Toll Brothers Inc. (NYSE:TOL) Q4 2018 Earnings Conference Call Transcript

Dec 05, 2018 • 11:00 am ET

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Toll Brothers Inc. (NYSE:TOL) Q4 2018 Earnings Conference Call Transcript

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Presentation
Operator
Operator

Good afternoon, and welcome to the Toll Brothers Fourth Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation there will be an opportunity to ask questions. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Douglas Yearley, Chairman and CEO. Mr. Yearley. Please go ahead.

Executive
Douglas Yearley

Thank you, Anita. Welcome, and thank you for joining us. I'm Doug Yearley, Chairman and CEO. With me today are Bob Toll, Chairman Emeritus; Rick Hartman, President and COO; Marty Connor, CFO; Fred Cooper, SVP of Finance and IR; Kira Sterling, Chief Marketing Officer; Gregg Ziegler, SVP and Treasurer; and Don Salmon, President of TBI Mortgage Company.

(Forward-Looking Cautionary Statements)

Those listening on the web can e-mail questions to dyearley@tollbrothers.com.

In fiscal year 2018, we produced the highest revenues, contract value and earnings per share in our 51-year history. In addition, our net income, home deliveries, contracts in units and year-end backlog in both dollars and units were the highest in over a decade. Our return on beginning equity grew from 12.7% to 16.5% in 2018 and our fourth quarter revenues, net income and earnings per share were the highest for any quarter in our history. Despite a healthy economy, we are seeing a moderation in demand. Fourth quarter contracts declined 15% in dollars and 13% in units compared to a difficult comp from one year ago. Fourth quarter demand flowed to a per community pace more consistent with fiscal year 2016's fourth quarter, which was still strong.

In November, we saw the market further soften, which we attribute to the cumulative impact of rising interest rates, rising home prices and the effect on buyer sentiment of well-publicized data of a housing slowdown. We saw similar consumer behavior in late 2013 when a rapid rise in interest rates temporarily tempered buyer demand before the market regained momentum.

Positively, we have seen Internet traffic at all-time highs and have maintained consistent traffic-to-agreement and deposit-to-agreement conversion ratios. California has seen the biggest decline. Per community contracts declined from 10.4 in fiscal year 2017's fourth quarter to 5.8 this fourth quarter. 5.8 was still above the Company average. Significant price depreciation over the past few years in California, fewer foreign buyers in certain communities and the impact of rising interest rates all contributed to this slowdown. But California is the world's fifth largest economy with diverse job creating industries, including vibrant technology companies, a large concentration of wealth and a very desirable lifestyle.

With our attractive coastal California land, our leading brand and the states constrained supply of housing, we continue to believe in our position in the California market. Backlog in California was up 26% in value at fourth quarter end compared to one year ago. Most of this backlog will be delivered in fiscal 2019 at a projected gross margin above the Company average. There are many positive factors underpinning the broader U.S. economy that we believe are supportive