TORO CO Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Operational Excellence: Exceeded adjusted earnings per share expectation for the quarter, returned cash to shareholders through dividends and share repurchases. Revenue declined 2.3% year over year due to weak consumer confidence and unfavorable regional weather, but golf and grounds businesses remained strong.
• AMP Program: Generated $70 million of run-rate savings and on track to deliver $100 million by 2027. Reduced global salaried workforce by an additional 10% and rationalized operational footprint in the residential segment by winding down production in a Mexico plant and transitioning to US facilities.
• Tariff Mitigation: Estimated 3% of annual cost of goods sold impact from tariffs in fiscal 2025, with strategies implemented since 2018, including USMCA qualified manufacturing and supply chain optimization.
• Product Innovation: Introduced new products like BOSS ColdFront Technology, expanded electric construction portfolio, and maintained partnership with Ace Hardware, showcasing innovation and customer focus.

Segment Performance

• Professional Segment: Net sales for the second quarter were just over $1 billion, up about 1% year over year, driven by higher shipments of golf and grounds products, partially offset by lower underground product shipments. Earnings for the second quarter were $202 million, up 6% year over year, with a margin of 19.9% (up from 19%) due to product mix and productivity improvements, partially offset by higher material and manufacturing costs.
• Residential Segment: Net sales for the second quarter were $297 million, down 11% year over year, primarily due to lower shipments of Watt Power Mowers, zero-turn mowers, portable power products, and pump divestiture. Earnings for the quarter were $16 million compared to $36 million last year, with a margin of 5.4% compared to 10.8% due to higher material, manufacturing, and freight costs, lower net sales volume, and inventory valuation adjustments, partially offset by productivity improvements and lower sales promotions and incentives.

Guidance

• Third Quarter FY2025: Anticipates total company net sales flat to slightly up, Professional segment net sales up mid-single digits, Residential segment net sales down high teens. Total company adjusted operating margin similar year over year, with slightly higher Professional segment earnings margin and lower Residential segment earnings margin. Adjusted diluted EPS slightly higher than last year's $1.18.
• FY2025 Adjustments: Revised guidance due to macro headwinds for homeowners. Total year revenue flat to down 3% from FY2024. Professional segment expected to be up slightly, Residential segment down mid-teens. Adjusted diluted EPS range $4.15 to $4.30, with adjusted effective tax rate of 19% and interest expense of about $59 million.

Risks

• Macroeconomic Headwinds: High interest rates and weak consumer confidence impacting homeowner spending on big-ticket items.
• Tariff Uncertainty: Potential reimposition of tariffs, particularly from China, steel/aluminum, and reciprocal tariffs, affecting costs and margins.
• Weather Impact: Unfavorable regional weather pressured top-line growth in some businesses, especially for products sold to homeowners.

Question and Answer

• Q: Inventory in landscape business and performance? A: Field inventory adjusted, higher due to late spring, but feeling better overall with shipments as expected but delayed start of spring causing slight increase.
• Q: Tariff details and mitigation? A: 3% of COGS impact in FY25, mitigated via AMP, productivity, and US-based manufacturing, with strategies in place since 2018 to reduce exposure to China.
• Q: Resi margins and inventory valuation? A: Inventory valuation adjustment was a one-off, driven by lower sales and higher production costs, with actions taken to manage residential segment profitability.
• Q: Underground business demand and backlog? A: Strong demand but affected by dealer sales, SKU rationalization, and startup challenges of new products, with backlog management ongoing and expected to normalize by fiscal 2026.
• Q: Pricing and promotions in resi? A: Promotions and incentives used, lower in Q2 due to comp from last year, but still using them to move product while managing margins.
• Q: Tariff impact on competition? A: US-based manufacturing and USMCA qualified products provide competitive advantage, but tariff dynamics are dynamic with ongoing monitoring of tariff reimposition details.