托爾兄弟 (TOL) 2003 Q1 法說會逐字稿

Good afternoon.

Welcome, ladies and gentlemen, to the Toll Brothers first quarter fiscal 2003 earnings conference call.

This conference is being recorded and all participants are in a listen-only mode.

At the request of the company, we'll open up for questions and answers after the presentation.

I will now turn the conference over to Robert Toll, Chairman and CEO.

Please go ahead, sir.

Thank you, Deb.

Welcome, everybody, and thanks for joining us.

With me on the call today are Joel Rassman, CFO;

Fred Cooper, VP of Finance;

Joe Secree (ph), Chief Accounting Officer; and Karen McCarren (ph), VP of Marketing.

Before I begin, please read the statement on forward-looking information on today's release or on our Web site.

I caution you that many statements on this call are based on the assumptions on the economy, world events, housing and the financial market, weather and other factors whose performance is uncertain and 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.

Today we reported record first quarter results for net income revenues contracts and backlog.

This was the 45th quarter in the past 46 in which we've produced quarterly year-over-year revenue growth and the 25th of the past 27th quarters we've achieved the same for earnings.

That's a very strong track record, especially given the state of the economy for the past few years.

Our revenues of 570 million increased 16% versus 2002's first quarter.

Our net income was 45.4 million, or 61 cents per share diluted.

The result versus 2002 was stronger than it appeared because this first quarter included an expense of approximately 3.9 million pre-tax associated with the early retirement of our 100 million of 8-3/4% subordinated debt.

Historically that would have been reported as an extraordinary item, but new accounting rules report us to report it as an ordinary item beginning in 2003.

This reduced our earnings by about 3.3 cents per share.

In 2002, there were no such items.

Adjusting for this, our EPS growth would have been 7% higher.

Since we replaced the 8-3/4 debt with 6-7/8 debt, we'll save 2 million in pretax interest beginning in 2004.

The best indicators of our future revenue potential are our contracts and backlog.

At Toll Brothers, a contract is a signed agreement backed by a substantial nonrefundable down payment of about 35 or $40,000 on average from a buyer.

Only when we have a signed contract and down payment will we count that contract in our backlog.

Contract and backlog this quarter were very strong.

Record contracts of 586 million were up 21% versus 2002, the previous first quarter record, and our record first quarter end backlog of 1.89 billion was up 34% versus the first quarter of '02.

Most of the contracts signed in the first quarter will be delivered in the fourth quarter of this fiscal year, '03, and some will flow into the first quarter of fiscal 04.

In addition, our backlog includes most of the next nine months' revenues, so these key indicators point to a strong result for 2003.

The combination of our 558 million in first quarter home building revenues and our 1.89 billion quarter-end backlog totals 2.45 billion.

This not only exceeds fiscal year 2002's total home building revenues of 2.28 billion, but equals 94% of our estimate of 2.6 billion-plus in home building revenues in fiscal year 2003.

This winter, severe weather, particularly in the northeast and mid Atlantic regions, undoubtedly will cause delays in community openings and home deliveries and increase weather-related costs.

Its impact, coupled with the economy's weakness and the threat of war, have kept some buyers indoors and caused some hesitancy among others in the past several weeks.

However, we look past the snow on the ground to the many exciting new communities we plan to open during the rest of the year.

We remain enthusiastic.

Obviously the weather as well as lot shortages in some of our communities has dampened activity to some extent in the past few weeks, but we believe demand in our major markets remains very healthy.

The New Jersey market, which based on year-end backlog represents about 15% of our business, has remained strong.

In New Jersey, we are currently facing lot shortages in some of our communities that are winding down, and others that have yet to open new sections.

However, we expect to have about eight to 10 new communities net by the end of the year compared to 2002.

Land approvals continue to get harder to obtain in New Jersey, which plays into our strength.

Right now with such an industry-wide shortage of homesites in the fluent markets, absent the weather, we find strong demand throughout the state.

Included among our planned new community openings is the he states at Princeton junction, which has been over 10 years in approvals and whose product line should open this quarter with a huge waiting list.

I think we have over 1,000 people on the waiting list.

Our active communities in New Jersey have been fantastic.

When we entered this niche in 1999, we thought we'd be selling $250,000 homes.

We are finding, however, that buyers are loading their homes with options and demand is much stronger than we had projected.

We are seeing delivered prices of 400,000 on average in a number of these communities, and some homes settling in the high 500,000's.

The suburban Philadelphia region, which is about 8% of our business, has remained very healthy.

Again, approvals are difficult, and this has created lot shortages, but with over 35 years in this market, we are probably the best in the state at winning approvals.

In the metro D.C. suburbs of northern Virginia and Maryland, which represent about 21% of our business, we are seeing very strong demand, although weather and temporary inventory lot shortages at some of our communities have had some impact.

We have a tremendous range of product in the D.C. market from move-up to empty nester to active adult to spectacular country club villa-type product, and we are doing extremely well in this market.

Florida, where we build on both east and West Coasts, represents about 8% of our business.

The East Coast in general has been stronger than last year, although it is a bit slower at price points over 800,000.

On the West Coast of Florida, we are still doing well as contracts are ahead of projections, sales paces are still brisk, although a little slower than last year's block buster pace when we were opening much of the product.

Our major market in the Midwest is metro Detroit, which produces about 7% of our business.

Metro Detroit has been strong both in our master plan communities and our traditional move-up communities.

Arizona and Nevada generate about 12% of our business.

Our Nevada communities are doing well.

At Red Rock, our new country club golf course community in Summerlin, we've had spectacular activity.

We've been able to raise prices and have sold about 26 homes since opening in January, and average base prices in excess of 600,000, with lot premiums going for 100- to 200,000.

We've limited taking new agreements for now, because we don't want to sell too far ahead of ourselves.

We have 22 buyers waiting for us to reopen, and we don't even have a model.

We haven't had a grand opening there yet.

Phoenix has picked up in the past few weeks.

This year, we have about the same number of contracts as last year with three fewer communities.

We are preparing for the opening in late summer of our Aviano at desert ridge master plan community which will consist of over 1300 homes with a wide variety of product types for multifamily to estate homes.

This should be a spectacular opening, as these 1,300 homesites are actually an infill to the rest of the Phoenix market.

California produces about 17% of our business, the market in Southern California remains very strong across the board.

This is especially true in Ventura County, where pricing is up about 10% over last year.

We opened the Pinnacle in October without models or site improvements, that means roads, and we have sold 15 homes priced over $1 million.

Current pricing is 150,000 above our projections last May.

The market in northern California is pretty good.

The market is holding despite the fact that there has been approximately, I read, 170,000 job losses.

The reason the market is holding so well is before the job losses, you had about five people looking for every home in the San Francisco market.

Today, you have about two people looking for every home.

We still have some pretty good pricing power left in that market, and recently have put in some price increases.

We have last year benefited from grand openings which we haven't had this year, so the comparisons are a little down.

This should be corrected in about two to three months, as we will be grand opening about five new product types in the San Francisco east bay area.

So far, we've had very strong demand at our Dublin Ranch master plan community, where we have yet to open or grand-open produced models.

It takes a great deal of imagination for these buyers to understand what the product is in this market because it's basically 50 to the acre over structured parking.

So it's a complicated offering.

To date, we've taken about 90 firm contracts without the people really being able to visualize what they're getting, so we are very excited about the offering that should come with the grand opening.

Palm Springs, California is doing very well.

The markets I've just discussed represent about 87% of our business.

Nearly all of them seem strong, factoring in the lot constraints and the weather as I mentioned above.

We believe based on our record backlog and our plans to have open approximately 185 selling communities by fiscal year end 2003, that we are still on course for another record year, and the more than 2.6 billion in revenues that we previously estimated for fiscal 2003.

Now I'd like to turn it over to Joel Rassman to do the numbers - Joel.

Thank you, Bob.

Before I start, I'd like to point out that there was a typo in the release on depreciation and amortization.

We supply that as additional information for you.

It's not -- doesn't affect earnings or anything else in the release, just for purposes of calculating EBITDA.

We had indicated depreciation and amortization of $4,154,000 (ph).

It actually is $3,045,000, a little bit more than $1 million lower than we've indicated.

Anyway, we just completed a record first quarter for 2003.

We delivered 1,036 homes at an average price of $538,500 for home building revenues of approximately $557.9 million.

Last year, with great weather, we delivered more homes each quarter than projected.

This year, in the first quarter, deliveries were at a lower end of our range, which we had given you at 1,020 to 1,100 homes, in part from the winter weather which delayed some closings and did not allow us to continue to accelerate closings from other quarters.

As we sold lower margin lots earlier than we anticipated, first quarter lands sales were 9.4 million, higher than the estimate of $3 million we gave you at December 11th, but with lower margins than we had projected.

Cost of home building sales were better than the guidance we gave you as the result of lower write-offs, approximately $300,000 this year, versus $1.3 million last year, and our guidance of $2.5 million, and slightly better profits from houses settled.

SG&A as a percentage of revenues was approximately 11.7%, or 80 basis points higher than last year, and in line with our guidance of 50 to 100 basis points higher.

In addition, as Bob discussed, this first quarter we recorded a pre-tax expense of approximately $3.9 million associated with the early retirement of debt.

First quarter interest expense was 2.8%, which was in line with our guidance.

Now let's look at the rest of the year.

As a result of the record backlog, the number of communities we have selling homes and our projected number of net new community openings, we still expect to produce more than $2.6 billion of home building revenue.

However, due to the continuing severe weather conditions in the mid Atlantic and northeast regions, we believe there will be some slip slippage in unit closings.

Accordingly, we are reducing our guidance range for the deliveries by 100 homes as we believe we will deliver between 4,800 and 5,100 homes compared to our previous guidance of 4,900 to 5,200 homes.

We have also reduced our expected average delivery price to between $525,000 and $535,000, since we believe the homes most likely to be delayed are the largest and most expensive that take the longest to be built.

Based upon the mix of expected deliveries both by product and geographically, we anticipate that gross margins will be between 40 and 80 basis points lower than last year, which is a 20 basis point improvement in our prior estimates, giving recognition to our better per performance in the first quarter.

We are now projecting land sales of about $24 million, an increase of from the guidance of $20 million we previously gave you, and expect for the year to have a 25% average margin on those sales.

Other income should be about $12 million.

In addition, income from joint ventures should be about $2 million, which is a reduction from the previous guidance of $4 million we gave you because of delays in the start-ups of two of our joint ventures.

We estimate operating SG&A for 2003 to be 20 to 40 basis points higher as a percentage of revenues than last year, as we continue to expand the company to prepare for deliveries in fiscal 2004.

As we do not currently expect to retire any more debt, your model should just include the 3.9 million pre-tax expense of this quarter.

We estimate interest expense at 2.8% of total revenues, and a tax rate of approximately 37%.

To assist you in preparing your individual models, I will highlight some quarterly guidance.

We expect slightly lower delivery prices in the second quarter than the first, and slightly lower again in the third and fourth quarters.

Remember, weather can have a significant impact on deliveries in any winter quarter, and spillover effects in later quarters due to delays in framing and starting of foundations.

Accordingly, we expect second quarter deliveries to be up slightly from the first quarter of 1,040 to 1,140, but lower than our previous guidance which was 1,080 to 1,160.

Third quarter deliveries should be between 1,150 and 1,250 homes, lower than our previous guidance of 1,250 to 1,350 homes.

Fourth quarter deliveries should be between 1550 homes and 1700 homes, which is slightly higher than our previous guidance as we expect to catch up some on the earlier delayed deliveries.

We currently expect approximately $8 million of land sales to occur in the second quarter, 4 million in the third quarter, and 3 million in the fourth quarter, and we've been using an average of 73% for the cost of sales in those quarters.

Other income should be spread evenly approximately $3 million in each quarter and joint venture income of approximately $2 million will be in the fourth quarter.

Remember cost of sales can be significantly affected by seasons and weather.

In general, we deliver fewer homes per community in the first and second quarters, and more homes in the third quarter and fourth quarters.

Also geographic mix of homes delivered will have a significant effect on the margins by quarter.

We currently expect home building cost of sales as a percentage of revenue will be 100 to 150 basis points higher.

That was cost of sales. 100 to 150 basis points higher in the second quarter than last year's second quarter. 50 to 100 basis points higher in the third quarter than last year's third quarter, and that the fourth quarter will be approximately flat to 25 basis points higher than last year's fourth quarter.

SG&A also varies significantly season to season with more selling and advertising costs expended in the first and second quarter than in the third and fourth quarters.

Accordingly, we would see SG&A as a percentage of total revenues at 50 to 80 basis points higher in the second quarter versus last year's second quarter, and that the third and fourth quarters will be approximately the same to slightly higher than last year's quarters.

Share count.

Obviously share price has an effect on the average number of shares we use in our projections.

Based on what we believe will be increasing share price through the year, our estimates for 2003 become reality, and as investors start to focus on 2004, we have used 76 million average outstanding shares for the year starting with this quarter of 74.3 and increasing to 77.4 by the end of the fourth quarter.

As we look forward to 2004 and beyond, we believe we should be able to produce annual growth of at least 15%, if not duplicate the pace of 20-plus percent we accomplished in the last (inaudible.

Thank you, and now I'd turn it back to Bob for Q&A.

Thanks, Joel.

So Deb, if there's any questions, we'll do our best.

Thank you, sir.

The question and answer session will begin at this time.

If you're using a speakerphone, please pick up the handset before pressing any numbers.

Should you have a question, please press star 1 on your pushbutton telephone.

If you'd like to withdraw your question, please press star 2.

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

Please stand by for your first question.

Our first question comes from Joseph Sroka with Merrill Lynch.

Please state your question.

Good afternoon, everyone.

Joel, on the share count guidance, are you assuming any more share repurchase than the 250,000 that you repurchased in the first quarter?

We've already purchased an additional 158,000 in this quarter after our last conference call, and we would expect that we will continue to buy shares throughout the year.

But have you taken it off of the number that -- how many shares did you take into consideration?

Roughly 1.2 for the year.

Joe, about 1.2 million, which would mean another 700 or 800.

And then the remainder just option dilution from your stock price going up?

Yes.

OK.

Thanks.

You're welcome.

Depending upon the price of the stock, we may buy more or less.

Thank you, Joe.

Our next question comes from Wayne Cooperman with Cobalt Capital.

Hey, guys.

Just curious if you're having sort of a benefit in your Florida operations from the cold weather in the northeast.

I don't think so.

OK.

You're not (ph) seeing a pickup in sort of the snowbird activity?

No.

No, we're not.

OK.

Thank you.

Our next question comes from Greg Nejmeh with Deutsche Bank.

Good job once again.

Thanks.

Question has to do with intergenerational wealth transfer.

We hear a lot of big numbers thrown about with regard to the amount of inheritance.

Any indication that one of the elements sustaining your market and driving your business has anything to do with those moneys and those inheritances?

You know, it's a reasonable-enough to pick that we really ought to poll our salespeople and our conveyancers to have access to that information to finitely discern what effect it has.

Our common sense tells us that it's having a great impact because we very often hear the comment, who are these people and where do they get their money from?

Because we sell so many homes for such high amounts that it surprises us, and we think the money is coming from outer space.

But, in fact, it's coming from underneath probably.

So I think your point is well taken by implication.

There is probably a significant impact in our business from the inheritance factor.

And anecdotally, you sense that from feedback you receive from the field?

Sure, because you ask, where do these people get their money?

And the answer is, I don't know.

It doesn't appear that they're making as much as they're spending.

So I think it is significant, but it's all just conjecture and anecdotal.

We haven't really done a study on it.

OK.

Thanks.

You're welcome.

Thank you, Greg.

Our next question comes from Myron Kaplan with Kaplan, Nathan and Company.

Please state your question.

Hi, Bob.

Good quarter.

Thank you, Myron.

Good quarter, Joel.

If you haven't seen the snowbird pickup, I'm ready to put down a reservation.

You know what?

To some extent, I think the terrible weather that we've experienced in the past three weeks with these storms coming in every week might have had a negative impact as much as they've had a positive impact because you can't get from here to there.

The airport has been closed so damn much, the equipment has been diverted to such an extent that it really takes a lot of guts to go to an airport today unless you've got a very clean weather prediction.

And security too.

Just a couple quick questions.

Are you seeing any cost pressures, like the price of lumber has gone up and so on, some metals prices?

to the contrary, we've been very fortunate in that while we've had significant pricing power over the last several years, our suppliers and subcontractors do not appear to, and lumber, in fact, has gone down quite a bit.

Concrete and dry drywall have not gone up.

Insulation has gone up about 10%.

Translates to about $250 a house.

Carpet has gone up a little bit, but the price dropped in lumber and has more than offset that, let alone concrete and drywall.

And your cost for the trades is pretty stable?

Yeah.

Especially in light of the fact that we're about the only industry that is really charging.

Because the number of the entry level -- the builders who build entry level houses are all talking about continuing to improve to widen margins because they continue to cut -- let's just say their costs or reimbursements or what have you.

That's quite true.

We just had a discussion, as a matter of fact, last night, and it appears as though we'll be able to take about $1,000 out of every house just on the basis of some new contracts for HVAC and plumbing supply that we've concluded.

So it appear as though in general, prices are coming down and margins are widening, just on the basis of costs.

Yes.

So then going to, let's say, the future that at some point, when you've absorbed the cost of the big expansion of new communities, at some point the margin should start widening again.

I would think so, yeah.

Our overhead is higher now than it's been in some time, but our expansion plan for the next year is greater now than it's ever been.

And the reality is you can't create the expansion intelligently or in a well managed way without putting on the overhead.

So unless we continue to expand on infinitum, the overhead will come down in comparison to the revenues.

All right.

Well, keep it up.

It sounds like you're doing really well.

Thank you, Myron.

Thank you, Bob.

Our next question comes from Michael Rehaut with JP Morgan.

This is Charles Crum (ph) on behalf of Mike.

First if you can tell us what percentage of the closings mix during the quarter came from the recently opened communities, and what do you expect this to be in the second quarter?

And second question is wondering if you can comment on the cancellation rates during the last few weeks relative to the prior quarter.

Thanks.

We count cancellations on a quarterly basis on contracts, which is what we report.

OK.

Can you speak to that?

Well, contracts for the quarter were better than the historical averages.

We get about 5.7% of cancellations for the quarter as compared to historical averages over the last 10 years of about 7%.

And I don't have the data -- repeat the other question, but I know I don't have it right here.

The percentage of the closings mix that came from the new communities that you're going to roll out and what you thought this was going to be.

The question, Joel, is with respect to the future, what will the percentage of new contracts be from communities that we're going to roll out, and the answer is, I don't know.

We had said in our last conference call that we were rolling out -- we had a lot of revenues this year that were coming from new communities that had no revenues yet last year, and that will phase in over the year so each of the progressive quarters will have more new community deliveries than the prior quarter, but I don't have a percentage of how many delivered in this quarter that hadn't delivered before.

OK.

Great.

Thanks a lot.

You're welcome.

Thank you.

Our next question comes from Timothy Jones with Wasserman and Company.

Weather down here in Florida is great.

Glad to hear it, Tim.

It's 72 up here.

The sunshining.

It's just fabulous here.

You ought to come up.

No thank you.

Anyway, a couple questions.

First of all, you came in to the last quarter at the low end of your expectations in mar margins -- excuse me -- deliveries, and yet you had higher margins.

I think you had a lower guidance in the fourth quarter, quite a bit lower than you had.

I think it was down 20 base I points or something.

How can you have the deliveries be less than you expect in and the margins being higher than you expect, and the second question is, why do you have the margins deteriorating so much in the upcoming quarters when a lot of home builders are still shows higher margins?

Joel?

As to this quarter, a significant portion of the difference is that write-offs were very low, it was 300,000, and our guidance had been to include 2.5 million in your projections, so that has a very major impact.

We still put 2.5 million a quarter in prospectively for write-offs.

Why were they so low?

Why would you miss it by that much?

Write-offs depend on things that go bad.

Nothing went bad this quarter.

We actually go through an approval process, Tim, and your capitalizing costs for those approvals are down, and in general we expect positive outcomes, but when we believe it's probable or 50% less like likely that we get a positive income, we start expensing those costs, and this quarter we did such a great clean-up cost last year, we didn't have anything.

Remember in the first quarter it's not unusual for that to happen because we finalize fourth quarter numbers a little later so you have a shorter period of time to have deterioration that you want to uncover.

As to the other guidance, the re of the guidance is relatively consistent with what I gave you in the past.

Giving recognition, however, to two factors.

One is slightly higher costs that we think will take place as a result of the snow offset by the slightly better results that we had in the first quarter, and we brought down overall -- we've improved overall guidance from a cost of sales standpoint by 20 basis points for the year.

Excuse me.

Can Did you address the higher SG&A costs?

I thought I had answered that, but ...

He's answered it.

You got it, Tim?

Yeah, I got it.

Thank you.

Thank you very much.

We're asked over the Internet by Steven Zawitz (ph), could you provide the average loan amount to sales price as a percentage?

Yes, loan-to-value ratios run about 75? 72%.

You that thank.

Thank you for that.

Another question that came from the Internet, Mitch Steidel (ph).

Mr. Toll, do you anticipate pursuing a growth strategy that includes acquisitions?

If so, what acquisition budget have you planned for 2003 and 2004?

Good question, Mitch.

We continue to look at acquisitions.

As a matter of fact, we had some good people in here today and we met with some other people at the end of last week, but so far, our record is three acquisitions that were very small.

We have not grown the firm by acquisition, and on the basis of the past, though it's no guarantee of the future, read your prospectus carefully, it does not seem as though the firm will grow by acquisition.

I'm sorry I can't give you a more definite answer than that, but there you have it.

Thank you, Mitch.

Are there any other questions?

Our next question comes from Stephen Kim (ph) with Salomon Smith Barney.

Please state your question.

Thanks very much.

Congratulations again, guys.

Thank you, Steve.

Congratulations to you.

Nice article in "The New York Times".

I don't know where this got that picture from.

Must have been my high school yearbook.

My family wanted to know, why were we number two in the group shot?

I said that's the way it goes.

You can't win them all.

It's a tight race too.

I wanted to see if I could post two questions.

One, can you shed a little bit of light on how you (inaudible) compensate your divisional and regional managers, and specifically address to what degree and how you compensate them based on a return on capital metric?

Yeah, we compensate everyone on a non-formulaic basis.

It's all done on a discretionary basis.

So far, we have never gone backwards in your total take-home, which is different from most of the firms.

Instead of paying on a formula basis, with a large percentage being bonus where you can go up and down, our employees and associates have all gone just in one direction, up, and that's over a 32-year history?

Oh, we're more than that now. 35 -- 36.

Thank you.

Do I hear 37? 36-year history, we have never taken anybody down.

Your bonus is paid on purely a discretionary basis, decided by your peers, and those who are immediately above, and the basis decided on the same method -- the base.

What we do instead of working from a formula is try and look at what you've accomplished versus what you were expected to accomplish.

But again, it's not done on a formula basis because we feel to pay on a formulaic basis rewards you for being lucky and being in the right territory, and penalizes you for being in the wrong territory.

For instance, Charlotte, yeah, that's true, and Raleigh-Durham have been tough territories in this past year, but the management there have been excellent.

So those guys will find more candy in the stockings perhaps than someone who has had an easier go of it in the better markets.

It would seem that that is something that probably the home office probably needs to get very involved in with respect to setting those initial projections given that that's what you're keying off of.

To what extent are those expectations -- or how are those expectations derived, and how are you ensuring that it's fair?

What we do is, every community which entails more than 185, for instance, by the end of '03 because you've got a bunch of communities that are winding down, no longer selling, but still performing.

Every community is reviewed three times a year.

Almost the same as a trimester examination at school.

The community management all the way up to the senior VP are responsible for putting together a budget, we call a project profitability, that includes assumptions of pace of sales and directs and variables plus direct costs, interest, cost of capital, et cetera.

And so then that's reviewed by other managers, not connected with that particular division or region, and that other manager says, are you sure this is the way -- are you going to settle 20 homes or 24 homes?

Are you sure this will be your average price this, will be your average lot premium, this will be your average broker participation?

This is what your cost of capital is?

We go through all the numbers and finally agree upon the budget.

So we have a pretty firm idea of what you expected to do, and you're not -- it's difficult to low ball and to say I expect to do nothing and here I did a little better than nothing so pay me a bunch because you've got somebody else sitting in judgment of your numbers saying, come on, now, you really only expect to sell 18?

That's unacceptable.

So we think it's fair on the basis that everybody is reviewed three times a year.

Great.

The second question I had is sort of a longer-term one, and that is occasionally I run into an invest or who has somewhat of a longer-term concern with the builders.

Frequently it seems people have shorter-term concerns.

One of those longer-term concerns is that the business model which the home builders have got have developed a real competitive advantage or expertise in sort of going out to the hinterlands and developing pieces of dirt, moving the cows over and building homes, and it sort of strains credibility that that could go on forever.

Your company is one that, you know, does more infill parcels and I've had some people query as to whether or not your opportunities might run out that much faster.

I was wondering if you could comment on sort of what you think the long-term viability is of the home builders in general business model and yours in particular as it manifests itself in your multiple longer term.

Let's figure this as a two-part question.

The first part is, can you keep on going out further.

The second part was, can you keep on finding spots within the boundaries of what is today considers as the metropolitan area.

And the answer is yes to both because as you go out further, well, then more is left inside of that expansion.

With regard to can you go out further, the answer is, can you not go out further?

When you've got 35 million people approximately every 10 years coming in, two-thirds of which are not babies but rather are immigrants, and these are not illegal immigrants but very legal immigrants generally who are coming into good jobs with support within the United States, how can you not go out unless you assume that the no-growth movement will become so politically powerful that it will designate that thou shalt only buy a home within a metropolitan area, and you shall live in a townhome or a condo, no more half acre or quarter acre lots.

I don't see that happening in the United States.

And, therefore, I think you're going to continue to see expansion.

With respect to our infill versus outward bound, so to speak, transaction, I must take argument with the proposition that we're more infill because if you take a look at our biggest communities, Belmont and Dominion, Loudoun and -- I'm sorry, Fred?

South riding just alone in the Washington met metropolitan area, we were pretty much the leaders in going out, and these communities are doing fabulously.

They may now be infill, but once upon a time, they were on the edge, and they're doing spectacularly for us.

The same is true in most of the territories that we're in.

The larger communities tend to be further out, the smaller communities tend to be closer in.

With regard to for how long can we continue, specifically if you take the 40,000-plus lots we've got, if we increase to 6,000 in '04 and 7500 in '08 and so on and so forth, we've still got a pretty good supply.

You can't just say it's an eight-year supply multiplying eight times five, but we're probably covered right now out to about 2006, and at that point, we have to start to find ground now for about 2007 and so forth to keep the expansion rate of 20%-plus that we've brought.

Thanks, Steve.

Thanks.

You're welcome.

As a reminder, ladies and gentlemen, if you do have a question, please press star 1 on your pushbutton telephone at this time.

Our next question comes from Margaret Wahlen (ph) with UBS Warburg.

This is actually William Lamb (ph).

My question actually revolves around the weather impact.

We wanted to get a better sense of it.

Can you talk a little bit about traffic and order patterns before and after the ...

Traffic has been down substantially.

Unfortunately the damn snow can't get it right.

It comes on Saturdays and Sundays, which are our main days.

Retail from Monday to Friday is pretty thin compared to Saturday and Sunday, so it's had a significant impact on traffic with regard to -- it would follow through, although the orders have recently not been down to the same extent as traffic has been down.

OK.

Thank you.

You're welcome.

Our next question comes from Steve Fockens with Lehman Brothers.

Good afternoon.

Quickly, the comments on the good markets at the beginning of the call which I think you said is 87% of total, were those recent trends or are those in reference to what happened in your fiscal first quarter?

Those were with regard to recent trends.

So is it fair to say that those comments are also probably a proxy for recent order trends?

Maybe not just traffic flow, but what you're actually seeing for people plunking down deposits?

Yeah, I think so.

So in which case ...

Joel disagrees with me.

We tried to evaluate it with respect to the effect of weather, so to the extent we were closed a couple of days in a number of communities, we tried to back out that.

The effect was absent weather issues where we would be, and that's what we tried to show you.

OK.

So where you see effectively, you know, fi read that right, you're seeing decent results or strength in 80% or near 90% of your market from an order perspective, stripping out the impact of weather?

Yes.

OK.

Which I guess means ex-weather related, you're still seeing pretty healthy demand?

Yes.

OK.

Fair enough.

To follow up on the lumber price question, at least what we've seen is that lumber prices have been quite low, but I have heard some rumblings that perhaps that's ready for a correction or you may see lumber prices moving higher.

Are you getting any feedback from people in the field or people you know in the industry as to how likely that is, and if it would start to move up, how that might impact you?

You'll always hear rumblings in the field that prices are going to go up so you better buy right now.

I think that's one of our primary sales lines, not only for lumber but for housing.

My personal feeling is that lumber will go up as there is a recovery in the economy, and as the housing industry heats up even more, and especially as a need is created where it has been very slack.

For instance, in Japan, which used to be a major buyer and has gone down.

With respect to how will lumber price increases impact us, not much.

In the short run of about a year.

After that, I can't say because we contract for our lumber about a year in advance.

We're one of the few builders that have our own lumber supply yards, so we don't depend on the supply yards, also known as distributors, who buy from the wholesalers who buy from the manufacturers or the lumber providers.

We buy directly from Boise, Weyerhaeuser and pecker mills, which are the smaller mills in British Columbia and in Washington and Oregon, and we have the lumber milled for our ourselves and then we ship it to ourselves on railroad cars directly to our plants, and then we store it and redistribute it.

So because we're buying in such quantity and in this fashion, our lumber costs, about 70% of our lumber costs are locked for a year.

Always rolling forward.

So we're either in good shape or bad shape depending upon the fluctuation in the price of lumber.

In terms of the cost of lumber per house, it's about $10,000 in each house, maybe just a hair higher, and it's not a huge portion as any direct cost.

None of the directs are a huge portion of the sales price.

Great.

Thank you very much.

Our next question comes from Dennis McGill (ph) with Credit Suisse First Boston.

Please state your question.

Good afternoon, guys.

I just had a couple quick ones.

First, you mentioned in your press release that you're still on pace to have one 185 communities by year-end.

Can you give us an idea by quarter?

And secondly, can you give us an idea what your budgeting inventory is too by year-end?

I'm sorry, what was the last part of the question?

Where you guys are budgeting inventories by the end of the year to be on the balance sheet.

Let's take them in reverse.

We don't budget inventories.

We do it on a community by community basis and as it close, we put it on our inventory so we don't have a budget, per se.

We would expect that for the whole year, we will add about $400 million of land and related costs this year, and based on what we currently project.

That's fair enough.

With respect to the first part of the question, does anybody here have written down a chronological budget as it were of the opening of communities by quarter, we've got three quarters left, how many new communities will be added each quarter to get -- net new communities to get to 185 from, what are we, 174 now?

174 now.

We thought we'd be about 178 at the end of this quarter and that's as far out as I have it.

OK.

I'm sorry we can't answer.

Joel said 178 at the end of this quarter.

OK.

Thank you very much, guys.

You're welcome.

Thank you.

Our next question comes from Alex Bann (ph) with Franklin Templeton.

Good afternoon.

Something (ph) you could expand -- I was hoping you could expand on the inventory line item.

Usually I guess you break it down in more detail in your 10-Q.

Joel, this is a question for you.

We will be breaking it down when we issue our financial statements in general.

We have one reclassification that hasn't been completed yet, which we don't normally do until after we make the release, so you will be getting it shortly as we -- as we issue the quarterly statement in a couple days, we'll have that exact number.

But you could assume that since inventory went up about $200 million, that you'll probably see a little bit of increase in land and a little bit of increase in cost of sales over the prior quarter.

OK.

And you also have the lots position available?

Lots we own and control?

Right.

About 40,000 lots owned and controlled.

Joel thinks it's about 65% owned.

Again, we'll be finalizing that number as of January 31st, but do not have the exact number yet.

OK.

And I guess going forward, you still project the amount of land to keep increasing just on pace with the growth of the company, or do you expect to kind of stay stable in terms of the lots you own?

The land is governed by the opportunity that we see, and right now it appears to be steady to increasing only in proportion to the increase in the revenues in earnings of the firm, but that could change depending upon what walks in tomorrow or this afternoon.

OK.

Thank you very much.

You're very welcome.

We have a question from Shannon O'Mara (ph) of Loomis Sayles.

How much is currently drawn into your bank line and what do you currently expect to have on your bank line during the year.

As of January 31st, we had no money outstanding on our bank line, and we would expect that we'll probably have a couple, maybe 100 to $200 million at the end of the year, but we're not sure exactly.

It depends on how improvements go and construction goes.

Thank you.

Any other questions, Deb?

Our next question comes from Paul Puryear with Raymond James.

Thanks.

Good afternoon.

Bob, do you spend much time tracking market share?

Does that mean much to you?

No.

I guess, you know, the second part of the question is, at your price points, is it your sense that you're outperforming the market here?

I don't know.

I mean, it would appear to us that that's the case.

In fact, I mean, the numbers are so good, it would appear that you're maybe dramatically outperforming the market.

Do you have a view on that?

I have no idea of such thing.

What we keep track of is how we're doing in comparison to the paces and profits that we've budgeted in the last trimester and going back two trimesters and then three trimesters, that's about as far as we go back to look at where we're supposed to be.

We're every week reviewing our sales in relation to our budgets.

That's all I can tell you.

OK.

And just one other sort of follow-up.

Did we hear correctly earlier that you're building a community in northern California to a density of 50 per acre?

Yeah.

We have some -- I don't know how many units are there in that?

Not all of them.

It's just the greatest density.

They go from 55 to the acre down to about 15 to the acre.

Depending upon which product line.

And that's on top of structured parking.

So it's pretty much the same as midrise construction on top of structured parking.

Oh, thank you.

Karen just handed me a note with regard to the previous question.

We study our competition all the time.

We know exactly how we're doing in relation to, on average, the five or six communities that are the most direct competitors to our community.

So we're always comparing ourselves again on a very formalized basis.

We have this comp study analysis that comes in three times a year as part of this trimester review of each community where we look at every item that we can think of, a huge checklist, pages of items all the way to such esoterics as the personality and look of the sales manager in the competition versus personality and look of the sales manager in our offering.

But, you know, the major things, location, proximity to shopping, feel of the area/neighborhood, schools, also love tubs, Viking ranges, everything you can think of for comparison purposes, and if when we're done, if we're outselling but there's no justification on a straight dollar basis, then we better be careful about raising prices, and B, we have to then quantify what is the brand name worth, how much more are we being paid because it's toll brother band.

If we find our pace is ahead of the other guy's but that on a comp analysis, the other guy is making 10 or 20,000 more a house than we are making by our calculations, if we were to build his home, then we do an examination as to whether we should slow ourselves down and go for the longer ball.

And we do this, as I said before, three times a year on every community.

Very good.

Thanks.

Thank you.

Thank you.

Our last question comes from Timothy Jones with Wasserman and Company.

Please state your question.

You said a couple interesting things.

First of all, can you give me an idea what your ...

This isn't Tim Wasserman.

It sounds like Tim Jones.

You know it.

First of all, what's your stick and brick cost per square foot?

It varies ...

I know that, but rough.

... tremendously by product.

I'll give you the full range.

The average of a build is around 34, $36, OK?

No, we're nowhere near that.

We go anywhere from about 45 up to about 65.

(inaudible) selling a home that's two and a half times the average builder, they're at 200,000, you're at five or something.

OK.

About, what are we, 540 now?

Whatever it is.

Close enough for government work.

I'm trying to get down to the full monty.

First of all, what's your average square footage of your homes?

About 3,300.

OK.

That's about 50% higher than the average builder, and the average home, and you say that your lumber costs are 10,000 per home, which is lower.

I can't understand that.

It doesn't include some of the components?

We may be wrong.

You are wrong.

OK.

Thank you, Tim.

I mean, no, it just didn't make sense.

What percentage of your lumber is served by the yards of your needs?

Oh, percentage of -- I think I know what you meant.

You know, of the homes you build.

It's not in every market obviously.

I think we supply about ...

Just roughly.

... about 70% of our needs.

OK.

The other question ...

Excuse me.

You think it's less than that?

We don't do West Coast, Arizona and Vegas.

No, we don't, but we do -- I'm sorry?

All right.

There's an argument as to whether it's 60 or 70.

Whatever.

Nickels and dimes, OK?

Are you going to expand that to those other markets?

Since you do lock in your costs and with your long lead time, it makes a lot of sense not to play the lumber market.

Are you going to add the yards into those markets that you're not adding?

Tim, the primary reason to expand, and we will expand, is not so much to save money as to be able to guarantee the quality and the stream of supply.

We save cost because we know so finitely what to ship and what quality to ship, and we are able to make the components within a factory setting so that, for instance, after the home is put together, there's not this mountain of trash laying around the home.

But the primary reason for running our lumberyards is for these ease of construction, which does translate to saving, and the quality we can guarantee ourselves.

For instance, our lumber coming from the West Coast by train to our own distribution yard not by boat, which is the way most get it, has a substantial impact on quality because even if you guy buy kiln-dried lumber, by the time it travels through the Panama canal, through Florida and up to Baltimore, that stuff is a sponge, and a wet sponge.

Also we can assure ourselves of quality because we do our own panels and our own trusses, make our own dormers, et cetera, put together our own window assemblies, so we think that helps us achieve greater profits.

30 years ago, my buddy from Lowe's said that the quality of lumber was one of his biggest problems.

So that's good.

The other one is of the 40,000 lots.

I want to know not what is owned, I want to know what is zoned.

The zoned of the 40,000 lots.

By the way, the fast answer but it's not the one you want ...

You don't want to get there.

I know what you mean.

The fast answer is all of it.

It is all zoned.

But what you ...

Wait a minute.

Do you a lot of ...

What you mean is entitled so we can go build on it.

Yes, entitled.

All right.

It is all in various stages of entitlement.

Is half entitled?

Not to the point where we can go put a shovel in the ground because if we could put a shovel in the ground on all 40,000 of it, we would probably have about 25 or 30,000 starts cooking, and we don't.

So the reality is, it is all held up seeking one approval or another, but it is all going through the process, and is barring some tragedy going to come out the other end.

Let's put it this way.

What percentage is really raw land, really in the early stages where you have six years or five -- four or five years left to fight everybody and, you know ...

Yeah, that's a good - yes.

Is it 10,000 of the 40, half of the 40?

What is it?

Let me see.

We have ourselves pretty well covered out through the middle of 06, so -- about 15,000, we still have to fight for.

I mean early stages.

You got four years left.

Some of the 15,000, five or six years to go.

OK.

So like 10,000, five or six years.

Yeah, but that stuff is on option.

Oh, that's your 35 ...

That stuff is mostly on option, yeah.

Thank you, Bobby.

You're welcome.

Sir, there are no further questions in queue at this time.

Great, Deb.

Thank you very much, everybody, for listening.

Talk to you all later.

Bye.

This concludes our conference call for today.

Thank you all for participating, and have a wonderful day.

All participants may now disconnect.