托爾兄弟 (TOL) 2007 Q2 法說會逐字稿

Good afternoon.

My name is Regina, and I will be your conference operator today.

At this time, I would like to welcome everyone to the second quarter earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question and answer session.

(OPERATOR INSTRUCTIONS)

Thank you.

Mr.

Toll, you may begin your conference.

Thank you, Regena.

Welcome 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, Greg Ziegler, 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, Greg Ziegler, 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, Greg Ziegler, AVP of Finance.

of Finance.

h 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, Greg Ziegler, AVP of Finance.

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 beyond their control that could significantly affect future results.

Those listening on the web can e-mail questions to Rtoll@Tollbrothersinc -- that's one word -- tollbrothersinc.com We'll try to answer as many as possible.

Today we reported our results for net income, revenues, backlog and contracts for the second quarter and first six months ending April 30, '07.

Fiscal year '07 second quarter net income was $36.7 million dollars or $0.22 per share diluted compared to fiscal year '06's second quarter record of $174.9 million or $1.06 per share diluted.

In fiscal year '07, second quarter net income was reduced by after-tax write-downs of $72.9 million or $0.44 per share diluted.

In fiscal year '06, second quarter after-tax write-downs totaled $7.3 million or $0.04 per share fully diluted.

Excluding write-downs fiscal year '07's second quarter earnings were 66 per share diluted compared to 1.10 in fiscal year '06's second quarter.

Fiscal year '07's six month net income was $91 million or $0.55 per share diluted compared to fiscal year '06's same period record results of $338.8 million or $2.04 per share diluted.

Fiscal year '07 six months net income was reduced by after-tax write-downs and a first quarter goodwill impairment totaling $137.4 million or $0.84 per share diluted.

In fiscal year '06 six months after-tax write-downs totaled $8 million or $0.05 per share diluted.

Excluding write-downs and the impairment charge, fiscal year '07's six months earnings per share were $1.39 per share diluted compared to $2.09 in fiscal year '06's first six months.

Fiscal year '07's second quarter total revenues were $1.17 billion compared to the second quarter record of $1.44 billion in revenues in fiscal year '06.

Fiscal year '07's second quarter end backlog was $4.15 billion compared to the second quarter record backlog of $6.07 billion in fiscal year '06.

Fiscal year '07's second quarter net signed contracts were $1.17 billion, a decline of 25% compared to fiscal year '06's second quarter total of $1.56 billion.

We signed 2,031 contracts before cancellations in fiscal year '07's second quarter, a 14% decline from the 2,372 signed in fiscal year '06's second quarter.

Net of cancellations, second quarter contracts totaled 1,647 units, down 24% from 2,167 units in the second quarter of fiscal year '06.

Second quarter fiscal year '07 cancellations totaled 384 units versus 436 units in first quarter fiscal year '07 and 585 units in fourth quarter fiscal year '06.

Fiscal year '07's second quarter cancellation rate of 18.9% was lower than its first quarter cancellation rate of 29.8% and the 36.9% cancellation rate in its fourth quarter '06.

However, it was still well above our historical average of about 7%.

We continue to operate conservatively in the current difficult climate.

We ended the quarter with over $550 million in cash compared to about $400 million one year ago and more than $1.1 billion available under our bank credit facility.

In the past year we have trimmed our lot position by 28% from its high of 91,200 lots to its current 65,800 lots.

We have reduced our net debt to capital to slightly below 32% which is as low as it's been at the end of any second quarter since we've been public.

We believe our prudent approach to managing our balance sheet should position us well in this down market and provide us efficient capital to take advantage of opportunities that may arise in the future.

We continue to seek a balance between our short-term goal of selling homes in a tough market and maximizing the value of our communities.

Many of our communities are on sites in locations that are difficult to replace and in markets where approvals are increasingly difficult to achieve.

We believe that many of these communicates have substantial embedded value realizable in the future that should not be sacrificed in the current soft market.

In what generally remains a soft market, there are glimmers of strength in certain territories: Manhattan, Brooklyn, and Queens in New York City, Jersey City and Hoboken in New Jersey are strong markets.

Southern Connecticut in Dutchess County, New York are also good.

Philadelphia suburbs and Delaware are solid.

Raleigh, Austin, Dallas, are holding up well, as are parts of Northern California, primarily around Silicon Valley.

We saw another bright spot this weekend, this past weekend, in Chicago which has been an otherwise weak market for us.

We grand opened two communities in Glenview, south of Chicago.

In March '06, through an auction process, we had purchased from the town of Glenview the last residential parcels within a large master plan that was a converted naval base.

This week we opened our sites and took 32 non-binding deposits, 23 back-ups to those, on condos and cottages at the two communities.

We continue to believe that there is demand if you have the right product at the right price in the right location.

Now for the numbers.

Joel Rassman, CFO.

Thank you, Bob.

During the quarter we delivered 1,686 homes at an average price of $666,000 for approximately $1.1 billion of revenues.

Second quarter cost of sales before write-offs and interest was 73.1% and after write-offs but before interest was 83.8%.

Pre-tax write-offs were approximately $119.7 million or 10.6% of revenues within the range of our revised guidance, compared to $12 million of write-offs in the second quarter of last year which was 0.9% of revenues.

Approximately $116.1 million of the write-offs were related to active communities or owned land while approximately $3.6 million was related to options for future communities.

The main impairments were in the North, at $49.5 million, principally in Illinois and Michigan.

In the West, $53 million, principally in California and Arizona, and in the South, at $16.4 million, principally in Florida.

We recognized $48.4 million of percentage of completion revenues with a 77% pre-interest cost of sales.

We delivered 164 homes in these buildings.

Construction during this quarter related to these buildings was somewhat slower than anticipated as well as somewhat more costly.

Interest expense was approximately 2.3% of those revenues, a little higher than in previous quarters.

SG&A was 11.1% of total revenues.

The selling expense portion was slightly lower in actual expenses but higher as a percentage of revenue than last year's second quarter, and the G&A portion at $83 million was $12 million lower in actual expenses versus last year and approximately the same percentage as a percentage of revenues.

Other income at $18 million benefited from $6.5 million of retained deposits, $3 million from sales of parking spots in Hoboken as our indoor garage facilities were completed and $4.5 million of interest income as we both had more cash to invest and higher average rate of interest.

In addition, joint venture income was approximately $4.7 million as deliveries were a little slower in our joint ventures than anticipated.

The tax rate of 38.3% was lower than expected, which we expected to be 39%, principally a result of tax free income -- tax free interest income.

For diluted EPS calculations, we had an average shares outstanding of 164.3 million.

The result of all of the above was after tax net earnings of $36.7 million or $0.22 per share fully diluted.

In the current environment giving any quarterly or annual guidance is difficult.

It is especially challenging to estimate write-offs.

However, we believe providing some educated guidance, even with its related uncertainties, is still better than no guidance at all.

We have filed an 8-K and posted our -- some guidance on our website.

Please read all of our disclaimers about forward-looking information.

For traditional homes based on our expected delivery mix, we believe closings for 2007 will be between 6,100 and 6,900 units with an average delivery price of between $670,000 to $680,000, and that deliveries for the third quarter will be between 1,400 and 1,800 with an average price per delivered home of between $665,000 and $675,000.

Deliveries for the fourth quarter will be between 1,450 and 1,850 homes with an average delivered price of between $680,000 and $690,000.

We project that cost of sales as a percentage of revenues before write-offs for the third quarter will be between 75.9% and 76.5% as a percentage of sales and for the fourth quarter between 76.5% and 77.3%.

Based upon market conditions, we do not believe we can estimate write-offs for either the third or fourth quarter and therefore will not provide any guidance on write-offs.

We estimate that the percentage of completion revenues will be between 55 and 60 million in the third quarter and 40 and 45 million in the fourth quarter with cost of sales of approximately 80%.

We estimate interest expense for the third and fourth quarters will be about 2.2% of revenues.

We believe that the SG&A as a percentage of revenues will be between 11.6% and 12% in the third quarter and between 11.1% and 11.5% in the fourth quarter.

We project other income and joint venture income combined to be approximately $12 million in each the third and fourth quarters and that our tax rate will be about 39% for the third and fourth quarters.

We are using 164.6 million shares outstanding for EPS purposes for each of the next two quarters.

Obviously since we are not providing guidance for write-offs, we are not able to provide guidance for net income or earnings per share.

However, you should note that for each $10 million of pre-tax write-offs, it would reduce earnings per share by approximately $0.037.

At this time I'll turn it back to Bob.

Thanks, Joel.

Regina?

(OPERATOR INSTRUCTIONS) We'll pause for just a moment to compile the q-and-a roster.

Your first question comes from Dan Oppenheimer with Banc of America.

Thanks very much.

Was wondering about your comments about the embedded value in many of the communities?

What -- I guess particularly -- it seems to indicate that you would be willing to let your sales per community continue to fall as you hold out for -- on the pricing on the margin side.

Is there a point at which you would decide to cut pricing more in order to increase the pace of absorption?

There must be.

That's got to be rhetorical.

I don't know what that point is, however.

I can't give you a percentage basis or a pace volume basis.

I think it depends upon the subjective relative value we place on the location of the ground compared to the pace and volume that the market is supplying us with at the time.

It would suggest, but this is very theoretical, there are certain pieces that we would be willing to just close sales and sit on because we believe the locations are so good.

I can't give you any more than that, and we don't see the sales dropping any more than they currently have.

But one never knows.

Okay, and just to follow up, just over the past couple of weeks since your preliminary call, are you getting more positive about the environment based on the sales trends, the same, worse than several weeks ago?

A little more confident, but I would emphasize the little.

Okay.

Thanks very much.

You're very welcome.

Your next question comes from Ivy Zelman with Credit Suisse.

Good morning.

How are you doing, Bob?

I am doing great.

With the expectations for the remaining months of the year, you seem as if the -- obviously can't factor in impairments, and you can't guide for us, but pricing continues to come down at least talking with other builders, and wondering what assumptions are you making on absorptions per project -- in order to get to your expectations for closing?

I don't know how to answer that.

Go ahead, Joel.

We do a specific project by project identification of volumes per community.

It's not done on an average basis.

We vet it by looking through the reasonableness on a top side of both the individual estimates and the region estimates as to comparable periods and their historical ability to project, and that's our best estimate.

It is significantly lower on average than we had in the past, but it isn't done on a top side basis.

I understand.

We're talking about the Monday G&A report.

Every week, Ivy, we do a re-evaluation of the projected pace for the next twelve months of sales in the community, and that has not been going down in the last several weeks any longer.

And with respect to price, I haven't noticed any deterioration or any significant increase.

We've been increasing some communities, and decreasing some communities, but pretty much holding its own.

And how is the existing market inventories continue to rise every week for the past nineteen weeks -- obviously those are potential buyers that can't sell their house right now -- how is that impacting your sales and communities?

Are you seeing the impact or has it been really not yet an issue?

No.

We see the impact of people that can't off their homes and therefore can't go to closing, but I guess you see the relative metric when we took you through the cancellations in comparison, and they've been down the last three quarters.

What did I say they are now, 18.9% or 18.8% compared to a couple of quarters ago when they were 30%, 36%.

So, obviously, the cancellations are going down.

With respect to your land buys and what you have currently in the portfolio, when you think about vintage, you say there is a lot of embedded value.

Would you like to share with us what year the vintage is that you say has embedded value or what percent of your land was purchased let's say prior to 2003?

No.

I don't have that information.

Do you, Joel?

It really isn't -- it doesn't matter when the land was purchased.

It's how well did you purchase it and how --

That's true obviously but do you have any --

No, I don't.

I think a lot of people would disagree with you, Joel, if they bought in 2005.

You're right and Joel's right.

Joel ducked the question, I think.

You said the older stuff, on average, probably, logically, should have been bought at -- for less than the new stuff.

Joel said it depends on what you pay, which is also obviously right, but your comment is more correct.

But we don't have the information for you as to how much was purchased in 2000, how much was purchased in '98, how much --

Okay.

What about your interest in ongoing expectations for land buying right now?

Are you underwriting new acquisition on option contracts and are you continuing to anticipate increasing the land portfolio?

I would hope that we would increase the land portfolio somewhat from where we are now.

We are actively looking and trying to buy.

We have raised the thresholds because we can and because I think we should operate more prudently, more carefully than we did when the market was going up.

You don't feel that having almost a ten-year supply of land is enough?

Well, we hope that it's not ten years, Ivy.

Okay, Bob, thanks.

Thank you.

Your next question comes from Stephen Kim with Citigroup.

[Sonora] for Stephen Kim.

Was wondering if you can break out the spec inventory for us, if you can give us a total number and possibly break that up between work-in-process and completed?

Okay.

Joel?

We have very little completed spec inventory.

We have 1,092 homes in our traditional product, 447 singles, 538 multis which buildings have been started, and we have not sold all the units in those buildings, and 107 age-restricted, some of them are also multis, giving a total of 1,092.

That's 11% less than it was the end of the first quarter.

Understand that the, please, that the specs are automatic when you do the multi-family buildings.

If you've got five attached, and you sell through, and you start the building, then you have [inaudible] -- you ended up with two specs.

And if the buildings are 200-unit buildings, and you begin the building with 130 contracts, then you've got 70.

We count specs from when the lumber is dropped, and very little of the specs are completed, but we certainly have more than we've had in the past.

Regina, I have a question from [Mike Spillane].

What is goodwill impairment?

That's a good question.

The goodwill impairment is for our purchase of Silverman Homes in Michigan.

We don't ascribe -- in 1999, and we no longer ascribe any value to the purchase of the going concern of the name, and we had ascribed some value to that --

$9 million, $9 million was left on --

On the goodwill, and where he wrote that off.

We wrote that off in the first quarter, not this quarter.

And how is a value assigned to that?

I think Joel has just explained it.

Once upon a time we put a value on it, and what was left and not written off, we have now written off.

And that was $9 million.

Regina?

Your next question comes from Nishu Sood with Deutsche Bank.

Thanks.

First question for Joel on the impairments.

Of the impairments that you've taken to date, the vast majority have been of operating communities and owned land, much less in option lots, and my question is how should we interpret that?

I mean, for example, does that imply or speak to the length of your option contracts that you've entered in and maybe haven't gotten to the point where you're being force to do write-off those option deposits?

No, that is not the reason, but in previous quarters I think it was more related to option land than in the most current quarters, and we look at option land every quarter and make an eval -- two evaluations, the first evaluations is how like -- since most of our options are approval options -- how likely is it that we will get our approvals, and then if we get our approvals how likely based on current economic conditions is it that we will close that land.

And we don't wait until the legal period of time lapses where we have to make the decision in order to write it off.

If we think that it no longer has economic value today even though we have three years left to go, we will write it off today.

How many total option lots through the past four or five quarters have you written off?

Anybody have that number?

But, I --

Greg, any guess?

I would think there about 30,000 lots would be my estimate, but it's a guess.

Based on the 90 to 60, is that how you got that?

It is 91 to 60, but we added a little bit.

Pretty sophisticated.

25 maybe.

25.

Okay.

And question for Bob.

I was wondering if you can give us more color on the Philadelphia market?

Obviously an important market for you.

What are some of the trends you're seeing there?

For example, in some of the other larger metropolitan areas you've seen greater strength closer in, greater weakness the further out you go.

What kind of trends are you seeing in the Philadelphia market?

It's one of the things you -- areas you site as an area with strength?

Right.

I don't know I would -- that I would ascribe a trend to it.

I would just say it is holding its own and that we're selling not as well as we did in '04, but '05, but we're selling pretty well, and we've got, just eyeballing it -- we've got about 20 communities in Philadelphia suburbs which is what the Pennsylvania market is for us.

That's what we meant by it anyway, and we're holding our own pretty well, and we're comfortable with the number of deposits and contracts that we're taking.

We also own lots in the Poconos where we had done very well up through '05, but the Poconos are not holding their own at all, and that is a very soft market.

Okay.

Thanks.

You're welcome.

Your next question comes from Ken Zener with Merrill Lynch.

Afternoon.

Hi.

I'm interested in your thoughts on why you kind of impair the same level of equity and inventories other builders given obviously your likely lower cost of land and higher embedded value.

Is there anything -- it would seem seem that higher embedded value you wouldn't have as equal impairments, but it's not the case.

Could you add color around perhaps what I'm missing?

Joel?

Option impairment reviews are community by community.

It isn't -- you don't get to offset positive profits on the future land deals or positive profits on owned land or value in owned land against some of the ones that are bad.

It is an individual community by community basis.

I can't evaluate how other people are taking their write-offs.

I do know when we look at our write-offs we do each individual community and specifically look at the economic conditions of that community, and that's the number we get to.

You may find out that others are ahead of us or behind us in picking those reviews, and we can't evaluate that.

Right.

Just cause it seems like, when I think about it if the value was greater in more of your communities, all else being equal, it wouldn't be the same.

But, I guess, time will tell.

Bob, I wonder if you can give a little comment on given your focus where you're having success on the right product and the right price.

Interested in your thoughts on the home sales data that we got today which showed all the volume increase in the sub $200,000 category?

I think what that indicates is that most new home builders that are large, the public home builders, their average product goes probably anywhere from about 250 up to us, which is about 700,000.

So, obviously, the increase is taking place below our space, which means that we're not out of the woods yet.

I took with surprise yesterday, and it is now confirmed today by this analysis when Secretary of the Treasury said that we've got the hard times pretty much behind us.

I wondered how many communities he had and where he got that information, but I now understand it.

The information that he got hadn't been peeled away, I guess, to show that it was $150,000 housing.

So I would say we have not got the bad times behind us yet, though it could be.

You never know.

For instance, here is an odd one.

Chicago which has been for us, as I mentioned in the monologue, and we think for others as well, but I don't want to state this specifically because I've only got my own info has been a very tough market, and yet we opened up last week the old Glenview naval air base which is a master plan community now of many thousand homes.

We bought the last parcel in there for two different kinds of products.

We opened up offering to the public 32 approximately units and sold every one with back-ups.

I think we had 23 back-ups to the 32 sales.

And then we stopped taking back-ups and just said give us your name, and we'll call you.

That's significant.

It shows that the market is really alive and well for the right product at the right price.

I think also what drove that is it's a brand new offering, so there is a perceived investment opportunity.

I'm not talking about speculators, but owner-occupiers who are not as afraid of catching a falling knife as I have said in the past, but have some confidence with respect to this offering which indicates to me that there is probably significant pent-up demand that's ready to go as soon as they can become convinced that they're not buying into a downdraft.

So I think we're probably better off than the market seems to indicate right now, but only the shadow knows as they used to say on the radio.

Thank you.

You're welcome.

Regina, I've got a question from [Robert Tracy].

Question on impairment charge.

Could you please provide a breakout of the $72.9 million impairment charge between inventory, contracts receivable and investments in unconsolidated entities or was the entire impairment charge taken to inventory?

Joel?

First of all, I think the $72.9 million is an after tax number.

It is.

So let's look at it on a gross basis.

It was $116 million, a little bit more in owned land and $3.6 million on optioned.

We don't have any impairment charges with respect to contracts receivable and none of the impairment charges were with respect to our partnerships or unconsolidated entities, so it was all either owned land, $116 million or optioned $3.6 million.

So it's all owned.

It's land that we're primarily operating on or getting ready to operate on or not.

Regina?

Your next question comes from Michael Rehaut with JPMorgan.

Hi guys.

This is [Ray Huang] on for Mike.

Question on SG&A.

Looks like you had a pretty good sequential decline and it looks like the guidance is kind of guiding for $130 million on a dollar basis.

Are you guys comfortable with that number or do you guys see any chance of that kind of improving or coming down over the back half of the year?

That's a good question.

Joel?

I am sorry, what was the 130?

The dollar amount.

Of SG&A?

Yes.

I think we -- given you guidance as a percentage of revenue and given you guidance as revenues.

And the guidance we gave you is what we're comfortable with.

And I don't know if it comes out to 130.

I assume it does if you have done the mathematics.

We've tried to control our expenditures, and obviously as revenues go down some of your over heads in the SG&A area are fifth and some variable and where we can we reduced them and where we can't we will see an increase in the percentage of those categories as it relates to revenues, and that's what we've tried to project out.

So If you looked at the mathematical numbers I've given you, that's the range I'm comfortable with.

Okay.

Also wonder if you guys can update us on your high-rise pipeline, where you guys expect to open these and kind of the time line for when you guys expect to open them for sale?

Everything that we're building is open for sale.

We're sold out, that was last week or the week before, on Third Avenue in Manhattan between 13th and 14th.

Sales are going up pretty strong in Brooklyn on the first tower, the building's topped out.

I think it's 31 floors, 32 floors.

We have -- the North Side Piers project.

The stuff we're building in Queens, which is pretty much online with Brooklyn, Long Island City, with tremendous demand there.

We're almost sold out on the other inland Brooklyn stuff that we had, North Eighth.

We have only 11 units left there.

Hoboken is is still pretty much going gangbusters.

Jersey City, we are fin -- we are delivering units now.

We have about 33 left to sell.

And we hope that when we're ready to deliver, we will have all sold.

So that one worked out pretty sweetly.

We're going through the approval process on a couple of blocks worth of buildings in Brooklyn, in Carol Gardens, and that pretty much deals with our pipeline.

We're looking for more deals.

Our tower stuff on the beach in Florida, we've finished.

We delivered, and are done with our first tower.

And the second tower, we have about half left to sell which represents about 20 units.

It's a small building, and we will make delivery there I guess in about six months.

Do you have better estimate of delivery?

I thought it was a year from now, but you could be right.

I am not sure.

Okay.

Great.

Thanks.

You're welcome.

(OPERATOR INSTRUCTIONS) Your next question comes from Susan Berliner with Bear Stearns.

Good afternoon.

Joel, can you go over the free cash flow for the quarter and also if you can articulate what you think it will be for the year?

Joel?

It's not a concept that we really focus in on because our definition is not the same as yours.

So I would rather if you describe what you want to call free cash flow, I'll be glad to try to respond to it, Susan.

We reinvest most of our cash in our business, and we've increased cash in -- actual cash in hand over the last quarter and over the last year.

Well, I guess if you can just say what your use of cash was this quarter versus in the prior year quarter?

I don't think I have it.

I will be glad to get you that data.

It will come off the filings we're going to do next week and then talk to you.

Okay, great.

Thank you.

Sorry.

You're welcome.

Your next question comes from [Myron Kaplan], a private investor.

Yes.

Hi, guys.

Hi, Myron.

Hi.

My question sort of has been broached somewhat, but it seems that the trend is for even though demand is all right in many markets, that the trend is for somewhat leveled, possibly even falling backlogs.

What steps are you taking to cut your generalized overhead and cost structure?

Taking the necessary steps.

As a matter of fact, on Monday, we had a meeting and decided upon a percentage of cutback in the G&A.

We will not be cutting the S side of the SG&A.

That's the last thing we would do in a market where you need --

Where you need to stimulate.

Good sales people, and you need good contact methodology to get your prospects clients into the -- into the offices.

So instead of just newspaper advertising, or depending upon the internet, we do a lot of mailers, for instance to prospective clients to interest them to come into the communities, so that'll bump up your S side.

But on the G&A side, we're into our third cut, third generalized cut now in the past -- how long has it been, almost a year?

No, I think we started after last summer.

I think held -- we were late and held off until about September, October.

From September, October to the present we're into now our third level of G&A cuts.

What size general reduction would you say that'll accomplish compared to beginning of '06?

We haven't given that information out, and I'd rather stick with that position.

Okay.

Very good.

Well, thank you.

Thank you, Myron.

Your next question comes from Timothy Jones with Wasserman & Associates.

Hi, Bobbie, Joel and Lamont.

I am sorry?

Hi, Bob.

Yes, hi, Tim.

Hi, how are you?

One -- I put in Lamont Cranston just for you.

Oh, that's a part I missed.

I'm sorry.

Okay.

No problem.

The first one is what have you done in the tough times?

You had talked about a couple of quarters ago, with you cutting labor costs and material costs, and I'm particularly you were talking then that your -- I think your gypsum prices were down even though the posted prices were up which doesn't surprise me.

Can you give me an update in how your cost reductions on labor and materials, especially gypsum and lumber are doing?

I can't give you the specifics on gypsum and lumber.

Do you guys have that?

With respect to the materials --

Thank you, Joel.

For some material costs, about $1,000 to $3,000 a house is where I would think we are this year-to-date.

On the materials?

How about labor?

On the labor, much more significant, I believe.

I don't know if you guys have the info.

We don't have it.

What we do typically is we'll go to the lowest price in a region as opposed to a specific area.

In other words, instead of just assuming that all homes in Dutchess County are going to cost $65 or $70 a foot, sticks and bricks to produce, we'll go and look at what the older communities were costing us in North Central Jersey, when we might have been building for $58 a foot.

If we take a look at those subs, they're now obviously willing to travel a lot longer and further for the work.

And we'll go back up to our New York subs and say, you're either going to meet the prices that we can get from the Jersey labor market, or you're going to be replaced and guys are going to be riding a little longer in order to get the work.

And so we bring the prices down in that fashion, Tim.

Okay.

The second question is you had gone a couple years ago from about nine-month backlog conversion up to about 12-month having to do with mix and so forth.

Now with the backlogs down and maybe a change in what you're trying to sell, what would you guess, Joel, that your backlog conversion will be now?

I mean, I understand the difference is the amount of specs you have -- where the difference are, but just on a regular backlog conversion basis for the next year?

Tim, it's probably about 10.25 months.

So, it's come back down from the 12?

Sure.

Okay.

As the backlog has come down.

Right.

I understand.

Right.

Thank you.

Your next question comes from Randy Raseman with Durham Asset Management.

Hi.

Just a few questions.

The first one, I'm just trying to tie what we saw in the new home sale numbers today to what we've been hearing from talking to builders where we were kind of told that April was a pretty tough month, and then you see the big spike up in new home sales.

Did you guys experience any big spike in cancellation rates at the same time in April?

I don't know if you can comment on that or not.

I stepped -- I'm sorry.

I stepped on your question.

What I wanted to say was, as you get further into a down market in terms of length of time, the comparisons are going to get better, so that ultimately if we stay here for a long period of time, you will see that April sales equaled April sales last year.

That's not what we're looking for, of course.

So, I think the statements are a little misleading.

The comparisons are good, but what you're comparing to stinks.

So that's why you're getting unhappiness expressed by the public home builders.

But sorry I stepped on your question and didn't hear --

He wanted to know why the April cancellations rates, which we really don't have, was better than previous ones.

And the second part of the question, I think, had to do with the surprise of the strongest of the numbers that were released, and I think we addressed it a little bit this morning in a previous question, rather this afternoon, where it seemed to be that the strength was coming from the $150,000 dollars house, which is not what most of the public home builders sell.

And someone indicated that it was primarily the subprime buyer market where in March, I am speculating here given all the publicity, was probably much more difficult to get a mortgage if you were a buyer of a home lying on a subprime market than in April.

Okay.

That makes sense.

And then just one other question, just following up.

You guys made a comment that you're actively looking and trying to buy land and then just wanted to take your, get a sense from you on what your appetite is for M&A in that context.

In the context of looking for land.

I don't think we focus on M&A as a substitute for looking for land.

I know that the comment was made three years ago when the market was hot that the best place to look for land was on Wall Street as opposed to on Main Street.

I don't think that's the case any more, so if there is any M&A activity out there, it's probably on a -- not on a acquiring land basis.

But what do I know?

Okay.

Thank you.

Your final question is a follow-up from Stephen Kim with Citigroup.

Hey, Bob, can you hear me?

Yes, I can hear you perfectly.

Okay.

My question related to inventory breakdown.

I was wondering if you can provide a little bit more detail as you kind of do in your Q, or for the breakdown of, let's say, inventory into construction in progress, land to land development, land option and fees?

We didn't have it as of this morning because it requires us to do some reclassifications between categories as we account for it, and it'll be out next week.

Sorry, Steve.

All right.

And then lastly, if I could ask you a question about how the sort of elevated level of cancellations has or may be hasn't affected your relationship with your buyers.

I know historically you've had a cancellation rate of about 7%.

I know it is coming down, but I also know that it's been elevated.

Well, our recent quarter we said was 18.9.

Right.

Compared to 7.

So, it's very elevated.

Exactly.

So, I guess my question is, number one, since I am assuming a large percentage of these cancellations relate to a person who is unable to sell his house or his or her house --

That's correct.

And then ultimately, they probably will, which would suggest that it's really more of a delay of a purchase than anything else, are you doing what some of the other builders are doing which is saying, we're going to keep your deposit, but if you come back here in the next three months and buy another house from us, we'll apply the deposit to that?

Not too much.

We do do that on the markets that are tougher, but on the average bad market we do not do it.

You lost me there.

So if the market --

What I was saying is, yes, we offer those kinds of goodies, hope certificates, where the markets are really bad, but where the markets are just bad, we do not do it.

I see.

Okay.

And how long do those typically hope certificates typically last?

A couple of months?

Or like a year?

Or?

I would say just a couple of months.

Okay.

So this is not going to be a significant issue that we need to be worrying about next year when --

No, not for us anyway, not at all.

Okay.

I just wanted to make sure.

It's very small for us.

Right.

We're pretty serious about enforcing the contract rights.

After all, they go one way.

When they go the other way, we're going to make sure that they stick.

That's right.

You've made a big commitment on your end.

So.

All right.

That's what -- that's what I needed.

Thanks a lot.

Thank you, Steven.

Regina?

Yes, sir.

Your final question comes from Joel Locker with FBN Securities.

You keep saying final.

Is it really the end, Regina?

Maybe it is.

Maybe it is, maybe it isn't.

Go ahead.

Just on the -- on your operating margins, just you're maintaining midteens which is significantly better than most of the other builders who act impairments are down into midsingle digits if not flat.

You noticed.

And you've always had somewhat of a buffer over the other builders, but now at about 1,000 basis points, just kind of wanted to get your take on how you're maintaining that and even increasing it over the other builders.

I don't know about the other builders to the extent that I want to answer that by speaking on the comparison.

I can answer it with respect to just speaking about ourselves.

It goes back to the monologue where what we're doing is evaluating the embedded value that we think we've got in a community and saying that we're not going to drop our drawers in this community in order to maintain pace so that subcontractors and management have something to do.

Rather, we will ask management to take a step back, operate on two communities instead of one, go from tie and jacket to boots, in order to operate efficiently.

And we'll operate with less volume and less pace, but we're not going to cut margin because we think that when the margin comes back we'll be happy that we saved the good ground.

So it is what we've already spoken about that probably maintains that margin.

So there is a little risk if the market doesn't come back for a few years that you might have to increase impairments just because of sitting on the land for longer than some of these other builders?

It's probably true.

And just on the -- just $119.7 million, was that all recorded in the traditional home sale expenses or was a portion of that in the impairments or in percentage of completion?

All in traditional homes.

All in traditional homes.

All right.

Thanks a lot.

You're very welcome.

Regina.

At this time there are no further questions.

Mr.

Toll, are there any closing remarks?

Thank you very much, Regina.

Everybody have a great Memorial Day weekend.

Thank you, Regina.

This concludes today's conference call.

Thank you for your participation.

You may now disconnect.

Thank you.

Bye.

Bye bye.