Toro Company (The) 2026 Q3 Earnings Call

Please proceed, Ms. Hille. Morning, everyone, and thank you for joining us for The Toro Company's third quarter 2026 earnings conference call.

I am Heather Hille, Vice President of Corporate Affairs and Investor Relations. On the line with me today are Rick Olson, Chairman and Chief Executive Officer, Edric Funk, President and Chief Operating Officer, and Angie Drake, Vice President and Chief Financial Officer. Rick, Edric, and Angie will provide an overview of our third quarter results, which were released earlier this morning, and discuss our priorities and outlook for the remainder of fiscal 2026. Following their remarks, we will open the phone lines for a question and answer session. Before we begin, please note that any forward-looking statements made today are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks are detailed in our earnings release, investor presentation, and our most recent filings with the SEC.

During our remarks, we will also reference certain non-GAAP financial measures. We believe these metrics provide useful insight into the company's performance. Reconciliations to the most directly comparable GAAP measures can be found in this morning's press release. Both the release and our third quarter supplemental presentation are available in the investor information section of our corporate website. With that, I will now turn the call over to Rick.

Thank you, Heather, and good morning, everyone. We delivered a strong third quarter, growing net sales 8% and generating adjusted earnings per share of $1.33. The sales momentum from the first half continued into Q3, with both our professional and residential segments growing net sales over 8%. Within the professional segment, landscape contractor sales increased double digits, with underground and specialty construction growing mid-single digits. As expected, golf shipments were down modestly year over year against a strong prior year comparison. The strength in professional contractor was driven in part by the redesigned Exmark Radius zero-turn mower launched earlier this year. Another key contributor was the GrandStand MULTI FORCE product line, now equipped with a new, more powerful and fuel-efficient engine. This versatile stand-out machine has numerous attachments, enabling customers to expand services, increase profitability, and remain productive in every season.

Our Ventrac business continues to grow with professional landscape contractors and homeowners with acreage. This season, we added to the more than 30 pro-grade attachments with the newly introduced Fence Post Mower. It virtually eliminates one of the most labor-intensive trimming processes, and it's a great example of our innovation process. Identifying a customer pain point and developing an effective solution. Customer response has exceeded expectations, with demand already surpassing our initial production run. Rounding out a strong season for professional contractors was a successful Q3 load-in for BOSS snow and ice management products. Liquid de-icing technologies and the Snowrator delivered the strongest year-over-year growth rates within the portfolio. Underground construction continues its strong performance, growing mid-single digits in the third quarter. We've seen increased market adoption for our industrial and utility pipe relining solutions by HammerHead Bluelight, which has grown over 30% year to date.

This is an advanced cured-in-place pipe rehabilitation system that avoids the disruption of digging a large trench for a full pipe replacement. Our patented LED Bluelight curing technology cures up to five times faster than traditional steam, hot water, or ambient air methods. Moving on to the residential segment. We grew net sales by over 8%, supported by the continued success of our partnership with Lowe's. Importantly, this growth was accompanied by a margin improvement of 400 basis points year over year. We remain on track to achieve our goal of sustainable double-digit operating margins in residential. In a moment, Angie will highlight the progress of our AMP program and the resulting margin expansion for the company. In addition to AMP, we are driving working capital improvements. Year to date, these improvements have contributed to our $425 million in free cash flow at a conversion rate of 128%.

As a result of our strong cash flow, we executed $358 million of share repurchases. We are entering the fourth quarter with strong momentum and high expectations. Healthy end markets, disciplined execution, and ongoing productivity initiatives are driving margin expansion and robust free cash flow. Our strong year-to-date performance gives us the confidence to raise our adjusted EPS guidance to a range of $4.60-$4.65, up from our prior range of $4.50-$4.62, bringing the midpoint up over $0.07 to $4.63. Now, I'll turn the call over to Angie for the details on the quarter.

Thank you, Rick, and good morning, everyone. Our third quarter results were driven by strong customer demand and disciplined execution. Net sales increased 8.4% to $1.23 billion, or 6.2% organically. Adjusted operating margin was 13.9%, up 30 basis points from the prior year. This improvement was driven primarily by the benefits of our AMP initiative, which will exceed our target of $125 million in run rate savings by year-end. We launched AMP in 2024 to focus on four key areas: supply-based transformation, design to value engineering, route to market optimization, and operational efficiency. The program has delivered meaningful benefits across each of these areas and has also been instrumental in helping mitigate tariff-related impacts. While AMP will conclude in fiscal 2026, our commitment to continuous improvement will not.

Across our supply chain and functional organizations, we will continue to use the muscle gained by the AMP initiative to improve efficiency, reduce complexity, and enhance profitability. Productivity is a critical part of The Toro Company's DNA. The net result for Q3 was an adjusted EPS of $1.33. The year-over-year increase was driven by $0.12 from operational performance, $0.05 from share repurchases, and $0.06 from tariff refunds. Partially offsetting these benefits was an $0.08 impact from a higher adjusted tax rate and $0.06 of other corporate items, mainly a higher incentive accrual due to year-to-date performance and less Red Iron income due to lower field inventories. The adjusted tax rate in the third quarter was 22.4%, higher versus our expectations due to the geographic mix of earnings.

Our adjusted earnings excludes a non-cash impairment charge of $43 million as part of our AMP-related network optimization and product portfolio rationalization. Moving on to our segment detail. Within professional, net sales increased 8.8%, with 6.1% coming from organic growth. Adjusted operating margin was 20.9%, down 40 basis points year over year. This was primarily due to product mix and higher manufacturing costs, partially offset by pricing, productivity improvements, and volume leverage. Within residential, net sales increased 8.6%. Adjusted operating margin improved to 5.9%, up 400 basis points year over year. The increase was driven by productivity improvements, pricing, volume leverage, and a favorable comparison to a prior year inventory valuation adjustment. These benefits were partially offset by higher material and manufacturing costs. Turning to balance sheet highlights. We improved inventory by $153 million year over year due to lower finished goods balances.

Accounts receivable were up slightly as a result of the Tornado acquisition, with accounts payable also up slightly due to higher purchases with a greater level of sales. As a result, working capital improved $217 million year over year, contributing to the strong free cash flow conversion that Rick Olson mentioned. Turning to our outlook. We are raising our full year guidance based on our sustained broad-based customer demand and the results of our productivity initiatives. We now expect our full year net sales to be in the range of 6.3%-6.6%, up from the prior range of 4%-6.5%. At the segment level, we anticipate professional net sales to be up mid-single digits, continuing the momentum of recent quarters. Residential net sales will be approximately flat as we lap last year's strong snow-related demand.

We are closely monitoring winter weather patterns and will react quickly as the season develops. Moving to profitability. The adjusted EPS range is expected to be between $4.60-$4.65, up from our prior range of $4.50-$4.62. The midpoint of our guidance increases from $4.56 to $4.63, reflecting our third quarter outperformance and a better outlook for the fourth quarter. The implied fourth quarter guidance puts net sales between 3.9% and 5.1% and adjusted EPS between $0.93 and $0.98. This guidance includes $7 million of anticipated IEEPA refunds. That is less than the previously expected $12 million as $5 million has been classified as outside of phase 2. The refund timing of this portion of IEEPA refunds is uncertain given the current process. If they are available in the future, we will include them in our guidance at that time.

We continue to build our business for long-term profitable growth. This includes prioritizing innovation investments that we believe will deliver outstanding returns, driving sustainable margin expansion with disciplined execution, including our productivity initiatives, and leveraging the talents of our team and the power of our best-in-class distribution networks. We are confident in our ability to drive significant benefits and opportunities for all of our stakeholders. With that, I will turn the call over to Edric.