The Toro Company (TTC) Earnings

Management highlights

- Overall Financial & Strategic Performance * The company delivered strong Q2 results, with 8% top line growth and 13% adjusted EPS growth (to $1.60), marking the second consecutive quarter of double-digit adjusted earnings growth driven by strong broad-based demand and expanding margins. * Adjusted operating margin hit 14.4% (up 70 basis points year-over-year), the highest operating margin in the past 12 quarters. Free cash flow was $266 million (up $181 million year-over-year), with 125% free cash flow conversion, enabling $361 million in shareholder returns via buybacks and dividends in H1 2026. * Core strategic priorities are accelerating profitable growth, driving productivity/operational excellence, and empowering employees. - Innovation & Product Development * Key product successes include the JT120 horizontal directional drill (for underground construction) with strong customer demand and a growing order pipeline, and the GT21 compact horizontal directional drill for fiber installation, which is already outperforming the market's incumbent standard product. * Orange Intel is a new customizable fleet and job site intelligence system for Ditch Witch customers that enables productivity optimization, maintenance management, and data integration across job lifecycles. * The company is advancing innovation across electrification, smart connected products, autonomous solutions, and AI. AI is being leveraged for autonomous navigation, R&D prototyping, and back-office process efficiency, while AR and collaborative robotics improve manufacturing quality and consistency. - Operational & Integration Progress * The AMP productivity program, launched in fiscal 2024, continues to exceed expectations and is on track to deliver $125 million in run-rate savings by the end of fiscal 2026. It has driven margin improvement via lean principles, continuous improvement, strategic facility closures, salaried workforce reductions, and non-core business divestitures. * Integration of the Tornado acquisition is progressing slightly better than planned, contributing over 2 percentage points to top line growth, with a long growth runway driven by increasing global requirements for safe soft excavation to avoid underground utility damage. * Overall field inventory has been reduced, with professional segment inventory (underground and golf) largely normalized; landscape contractor and residential inventory are slightly below target levels due to pockets of elevated demand, particularly for zero-turn mowers. Snow equipment channel inventory is now at normalized levels after the 2025-2026 winter season.

Guidance

- Full year 2026 guidance has been raised from prior ranges: total company sales growth is now expected to be 4% to 6.5% (up from the prior 3% to 6.5% range). Adjusted full year EPS is now expected to be $4.50 to $4.62, up from the prior $4.40 to $4.60 range, with a higher midpoint reflecting H1 outperformance and reduced downside risk. - Professional segment full year sales growth guidance is 5% to 7%, while residential full year sales growth is now expected to be roughly flat, an improvement from prior outlooks, even amid challenging consumer confidence and inflation. - Full year adjusted EPS is expected to grow high single digits, with free cash flow conversion of at least 120%. - Q3 2026: Total company sales are expected to grow mid-single digits, with professional sales up mid-single digits and residential sales up low single digits. Total company adjusted EPS is expected to grow mid-single digits, but total company margins will be lower than Q2 in line with normal seasonality, and inflation/tariff pressures will be more acute in Q3 before mitigation actions are fully implemented in Q4. - The net impact of recent Section 232 tariff changes and expected tariff refunds is negligible to full year 2026 guidance.

Segment performance

Total company net sales for Q2 2026 were $1.42 billion, an 8.1% year-over-year increase (5.7% organic growth). - Professional Segment: Net sales were $1.1 billion, up 9.1% year-over-year (6% organic growth), accounting for 77.5% of total Q2 revenue. Segment earnings were $224 million, with a margin of 20.3% (up 40 basis points year-over-year). Within the professional segment: golf and grounds achieved mid single-digit sales growth, landscape contractor achieved high single-digit sales growth, and underground and specialty construction achieved low double-digit organic sales growth. - Residential Segment: Net sales were $310 million, up 4.1% organic growth year-over-year, accounting for 21.8% of total Q2 revenue. Segment earnings were $30 million, with a margin of 9.8% (up 430 basis points year-over-year).

Risks & headwinds

- Ongoing macroeconomic and geopolitical headwinds, as well as sustained inflationary pressures for materials and fuel, which are expected to impact EPS by approximately 16 cents per share in full year 2026. - Drought conditions in key U.S. markets that could create downward pressure on residential and landscape contractor demand, though this is partially offset by higher golf course demand from increased rounds played and less job site disruption for construction activity. - Continued uncertainty around evolving global tariff regulations, which create potential incremental cost pressure that the company is working to offset via sourcing and manufacturing adjustments. - Soft residential market demand, particularly in Europe, which continues to act as a drag on residential segment results. - Slow near-term adoption of autonomous golf equipment, leading management to temper near-term revenue expectations for this new product line.

Analyst Q&A

• Q: How did lean channel inventories entering 2026 contribute to Q2 unit growth, and were there any offsets from extended Mexican manufacturing lead times?

  A: Management noted that entering Q2 2026, the company was back to a normal inventory situation after working down excess channel inventory over prior years. There was very little remaining excess inventory heading into spring, and supply flow from all facilities (including Mexico) was normal. Demand ended up stronger than expected, but overall the quarter was fairly normal from a residential inventory and stocking perspective.

• Q: What is the demand outlook for Ditch Witch, and is there room to grow parts and service penetration and margins for this business?

  A: Ditch Witch's underground construction segment delivered low double-digit top line growth in Q2, driven by strong sustained demand across product lines, particularly the new JT120 and GT21 drills. Demand is supported by widespread infrastructure work including fiber installation, utility and power transmission for data centers, and water projects. Management sees significant room to grow parts and service as a percentage of total Ditch Witch sales; this higher-margin business is already a solid contributor, and growing it will further boost profitability and fund future innovation, with appropriate dealer support and channel inventory in place to support this growth.

• Q: What is the net impact of recent tariff changes on full year 2026 guidance, and are new tariff announcements from this week material?

  A: The $20 million gross increase in expected annual tariffs is fully offset by a $20 million expected refund from prior IEPA tariffs, resulting in a negligible net impact on full year 2026 guidance. Recent agricultural/industrial equipment tariff reductions have no direct impact on Toro, as its products are not covered by the relevant HTS codes, and recent Section 301 changes only have a very small unfavorable impact. The $20 million refund will be split ~70% to the professional segment and ~30% to residential, and included in the current adjusted EPS guidance. The current $120 million gross tariff estimate can be considered the new steady-state run rate going forward, and management is working on sourcing and manufacturing adjustments to offset this higher run rate over time.

• Q: What is Toro's acquisition strategy, and what areas are prioritized for future growth?

  A: Toro maintains a disciplined approach to acquisitions, focusing on opportunities that fit the company's existing core markets and strategic strengths, at viable price points. The Tornado acquisition is a model example: it fit Toro's existing underground construction market, had an existing partnership history, and opened new adjacent business opportunities. Priorities for growth align with current strengths: the company prioritizes professional segment acquisitions, and is particularly interested in technology-enabled opportunities that can leverage existing technological investments across the business, similar to prior robotics acquisitions.