托爾兄弟 (TOL) 2006 Q2 法說會逐字稿

Welcome to the Toll Brothers second quarter 2006 earnings release conference call. [OPERATOR INSTRUCTIONS] 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 Chief Executive Officer of Toll Brothers Incorporated.

Please go ahead, sir.

Thank you, Tonya.

Welcome, everybody, and thank you for joining us.

With me today are Joel Rassman, Chief Financial Officer;

Fred Cooper, Senior Vice President of Finance and Investor Relations;

Joe Sicree, Chief Accounting Officer;

Kira McCarron, Chief Marketing Officer and Greg Ziegler, Director of Finance.

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

I caution you that many statements on this call are based on assumptions about the economy, world events, housing 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.

That is one word.

We will try to answer as many as possible.

Today we reported record second quarter net income of $174.9 million, up 3% versus fiscal year '05.

Record second quarter revenues of $1.44 billion, up 17% versus '05.

Record second quarter end backlog of $6.07 billion, up 3% versus '05 and signed contracts of $1.56 billion which declined 29% compared to fiscal year '05's record second quarter results.

We are in our ninth month of slower sales in most of our markets.

Demand, while obviously diminished is still alive.

In most cases buyers are looking for deals.

But in a few of our communities they are looking to move up on waiting lists.

We believe in general, though, that many customers currently feel a lack of urgency to purchase due to the uncertainty over the direction of home prices.

Many potential buyers are on the sidelines.

While the general economy remains healthy, the new home economy is beset by an over supply of investor specs, builder specs, specs created through buyer cancellations.

Generally we do not sell to speculators nor build spec homes, but we certainly have been impacted by the overall increase in supply in the market.

We believe that once this excess inventory is absorbed, demand should once again exceed supply, and prices should start to rise again.

This should increase customer confidence and improve perceptions of the markets health, then we believe the buyers that have been on the sidelines will come back to the market.

We now believe we will deliver between 9000 and 9700 homes in fiscal year '06 and produce net income of between 780 million, and $850 million and earnings per share of between $4.69 and $5.16, in fiscal year '06.

This would translate into a return on beginning equity of between 28% and 31%.

These earnings while slightly down from our most recent guidance would still be our best or second best year ever.

Now at this point, let me introduce Joel Rassman, CFO of the firm to do the numbers.

Joel?

Thank you, Bob.

During the quarter we delivered 2,063 homes at an average price of $679,000 for approximately $1.4 billion of revenue, a little above the mid-point of our guidance.

Second quarter cost of sales at 69.7% before interest was higher than our previous guidance principally as a result of higher write-offs, write-offs were approximately $12 million compared to 2005's second quarter of $200,000, and our budgeted write-offs of 4 million a quarter.

The increased write-offs were in most part attributable to continuing weakness in the Detroit market which accounted for approximately $8 million of the write-offs.

About $2 million of the write-offs were attributable to two communities in new England and about $2 million attributable to small write-offs of predevelopment costs throughout the country.

We recognized $40 million of percentage of completion revenues with a 78% cost of sales resulting in income from percentage of completion operations of $9 million, slightly lower than our $10 million of guidance.

Interest expense as a percentage of revenues at 2.1% was slightly better than our guidance at 2.2%.

SG&A of 9.85% of revenues was also lower, i.e. better than our guidance as we had an absolute expenditures at the bottom of our range partially as a result of timing of community openings and lower advertising costs and revenues above the middle of our range.

Other income at $11 million was about $5.5 million higher than guidance as we benefited from the interest income on the money we received and then invested from our new bank term loan and higher income from our ancillary businesses.

In March of 2006, we closed on a new bank facility which consisted of a revolving credit of $1.5 billion, up from $1.2 billion under our previous line, and a term loan of $300 million.

In addition, joint venture income of approximately $13 million was almost $6 million higher than our guidance as income from one of our joint ventures was accelerated from future quarters as a result of earlier than anticipated closings.

The tax rate was 38.5%, approximately equal to our guidance.

And for EPS, diluted EPS calculations, the number of shares was 165.7 million shares, slightly lower than our guidance of 166 million shares.

The result of all of the above was after tax earnings was approximately $175 million and earnings per share of $1.06 both above the midpoint of our guidance and slightly below the top of our range.

We have filed an 8-K and put on our website detailed guidance for the remainder of 2006.

We suggest you access that guidance to assist you in modeling.

We will continue to review our guidance throughout the year and adjust guidance if necessary in future conference calls.

In order to help you create your annual and quarterly models, I have highlighted some information we believe you should consider.

We caution you that quarterly guidance is subject to even more vagaries and uncertainties than annual guidance.

We expect to deliveries in the third quarter to be 2100 and 2450 homes and deliveries in the fourth quarter between 2900 and 3300 homes.

These quarterly delivery estimates are lower than our previous guidance and reflect the revised annual guidance we gave on May 5, 2006.

We believe the average delivered price for the third quarter will be between 675 and $685,000 and between 690,000 and 700,000 for the fourth quarter.

Both are slightly higher than our previous guidance.

Based upon expected delivery mix, we believe cost of sales for traditional housing without interest will be between 70 and 70.3% for the third quarter and 69.3 and 69.5% for the fourth quarter both of which are higher than our previous guidance.

We expect interest expense to be approximately 2.1% for each of the last two quarters.

We estimate percentage of completion revenues of 60 to 65 million in the third quarter, and 100 to-- 110 to 120 million in the fourth quarter which would make percentage of completion revenues for the year 265 to 280 million down from the previous guidance of 280 to 300 million with gross profits of approximately 25%, slightly better than our previous estimate of 20% before interest.

We expect land sales of $4 million in the third quarter with an 80% cost of sales -- $5 million in the third quarter and 4 million in the fourth quarter with a 90% cost of sales.

SG&A normally varies quarter to quarter as a percentage of revenue for many reasons including the timing of expenditures and the opening of new communities.

We estimate that SG&A will increase for the third quarter and will be between 9.9% and 10.2% of total revenues and will decrease to between 8.1% and 8.3% of revenues for the fourth quarter.

These are both increases from our previous guidance.

We estimate that other income will be approximately 7 million for each of the third and fourth quarter which is about the same as previous guidance.

And that joint venture income will be 7 million in the third quarter which is lower than our previous guidance and $20 million in our fourth quarter which is higher than our previous guidance.

We expect the tax rate in each quarter to be approximately 38.6, the same as our previous guidance.

For purposes of EPS, we are using an average of 165 million shares for the third quarter, 165.3 million shares for the fourth quarter, and this results in an average of 165.8 million shares for the full year.

We expect to provide guidance for fiscal 2007 in our third quarter earnings conference call.

However, as we've discussed previously, we expect that deliveries in 2007 will include about 30% or more multi-family product compared to the 22% in 2006.

We expect this when combined with other mix changes, for example, lower priced Florida deliveries, will result in a decrease of the average delivery price of a home for 2007 versus 2006.

Bob?

Thanks, Joel.

There will be a test on all of that later.

We continue to increase our community count and expect to end fiscal year '06 with approximately 295 selling communities compared to 230 at fiscal year end '05.

Most of these new communities have been under option and in approvals for several years and have recently begun to emerge successfully from the approval pipeline.

Since newer communities generally offer greater choice and shorter delivery times, we believe this expansion will lead to more sales.

We continue to find attractive land opportunities which we are putting under option and taking through the approval process.

These sites will become new communities several years out but out once approvals are received.

We currently control about 91,000 lots, about half of which are owned and half of which are optioned.

We see this as a major source of future growth.

The demographics of the luxury market remain strong with growing numbers of affluent households.

Approval processes continue to get tougher and more expensive.

This is limiting new lots apply.

Based on our community count and strong land position, we continue to look forward to the future with cautious optimism.

This quarter Fortune magazine published it's 2006 Fortune 500 list of America's largest companies.

Toll Brothers jumped 107 positions to rank 370 in the group based on revenues.

We ranked 211 based on fiscal year '05 net income.

We ranked 67th based on fiscal year '05 net profit margin, and we were 34th based on ten-year earnings per share growth.

Producing a 29.2% compound average annual rate of earnings per share growth from 1995 to 2005.

Our total return to investors ranked 69th for the ten-year period from 1995 to 2005.

We led the homebuilding group with a 97% increase in net profits over '04 and a 13.9% net profit margin in fiscal year '05.

We hope and believe that with our tremendous team and strong land position in the coming years we will continue to improve our standing in this prestigious group.

Now it is our pleasure to open it up for questions.

Tonya?

[OPERATOR INSTRUCTIONS] We'll take our first question from Michael Rehaut with J.P. Morgan.

It is actually Ray [Joaman] for Mike.

I had a couple questions.

First, if you could provide a little more color on some of the raw material and labor costs assumptions you guys are using for your guidance.

Joel?

Okay.

In the last conference call I think we talked about seeing about $7000 a house, average price increase in costs for the first six months of this year.

We have assumed that that will continue to escalate by about another 50 basis points for the rest of the year.

Are there any materials in particular that are giving you the most inflation?

Well, concrete costs have continued to go up.

Any oil based products such as paving continues to go up, and steel looks like it stayed constant for the last three months, but we haven't seen it go down for the prices it was previously.

Okay.

Also if you could comment on some of the traffic levels you're seeing into the third quarter, and maybe provide some commentary on some of the markets.

Traffic, you want to know about in the third quarter.

I haven't got a total.

I have it week by week in front of me, but not total.

Does anybody have it totaled for the third quarter?

No.

Look at comparison weeks.

I can tell you that traffic just scanning it in the second quarter traffic is down.

It looks to be about 20 to 30% in the second quarter.

In the third quarter so far just scanning it, it looks to be down 20, 30%, the exact same as it was in the second quarter.

Okay.

Year-over-year or sequentially?

That was year-over-year I was giving you.

Okay.

Bob, the traffic trends have been down for three years, and being down is not necessarily an indication of something that was just seen currently.

Okay.

Thanks.

Thank you.

We'll go next to Margaret Whelan with UBS.

Hello, guys.

Hi, Margaret.

So your lot count is going up as a percentage of – [as a percent of what you own is going up] --

I can't hear you.

You know what, I remember this last time from your phone, too.

It is the phone.

Say it again.

I am sorry.

Your lot count is going up.

Lot count is going up.

Correct.

The percent of lots you own versus options going up?

Percent of owned versions optioned.

That's correct.

I believe you're right.

We were 40 something last time and now we're 50, right.

Your share count is not really coming down?

Share count is not really coming down says Margaret.

I thought it was come down but not a lot.

Yes.

Does anybody know where we were?

You were using --

157 before --

I got it.

Quarter I think and now 165.

Yes.

I thought we were using 170 something.

Maybe that was awhile back.

That was a year ago we were 170 something.

Okay.

So my question is are you --[inaudible] -- buying land or are these positions and deals you had in place.

We're at 168 -- for the year for 2005.

Okay. 168.

We're now 160 whatever it is.

I know.

No big deal.

No big deal.

Absolutely right.

Are you still actually putting money into land or is the lot trend going up because of the – positions and you are starting to take on [inaudible].

We're putting money into land that is coming through the pipeline after several years.

I guess on average four years of fighting your way through the approval process, and when we do put that money out, that land is ready to go into production which is giving us the increased community count.

Gives us the new communities which we believe affords us greater opportunities to sell because new communities have more to offer obviously than old communities, and they don't have a backlog generally, and not generally, always.

So we believe that helps sales.

We're also continuing to seek out new deals.

Put those into the pipeline, and bring them out four years from now, so that we'll be ready when we believe the market is ready for us.

Do you think it is wise to be spending more money on – [inaudible] here though?

You're breaking up again, Margaret.

How do you make the decision between buying in your equity versus at this level versus buying more dirt?

Pretty much look up at the upper right-hand ceiling of the room and say, yeah, we think the price is right today and let's buy some shares, and we buy some shares.

If a good land deal comes in, we say that's a good land deal.

I think we ought to take that one, or vice versa.

Joel?

Underwriting criteria for new land deals --

Here is the real talker.

It is probably the equivalent of roughly 30% IRR unleveraged.

And if you assume we’re roughly 50% leveraged, we were less than that.

That means we're getting a 60% return on any land deal when we get the compounded.

So right now even though we believe the stock is very depressed.

Land deals at those kinds of numbers on an underwriting basis which is today's basis, if there is any appreciation will be even higher are certainly more attractive than buying in our stock if we have to make a choice.

We have done this evaluation a number of times this year including about six or eight weeks ago for our board, and it still comes out to the same answer.

Never the less when the stock is as it is and as it was which was higher than as it is, we think it is a bargain, so we buy some.

We always try and buy enough stock to keep ourselves from diluting due to the options, but when we think it is a bargain, we continue to buy extra to take advantage of the bargain.

Joel said it is not as good a bargain as buying land.

Nevertheless, we still buy it, and we will continue to do it.

Have you increased the threshold return that you expect on your land -- [inaudible] – new land buys [inaudible].

It is very hard to hear you.

I think your question is have we increased the threshold for buying land.

Yes, we have.

There are more deals on the market.

Therefore you raise your threshold, and obviously the market is more tender, so I am sorry?

Tentative.

That's the word I was looking –.

The market is more tentative, not tender.

And therefore, you raise your return on investment requirements, and you raise your profit requirements.

The $12 million in Detroit, was that an asset impairment on your balance sheet?

Or was it a deposit you walked away from?

We couldn't hear you.

It is referring to the $12 million.

I didn't hear what she was asking.

Was it a land impairment off your balance sheet or was it an option you walked away from?

In Detroit we believe that the communities had slowed to such an extent that given the current market we had to take land impairment charges.

Land impairment is the answer.

Should your lot count come down as you do that?

No.

Unfortunately we still got the lots.

Right.

Just write it off, okay.

We don't write off the lots.

We bring down the lots so we can realize a profit on sales in the future is effectively what happens.

If as if luck would have it the Detroit suburbs returns to prosperity and decent economy, we'll be sitting with some very cheap lots.

Good.

We believe they are cheap at this time, and that's why we write them down.

Okay.

Thank you, guys.

Thank you.

Tonya, question from the internet from Michael [Taupopov].

What is the average age of the Company's land holdings.

It takes on average two to seven years to get approvals, and land we own has probably been owned for two-and-a-half years.

About five years.

Two and a half to four years.

I would guess, what, about five years, four years?

Maybe six years or seven years from the time we sign the contract, yeah.

You think on average six or seven years?

I would think a little less.

Michael continues to ask what percentage of revenues come from what would be considered as hot real estate markets of Florida, Las Vegas, and DC?

Percentage of completion-- I am sorry.

I missed the question.

What percentage of revenues?

I don't know.

Guys, have you got the figures on percentage -- I can give you general flavor.

We have four different markets in Florida, so it is a large market.

We've got the Orlando market.

We call it central.

We've got the north Florida market which is Jacksonville for us, and we’ve got east Gold Coast and west Gold Coast, so altogether how many communities, guys, do we have in all of those Florida markets.

41 communities in Florida.

We have 41 communities in Florida and 295 communities now.

275 communities now.

Approximately.

That gives you an idea of that percentage.

Las Vegas, viva Las Vegas, what do we have, about 15 communities in Vegas?

How many?

Sixteen.

Not a bad guess.

We have sixteen communities in Las Vegas.

Washington, D.C., northern Virginia, and Maryland markets, just eye balling it must have 40, 50 communities.

More than that?

55.

55.

You can distinguish between the two of them.

Maryland is still going very well for us.

Might even call it a hot market.

Northern Virginia is still very slow, still a very weak market, better than it was a couple of months ago, but still to be characterized as weak.

Thank you, Michael.

We'll go next to Myron Kaplan with Kaplan Nathan and company.

Yes.

Hi, guys.

Hi, Myron.

Good quarter.

Thank you.

My questions have more or less been asked, so --

Thank you very much, Myron.

Thank you.

We have from the internet Robert Tracy, two questions.

How is May traffic trending relative to last year?

Okay.

I think I did that one.

Let me do it again.

May traffic -- yes, that's right.

I said it was off 20 to 30%.

It still is, and relative to April '06, relative to April '06 it is about the same.

One week down, one week the same and one week the last week up.

So on a basis it is about the same.

Second question from Robert Tracy.

How are absorption and cancellation rates for May trending relative to last year and April?

We don't do monthly cancellation rates.

We don't have it.

I am sorry.

Tonya?

We'll go next to Dennis McGill with Credit Suisse.

Hi, guys.

Just a couple quick ones.

Joel, on the joint venture income it looks like the backlog from the housing side is pretty minimal right now.

Is the income going forward largely land sale income?

On the joint venture income we have income from a joint venture in Hoboken which is the biggest piece and a couple land sale partnerships --

Excuse me, the Hoboken is not land.

That is a conversion.

A conversion, right.

Is there a reason it doesn't show up in the unconsolidated backlog number?

It should.

I am looking at is the 7.7 million the right number to be looking at?

Yes, Hudson Tea.

That’s the number.

That is Hudson Tea.

The reason is at this point we've moved out most of the people who we could easily move out and sell units and now we're moving them out monthly and we’re selling when people move out who are tenants.

The other last year we had in there Maxwell Place is a joint venture, and as you may remember we bought out our partner at the beginning of the year.

That became a consolidated entity from unconsolidated entity.

But when we look at your forecast for the rest of the year, 27 million from unconsolidated entities, is that because of a difference between closing and the percentage of completion recognition?

The percentage of completion recognition we have an unconsolidated joint venture is nothing I think at this point.

The only thing you have primarily delivering is some land partnerships in California, and –-

I guess I am trying to understand how you're delivering 27 million of income in the last two quarters when your backlog is 8 million.

On the unconsolidated?

Most of the income is from land joint ventures, not from the delivery.

So most of the income to come is from land?

That's all I am trying.

It’s also from unsold units for condo conversions.

Okay.

Okay.

And kind of on the lots that you guys have under control, the 91,000, how many of those roughly would you have entered into either owned or optioned say in 2005 or so far this year?

How many would we have – you mean using the current criteria?

Or how many did you in 2005 and the first quarter of this year?

Calendar wise?

I am sorry, I didn't understand.

How many deals did we enter into for the future?

Of the 91,000 lots, how many of those --

Plenty of those are fresh.

How many were entered into in '05 and '06?

We were 70 a year ago –-

I am going to guess about 20.

We were 70 about a year ago, I think.

That's what I think.

20 less whatever we do, plus whatever we deliver, about 25,000.

Right.

Okay.

I think about 20,000 is the right answer.

Thanks, guys.

The best I can do now.

You're welcome.

Thank you.

Tonya?

We'll go next to Carl Reichardt with Wachovia Securities.

Good morning, guys.

How are you?

Do you know offhand what percentage of buyers paid cash in the second quarter and how that might compare to past history, Bob?

It hasn't changed significantly as a companywide basis, 11% of our buyers companywide paid cash in the second quarter. 44 %of the people who are active adults paid cash that are included in the 11% and 7% of our buyers who are not active adult, paid cash.

Perfect.

It is roughly the same as it was last year.

And, Joel, just on the back half guidance on margins, I want to make sure I understand.

As I look at the last two quarters compared to the last two quarters of '05, I think we're down 270 basis points in gross margin.

You're saying about 50 bips of that is materials costs, correct?

No.

I have increased my guidance by about 50 bips, basis points for additional material costs above what I had had in there previously, and the rest of it is primary geographic differences which we talked about a couple of times.

For example, we had twice as much, almost twice as much deliveries last year in California than we will have this year in California, and we substituted deliveries of Florida homes this year versus much less of Florida homes last year.

California has much higher margins than Florida, and therefore we have a compression of the margins associated with that mix change.

So that was mostly geographic mix as opposed to -- .

That is correct.

And we had cautioned a year ago that was going to happen.

Right.

Thanks a lot, guys.

You're very welcome.

We'll go next to Dan Oppenheim with Banc of America Securities.

Thanks very much.

Wondering if you can talk about what you normally see in terms of the pace of absorption as you open new communities relative to how that would be in communities that have been open for longer as we think about what the sales trends could be later in the year just for that mix of the age of the communities that will be open?

I am sorry?

What was the question, Joel?

I think the comment was -- I'm paraphrasing -- Do we get more sales out of existing communities, that have been open a long time or new communities that are opening up?

Was that your question?

Essentially just how much the difference is in terms of – I think you basically were saying in your comments the absorption is better as you open new communities.

Yes.

Open a new community.

It depends how hot it is.

If it is a hot community, you can open up and in one week make 20 sales.

If we're willing to take -- I am thinking of a couple of master plan communities we recently opened where we had five different products in the master plan, and we opened the whole master plan, so we took five in each product in the first week, and that brought in 25.

In general that's not possible with an older community because you already got a backlog.

Most of ours are 10, 11 months.

As a matter of fact, quite a few are 12 months, so we're not going to make available more than two or three until we deliver two or three we can't make another two or three available because we don't want to backlog ourselves in general more than 12 months.

New communities provide us with significant opportunity.

Okay.

Thanks.

The second question, on the percentage of completion, raising the guidance there, how much of that is due to conservatism with your initial cost estimates versus better on the revenue side than you had expected?

Joel?

We had a slight change in mix of expected deliveries, and also some of the newer sales are at higher sales prices particularly in New Jersey, and as a result of that, as we talked about in the last two quarters, the as we raised prices we reflect for the new sales only the prices, the increased prices and that increases the net margins for those.

I don't anticipate sales when I give you guidance.

And we have a question from Maya, and I am sorry if I mispronounce this. “Moowod.”

Mr. Toll, how significant is the spec inventory created by investors in your view?

That's a good question.

I have no way of knowing, and I have often been wrong before.

Ask my wife.

You can switch that to almost always.

I bet that spec inventory -- that spec inventory has gone up 10% to 15%.

The way I would break it down is we had 10% extra demand from the speculative market which ended pretty much with Katrina '05, and that 10% of extra demand went away, and flipped to the other side because the product that had been absorbed by the speculators, now went on the market, and that probably put 5 to 6% more on the market.

Then on top of that you had builder's specs that were now sitting that were once hot properties.

You had to get a ticket in order to get your order, and all of a sudden became inventory, and then you had cancellation from ordinary buyers and from speculators who hadn't yet taking position.

That probably added 5 or 6 more points to it.

All told, I guess you had about a 20% flip in the demand supply equation which results in the market that you see today, but remember that's just my guess.

Question number two, Will Toll continue to expand in weakening Midwest and DC markets?

It depends what Midwest markets you're talking about.

If it is Chicago, definitely.

We opened one of those master plans and is had to go to a phone lottery.

You have to like you're dialing in to get the record from the DJ of the week.

If you get through, you get to buy a home, and if you don't get through, somebody else did, and they get to buy a home, and we gladly take all of those we could get.

We have another one opening this weekend in the Chicago area, Bloomingdale, and it is called Bloomingdale Walk, and we have 600 on a waiting list.

We expect the same kind of pretty hot demand there as in the last master plan we opened.

On the other hand, as I have already discussed, if I go into another deal in Detroit, it would be surprising within the next period of time until we see some change in the market there, so some Midwest is strong, and some Midwest is weak.

With respect to DC, if I am shown a deal that somebody has brought through the approval pipeline themselves, and it is ready to put a shovel in the ground, put the roads in and build homes, I am not so anxious in northern Virginia.

Maryland, I am very anxious.

If I am shown a deal in northern Virginia, subject to approvals, I have to get the approvals, and it will be ready for delivery in three years, yes, I very much will look at that because DC unemployment and environs runs 2, 3%.

It is a burgeoning market.

The economy is fabulous.

In good times and bad times your government grows.

There is a good chance it is going to grow very quickly.

If there is a turnover in the next few elections, that is generally what happens.

I don't believe the market is going south for a long time.

I think it will be back as soon as the over hang of the extra speculative product is taken off the market.

The next question, what markets will the new communities be concentrated in?

We're pretty opportunistic, and we don't work on a budget basis so much for this region and so much for that, so I really can't tell you.

It depends on where the good deals come from.

Where are you buying land currently, see the answer above.

I guess actually -- I am being smart.

We could give you an answer of where are you buying land currently by going back through the last 20 land deals that have -- I don't know whether buying means closed or buying means put under agreement, but it is going to take some time to put that together.

We'll have to deal with that privately.

If you call in later, we'll try to get you the answer to that.

What percent of your total land owned was purchased on options?

Almost all of it.

All of it.

Pretty much.

I am sorry.

That's all they told me I can take from your questions since we have other questions waiting on the line.

Thank you.

Tonya?

We'll go next to Douglas Pratt with Galleon Group.

Thanks very much.

I apologize if you were already given the answer on this.

What was the cancellation rate for the quarter?

We haven’t given the answer to that --

8.5%.

8.5 Over our public history we've run about 7% on average.

However, to put it in fair perspective, in '03, I don't know about '03, but '04 and '05 we ran about 4.5, I think.

Okay.

Thank you.

One of the earlier comments you made regarding costs of sales, I believe you said you had looked for about $7000 in the second half.

The numbers as I ran them, are show that cost of goods per home delivered was a little over 500,000, up from 452,000 roughly in the second quarter of last year, so what is the 7,000?

Excuse me.

What I had said was that prices, costs have gone up in the last six months by $7000 a home on average is what we believe has happened.

You can't go year-over-year.

There is tremendous mix differences, and you will get the wrong answer if you try to do that.

Okay.

I assume the mix of homes sold was also changing, and so is that 7,000 what we should look for on average going ahead for the rest of this year?

We added an extra 50 basis points above what we have already seen for future costs which we don't know about yet.

How does that compare to the 7,000?

I think it is about 100 basis points.

Okay.

Finally, cost of goods sold rose pretty dramatically.

Can you tell us what should we in our modeling --

We didn't hear that.

How should we try to drive that?

It was up about 30% --

What rose dramatically?

We couldn't hear you.

Cost of goods sold.

I am sorry, SG&A.

Rose?

SG&A was below our estimate.

I am sorry relative to last year, the growth rate has been kind of dramatic.

What should we expect going forward?

If you look for the next two quarters, you can pick it up, the details up in the 8-K if you want to go back to it, and what we do is we project actual expenditures of versus divided by actual revenues that we expect to have to give you that number.

New community openings end up increasing SG&A this year, and you don't see revenues for another year.

Thank you very much.

Tonya?

We'll go next to John Forrey with Merrill Lynch.

Two quick questions.

How much is currently available on your credit facility, and the second question would be do you have any plans to call the 8.25 senior subs that are due in February 2011.

We have about a billion one on our credit facility currently available, and when we're ready to call it we'll let you know.

Thank you.

Referring to the bond, not the credit line.

Tonya?

We'll go next to Dana Richardson with Argus Research.

Good afternoon.

I was wondering if you had a ballpark figure or estimate of the time frame that you thought the excess inventory would be burned off in?

No, I would really be making a wild prognostication, I would think six months but again I have been very wrong before so that's just an opinion.

Okay.

Thank you.

Next to Alex Barron with JMP Securities.

Thank you.

Hoping you can discuss your guidance for SG&A for the third quarter versus what you had said last quarter.

I think you bumped it up a little bit and just wanted to know what that was due to.

First of all we had some timing of expenses.

You will note the second quarter was lower, some of the community openings didn't hit until later, and therefore we didn't see the community opening expenses until the third quarter plus we have significantly reduced revenues for the two quarters based on the previous guidance we gave you.

We broke it out quarter to quarter, and when you take higher expenditures divided by lower revenues, you get the higher SG&A as a percentage of revenues.

Got it.

Where in the income statement does the write-offs of land that you guys have incurred or are going to be incurring – where does that show up.

In cost of sales.

I think you mentioned something about Florida prices going down for deliveries.

Can you elaborate on that?

What Joel said was you had a mix issue of more settling out of Florida, closing out of Florida than was closed out of California.

California has a higher price range in general than Florida, so when you swap California product for Florida product, the overall prices on average of all of your product goes down.

Joel did not say the prices in Florida are going down.

I misunderstood.

That’s okay.

Perfect.

It is not simple.

Thank you.

Tonya?

We'll go next to Rick Murray with Raymond James.

Good afternoon.

Hi, Rick.

Just a couple of quick questions.

One, can you tell us how much if any spec inventory you have both on the traditional business as well as your high-rise business and the other question was, Bob, how if you guys are raising your hurdle rates to a level where I would say generally speaking you're at a much higher level than most of your peers, how are you competing for land deals in today's environment?

We're not having a tough time, and then again it is not easy, but it seems as though it is a little easier than it was back in '97 -- no, I am back too far.

Than it was in '01, '02.

We were having a tougher time finding ground in '01 and '02.

Oddly enough, as the market heated up in ’03 and ’04 and ’05, we had a little easier time finding ground, and right now I would say it is about on average.

It’s maybe a little easier than it has been even in '04 and '05 to find ground.

What was the other question?

I am sorry.

The other question was can you let us know what your spec inventory levels are and how that compares to last year?

About the same, I think.

Do you guys have a handle on it?

We don't have one spec on average per single home community, in multi-family communities you have about 40, probably 30 to 40% of a building on average on spec because let's suppose it is five units attached.

You sell three, you start the building, so you have 40% spec there.

If it is high-rise, in some cases we've determined there will be no specs, and so you start the building and everything is presold.

We did that on Singer Island.

On another high-rise in Singer Island, we decided we would take half the building and spec it.

We're down to I think we have 13 left to sell on that building.

It is going very well.

In Hoboken where we're building three high rises right now, we have out of 270 at the Grove I think we have 84, but we did seven this week, so we're down to 77 out of originally 270.

Maxwell A, we have no specs.

No, I lied.

I am sorry.

We have three open for sale there.

In Maxwell B, -- we have 58 -- oh, three out of I don't remember -- but we delivered 160 already this year, so -- no, we didn’t -- we have 160 to deliver this year.

Maxwell B, we have 58 for sale and since the buildings under construction they're all for spec, but we have outstanding agreements for 192, and I am trying to give you a rough idea of the combinations of spec to the multi family inventory.

I hope that gives you some insight as to how it works.

That's great.

Thanks.

You're welcome.

We'll go next to Steve Fockens with Lehman Brothers.

Just one quick question, maybe, Joel for you.

On that 30% IRR to what degree do you scenario model against that or probability adjust that.

If you're expecting price A do you find any probability that it could be A less 10% in four or five years or that costs of building could be 15% higher?

To what extent do you think about that when you apply that 30%?

I think we've been very conservative.

We assume no price increases of the houses.

There is a builder's reserve built into the costs side that runs between 3 and 10 % depending on where it is.

What their experience is.

What the experiences have been.

That's basically what we do and Bob tends to be -- I haven't been in the recent ones, but he tended to be very conservative in the paces particularly in this market where we're concerned that we can't get the paces we've had in the past.

That impacts an analysis of a deal.

We don't assume any inflation if that's what the question was -- We don't put any inflation of house sale price on the analysis of whether we buy or don't buy a piece of ground.

I am sorry.

We have a builder's reserve in there. 3 to 10%.

Of the purchase price or of average home sale price.

I am sorry.

Yes.

It’s 3 to 10% of the average sale price including options of the home for builder's reserve, and that varies depending upon the market and upon our experience in the market.

If our experience has been that there has been cost over runs of 10%, and you come in for approval of a new community in this area, we stick you with 10% on the analysis.

If the Vice President says I can't do a deal like that because I am putting too much cost in, and it is going to make me noncompetitive with the my peers out there from the other companies, we say, well, that's the way it goes.

This is your record.

So you can bring it down by bringing in your houses in the next quarter and showing us you ran over by nothing and we'll go back and put you at a 3% reserve.

Do you follow?

Yes.

Thanks.

Thanks.

You're welcome.

Tonya.

We'll go next to Michael Shaoul with Oscar Gruss.

We'll go next to Tom Zeifang with Lucrum Capital.

Guys, with your community count up about 28% versus FY '05, what type of mix or ASP impact would that have on that delta?

A majority of our community or a higher percentage of our newer communities are multi-family than they have traditionally been.

That's why we will have more multi-family deliveries.

Is that true in the last 20 or 30 that came on, Joel.

It is true for the whole year of 2006.

It seemed to me that –

Inching up.

It seemed to me the last 20 or 30 were mostly singles.

For the whole year of 2006 it will inch up.

That's the key answer anyway.

It doesn't matter where the last twenty have been.

Can you give me some sense of what the ASP's are on the multi-family versus what you just closed in the quarter?

Multi-families tend to be significantly lower because --

On what you just closed in the quarter, are you talking about the average -- what this will do to the average of everything?

I am trying to get a sense if I am using your guidance on units.

You're trying to get a sense of our average sales price.

Yes.

What is our average sales price.

We expect deliveries to multi-families to be about 42.

No.

The totality he wants to know.

What's the average sale price going to be?

We've given that as between 680 and 688 for the --.

But your community count increase isn't going to be sold over the next two quarters.

I am just trying to get a sense of what the increase in community count ASP is.

I can't answer that question.

I don't know.

You don't have them listed.

We don't do it that way.

When I am ready to give you 2007 guidance, I will have in there what we expect the closings to be.

We don't project out the orders the way that you’re asking.

Okay.

Thank you very much.

You're welcome.

Our final question today comes from Larry Horan with [Horan and Associates].

You talk a great deal with the spec inventory.

I would I would like to get a sense as to whether you see it sequentially getting better or worse and in what markets do you see those changes?

I don't know is the accurate answer, but if you're asking a market question about which markets are getting softer still, and which markets are getting tighter or better, I can do that if I go through it.

From the top of my head, I would guess that the northern Virginia as I already said looks like it is getting a little better.

Phoenix looks like it is getting a little softer.

We've had very good experience in Phoenix and still are having very good experience, and we're probably not the ones to ask.

Because I hear from others that there is a pretty tremendous over hang in Phoenix, but we're not feeling it.

Florida, the East Coast just going from memory seems to be doing better.

Therefore, we would conclude there is less spec inventory over hanging if indeed there were much.

The West Coast, Gold Coast I am talking of Florida, nose dived tremendously in the last four months but didn't go down with Katrina.

It waited awhile and then went down.

It now seems to be inching back up.

I guess that's getting a little healthier and so on and so forth.

Thank you very much.

You're very welcome.

Let me see.

Tonya.

I have a question here from Tony Gleason.

For how much would it cost Toll Brothers to purchase all the land that is currently under option?

The answer is $4.5 billion.

I assume you're talking about what the price would be to us under our contracts, not what would it cost if we tried to buy it again in which case I don't have an answer.

[Basu] [Mulic], Congratulations you run a good business.

Thank you very much for this question you are a stock owner I'll bet.

With great demographics.

When do you think we will see contracts turn positive year-over-year meaning orders.

Good question.

Four quarters.

Fourth quarter we think that contracts --

Contracts will turn positive.

All right.

That is not four quarters.

That's two quarters from now.

By the way, that doesn't mean that the market gets as healthy as it was in '05 before the serious downturn.

What that means is you're now comparing your numbers to the fourth quarter of last year of '05 and that's an easy comparison.

That's why we think we'll be positive compared to the fourth quarter.

As cancellation rates -- I think it is have cancellation rates stabilized at 8.5%?

Yes, I believe they have.

Your best guess on how many months will it take to burn off the excess inventory?

We don't have excess inventory.

But the excess inventory in the market I have already given you my questions there was which was six more months.

I have been wrong before about that.

I think I predicted six months two or three months ago.

Do you see units up at least 5% in '07?

That's too speculative for me to even take a guess on, and I will guess on almost anything.

Earnings up more, I am not going to guess on that either.

Thank you very much, Mr. [Mulic]

Another question from the internet.

Is Toll Brothers Inc. involved in buying the Philadelphia Inquirer , a Newspaper?

No.

The answer is definitely not.

That is my brother Bruce together with a group that I believe he manages and has put together and another partner, I think his name is Tierney.

We have nothing to do with that.

Bruce is a fabulous investor, and I am sure this is a great buy for Bruce.

Michael Steinberg asks are your customers having trouble obtaining insurance in Florida?

Has this delayed any closing?

Not that we have can tell I have had no comments on it, so I assume that it is not a problem yet if indeed it is going to be one.

It has definitely not impacted closings and I don't think it has impacted sales either because nobody has ever mentioned it to me when I complain how come you haven't sold the house in the last three weeks.

Nobody’s told me anything about the insurance.

What is the percentage of cash buyers in Florida?

You guys know this? 15%.

Are Snow Birds more cautious about buying than permanent Florida residents?

I believe so.

We call them primary residences are going very well in Florida today in the East Coast, not necessarily in Orlando -- in Orlando they're going well, too.

Jacksonville has been slow, but on the West Coast I don't think we have any primary.

That's why I can't speak to that.

It is all secondary.

So the answer is yes.

Tonya, do you have any more questions?

We have no further questions at this time.

All right.

This comes from Mark [Yuckleson].

How do you factor in the land supply of competitors in your land purchases decisions?

Very much so.

We look at everything that's in production of all relevant competition in the relevant radius of the proposed new land purchase, and we also look at all relevant land moving through the approval process from others to make an analysis as to what the competition will be, and therefore what we will have to price our homes to move them at to sell them at, and whether there will be enough profit and return on equity to make it worthwhile.

Do you think -- the second part of the question.

Do you think the public home builders share of land owned by home builders is dramatically different than their current share of the homebuilding market?

Share of land owned by homeowners dramatically different than their current share?

Fast and fair answer is I don't know.

I would think it is gone up because the share of the business that the public home builders has recently done is about 25% to 30%.

Ten years ago it was probably 5% to 7 or 8%.

I would bet that public home builders are increasing their landownership compared to others significantly, so that in the not too distant future just a guess, but I would bet you will see over 50% of the business done by the public home builders, and that's because of the tremendous expense and going through the approval process and the tremendous expertise which equates to expense also.

The smaller guys are being forced out for lack of capital and expertise.

Next we are asked by Barry [Buehrlewits], Can you give us a range of values you estimate your land holdings have appreciated above book?

Simple answer is no.

We have refrained from marking our land to market, and are not ready to do that yet.

Thank you very much.

Tonya, any other questions?

There are no further questions.

All right.

Thank you very much, Tonya.

Appreciate everybody for joining us.

Thank you, Tonya.

Thank you.

This does conclude today's conference call.

You may disconnect at this time.

Thank you for participating.