Northern California, San Francisco market, has just been lights out spectacular for the entire quarter.

And without explanation in the beginning, we were dumbfounded when it struck.

The "New York Times" article that we referred to in the monologue, I think is as good an answer as any as to why the market is doing so well.

It's probably and unfortunately for the average consumer a warning as to what's to come in almost all of the markets where there is -- I don't want to say excessive because that's making a judgment on the regulation - but where there is increased regulation of building permits and lot approvals.

Southern California has been tremendous throughout the quarter.

And there seems to be no let-up.

We have just started in Denver, and we are not overwhelmed with the rush.

And generally, we are pretty much rushed when we open up in a new territory or when we open up new communities.

So from our position, Denver is not back yet.

But that's anecdotal information, because we only have two offerings in the same location.

Connecticut is doing very well and has done well most of the quarter.

It was slow in January, February.

But March and April, it picked up.

Delaware has been very strong for us.

We are almost sold out.

We have some new communities coming on.

We just opened a resort community, and we're doing very well down by the Delaware Bay, which is fed from the Baltimore/Washington market.

Florida , East Coast, we were slow in the beginning of the quarter, and ended up with a quickened pace and pretty great success.

On the West Coast of Florida, we did welcoming out of the box this quarter, and continue to do well and are still exceeding seasonal expectations.

By now, people should be home.

But apparently, they are making extra trips down to the West Coast to buy product.

Chicago, we only have one community opened.

And we're doing well this week.

The past several weeks, it has not been doing as well as it should have been.

The Detroit market has had a tremendous quarter, done very well and continues to do well, which continues to surprise us because so much talk about so much hardship in the automobile industry for so long, it just hasn't happened.

The manufacturers may not be making money, but those who are working for them appear to be, because they are buying homes.

Las Vegas market, continues to confound -- there is , if anyplace, there is a place where they should have gone into the toilet and they didn't.

The travel industry and Las Vegas were supposed to be decimated.

But we continued to do well and still are doing well in the Vegas market.

Massachusetts has been weak for the quarter.

Lately, it is showing a little more strength.

New Hampshire, for us, has been a bust.

The $500,000 product has not been doing well in the quarter in New Hampshire.

Rhode Island has been doing well.

New Jersey has been doing very well.

for the quarter.

New York, we're pretty much sold out and so I can't tell what you we have left the, has done very well.

Charlotte, for us, has not done well for the quarter.

Raleigh has done very well.

Columbus, Ohio, in the beginning of the quarter, not so good.

At the end of the quarter, excellent.

Pennsylvania continues to roll, and we're very happy and even excited with what's been happening for us in Pennsylvania.

A new market, the Poconos, we opened recently.

We are doing very well there.

We opened that on the basis of expectation of New York or Northern New Jersey taking the trip across New Jersey into the Poconos instead of getting on airplanes and going away for second homes.

And the thesis appears to be proving out.

Tennessee, has been a bust for us.

Austin, for the quarter --

Austin for the quarter has not done well at all, has not come back.

Dallas has been weak for us.

San Antonio recently has done well for us.

Washington, D.C. and Maryland, I just can't say enough good things about it.

As you have heard me say before, in good times and bad times, your government grows.

And when it does, it grows right into our luxury product outside of Washington, D.C.

And that's the recap.

Thank you, Myron.

If there are any further questions at this time, please press 1 followed by 4 on your push button phone.

Our next question comes from Carlos Abarro.

Please state your affiliation followed by your quesiton.

Credit Suisse First Boston

Congratulations, guys.

Thank you

Joel , just a quick clarification.

I know you bought 200,000 shares plus for the quarter.

What's your remaining authorization?

2 million 8.

I'm sorry, double it up.

7 million and change.

7 million and change , Joe says.

I think it's a little less.

7,800,000 shares.

Bob, do you want to comment on May business, specifically?

Do I want to comment -- oh in May!

Yes.

Well, I don't want to do a recap for all those --

No, no.

Just in general, you know, generally.

Generally, let me see a piece of paper.

I think May has been pretty good.

On a gross basis, May has been up.

And on the same-store basis, May has been about even.

I think that's slightly misleading.

It's because most of the stores have sold out a good bit of the product and can't restock the shelves as fast as the stores -- that is we -- would like to, because the increased government regulation slows down the pipeline of available product even in stores that have been opened for 4 or 5 years.

Go to the government for your next 20 or 30-lot approval within your plan, within your master community, and you're slowed down on receiving the ability to offer those to the market.

So, in general, I would say May is has been a pretty good month.

And Joel, just to -- you may have stated this before.

Community count at quarter end?

We started the quarter at about 166.

We are about the same now.

I know you're at 175 for year end 2002 or fiscal year end 2002.

What's your projection for 2003?

I don't have a count yet ,other then it will be up.

Thanks, guys.

Your welcome, Carlos, Thank you

Our next question comes from Rich Class.

Please state you affiliation followed by your question.

Hi, guys.

Rich Class with Banc of America Securities.

Just wanted to follow up on the weaker market.

And I wanted to see - - you mentioned New Hampshire, and Tennessee seems to have been on that list for the last few quarters.

Any thought to reallocating capital to other markets and getting out of those markets?

Yes.

Any -- where would you put the -- reallocate the capital if you decided to move out or, you know, is there any --

That answer's also simple.

We don't allocate capital other than opportunistically.

It comes back to the pocket, as it were, and it doesn't burn a hole .

And we wait for the next good offering.

And we don't care whether the good offering comes from L.A., San Francisco, Boca Raton, Northville or Novi, Michigan, one of the counties in New Jersey or Pennsylvania.

It doesn't matter.

So we don't allocate capital on the basis that we want to see our sales do more in this particular area.

So, yes, the capital will be reallocated.

No, it's not earmarked for a specific spot.

And then just what's the split between lots under control, owned and option at the end of the quarter?

Fred Cooper, guesstimates two-thirds, one-third.

Two-thirds on, right.

I would have guessed about the same thing, Fred.

Thank you, Fred.

Thank you

Our next question comes from Les Goldstine.

Please state your affiliation followed by your question.

I'm with [Fingals and Schneider.]

You were kind enough to give us a couple of quick estimates on 2003 and 2004.

2003 , you obviously assumed maintaining a $500,000 unit amount.

And if you were working on $3.00, then we can figure out what the margin is.

What happens in 2004 when you go up to 6,000 homes?

Are margins likely to continue higher?

And are prices likely to continue higher?

I can only give you a guess, and the answer to margins is, we could not assume they would continue higher.

With respect to prices, if the past is any indication of the future, and please do not assume that we are representing this to be such -- read your prospectis carefully -- the prices will continue to rise.

As long as you have a continued constraint in supply, coupled with continued growth in demand, that comes not necessarily from a good economy, but just from an ordinary increase in population.

You are going to get an increase in price.

Okay.

That's some help, anyway.

Thank you.

I'm sorry.

Thank you, Les.

Our next question comes from Matt Moyer.

Please state your affilitation followed by your question.

Good afternoon, everybody.

This is Matt moyer from AG Edwards.

Most of my questions have been answered.

Joel, if you would run through the SG&A guidance for me one more time?

Sure.

Let me pull it out.

Do you have another question while I pull it out?

I'll get it for you.

Come back to it.

No, apparently not, Joel.

No.

I think a lot of it's been covered.

SG&A for the third quarter is expected to be between 160 and 220 basis points higher than last year's third quarter.

Okay.

About the same guidance I gave you last --

Okay.

SG&A for the fourth quarter should be slightly higher than last year's fourth quarter.

That's a little bit more than -- higher SG&A than guidance that I gave you last time because I have volumes going down because we have accelerated some volumes.

And accordingly SG&A for the whole year we expect to be between 50 and 100 basis points higher than last year's.

All right.

Thanks very much.

Have a good afternoon, gentlemen.

Thank you.

Our next question comes from Simon Wahlberg.

Please restate your affiliation followed by your question.

Just a follow-up questions from Sampson Partners.

The estimates that you have going forward for 2003 and 2004, can you give us an obviously no one's a scientist on this give us an idea of what basis of interest rates you are looking for for those types of numbers, you know?

You have pretty nice projections for the next two years.

Where are you looking for interest rates to be six months, a year and more importantly going into 2004?

Thank you.

Our customers tend to be more insulated from interest rate changes.

100 basis point interest rate change would not affect our projections and so we haven't really built it in other than to say it's roughly the same kind of pace as we're selling.

Simon, were you talking about the interest rate that we pay on our money?

No.

I'm talking about, you know, for, you know, a 30-year mortgage, a 15-year fixed, you know --

We assume the mortgage rate will not have increased to an extent that our housing sales would suffer.

And we have not assumed a decrease to an extent that we would be stampeded because it's giveaway time.

I don't think that interest rates are going to go down much, and I don't think they are going to go up much, either.

If they do go -- by that, I mean that if they go up to an 8% mortgage rate instead of a 7% mortgage rate, I don't think that matters much to our buyers.

Average mortgage, $350,000, 1%, 3500 a year divided by 50 weeks, you have $70 dollars a week.

It's not going to make the difference for our buyers in determining whether to buy a home or not.

So I'm just reiterating, you're using for the next 24 months somewhat within 100 basis points one way or the other in this neighborhood for --

I think that's about right.

Okay.

Perfect.

Thank you, gentlemen.

You're welcome.

Thank you.

Our next question comes from Alex Barring.

Please state your affiliation followed by your question.

Hi, Franklin Templeton.

How are you, Alex.

Thanks for taking my call.

And congratulations.

Thank you.

I was hoping you could help me understand a bit more your average sales price for this quarter throughout your various just markets.

As I look at the average sales price, I get on the backlog looking in the previous quarters, it seems like it's much lower what you actually delivered.

I'm trying to understand why that might be the case, especially like in your Southeast market.

Especially in the Southeast market.

It seems mostly all across, like the -- what I'm doing is basically just, you know, dividing the revenue that you give out by the units, just kind of get an average sales price for each market.

And then I compare that to what you had in the backlog doing the same thing.

And I guess they don't seem to jive is kind of what I'm struggling with here.

I'm afraid that's over my head.

Joel?

There is some lag period obviously, if I sell a smaller house, it gets delivered faster because it takes less time to construct.

They tend to be easier and so there is a more expensive homes stays longer in backlog.

Some of the Florida homes in the multis particularly which is the area you picked out are multis lower priced and, therefore, they turned much quicker than in other regions and that probably distorted the Florida statistics a little bit.

But I would be glad to --

It's another phenomenon, Joe just gave me a note.

When you build a 19-plex, if let's suppose you have sold 14 of them, you go ahead and construct the 19-plex, then you have 5 spec homes.

And those can turn over very rapidly.

You don't even have to build them.

They are already built.

That's about the only spec inventory that Toll Brothers carries.

We don't even get a chance even if we had the inclanasion nation which we don't to build spec housing in our single family market.

So what's happened is you have spec inventory that gets bought and turned over and that can produce the anommy that you're referring to.

Okay.

Thank you.

Our next question comes from David Weaver.

Please state your affiliation, followed by your question.

Legg mason.

Good afternoon.

Hi.

Could you comment on traffic, particularly I guess the level of traffic you are seeing but also the breakdown, whether you are seeing the browsers retired tickers coming back into the market?

Yeah.

That's a good question.

We are seeing the

browsers, star kickers coming back into the market because our traffic has been been on a per-community basis with last year the same or up.

Now, this time last year, was a pretty robust market still.

So to be doing about the same or up indicates that traffic has been pretty strong.

Now that phenomenon has only started from about March to the present.

Prior to March, going all the way back to the beginning of the summer last year, our traffic was down on a per community basis while sales were up.

Suggesting the more serious buyer, which turned out to be a buyer who was making a decision not just on the basis of lifestyle but on the basis of investment.

Thank you very much.

You're welcome.

Thank you.

Our last question comes from Mr. Scott Campbell.

Please state your affiliation followed by your question.

Thank you.

Scott Campbell with Raymond James.

Bob, this is more of a theoretical question but as you look back over the last 5 years or so for the industry, operater margins on average have jumped 400 basis points-plus for the group including Toll Brothers.

Most of that benefit has been on the gross margin line.

Benefiting from purchasing power and pricing increases and the supply constraints that you spoke of.

At what point do we expect to see some additional leverage through the SG&A line, what has preclude that, I guess, over the last five years?

And what is your view going forward on not only your company but the industry's ability to leverage our SG&A overhead going forward?

Well, I appreciate so much your kindness in referencing me for this theoretical question.

but my son took philosophy at Princeton, and he is the one in the family to do this kind of thinking.

Other than Joel Rassman, who I'm going to turn this question over to!

Joel?

And I'm sorry, you're way over my head.

As we have discussed on a few conference calls, our SG&A has increased because we have opened up more as a percentage of our total business the master plan communities and so as long as we continue to open up more active adult and more master plan communities which have higher initial expenditures for advertising and marketing and startup costs before revenues come in, we will not gain it what you call the benefits but we are getting the benefits by growing that business and that's leading to higher profits elsewhere.

And it's just kind of a little bit of a trade-off because we understand up with slightly higher margins in those kinds of communities would show up on the gross profit line and our SG&A may be a little higher because we have some long lead time.

I can't answer as to the entire industry, however.

But again, kind of looking forward is the --

I must say, I couldn't understand Joel's answer, either, so I'm with both of you.

The opportunity though going forward, joel, do you see it really still being on the gross margin line as opposed to the sg&a line?

Oh, no.

We are getting benefit on the SG&A side.

It's just that it's masked by having a different type of product which requires more SG&A up front to start it.

Sure.

As we continue to grow, we will pick up benefits in that side, as well.

Okay.

Thank you.

Deb, thank you very much for organizing the call.

And thank you all very much for listening.

I appreciate your consideration and following our company and our industry.

and Go, Nets, Go!

Good night, everybody, except for those in Boston and -- well, that's your problem!

See you, guys.

Ladies and gentleman that concludes our conference call for today.

Thank you all for participating and have a wonderful day. All participants may now disconnnect.