托爾兄弟 (TOL) 2004 Q3 法說會逐字稿

Good afternoon.

And welcome ladies and gentlemen to the third quarter earnings release hosted by Toll Brothers.

At this time I would like to inform you that this conference is being recorded, and that all participants are in a listen-only mode.

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

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

Please go ahead, sir.

Thank you.

Welcome, all.

Thanks for joining us.

With me today are Joel Rassman, Chief Financial Officer; and Fred Cooper, Senior Vice President, Finance and Investor Relations; and Joe Sicree, Chief Accounting Officer.

Before I begin, I ask you to read the statement on forward-looking information in today's release and on -- and on our website.

I caution you that many statements on this call are based on assumptions about the economy, world events, housing and financial markets, weather, and other factors obviously beyond our control that could significantly affect future results.

Those listening on the web can e-mail questions to rtoll@tollbrothersinc.com.

Excuse me.

We'll try to answer as many as possible.

This quarter's earnings, revenues, contracts and backlog were the highest for any quarter in our history, and we believe we're on our way to record results in fiscal 2004, 2005, and 2006.

Third quarter 2004 net income rose 56% over fiscal year 2003's third quarter to $106 million.

Third quarter EPS rose 46% to $1.31 per share.

Third quarter revenues rose 46% to 1 billion.

Third quarter contracts rose 69% to 1.6 billion.

And third quarter end backlog rose 75% to 4.3 billion.

For the 9-month period, 2004 net income rose 37% to 228.5 million, and earnings per share rose 26% to 2.82 per share. $2.82 per share.

Revenue rose 30% to 2.43 billion, and contracts rose 67% to 4.1 billion.

These results are particularly impressive because they were achieved against record results across the board in the third quarter and 9-month periods of '03.

In addition, in our third quarter, unconsolidated joint ventures, in which Toll Brothers had an interest, signed contracts of 79 million, compared to just 1 million of contracts in fiscal '03.

Buyer appetite for luxury homes has remained tremendous throughout 2004, and we are enjoying very strong demand for our homes across all of our product lines.

We've continued to demonstrate our ability to grow dramatically in a very difficult economy.

Since 2000, despite a recession, dramatic job losses, a severe stock market slump, volatile interest rates, and global political turmoil, we have doubled our revenues and net income.

While much of this can be attributed to the tremendous hard work of our associates, we also believe that it reflects the strength of the luxury market, the brand name we have built, the growing number of affluent U.S. households, and the industry's environment of greater stability and reduced cyclicality.

Geographic and product diversification, access to lower cost capital, a versatile and abundant home mortgage market, and improving demographics are promoting strong and steady demand across many price points for those builders who can control land and persevere through the increasingly difficult regulatory approval process.

All of the above favors the large, publicly-traded, home building companies with a capital and the expertise to control sites and, therefore, gain market share.

This helps explain the growth of many of the public home building companies during this difficult economic times, and we believe it is important that investors differentiate the behavior of national housing market from the performance of the major public home building companies.

In the decade of the '70s, we averaged 1.77 million single and multifamily housing starts, annually.

In the '80s, we averaged 1.49 million.

In the '90s, it was 1.37 million.

We've rebounded somewhat in this decade, and have averaged about 1.68 million since 2000.

However, we must consider that about 200 to 300 thousand homes a year in this recent decade, the last couple of years, have been new, second homes, which is a meaningful number in the stats.

If you remove that number from the 1.68, you see you're right back to the '90s number.

This suggests, strongly, that we are not keeping pace with population growth.

In 1970 we had 65 million households.

In 1980 we had 82 million.

In '90 we had 94 million.

And today we have 110 million.

Based on that growth, the market should be hotter and producing more.

But due to regulatory constraints, supply is limited.

That is why housing starts are not greater, and also why prices, of course, are going up.

Two recent studies project that new home demand for the next 10 years will range from 1.85 million to 2.17 million new, single-family and multifamily units.

In anticipation of this, we now control more than 61 thousand home sites in lot-constrained urban and suburban markets.

With this supply, we believe we are well positioned in the coming years.

Overall, the past 4 weeks have continued the strong pace of demand that we discussed in our call in early August.

With each of the past 4 weeks, deposits being either the best or the second best week per community dating back to 1991.

Now, I'll give you a quick overview of the markets as I can judge them, just from the experience that we've got.

I'll do this in alphabetical order as quickly as I can.

We ended the quarter with 215 selling communities.

Arizona we have 10 selling communities, the market is excellent.

California, Palm Springs, 3 communities, it's good.

A bit slower over the past 4 weeks, although August is not the time to be selling homes in Palm Springs, California.

Northern California, which is the Bay Area and surrounding counties for us, we have 10 communities, and the market is excellent.

Southern California, with 6 communities, mostly in the Metro L.A. area and surrounding counties, market is excellent.

Colorado, we have 2 communities, the market is good and getting better.

Connecticut, we have 5 communities, the market is good.

Delaware, 6 communities, the market is excellent.

In Florida, we have 20 communities.

Luckily, by the way, we did not suffer any damage, other than landscaping, at our communities during the hurricane.

On the East Coast the market is surprisingly good, given the hurricane.

In Jacksonville, where we just bought the Dostie Company, the market is good.

On the West Coast, the market is excellent.

In the Metro Chicago market, we have 8 communities, the market is good.

Michigan's Detroit suburbs, we have 16 communities, the market is good.

In Nevada, we have 9 communities in Las Vegas and Reno, and the market is excellent.

We've noticed that after a period of frenzied price increases, the market is showing signs of leveling, which makes a lot of sense, and we view as a very positive development.

In New England, we have 5 communities in Massachusetts and Rhode Island, the market is good.

In New Jersey, we have 19 communities, the market is excellent.

In New York, we have 2 communities, the market is excellent.

North Carolina, in Charlotte, we have 4 communities, the market is strengthening too good -- fair to good, but recently been good.

In Raleigh, we have 6 communities, the market is good.

Ohio, Columbus, for us, we have 3 communities, the market is fair.

Pennsylvania, we have 24 communities, the market is excellent.

Hilton Head, South Carolina, we have 2 communities, the market is fair.

Texas, we have 6 communities in Austin, which is improved -- which has improved to be a good market.

We have 4 communities in Dallas, which is good.

We have 1 in San Antonio, which for the last 4 weeks, is just fair for us.

And Metro Washington D.C., which includes northern Virginia and Maryland, as well as suburban Baltimore, it's our largest market, 44 communities, the market is excellent.

Now, Joel, would you please do the numbers?

Joel Rassman, our CFO.

Thank you, Bob.

As Bob said, this has been a great quarter.

Home building revenues were $991 million, as we delivered 1,684 homes at an average price of $588,600.

The mix of deliveries was slightly richer than we had estimated in both average sales price and gross margins.

Gross home building margins at 28.5% were 100 basis points better than last year's third quarter, and 30 basis points better than this year's second quarter.

Some of the improvement was a result of increased sales prices, some as a result of lower overheads per home because of the higher delivery volumes, and also, it was attributable to lower write-offs during the quarter than what we budgeted.

Write-offs for this quarter were $1.2 million, versus our budgeters guidance of 3 million.

Land sales, at $12.9 million, were higher than our average of $5 million guidance, as we closed an additional parcel for $8 million, which we had projected would close next year.

Gross margins on land sales at 42% were also higher, as this additional property had a very low basis.

Other income and joint venture income combined at 8.9 million, were approximately equal to our previous guidance.

SG&A at 10.2% of total revenues was lower than the guidance we gave you as we benefited from the effect of the higher revenues, partially offset by higher expenditures.

Interest expense, which is based on specific lots closed, was 2.4% of revenues and slightly better than the 2.5% guidance we gave you.

For the fourth quarter, we expect to deliver between 2,075 and 2,175 homes, bringing total deliveries for the year to between 6,300 and 6,400 homes.

This is the same guidance we gave you on August 5th, and approximately 100 homes higher for the fourth quarter and 200 homes higher for the year above May guidance.

We expect that the average delivery price to be between $580 and $590 thousand, although there -- there is a chance that it will be slightly higher.

Again, this is the same guidance we gave you on August 5th, but higher than the range of 565 to 575 thousand we gave you in May.

We estimate land sales will only be $2 million for the quarter, and that land cost of sales will be about 80%.

We estimate that other income will be approximately $4 million, which is $1 million less than our previous guidance, and that joint venture income will be about $8 million, which is $2 million above our previous guidance.

We estimate that gross margins will be approximately the same as last year's fourth quarter, reflecting the fact that we had a slightly richer mix in the third quarter, some of which was taken from closings which had originally been projected to take place in the fourth quarter.

This is at the low end of our previous guidance that we gave you of 28 -- 28% to 28.3%, previously.

The SG&A as a percentage of total revenues will be 10 to 20 basis points higher than last year's fourth quarter, which is an improvement over our previous guidance which we had told you was going to be 20 to 40 basis points higher than last year's fourth quarter.

Interest expense should be approximately 2.5% of revenues, and we estimate our tax rate at about 37%.

The last component of earnings per share is share count.

Based on the closing price yesterday of $43.46, and what we believe will be our share price at the end of this quarter and the end of this year, as investors focus on 2004 records and our projected results for 2005, we would expect the number of average shares outstanding to be approximately 81.8 million shares for the fourth quarter calculation, and an average share count for the year of approximately 81.3 million shares.

As we discussed in our last conference call, as a result of the longer delivery times for homes and the introduction of some high-rise products where deliveries will be more than a year out, some traditional relationships between backlog and projected quarterly deliveries for next year may vary.

Accordingly, based upon our record backlog, current pace of traffic and deposits, expected community opening -- openings and current economic conditions, we estimate that we will deliver between 70 -- 7,700 and 8,000 homes in 2005, and that the average delivered home price will be in excess of $600 thousand.

Therefore, we believe we will achieve at least 30% net income growth, or approximately 25% per share growth in fiscal 2005.

We are still working on our detailed quarterly projections for 2005, including cost of sales, and SG&A estimates, and we'll update our guidance in our November 9th Contracts and Backlog conference call, and, again, in our December earnings conference call.

Based upon the current economic conditions and increased community count, we believe we can achieve growth of 20% in revenues and net income in 2006, as well.

At this point I'd like to turn it back to Bob for questions.

Thanks, Joel.

I've been asked to keep my answers shorter.

I'll do my best, and Joel will, too.

And I've also been asked by a good many of you to try and limit the questioner to 1 legitimate question.

Could be a couple of parts, but 1 legitimate question instead of A, B, C, D, E, F, G, so that everybody gets a chance.

So, if there's any questions I'll do my best.

Today's question-and-answer session will be conducted electronically.

If you would like to ask a question, please press the star key, followed by the digit 1 on your touch-tone telephone.

If you are using a speaker-phone, please make sure your mute function is turned off to allow your signal to reach our equipment.

Once again, if you would like to ask a question, please press star, 1 at this time.

We will take our first question from Margaret Whelan with UBS.

Please go ahead.

Hi, guys.

Hi, Margaret.

You kept your prepared comments short, so that's half the battle.

Thank you, very much.

And I have one question, a couple of parts, I guess.

I'm just thinking about your guidance for '05 and into '06.

What are you thinking about in terms of the margin embedded in your backlog, the fact that it's so high now, your costs are rising?

And, I guess, in particular, what you're saying in '06 is that your sales and net income growth is going to be flat, so you're not assuming any margin expansion, is that right?

Joel?

We never assume that 2005 prices will go up, although we hope they will.

Mm-hmm.

And, therefore, that's in our projected numbers.

And we have increased sales prices greater than costs have gone up, and therefore, the costs -- increasing costs that we've recently had, and has gotten so much publicity, we think will not have a major impact on us.

But, you know, if there's a benefit to size, when are we going to see it, in terms of sustainable margin expansion, as opposed to just benefiting from better pricing environment?

I think we've seen improved margins increases.

We've increased -- achieved margin increases, despite the fact that our mix of closings by geographic region should have led to margin decreases based on guidance we gave you a year-and-a-half and 2 years ago.

So, I think you've seen some of that, and I think we will continue to see some of that.

Can you give us examples of what you're doing, specifically, to offset that unfavorable mix?

I couldn't hear the question.

I'm sorry, Margaret, I couldn't --

Could you give us some specific examples of what you've been doing that's helping your margins, such as offsetting unfavorable product mix, and that gives us the confidence that it is sustainable?

Well, I can't give you the confidence that it's sustainable, meaning it will continue to increase margins, but I can give you the answer to the first part of the question, which is we've been raising prices.

No, I know you're raising prices, but in the event that home price inflation slows, or, you know, it's stagnant with deflation, is there anything Company-specific that you're doing?

You know, taking costs out, beating up your vendors, that's going to help protect your margins?

No, I can't give you comfort that we'll beat our vendors and take costs out.

We'll just naturally expect that if you have the slowdown in the economy and in the market, in the home building market specifically, that you wouldn't be giving your vendors increases.

Neither would you be giving your subcontractors increases.

Okay.

So it'll be -- it'll just work itself through?

Yes.

And then, just finally, housekeeping, 30% net income growth and 25% EPS growth, what are you assuming for the share count for '05, Joel?

Approximately 84 -- 84 million shares.

Okay.

Thank you, guys.

Thank you, Margaret.

We will take our next question from Stephen Kim with Smith Barney.

Please go ahead.

Hi, Jed Barron for Steve Kim.

Congratulations on the numbers for this quarter.

Thank you.

Just, I guess, broadly under the umbrella of your '05 guidance, I guess to the extent that could you help us out, in terms of the equity earnings, the unconsolidated JV earnings next year, would you assume, I guess, that they'd be, kind of, more in the range of what we saw in the last couple of quarters, here, and then that would be fairly steady over the course of the year?

Or what -- what might be the best way to, sort of, think about that in '05?

Joel?

We haven't broken out the detail by category yet.

We've kind of looked at what offsets what.

And I, you know, if I think if you took a look at the numbers from last year and you said, gee, on average they'll roughly repeat themselves, maybe not by a category, you get a pretty good comfort level.

But by category, I can't give it to you.

All right.

But I assume that the numbers there would be higher, though, than we have seen historically, given the new projects that you're opening up.

Roughly the same, is my best guess, but that's -- because that's what I just told you, 1 will offset the other, land sales may be higher or lower, joint venture may be higher or lower, roughly the same --

Okay.

-- is what I'm projecting.

Okay.And then 1 other point.

On your community growth, or sub-count expansion plans for '05, if you could just give us, I guess, a rough idea of what you're looking at there, and in what regions, maybe in particular, you'd be looking to put additional communities in?

I don't have the regions in front of me, but 235 communities at the end -- selling communities at the end of 2005 is our current estimate.

Was that?

What was that, again, Joel?

23 --

235.

Great.

Thanks, very much.

You're welcome.

We will take our next question from Lorraine Maikis with Merrill Lynch.

Please go ahead.

Thank you.

Some of your regions like Boston and California have experienced above-normal price increases over the past few years.

Can you just talk a little bit about your pricing outlook over the next couple of years in the areas where you've seen higher than average growth?

Boston hasn't been growing as fast as many other areas of the country.

The press continues to write it because I think the press focuses on resales in Newton and Brookline.

But if you go around the 495 ring in Boston, I don't think you've had as great a price appreciation as you have had in the Washington D.C.

Metro area.

Virginia, Maryland have been -- have seen much, much faster price appreciation.

You've seen pretty -- pretty good price appreciation on the west coast of Florida, and the Gold Coast.

Slightly less on the east coast of Florida.

New York has seen tremendous price appreciation, but it doesn't show, because what's happened is development has moved out of Westchester, and moved up into Putnam and Dutchess Counties.

So, you go from a million dollar home down to a $600 thousand home, but that $600 thousand home, 2 years ago was $400 thousand in Putnam and Dutchess.

So you've had tremendous price appreciation, but it's not showing.

It's actually the opposite impact of what I've just described has been happening in Boston.

Rhode Island's been fairly steady.

New Jersey, tremendous price increases, and the reason is tremendous constraint, regulatory constraint, and NIMBY politics taking its toll on the availability of lots.

Philadelphia has had pretty strong price -- price appreciation, and it looks to me as though all of these areas that I've just described will continue in the same -- same vein.

Although I think, in general, it will not be to the same excited extent that you've seen in the last 2 years, you know even -- even a tree must stop growing, and I think it's a good thing, as I said in the monologue.

It's a good thing to have a leveling off of the market, because I think it keeps us from doing that Wile E. Coyote-thing, and running off a cliff with price increases and then finding out that we are in space.

Chicago has had pretty good price increases.

Northern California and Southern California have been -- have seen tremendous price increases, and I would expect that you'll see a leveling off there, more discrimination being brought to bear on the consumer's choice, as opposed to just, I've got buy it because if I don't, I'll never get into a house.

Phoenix has seen very strong price appreciation, and there doesn't seem to be any slowdown on the immediate horizon.

So, sooner or later it must come, but it's not -- it's definitely not the same as the California market, where you can -- you can sense that there's more discrimination in choice of housing, due to pricing.

Vegas, tremendous price appreciation in the last several years, and as I said, there's a leveling off now, but it's, again, it's a very welcome thing.

You're not seeing a leveling off in sales.

Sales are still strong, but you no longer can push a price 10 thousand or 20 thousand a week.

I think I've -- have I missed any of our markets, guys?

Texas.

Texas, there hasn't been significant price appreciation in the last 3 or 4 years, and I don't see it for Texas on the horizon, because there's -- that's one of the few markets where you have tremendous lot availability.

So I don't think you'll see inflation there commensurate with the inflation in the rest of the country.

Thank you.

We will take our next question from my Myron Kaplan with Kaplan Nathan & Company.

Please go ahead.

Yeah.

Hi, guys.

Hi, Myron.

Tremendous numbers --

Thank you.

-- continuing.

I think I have a contribution for the -- why the multiples of the home building stocks are low, and that's because you have an industry where the macro numbers get revised every month 10%.

Mm-hmm.

That's a good idea.

Do you have any commentary on the validity of those -- the numbers that come out every month that move markets?

I reiterate, I think what you're implying, which is that we don't put much stock in the numbers.

I mean, if the Northeast is down, it's only because the Northeast is out of business, due to the regulatory process.

Those that are here, are enjoying a tremendous market.

I'll make a deal with the devil, the Northeast should stay the way it is forever, and that would be just fine with us.

So, I mean, I could make stuff up as to why the macro number of housing --.

It'll change much?

-- is down, which is that interest rates were going up in May and June, so your fence-sitters were jumping into -- jumping into contracts in anticipation of being frozen out of the market.

And then in July, interest rates went down, and so there's not -- there's not as strong an impetus to buy now, as opposed to waiting a week or 2, to see if you can't do better.

But that's just talking-head chatter, and I wouldn't put any more stock in what I just said than in the numbers that I'm reading, so.

It doesn't matter, because the macro numbers will be revised, anyway, next month, so.

Probably.

We'll find out there'll be another story.

Just from a practical point of view, you're being required to maintain a ramp-up of production up from somewhere between 6 and 10 million feet, square feet, of luxury housing this next year.

And are you able to do it in some kind of orderly and cost-effective manner?

We certainly hope so.

Otherwise, we've been foolish in selling those houses.

We believe we have the management in place, and the subcontracted base in place, and, certainly, the material supply lines in place.

So, we wouldn't give the projections of the number of homes that we expect to be completed without having a pretty firm belief that we know how to do it.

I hope so.

Well, it's pretty -- pretty impressive.

Thanks, very much.

Thank you.

We will take our next question from Carl Reichardt with Wachovia Securities.

Please go ahead.

Good morning, guys, or afternoon.

It's morning somewhere.

Where I am.

I have 2 unrelated questions.

First, I'm curious about material prices, what kind of trends you've seen in lumber sheeting and cement concrete over the last, let's say, couple of months.

Are we getting any improvement in the shortage situation, or worsening of it in cement/concrete?

And then, just, what you're seeing, especially because you've got the -- the factory in Philly, Joel, in terms of lumber prices?

I haven't got any info -- go ahead, Joel -- that indicates that we're having any problems.

No, in fact, there've been -- material prices, in general, has stabilized or decreased in the last few months, so it's better than it was last time we had this conversation.

Is that true for concrete, Joel, because -- ?

Concrete has gone up, it's one of the few materials that have gone up, but we've gotten better pricing on the rest of the supplies that we have.

I haven't -- I haven't learned of any supply problems with concrete, although I read about it, that it's in short supply and tough to get, but as I said in the last conference call, when asked the same question, if you pay for it, you get it.

One of the good things, among others, of the capitalist system.

Okay.

And then, the unrelated question, looking at the joint venture stuff, Joel, do you -- I don't know if there's a unit count in terms of number of joint ventures, but I'm curious what percentage of them you're working with other builders on, and what percentage you are doing by yourself with a -- with a third-party investor or land investor or some other equity money or something like that?

We have 2 in California with Aera Energy, which is Shell and Mobil Oil.

We have -- we have 1 in South Carolina with a developer.

We have 2 in Hoboken with developers.

We have 1 in Texas with a builder. 1 in Jersey is a builder.

Right.

That's correct.

And 1 in Detroit with a builder.

And 1 in Pennsylvania, new one, but it hasn't started, yet. 5 in total.

So the thought process is just size of deal for most part?

I'm sorry, say that again.

The thought process of doing them as joint ventures as opposed to straight ownership would be size of transaction or risk sharing because of the, something like Hoboken, which would -- ?

The first part, the determinant has been the owner of the land, and that's the way we got into the deal.

They -- in other words, they wanted to participate in the ups of the project, as you raised prices over time and you had to set it up as a JV, or tax reasons for the owner of the land?

That's the only way -- the only way they wanted to sell the land.

For instance, the Chevron/Shell/Mobile deal in California, that deal's been going on for 4 years.

And that was the way we got into the land.

Thought, there, the land -- the land deal was so large, that it was a very welcome situation to be a JV, and it's been a very good one, with the oil companies.

They make good partners.

Good deal.

Okay.

Thanks, Bob.

Thank you.

Bye.

We will take our next question from Larry Horan with Parker/Hunter.

Please go ahead.

My question has been answered.

Thank you.

Thank you, Larry.

We will go next to Alex Baron with JMP Securities.

Please go ahead.

Yes, hello?

Hello.

Congratulations.

Couple questions here.

One was relating to your comment about the relationships between backlog and deliveries that are going to, I guess, change a little bit, going forward.

I was focusing, specifically, on your Southwest market, where your backlog has been rising very strongly and yet, it seems your deliveries have, you know, have slowed down quite a bit.

So, I guess I'm trying to get a better understanding of what we can expect going forward.

And, you know, are they, sort of, multi-unit projects?

Is that why you're booking a lot of orders all at once?

The only thing I could think rapidly, is, I mean, of right off the top is -- oh, that's right, he said Southwest.

I was going to talk about the high-rise in Florida.

But that's Southeast.

Go ahead.

Sure, we are sold out, pretty much, in Phoenix -- in the Phoenix market, Scottsdale, et cetera, to a 12-month period.

So the backlog grows.

We've been extending the backlog without concomitant construction production.

The average time in backlog last year was probably 9 to 10 months, and today it's probably 11 to 12 months.

Oh, it is?

Thank you.

Okay.

Another follow-up question.

Focusing on your average --

Remember, I'm trying to -- trying to let everybody get a chance, but go ahead.

Okay.

Focusing on your average sales prices that you had in your orders, it seemed like they're, you know, they're quite a bit stronger this quarter than they have been in previous quarters.

And I'm just wondering if we were to go down market-by-market, is each one of those fairly sustainable average price, or is there some kind of mix issues as we look, you know, over the next 12 months?

Can we, sort of, use the same prices that you received in orders this quarter, going forward?

Well, obviously, every quarter, mix issues change, but those are new community prices, and we have a lot of new communities that have opened up that were very expensive communities.

And we're doing very well in them.

Okay.

Thanks a lot.

You're welcome.

Thank you.

We'll take our next question from Timothy Jones with Wasserman & Associates.

Please go ahead.

Good afternoon, Lamont.

Hello, Tim.

How are you?

Okay.

I'm going to make it quick.

But it's about a 3-point question, same subject.

Margaret who asked the first question, was right on the -- on the button.

But she let you off a little too easy, okay?

We appreciate your compliment, Tim.

You know how many compliments I give.

Anyway, so let's go, again.

Here we go.

Since and Joel are fanatics about following everything about Company for the last 25 years, tell me, when is the last time in the history of the Company that the Company's top line was less -- growth was less than the bottom line?

Excuse me, the bottom line was less than the top line?

In other words, when your earnings were less than your revenues.

Joel?

Is that what happened this time, Joel?

That our bottom --

No, no, no.

It hasn't happened in ages.

I just want to know, when's it the the last time?

It's happened -- it happened in the late '80s, early '90s, and it happened in the mid-'80s.

But where are we going with this, Tim?

Okay.

Very simply.

You have a 75% increase in your -- in your dollar backlog.

You are projecting a 20% increase, actually 20 to 23% if you want to take your guidance on that, plus a little bit higher price.

I am wondering, I understand you went from 9 to 12 months on your backlog, but if you do the mathematics, it implies that your sales should go up in excess of 30%, well in excess, unless you are constrained, basically, by a factor such as your production capabilities.

Or is that the factor why you are not giving a higher top-line growth, and I suspect you're being, you know, conservative on the -- on the margins?

Well, we try not to over-promise, Tim.

I understand -- I understand the second part.

Let's go to the first part.

When you sell a high -- when you sell high-rise, you know, it comes to the backlog, but doesn't come to the bottom --

All right.

Let's ask it the other way.

-- for 2 years.

What percentage of your backlog is high-rise?

Oh, not much.

It's a small percentage.

How much?

Couple of percent.

Huh?

So that answer doesn't fly.

No, but --

Okay, and the other would be through an extension of the backlog.

I understand that, but you've been going through that this year.

That's what you -- what you've done for the last 3 -- 9 months, you've talked about that, so most of that -- not all of it, I agree -- has already been -- is already being factored in.

But I come back.

You say you have a 75% increase in the dollar value, and you're projecting a 20% increase in sales.

In closings.

In closings, yes.

Sales being a very --

Closings.

You know I know it.

Yes.

Well, Tim, we could debate, but I don't --

No, no, but I meant, I just --

You want a debate, and I understand your points, and they appear reasonable and logical.

We've done our best to give you all --

[Laughter]

I thank you for your analysis.

[Laughter] Thank you, Bobby.

I can't even keep a straight face on that, but okay.

Thank you, Tim.

Yeah.

Bye-bye. [Laughter]

We will take our next question from Ivy Zelman with Credit Suisse First Boston.

Please go ahead.

Actually, this is Mark Herbeck on behalf of Ivy Zelman.

How are you guys doing?

Great.

Thank you.

And how are you?

Just fine.

Good.

2 quick questions.

Any color on August traffic, how that's shaping up?

And can you give us your share repurchase numbers for the third quarter?

August traffic numbers appear to be near record numbers, except for this past weekend.

Other than that, you are either at or bumping up against record traffic going all the way back to '91, which just happens to be the information that I have in front of me.

The Company goes back to '86.

We went public in '86, but I don't have more than '91.

That's on a per-community basis, so obviously on an absolute basis, it's much higher.

And --

As for share count, we purchased a little over 300 thousand shares this quarter.

Okay.

Thanks, gentlemen.

Appreciate it.

Thank you.

We will take our next question from Joel Walker with Benchmark.

Please go ahead.

Hi, guys.

Great quarter.

Just wanted --

Thank you.

-- to ask you a couple questions.

Just on a -- just cost year-over-year, based on just materials and land, just over the next 6 months, say the October quarter and January quarter, how much on a percentage basis would you say that your costs are up year-over-year, just the materials, you know, lumber, steel, cement, to make a house?

And then the land, actually, too, that you're building the lot on -- or building the house on?

1% for the year -- year-to-date and the last 9 months.

As a percent of sales price.

1% of the materials?

That's right.

And then, are you talking about land or the materials right there?

Materials cost went up roughly 1% of the selling -- average selling price of the house.

Right.

Roughly 6 thousand bucks, on average, for the -- for the year.

And what about land, per se?

Say, not this quarter, but say, you know, this October quarter of '04 compared to the October quarter of '03, like how much -- ?

I think -- I can't answer the question, but remember the land that we're delivering now is probably land we put under contract a long time ago.

Right.

So it's appreciated, or the cost, you know, the cost of that is up, I guess, a little bit?

I guess.

I don't know.

And I just want -- on, actually, the average house in backlog, too, from this quarter right here compared to last quarter, or, sorry, '03 quarter a year ago, has the size of the house, on average, any bigger or smaller?

Is it similar?

I think -- I think the homes continue to grow in size.

The answer is the product mix got a little bigger, also.

And the size of the houses went up.

Right.

So, like on average, on percentage-wise, how big would you -- how much bigger or larger would they be this quarter compared to a year-ago quarter?

Oh -- It's a different mix this year.

Last year in backlog we had --

Yeah, but, taking the -- taking the same -- taking the same product, to try and answer the gentleman's question, I would guess you're up about 3 to 5% in size.

Yes, that's true.

Thank you.

I'm thinking of square footage.

It's up, also, in volume.

Your ceilings continue to go -- to get higher.

Do you follow me?

Right.

Yeah, I'm just -- I'm just wondering how much, you know -- what size, on average, is, you know, the average house?

It's a -- it's a guess, but I'm probably not too, too far off.

About 3 to 5%?

Yes.

All right.

Thanks a lot.

You're welcome.

Okay.

We'll take our next question -- excuse me, our last question from Gil Alexander with Darphil Associates.

Please go ahead.

Good afternoon.

Could you -- on the financings of your homes, about what percentage are homes financed with over 80% debt, and of that number, how much -- what percentage use ARM financing?

Well, let's answer the first question, then we'll get a restated --

A very small percentage have high debt.

Our average loan to valuation is about 70% Company-wide.

We don't know how many are over 80, but it's not many.

What was the second part of your question?

How many of them are ARMs?

Of the over leveraged -- of the overleveraged --

Oh, of the overleveraged are ARMs?

I don't know how many are -- well, you shouldn't say overleveraged.

We don't know -- we don't know how many we have over 80%, so I can't tell you how many are ARMs over 80%, but do you know how many are ARMs, Joel?

70% of the deals in the last quarter that closed were ARM products.

That's a higher percentage than normal, but it's a result of -- it has nothing to do with -- the same percentage is -- of programs that people select is the same.

Same number of people select ARMs as selected 30-year fixed, but the few more closed with ARMs than traditionally.

You said 70% of deals are with ARMs?

Joel, you said 70% of our deals?

70% of the last quarter's closings had ARM products selected -- selected in them.

That is correct.

That's 10-year ARMs --

No, it's not.

It could be --

-- 10-year ARMs, 5-year ARMs, and 7-year ARMs --

The 10 made no sense.

We did a lot of -- oh, yeah.

Yeah, that makes -- oh, these -- these are -- excuse me.

These are the ones that we wrote to the Westminster Mortgage Co., which is the Toll Brothers' mortgage company.

The outside companies may have written more fixed, so this is not an accurate answer.

I'm sorry.

This is only an answer with regard to our mortgage company, and our mortgage company is only a 30% capture rate.

So I'm not telling you about 70%, and I haven't got that info.

All right.

Thank you very much.

You're welcome.

By the way, I noticed alarm or surprise at the number of ARMs.

The ARMs certainly make more sense than the standard 30-year fixed, because a 7-year ARM, you get such a significant break over a 30-year.

And most people don't stay in their home for more than 7 years.

So why pay for the privilege of locking a rate?

[Inaudible] 7% ARMs?

I'm sorry?

You have any idea what percentage of homes are sold under 7% ARMs?

7-year ARMs.

7-year ARMs, not 7%. 7-year ARMs.

No, I don't.

All right.

Thank you, very much.

You're welcome.

We will take an additional question.

We will go to Jack Kasperzak with EBT.

Please go ahead.

Thank you --

By the way, is it Kathy?

The operator, moderator?

Cynthia.

Cynthia, I'm sorry.

Cynthia, I don't have to cut the questions off for another 7 or 8 minutes.

Very good, sir.

Okay.

Thanks.

Good afternoon, everyone.

Hi.

Hi.

Just one quick question.

The guidance you guys -- the detailed guidance you gave in the 8-K has the home building margin 28.07%, and that's down from what we've seen over the first 3 quarters of the fiscal year.

Can you just talk about why you expect it to the decline?

It's a mix issue.

And the mix, can you just give me a little detail on that, Joel?

Is it makes toward more high-rise, even though that's a small percentage, or what would that be?

No, we think that the -- that it's statewide mixes, generally, and a little product mix.

We closed some additional units in states that had higher margins in the third quarter than we expected, and defer, not intentionally, but some things that didn't close with some lower margins, will close in the fourth quarter that we had projected for the third quarter.

And we think the impact of that will be roughly flat to last year's fourth quarter.

Okay.

Very good.

Thanks, guys.

You're welcome.

We will take our next question from Gabe Kim with Bathwood.

Please go ahead.

Hi.

Could you guys tell me what the average number of selling weeks per community was?

What the average number of what?

Weeks.

Selling weeks per community.

Oh, for the life of a community?

Yes.

You indicated 235 was sort of the community count at the end.

Yes.

But in your previous conference call you talked about, sort of, how you've been opening and closing your communities, so the average was not necessarily the same as the ending community count number.

Oh.

What we were trying to explain to you was that we do our best to try and give you static benchmarks to judge the same-store sales per community and the average number of communities opened at the end of the quarters.

There are communities that we open and close during the same quarter.

If we open a community in the beginning of the quarter and sell 20 homes, which puts us at 9-month backlog, and then we see we're headed to 12 months by the third quarter, we will shut the community down for sales.

Often.

And have no lots available, so that would be 3 quarters of a community open.

In some cases, we might have a community half open for the quarter.

So we do our best to approximate for you, and for ourselves, the number of communities that were open for the quarter.

We actually have more communities open and selling than we are giving you a number for open communities.

Do you follow me?

I do.

So, then, I guess, the question, though, is, are you keeping your communities open for less?

I mean, presumably they're open less, on average, than they were, say, at the beginning of the month or the beginning of the quarter or the beginning of the year?

No, I would -- I wouldn't say so.

I would say that they're open less than they were 3 or 4 years ago, but not for the last quarter or the last week or the last month.

Or year?

Or year, right.

For the year, things have been pretty static.

Great.

Thank you.

You're welcome.

We will take our next question from Jim Wilson with JMP Securities.

Please go ahead.

Jim, how you doing?

Good.

How are you, Bob?

Great.

Thank you.

Just one question.

Was wondering if you could color at all how the months went in the quarter, and whether there was any sort of -- I know you've already colored what August looked like, but whether there's any change or any particular months were stronger, anything noticeable or anything -- anything, even regionally, that certain places slowed down or certain places got stronger, for that matter, as the quarter progressed?

Yeah.

In general, it seemed as though there was no discrimination 3 months ago in the hot markets.

And I think we've all now been through it couple of times.

You know what I'm referring to when I say the "hot markets."

And I think that some level-headed discrimination has entered the market in the last 3 or 4 weeks in the markets that were silly.

And so you're getting a more rational leveling off of price increases in those markets.

That's about it.

I think there hasn't been any change in the last 3 months, or even in the last year in the markets as they compare to one another.

California was hot a year ago, California is still hot.

Washington D.C., you've seen no change.

It's just hot as a pistol.

Texas, it's not a struggle, but it's an ordinary business, another day, another dollar, as opposed to hitting home runs.

But that's been the same for years, because -- and it's all got to do with the availability of home sites and the political control in the various markets.

Where you have small entities, small governmental units controlling land supply, you get more constraint than when you get larger governmental units controlling land supply.

In other words, California, which is governed slightly differently, to say the least, than the Northeast, although they think it's the toughest market, it's not.

It's much tougher to get land control -- to get land qualified, entitled, in New York and in New Jersey and Massachusetts and in Pennsylvania, than it is in California.

Okay.

Good.

That's what I thought.

And so even more prices have, maybe, started -- started to hit ceilings or, you know, found their highs already, it hasn't really changed volume?

That's correct.

That's correct, yeah.

Okay.

All right, good.

Great quarter.

Thank you.

And we will take our final question from Timothy Jones with Wasserman & Associates.

Please go ahead.

Hey, wait a minute, that's Tim Jones', number 2, Cynthia?

What are you doing to me?

No, the last one was Cuthbert J. Twilly.

Go ahead.

You said something -- you've had 5 really great questions on this call, but the last one, it just knocked me over on your answer.

So I to have ask it to you again.

And this time think about it.

This is very simple.

One of your questioners, about 6 minutes ago, asked about the average price of your homes, and they said have your land price escalated, and your answer was, I guess, I don't know.

Would you prefer -- would you like to rephrase that answer?

I'm sorry, what was the question that I didn't -- ?

The question was, the person was asking about, you know, the increase in the homes prices and you went to the --

That was, yes.

Yes.

And this is a little bit bigger, and blah-blah-blah.

But then -- but then they -- but when they ask about -- about land, you -- had they escalated, your answer was, I guess, I don't know.

Now, I know.

Why don't you?

Well --

I mean, come on, Bobby.

Why do you have 7 years of land, if you don't know the answer to that question?

I'm sorry, I didn't answer it.

Joel, I believe, did.

Well, then, you should shoot Joel.

Tim, I don't have the answer.

Joel, answer the question.

Joel?

I don't have the answer.

Come on, guys.

You know the land has gone up.

Please.

Just say it.

Tim --

Why do you -- why do you have 7 years of land, if you don't think the land is going up?

I'm sorry?

Joe?

Oh, Joe Sicree says, in absolute dollars, probably it has gone up, but as a percentage of sales price, he's not sure.

I would think, maybe, it has even gone down a little bit as a percentage of sale price.

Good job, Joel.

Thanks.

[Laughter] Thanks.

Cynthia?

Cynthia?

Yes, sir.

Ladies and gentlemen, this will conclude the question-and-answer session.

Mr. Toll, I will turn the call back over to you, sir.

Well, Cynthia, you've done a great job.

Thank you very much.

And everybody, thank you for participating in our conference call.

I look forward to speaking to you again.

Have a good day.

Good-bye.

Again that will conclude today's conference.

We do thank you for your participation, and you may disconnect at this time.