The Toro Company Q3 FY2026 earnings call

Financial Performance:

• Delivered strong Q3 results with net sales growing 8.4% to $1.23 billion (6.2% organic).
• Generated adjusted EPS of $1.33, up year-over-year, driven by operational performance ($0.12), share repurchases ($0.05), and tariff refunds ($0.06).
• Adjusted operating margin expanded to 13.9%, up 30 basis points, primarily due to the AMP program which is on track to exceed its $125 million run-rate savings target by year-end.
• Achieved $425 million in free cash flow year-to-date with a 128% conversion rate, enabling $358 million in share repurchases.

Operational Highlights:

• Professional Landscape Contractors: Sales grew double digits, supported by the Exmark Radius mower launch and GrandStand MULTI FORCE line. Ventrac business continued strong growth, aided by new attachments like the fence post mower.
• Underground Construction: Ditch Witch and HammerHead Bluelight solutions grew mid-single digits, with Bluelight seeing over 30% YTD growth due to adoption for pipe relining.
• Residential: Growth supported by the Lowe's partnership, with significant margin improvement. Inventory levels are well-positioned entering Q4.
• Innovation & Technology: Successful deployment of autonomous golf equipment (Turf Pro, Range Pro) at the U.S. Open. Strong adoption of electric greens rollers. Expansion into AI-enabled business processes and Spatial Adjust Precision Irrigation Technology.
• Leadership Transition: Rick Olson stepped down as CEO after a decade of leadership; Edric Funk assumed the role, citing a strong portfolio diversification strategy through acquisitions like Charles Machine Works (Ditch Witch) and Tornado.

Professional Segment: Net sales increased 8.8% (6.1% organic) to approximately $937 million (estimated based on total net sales of $1.23 billion and residential share). Adjusted operating margin was 20.9%, down 40 basis points year-over-year due to product mix, higher manufacturing costs, and the initial margin impact of the Tornado acquisition, partially offset by pricing, productivity improvements, and volume leverage.

Residential Segment: Net sales increased 8.6%. Adjusted operating margin improved significantly to 5.9%, up 400 basis points year-over-year, driven by the AMP initiative, pricing, volume leverage, and a favorable comparison to prior-year inventory valuation adjustments, partially offset by higher material and manufacturing costs.

• Full-Year Net Sales: Raised full-year organic net sales growth guidance to 6.3%-6.6%, up from the previous range of 4%-6.5%.
• Full-Year Adjusted EPS: Raised adjusted EPS guidance to $4.60-$4.65, up from $4.50-$4.62, bringing the midpoint up to $4.63 (an increase of ~$0.07).
• Implied Q4 Guidance: Q4 net sales expected to grow 3.9%-5.1%; Q4 adjusted EPS expected between $0.93-$0.98.
• Segment Outlook: Professional segment net sales expected to grow mid-single digits; Residential net sales expected to be approximately flat due to lapping strong prior-year snow-related demand.
• Tariff Refunds: The updated guidance includes $7 million in anticipated IEEPA refunds, reduced from the previously expected $12 million, as $5 million is classified outside Phase 2 with uncertain timing.

• Weather Dependency: Residential performance is sensitive to winter weather patterns; management is monitoring El Niño possibilities but aims to balance inventory to avoid excess if snowfall is low or extreme events if it is high.
• Tariffs and Geopolitics: While current impact is deemed minimal, ongoing trade tensions, including potential Canadian retaliatory tariffs and US import duties, create uncertainty. Management has factored near-term impacts into guidance but notes that future discussions could alter outcomes.
• Integration Risks: The recent Tornado acquisition contributes to sales growth but negatively impacted professional margins in Year 1 due to integration costs and lower initial margins.
• Supply Chain and Labor: Installation rates for irrigation projects are gated by crew availability. Broader labor challenges in the industry continue to affect service capacity.

Q: David MacGregor asked about the profitability runway for the underground construction (Ditch Witch) business and whether inorganic growth remains a priority following the Tornado acquisition. / A: Rick Olson emphasized that underground construction is a top priority for capital allocation and M&A, driven by massive demand from data centers, utilities, and broadband infrastructure. He highlighted that opportunities extend beyond site work to utility access, citing a specific example where 14 miles of drilling were required just for data/power access. He confirmed that large facility investments are underway to unlock capacity for Ditch Witch and that Tornado opens new nodes for soft excavation growth.

Q: Analysts Mike Shlisky and David MacGregor inquired about the future of the AMP productivity program now that its $125 million savings target is met, and whether there will be an 'AMP 2.0' focused on growth rather than just cost-cutting. / A: CFO Angie Drake stated that while AMP creates durable margin potential, she declined to guide for FY2027 specifics yet. She noted that some AMP savings were used to offset tariff/inflation headwinds this year, meaning more run-rate savings will likely flow to earnings in FY2027. President Edric Funk added that they are actively designing the next strategic initiative, which will likely include growth elements, aiming to institutionalize AMP's culture of continuous improvement.

Q: Tim Wojs asked how much of the professional contractor strength was driven by snow products versus mowing/attachments, and how field inventories look exiting the season given drought conditions. / A: Rick Olson explained that landscape contractor demand was broad-based, fueled by healthy prior-year snow seasons allowing contractors to invest in new mowing equipment like the Exmark Radius. He identified Ventrac as a key growth driver due to versatile attachments (e.g., fence post mowers) that boost productivity. While homeowners with acreage saw slight slowdowns due to drought, contractors exited the season with great inventory conditions, positioning them well for spring demand.

Q: Sam Darkatsh requested a breakdown of exogenous factors affecting FY2027 gross margins, specifically asking if tariff headwinds ($20-40M) and refund headwinds ($10-15M) were accurate estimates. / A: Rick Olson advised against viewing tariffs in isolation, stating that productivity gains, strategic sourcing, and manufacturing adjustments largely neutralize these costs. He expects tariffs to become part of the general inflationary backdrop rather than an outsized standalone impact. He reaffirmed confidence in returning residential margins to double-digit levels and expanding overall margins through market strength and new product introductions, noting that formal FY2027 guidance will be provided next quarter.