Toll Brothers, Inc. (TOL) Earnings

Management highlights

### Leadership Transition & Recognition - Long-time President and COO Rob Parrahouse will retire June 30, transitioning to a senior advisor role. Seth Ring will succeed him, with 20+ years of company experience and strong preparation from a multi-year mentorship with Rob. - Rob was credited for building the strong foundation that supports Toll Brothers' current growth. ### Quarterly Operational Results - Q2 delivered 2,491 homes at an average selling price of $1,009,000, generating $2.5 billion in home building revenue, beating the midpoint of guidance by ~$110 million. Net new signed agreements were 2,834 units for $2.8 billion, up 7% in units and 8% in dollars year-over-year, with average contract price up 1% YoY. - Adjusted gross margin came in at 26.2%, 70 basis points above guidance, while SG&A as a percentage of revenue was 10.3%, 40 basis points above guidance. Diluted EPS was $2.72, an 18 cent beat over the guidance midpoint. - The company ended Q2 with 459 selling communities, up from 421 one year prior, and completed the acquisition of Buffington Homes for entry into Northwest Arkansas, an acquisition that added ~1,500 lots to the pipeline. ### Market & Demand Trends - Overall demand remained challenging, but Toll Brothers' affluent luxury buyer base is more resilient to affordability pressures, with 23% of Q2 buyers paying all cash and an average 69% loan-to-value for financed buyers consistent with prior quarters. - Geographically, Florida was a bright spot with broad improved demand; the East Coast from Boston to South Carolina, Boise, Las Vegas, and Austin also performed well. Weaker markets included Atlanta, San Antonio, Seattle, Portland, and San Francisco. - Average incentives as a percentage of gross sales price remained flat at 8% for the fourth consecutive quarter, highlighting the strength of the company's brand and buyer demand. - The company reduced finished spec inventory by 28% YoY in the first half of FY2026, bringing the count down to 2 finished specs per community from 2.8 at the end of FY2025. Selling specs earlier in the construction cycle allows for more design studio customization, which is highly accretive to margins. - Production efficiency improved, with build-to-order cycle time falling to 9 months, and spec cycle time 1 month shorter on average. Overall building costs remained flat even as lumber prices rose in the quarter. ### Land Strategy & Capital Return - At quarter end, the company owned or controlled 76,800 total lots, 58% of which are optioned. The company maintains a disciplined land acquisition approach, favoring seller financing, joint ventures, and option agreements when possible, with land banking used opportunistically. - Toll Brothers' luxury positioning often means less competition for desirable in-fill land, with most competition coming from smaller custom builders that lack the company's scale and access to capital, creating a competitive advantage in land buying. - Year-to-date share repurchases totaled $226 million as of Q2 end, and the company maintains a full year target of $650 million in repurchases, after raising the quarterly dividend. The balance sheet is healthy with $3.3 billion in total liquidity, a 15.4% net debt to capital ratio, and a strong investment grade credit rating.

Guidance

- For Q3 FY2026, the company guides for 2,600 to 2,700 home deliveries, an average delivered price of $965,000 to $985,000, an adjusted gross margin of 25.25%, SG&A as a percentage of revenue of 10.0%, and a tax rate of approximately 26.0%. - For full-year FY2026, management raised the lower bound of delivery guidance by 100 homes, and raised the midpoint of average delivered price guidance by $12,500. Full-year guidance is now 10,400 to 10,700 home deliveries, with an average price of $985,000 to $1,000,000. - Full-year adjusted gross margin guidance was increased 10 basis points to 26.1%, implying a Q4 adjusted gross margin of 26.3%, driven by higher concentration of higher-margin luxury move-up homes and early-sold spec homes scheduled for delivery in Q4. - Full-year SG&A margin guidance was improved 15 basis points to 10.1%, with interest as a percentage of cost of sales expected to hold at 1.1% for the full year. - The company projects full year 2026 other income, unconsolidated entity income, and land sales gross profit to total $120 million, with $81 million already realized in the first half. The full year effective tax rate is projected to be 25.5%. - The company confirms it expects to end FY2026 with 480 to 490 total selling communities, an 8-10% increase from FY2025, and projects 8-10% community count growth will continue in FY2027 and beyond, supported by sufficient existing lot control. Guidance assumes the full $650 million in targeted share repurchases for FY2026.

Segment performance

Toll Brothers operates across three buyer segments within its luxury home building business: 1. Luxury Move-Up: Generated 62% of total home sales revenues in Q2 FY2026, up from 59% in Q1 FY2026. This is the highest margin segment for the company, driving overall margin outperformance in the quarter. 2. Luxury First-Time: Contributed 22% of Q2 home sales revenues. 3. Luxury Move-Down: Contributed 16% of Q2 home sales revenues. By delivery type, spec homes represented 51% of Q2 unit deliveries and 41% of Q2 home sales revenue, broadly consistent with the company's 50-50 target delivery mix. Build-to-order homes represent the remaining share of deliveries and revenue, and carry a 30% adjusted gross margin, several hundred basis points higher than the average for spec homes.

Risks & headwinds

- Forward-looking results depend on multiple unpredictable external factors, including general economic conditions, global events, housing and financial market conditions, interest rate volatility, labor and material availability, and inflation, all of which are outside the company's control and could materially impact actual performance. - The overall housing demand environment remains challenging, with extended decision timelines for buyers tied to low consumer confidence. - Recent increases in lumber prices and diesel fuel costs could create upward pressure on construction costs, though the company has not seen material impacts to date for its 2026 delivery guidance. - Finished, completed spec homes generally require higher incentives to sell in the current market environment across most markets, creating margin pressure if specs are not sold early in the construction cycle.

Analyst Q&A

• Q: What recent trends are you seeing in buyer traffic, conversion rates, and spec home selling behavior amid ongoing macro and interest rate volatility? /

  A: Demand has been consistent throughout Q2 and the first weeks of Q3, with April as the strongest month of the quarter. On a per-community basis, demand is flat year-over-year, which management is pleased with given the challenging backdrop. Buyers continue to take longer to make purchase decisions due to muted consumer confidence, but the overall trend has held steady, with no change to the company's ability to sell specs earlier in the construction cycle despite recent rate volatility.

• Q: Why did you raise full-year delivery guidance when most other home builders cut their outlooks this earnings cycle, and is there appetite to exceed the $650 million annual share repurchase target? /

  A: The guidance raise reflects two factors: the relative resilience of the company's core luxury move-up segment, which makes up 60% of revenue and is outperforming broader housing markets, and stronger than expected first half performance paired with visibility into backlog, plus a modest unit contribution from the recently closed Buffington Homes acquisition. Management reaffirmed the $650 million full-year repurchase target, noting more repurchase activity typically occurs in the second half and the company will monitor opportunities during its open trading window.

• Q: What geographies are top priorities for future M&A entry, and what is your current appetite for acquisitions? /

  A: Management notes it has already built out a broad national footprint over the past 10 years, but top targets for new entry are Midwest markets including Indianapolis and Minneapolis, where the company can build scale as a luxury player. The company will continue focusing on small, bolt-on strategic acquisitions of local luxury builders like Buffington Homes, which has been its consistent M&A strategy for decades. No transformative large M&A is expected in the near term.

• Q: Has the recent strength in builder confidence and traffic from the NAHB survey matched what you are seeing across your markets? /

  A: Management commented that it is still too early to confirm a sustained upward trend, but echoed that May 2026 performance has been similar to April, which was the strongest month of Q2. Total web and in-person traffic is up year-over-year nationally, but remains flat on a per-community basis, consistent with prior trends.

• Q: Why did selling costs come in below expectations in Q2, and can this lower cost level be sustained? Is the lower cost a reflection of stabilizing market conditions? /

  A: The 40 basis point SG&A beat relative to guidance is split roughly evenly between fixed cost leverage from higher than expected revenues, and cost discipline, specifically lower advertising spend and a small reduction in average outside broker commission rates. Management confirmed this improved efficiency is expected to continue, as the marketing team has found more cost-effective ways to drive sales even in the challenging demand environment.