Toro Company Aktie

Well, hi, everybody. Hello again. I am Mike Shlisky. I'm the analyst here at D.A. Davidson covering Toro Company. I'm here in Nashville at our 25th Annual Diversified Industrials and Services Conference. And I'm very pleased to have Edric Funk with us. He's currently the COO, but he's basically the incoming CEO of Toro starting, I guess, November 1?

That's right.

So the fiscal year ends October 31. It's first day, but it's been 30 years. So we'll preview that. It's not like it's your first day at Toro. Seasoned vet of Toro. We're here to ask a few questions about Toro, tell investors about it and hopefully get some time for some Q&A towards the end.

So first, Edric, tell us a little bit -- not everyone is aware, tell us a little bit about the high-level view. Just what does Toro do exactly and your key products?

Thanks for the invitation and for the opportunity to share that story. We exist to help our customers enrich the beauty, productivity and sustainability of land. And you might think of us creating value at the intersection of humanity and our natural ecosystems. So our products would be used in the beautification of the parks where communities gather, in the conditioning of athletic fields where kids play or the iconic stadiums where some of our favorite teams compete. On the golf courses where relationships are strengthened and where championships are contested and in backyards where barbecues are hosted or people relax after a challenging day.

And Mike, if you haven't spent time in any of those settings today, you were probably still impacted by our products in the first 5 minutes after you woke up this morning. When you switched on the light and the electricity was there, when you use the water for your shower to brush your teeth, when you retrieve data on your phone or your laptop, all of the infrastructure that delivered those services are installed by our customers using our products. So as our team knows what we do really matters. And we use that as a motivation to invest in innovation that drives real value, to work to serve our customers exceptionally well, and we do all of that to deliver consistent and sustainable value to shareholders.

That sounds like a lot more than what some folks think Toro, which is a lawnmower company. So let's maybe dive into a little bit why you're not a lawnmower company. And I'll just give the preview. I think your lawnmower type residential stuff is probably 10% of EBITDA, but the rest is professional. So maybe tell us a little bit about more in depth what is the professional -- besides professional landscapers doing also mowing lawns. But what is the real mix of the business here beyond just caring for grounds? Tell us a little bit more.

Yes. Thanks for going there because the professional portion of the business is where our strategic emphasis resides. And we cater to professionals across a number of different markets, all of which connect to that purpose that I shared a moment ago. So many other people would know us for our presence in the golf market. And we're the only supplier of both equipment and irrigation to the maintenance teams that maintain golf courses. We're doing more and more to integrate those solutions and bring more holistic offerings to those golf courses. Several people would know of the significant acquisition we made in the Charles Machine Works Companies, which brought brands like Ditch Witch into the fold. And that's to focus on the underground infrastructure and underground and specialty construction market.

I'm sure we'll talk a bit more about that, but a really important growth driver for the company because that's one of the markets that itself offers the biggest growth opportunity and a number of demand drivers, and an area that we're investing in significantly. And you mentioned professional contractors, whether they're caring for residential properties, corporate campuses, partnering with municipalities, whatever the case may be, another group who relies on our products to make their business run more smoothly and relies on us for their means of making a living. And across all of those professional segments, we know that a significant portion of their budgets, often more than 50%, is directed towards labor, which is a real challenge for all of them, and it's a place where we invest a lot of our time and innovation.

And you didn't mention it, but I want to mention it as well. Some of those same contractors who help mow the lawn and care for the grass in the off-season or plowing snow. So you do own a large snowplow brand as well, one of the largest, if not the largest, Snow Plow brand out there. It's complementary, right?

It is. You've got it exactly right. You're referring to the BOSS brand, and we've got both the plows that would go on trucks and then their Snowrator product is for clearing sidewalks and areas around parking lots and so forth. And you're exactly right, in areas that receive snowfall, a number of the contractors cross over and both do that winter hardscape maintenance as well as the turf care maintenance during the summer season. There's also some nice synergy with a number of our channel partners. And even outside the direct customer piece, we've already made reference to the underground infrastructure. This would be on the surface, the infrastructure that keeps people moving by keeping the roads clear, the parking lots and sidewalks clear.

Just to clarify for someone who doesn't know, underground construction, it sounds like a subway system, but it's really maybe is it like getting power lines in the ground or pipes, fixing pipes, things like that. So it's -- it's important for power grid expansion things along those lines. Am I on the right track?

Yes, you got it. One of the hot topics, of course, right now would be data centers. And...

You said the word.

Our products don't do a lot of work, although we're finding some interesting crossover on the data center sites themselves. But the majority of what we do is delivering the things that you described to those locations. It's bringing in the enormous amount of fiber optics. It's delivering the water that's used in cooling. It's the power that's required at those sites. The interesting thing, though, is all of those same things from an infrastructure perspective are important even outside of the data center space. We've got, of course, expansion and new development that's calling for that kind of infrastructure, but also a lot of aging infrastructure around the world, particularly here in the United States.

From a power perspective, you talked about getting power lines underground. One of the drivers is we know that we've experienced things like wildfires that have been sparked by issues with the aboveground lines. It's good to get that underground and it's more aesthetically pleasing often. On the water side of things, the American Society of Civil Engineers had published a statistic estimating that we lose 6 billion gallons of drinking water a day between the treatment plant and being delivered to people's taps. And so replacing and repairing infrastructure in that space is really important. And data, not only for the data centers, but continuing to bring high-speed Internet to areas that have been underserved. All of those are drivers that we see extending well into the future.

Got it. Got it. And let's maybe just touch on your earnings results over the last couple of years. It's interesting. You've almost reported the exact same earnings number every single year for 3 or 4 straight years.

Thanks for pointing that out.

Well, that's not my favorite thing to talk about. We'll talk about the guidance for this year, which is different. But it's been flat is good at times. And there's been some ups and downs and different drivers that have made it flat, some great years, some bad years for certain markets. They've all balanced out is what I've been gathering. Tell us a little bit about some of the moving parts and how it has, in fact, because this could have been bad, but it ended up being flat. So tell us about how it ended up not being bad and ended up being okay.

I sure really appreciate that perspective because we all know that it...

I say very differently that question.

It has been a dynamic environment and really challenging, and our teams have worked really hard in order to deliver even that level of results, but that doesn't live up to our aspirations. And we've learned from that experience, but I'd say it's generally behind us. We weren't immune to what a number of other companies experienced in terms of demand that became very abnormal, disruption in the supply chain. But we've come out of that even stronger, and we now see a situation where our end markets are strong. We continue to have leading positions within a lot of those markets and just a lot of progress. Inventory would be one example that over the last 1.5 years, we've improved significantly. That's led to us now delivering more than 120% free cash flow conversion.

We've seen margins improve, particularly in the residential portion. As you said, that's a small subset of our business, but it's one that was particularly challenged. We now see that back on a path to double-digit margin. And we're just really optimistic about the future. Our guide, as you alluded to, puts us back into double-digit earnings growth, and that's the kind of performance that we want to continue to see going forward.

Yes. So prior to the last couple of years, it was 10% growth every year, if not higher or a lot higher between the Great Recession and COVID basically. So 10-plus years, I think, of really strong growth that people really admired. There was a COVID overhang. There's strength in golf, but other areas got weaker, didn't snow for a couple of years. So things are -- there are some ups and downs, but you kept it kind of flat and you're -- as you just mentioned, you're back on that double-digit earnings growth trajectory. That's really strong.

So you're kind of finally back on track after, I would say, a very tough COVID hangover. Tell us a bit about the targets that the Board or that your company is putting out there going forward. Do you really want to keep that 10% growing growth rate? Has that been a stated internal goal at least? Or do you have other aspirations?

Well, the -- first, maybe just to address the return to performance, it's all about execution. And that doesn't mean we didn't execute a number of things well, but during all that period of disruption, didn't see what historically has been a hallmark of the company. So we'll come back and certainly share more detail on some of the longer-term aspirations. But as I said just a moment ago, that double-digit earnings growth has been something that we've been proud of. It's something that we want to continue to deliver. It's the kind of thing that we want to provide.

And we're focused on continuing to drive productivity. We've talked publicly a great deal about our AMP productivity initiative. That's delivered great results. We've talked about the strong end markets. We're capitalizing on the demand that's in front of us. And I referenced the residential margin, but across the company, looking to continue to expand margins. So we'll provide more detail, but those are the things that we're certainly thinking about and things that we know are important to our investors.

You just -- you touched on that the -- some of the cost reductions you made as part of what's called the AMP program. Any numbers behind that you can share with us, you've gone through that so far? And has cost reductions, are those permanent? And the mindset of cost control, how has it changed as an employee mindset the last couple of years?

It's probably before, during and after AMP that's worth referencing. Even before the AMP initiative came to be, productivity was an important part of our culture, and we were always looking to use productivity to offset the effects of inflation. But as we navigated the post-pandemic situation and all of the hyperinflation that we experienced, we knew that we had some extra work to do to get that back, and we wanted some additional focus from our employee base. And that's what led to establishing that initiative. We originally announced a plan to do -- to achieve $100 million of annual run rate savings. We ultimately increased that goal to $125 million, and we were excited for our CFO, Angie Drake, who championed that initiative to be able to announce at our last earnings call, we've already achieved that run rate savings.

And that will flow through now to next year and beyond. So those are permanent and durable savings. And as we go forward, we shared in that earnings call, while the initiative ends at the end of this fiscal year, we've achieved what we intended, which was to reinvigorate the employee base to build that muscle and AMP and productivity will remain something that stays with us even belong the end of the formal program. And even while we shift our attention to other things like a return to growth.

Great. And as the incoming CEO, as I mentioned earlier, you're starting in about a month. But you've been at Toro for 30 years. You've headed up the golf division. You've done a couple of other areas over the years. So you're not new. But as the new CEO, is there anything that you're thinking about doing differently or at least anything that the Board, broadly speaking, even with or without the CEO change, anything new you think you've got going on for 2027 from a strategy perspective that we should know about?

Yes. Of course, there are things we're thinking about doing differently. We've talked a fair amount about this, and people obviously have the question with our leadership transition, what's going to change. And I've been consistently describing it as continuity balanced with evolution. And we think the continuity is important. We have a really powerful foundation that we work from. We've got a strong product portfolio, as you know, industry-leading brands. We have incredible relationships with our channel partners and end customers. And we have a culture that is genuinely built on innovation and disciplined execution. So I view those as just a really good place to start.

But we know our customers' needs are evolving. Our markets are evolving. The world around us is evolving, and we have to evolve with that. And when I've shared specific examples, if we were to contrast maybe the last decade to the one to come, our current CEO, Rick Olson, did such a brilliant job of putting forth a vision that helped us to transform our approach to technology development and ushered in a lot of the work that we're doing from autonomous solutions to smart and connected products to alternative energy, those remain pillars of our technology development. That won't change.

But what will shift is we're now at a point that we need to invest more in accelerating commercialization and accelerating adoption of some of those technologies. And that's one place that I'll focus. Another -- you've already highlighted some of the acquisitions that we've made and how those brands have contributed to the company. That will continue to be important. But as we go forward, we'll look for even more integration of the products. There's more technology that we can leverage across product lines and more alignment of our businesses, including the channels through which we serve our customers.

And finally, as I said just a moment ago, we're coming off the heels of this extra attention and focus on productivity. That's not going to go away, but we're going to again get back to driving growth, which was also something that prior to the disruption of the pandemic and what followed had been something that we were known for and something that we're going to get back to. So the foundational pieces will be the same, but we have a number of things that will change, and we look forward to even sharing more detail on that here in the coming months.

Got it. You'll have earnings just before Christmas. Is that correct?

Yes, that's right.

Okay. All right. Great. Maybe let's just hone in on 1 or 2 of the end markets that have been interesting. The golf business, you were the -- until recently the Head of the golf business. You were CEO for a couple of years -- COO for a few years, but prior to that, golf. Tell us about the strength you saw during the COVID period. Golf is very socially distanced sport, I guess, because you're 200 yards away. Well, with me it's 10 yards away. Most people are 200 yards away. And it's been 6 years of pretty strong golf, people out there playing golf.

How much do you think is left in the tank and interest in golf to continue? And maybe more importantly, how much is left in the tank for golf courses after a couple of years of continuing to spend on their green space equipment?

All good questions. Let's not forget golf has been around for centuries. So there's some pretty good resiliency there. And there's no doubt that COVID provided a boost to the game. But as I shared with some other people recently, the -- we were seeing the signs of improvement in golf even before COVID. A lot of the fruits of the labors of a number of organizations that, frankly, we've helped support in terms of growing the game. And today, we see more and more youth participating, female golfers, just a lengthy list of underserved demographics that are now playing the game of golf. And the surge of off-course opportunities that at one time, we wondered if would be in conflict with green grass golf have all just proved to increase the funnel of participants.

And to your point, we've seen multiple years of records on top of records in terms of rounds played. That's driving more money into the industry. Private club memberships are full, waiting lists are robust, tee times are full. We're just seeing a lot of investment in the sport, and that's ultimately good for those of us that serve that marketplace. And it's not only on the equipment side where people know we have to go out and maintain the properties and everything else. But from an irrigation perspective, the useful life of an irrigation system might be 20 or 25 years. And if you go back to around the turn of the century, many people would know of the phrase, the Tiger boom associated with when Tiger Woods was ascending in popularity, and it was causing a significant influx in development of golf to rise to meet the demand.

We kind of went from over demand undersupply to the other way around, given all the properties that were opened up. And then we went through a period where that was coming back to normalization. And now I think a lot of us would say it's in balance. And some would probably argue there's room for more and we're seeing some development because the tee times are -- can be tough to get. So we still see a lot of runway there, really, really important. And even as demand has, let's say, normalized after a concentration or a surge, that remains a really important market for us and a really valuable one to the company.

So golf courses are -- I assume they can raise prices at certain times, and they've got the money to spend on equipment and on irrigation. That's not changing, it sounds like.

And it's really allowing them to tap into -- I talked about the technology that we've been working on to a greater and greater degree, we're integrating the equipment and irrigation. I mentioned we're the only supplier that does both, and that gives us some unique opportunities to have equipment talk to the control system for the irrigation and to have -- while our equipment is out canvassing the property, it can collect passively moisture data, for instance, and feed that into the irrigation system and use that to make recommendations to the superintendents.

We're tapping into AI, not only for our internal productivity, but in the products to help provide recommendations to the superintendents who can then look at what we're suggesting, accept that with a click of a button and do things that would have otherwise taken them hours to do to balance the water, save water, but ultimately bring their conditions into better balance and delight the customers that they're trying to serve.

Not driving out to 18 holes, it's visually checking every green and making sure it's not flooded. There's ways to find out using the -- potentially to spend less than a few minutes figuring out whether anything's flooded.

Yes. And Spatial Adjust is the brand name, if you will, of that software enhancement that we've made. You'll hear more and more about that as customers are embracing it. And as I told somebody else, I don't use that game changer label loosely, but that's what we're hearing our customers describe to us that this is making that big of a difference to their productivity.

Can we maybe discuss other tech on the golf course? Things like electrified equipment, hybrid equipment, autonomous equipment, that's -- the actual -- the mowing part. So any -- have you seen a rapid adoption? And how soon do you think those will have a pretty significant share of the overall market?

It's interesting. It's something we're monitoring every day. But there are some really interesting pieces in what you just talked about. Electrification is one. If we look more broadly across markets and product lines, we've seen some slowing in the adoption of electric products, some of that having to do with policy, some of it to do with incentives. But golf has been one exception for us. And greens mowers are a great example where we've seen customers continue to invest in that technology. And it's because of the other benefits that you get beyond a reduction in exhaust emissions. Being quiet is important on a golf course, whether it's because you have residences near the playing area, the clubhouse or whatever the case may be. On the putting green, there's a high premium placed on eliminating the potential for hydraulic leak.

So by going with an all-electric product, that's peace of mind for the superintendent. It's not just the mower, but we've recently launched a new greens roller. We highlighted that in our last earnings call. All-electric has some incredible new innovations that make it easier for the operators to control, makes it easier for the superintendents to put a wider range of operators on the product. And shame on us, we underestimated how enthusiastically that would be received. We're already sold out for this year and making plans to ramp up production in the year ahead. So electrification has actually been widely adopted or some of the hybrid solutions on fairway mowers and elsewhere.

On the autonomous side, lots and lots of experimentation going on in golf because labor, again, is such a key driver for them. And while some of them may have to find a way to get work done without labor that they can't get or others may be looking at opportunities to reduce their labor force, the overwhelming use case is looking for opportunities to redeploy the human labor to do other important jobs to elevate conditions. And so anywhere that we can help them take the human out of the more mundane tasks, that's valuable. We just introduced most of our autonomous solutions from a commercial perspective within the last year, and we're seeing really great momentum.

And we've taken care as we've commercialized to make sure that we're ready for the market, acknowledging that adoption won't become enormous overnight. But like I said, seeing really good momentum, and we'll be -- we'll remain cautiously optimistic and prudent in our expectations for the next year or 2, but couldn't be more excited about what that means for the long-term horizon.

I'm a little worried about the electrified quiet products on the golf course because I often blame the mower for why water hazards...

Plenty of other excuses you could use, Mike.

A new excuse. So I'll think about that. You did mention -- we did mention earlier the Snow Plow business, the BOSS business. It's been a good business. I don't know if everyone is aware, how -- is that a margin-accretive business for Toro? Is it just more of a throw in? And doesn't have a lot of margin. And finally, we did see a pretty decent winter, at least parts of the country this past winter. Can you take us through like what that means the heavy winter last winter and what that means for what might be ahead of us over the next few months as far as shipments are concerned?

Yes. First of all, it is a product that has attractive margins for us, and it is accretive to the company. And of course, it's in our control to make that even better when we manage it really well. And what I mean there is being disciplined in our expectations. So to your point, we had a really nice snow season last year after a couple of years that weren't so great, and that helped to clear out the channel. That's true not only for BOSS, but some of the other snow products that are part of our portfolio.

One of the interesting things for BOSS with the work that they do with the plows and with the sidewalk clearing -- even small snowfalls ultimately need to be cleaned up and their products go into operation even if we're not getting those massive winter storms that may drive more of the business for some of the snowblowers and other things that we make. So we're optimistic there. The channel is in a healthy position. They're calling for more. There's all kinds of questions I know that people have about what's it going to mean when we have a super El Nino. And I don't think any of us would profess to be excellent forecasters of the weather. It's challenging enough for the trained meteorologists.

But what we do know is even when there is an El Nino, you tend to get snow. It moves around. We tend to get more moisture in the south, and you can get snow and ice in the transition zones. The Mid-Atlantic will tend to get snow even if we don't see as much of it in the Great Lakes. So we're conscientious about that. We're being intentional about our forecasting, about our production. We're ready to adapt and adjust. And if we see more opportunity, we'll follow that, but we'll make sure that we don't get out ahead of ourselves and manage that prudently. So bringing it all back to the core of your question, a really valuable part of our overall business and an important one and one that we like a lot.

So again, so it did snow last season, does that mean you feel better about this coming season? They were out there using their product, they got cash paid for their services. Does it feel like you're going to be seeing a somewhat strong winter ahead?

Yes. Look, when there's more usage, more things wear or break. So it's great for the aftermarket business. The businesses themselves tend to be more optimistic. They can have a short memory and they remember things were good, and they're going to prepare for that. So we're seeing nice load into the channel as we prepare for the season. So yes, we're optimistic, but we're just -- we're also going to be really diligent, really, really sensible in terms of how we approach the business.

Got it. Why don't we pause there? We've got an audience here and make sure people have a chance to ask a question or 2. I've got more questions. My questions really go on for 3 sessions worth. So we're not going to do that. But anyone have any questions they want to bring up at this point? Feel free to just shout them out. We have the opportunity to do it, we always do it. Not everyone takes it. That's fine. We can just keep on -- we have one. Sure.

Autonomous. Autonomous mowers. Should we be excited about that as maybe some people are? I mean, I feel like it's in some -- it's talked about the last 5, 10 years. Can it move the needle?

And just to ensure that those that are listening in remotely, the question was around how excited should we be about autonomous mowers. We've been talking about that for 5 years and will it move the needle? I love the question, and I'll actually build on some of what you said. We've been talking about it for more than 30 years. When I joined the company 30 years ago, our research and development team had been working on prototypes that don't look that different than some of what we've commercialized now. Now at the time, the technology wasn't ready. It was far too costly to ultimately deliver for customers. But we've stayed at it over time.

We've stayed in close contact with our customers and the need to address their labor challenges has only intensified. So we know there's a problem to be solved, and that's where we start. We also have evidence that while there's talk of automation in all sorts of areas and different industries are in different places, the use case is pretty clear with our golf customers. And I mentioned earlier, people have been experimenting with a number of solutions. We've seen residential products deployed on golf courses. We've seen start-ups that are looking to come into that place. And what we've continued to hear from our customers over and over is we know there's a place for this eventually. We're not quite sure how we're exploring.

But we -- I know this sounds self-serving, but they've told us we're waiting for Toro to bring these products because we trust that you know what we're trying to accomplish. We trust the partners that we, Toro, have across the industry that provide the local service, and they're ready. So I mentioned recently, I really believe we're approaching an inflection point where that's going to move from experimentation to execution and adoption. We're already seeing that with the products that we've rolled out. So as I said in response to Mike, we're not going to get ahead of ourselves in terms of what that might mean for revenue next year, maybe even the year after. But we're sensing a legitimate change.

And I'll just -- I'll wrap that by talking about our recent activity that we had. We hosted an event with golf course superintendents that we call our innovation experience. And it's to come in and it's just to collaborate together to brainstorm and we had a focus on autonomous mowers. And we heard them saying with even more gusto, a lot of what I just talked about. So it's going to be real. And it's -- this isn't a matter of if, it's a matter of when we see that significant escalation.

I want to follow up and ask to that question. You are seeing sales of electrified and hybrid. It's growing nicely. You will soon hopefully have autonomous and a lot more of that. Is there a pricing and margin difference between what you're now selling and then these new models?

Yes. Well, the -- when we add the guidance, the localization and navigation technology, it certainly increases the price point. And our aspirations are to actually increase margins, not to have them diluted. I've heard some people talk about the new technology being dilutive to margins. That's not going to be the case for us. There's value for the customers, and that means there's value for us to share that we can capture more pricing and they can improve their operation. At this point, we're really close to margin neutral. So we're capturing more margin dollars on that higher selling price. And as we scale, as the technology costs come down, there'll be an opportunity for us to increase margins over time.

Got you. Make sure we are still -- we have a little bit of time left. All right. Let's talk about maybe M&A. Let's just maybe discuss your most recent largish deal, the Tornado deal out of Canada. Tell us a little bit about what that's done for Toro since you bought it a few quarters ago, maybe from a product mix and channel standpoint and also just from a financial standpoint, how has that gone for you?

It's been fantastic. We probably need to rewind that M&A story back to what we talked about earlier as we got into the underground construction with the purchase of the Charles Machine Works Company. That immediately became a really significant portion of the company. A lot of people wouldn't realize that's more than 1/4 of the company now that sits in that underground and specialty construction realm. And the addition of Tornado just continues to enhance our offering through the channel and ultimately to the end customers.

Imagine folks have different levels of familiarity with that brand and with that company, but Tornado specializes in vacuum excavation or some people would talk about soft excavation. And if you haven't seen the product, you could visualize it as injecting really high-pressure water to loosen the soil and then a giant vacuum that's sucking the spoils away. And it's used in a number of ways. It's used in concert with our horizontal directional drills for something called daylighting, which is where rather than dig a trench or bring in an excavator to dig down towards existing infrastructure, we'd use this hydro excavation practice to expose where the existing infrastructure is.

And it's used to verify that when the new infrastructure is installed, we didn't go through an existing pipe. We went above it or below it. It's becoming an increasingly common practice, in fact, regulated in a number of areas, identified as a best practice in many regions. And so we see continued demand driving that. And that's true of the underground, but there are other applications in terms of cleanup and other things where it's really complementary. It's expanded our reach in the Canadian market. Tornado is based in Canada, but their business even outside of what we would do through our Ditch Witch channel has been really good.

We've shared a number of times. This was an easy acquisition because it was strategically very much aligned with where we want to invest. And we had experience with Tornado because they were a supplier to our Ditch Witch business for the hydrovacs that we already had there. So we knew the people, we knew the innovation. It's been a great alignment culturally, and the performance has not only met but actually exceeded our expectations so far.

And just to be clear, so for those who are listening, it's a vacuum truck, but it's not a sewer type. It's not for infrastructure on the road. Some of the competitors are public companies, too, but it's not that.

Yes, yes. The...

Off-highway on the trucking side.

The trucks can be configured to do different jobs, but our focus is really in that underground infrastructure.

Soil, not sewer trash and stuff like that.

Yes.

Got it. So Toro, as you just mentioned, Tornado, you've mentioned Ditch Witch, we've mentioned BOSS Snowplow. Ultimately, you're a collection of brands. Toro is another brand, of course. A lot of it has been assembled through M&A over a very long period of time, some more recently, some a few decades ago. What are you looking to do going forward? Do you have a very robust pipeline? Are there areas that you want to fill in or expand your product lineup? And then maybe would you look to expand internationally? International is only about 20% of your sales. So would you want to go bigger in other countries? A little bit about some of your expansion plans through inorganic growth.

I have to go back and first share, I found myself twinging a little when you described this as a collection of brands. It's probably accurate somewhere...

That's not fair. But it's...

No, it's a fairness thing. But what I would point out is we've been really intentional in our acquisitions to align with the things that are important to our values and at the core. What you'll see is a consistency across all of them is a focus on customers, really good innovation, really strong channel. They're not all the same channel, but a strong channel. And as I talked about earlier, as we evolve, we're going to look to leverage all of those strengths but be even more aligned and more integrated. So it is true that we have a number of different brands that each have their own place in the markets that they serve. But we view it really as one clear family.

And so to your other question then of where we might look going forward, we're going to continue to look for those things. And we -- I'll add to that, we look for cultural alignment from the beginning, and that's one of the reasons that we've been so successful with our integrations that that's not an afterthought or something that we have to solve at the end. We -- as we contemplate our M&A priorities, we have a robust pipeline across our entire enterprise, but we will focus in the professional area. And we've been pretty vocal about underground infrastructure continuing to be really important areas. And there are some near-term adjacencies in some of the landscape and turf management as well.

And then to the international piece, like anything, we'll look at what makes sense for us there. And there are cases where our product lines and our strengths very naturally scale globally. And there are others where, of course, things differ pretty significantly regionally. And so anything is on the table for consideration, but we'll be intentional, and we have so many great priorities. We don't have to settle or chase some of the things that may not be as attractive from a return perspective.

Got it. We only have time maybe one more question left, and I'll just throw it out there. As you head towards that first day as CEO, just say a little bit about your key concerns. What do you want to get right from the get-go? And what are the major issues that you think you and the Board need to be dealing with today on an enterprise-wide basis?

Well, the good news is I come back to what I said earlier, the company is in a really strong position.

It's pretty healthy. Yes. I could...

And we've talked about the operating results, but I got to come back around to the balance sheet is in great shape. We've been generating cash. Our leverage is in a really stable place. We're at 1.3x for a leverage ratio. So one that, to some degree, insulates us against some of the challenges we're seeing in the macro environment, and it gives us strategic optionality. And so our team is excited about looking at where are we going to make those next investments. We -- yes, November 1 will be a change. I mean, I do understand that, that's significant and important.

But at some level, it's the next day. We're turning the calendar, and we're continuing to execute the things that we're already doing well. We're continuing to make progress on the strategic priorities and just continue to look for margin expansion, generating cash, serving customers really, really well and continuing to invest in innovation because we've always seen that to deliver the strongest returns. And frankly, it's something we're really good at.

Well, great. Edric, thank you for joining us. Thank you for being with me up here on the stage and all the investors. Everyone, enjoy the rest of your day here and a great weekend.

Yes. Thanks for spending the time with us.

Good day, ladies and gentlemen, and welcome to The Toro Company's Third Quarter Earnings Conference Call. My name is Marvin, and I will be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes.

I'll now turn the presentation over to your host for today's conference, Heather Hille, Vice President, Corporate Affairs and Investor Relations. Please proceed, Ms. Hille.

Good morning, everyone, and thank you for joining us for The Toro Company's Third Quarter 2026 Earnings Conference Call. I'm 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'll 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 standout machine has numerous attachments, enabling customers to expand services increased 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 snow raider delivered the strongest year-over-year growth rates within the portfolio.

Underground construction continued its strong performance, growing mid-single digits in the third quarter. We have seen increased market adoption for our industrial and utility pipe relining solutions like 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 type replacement. Our patented LED Bluelight Curing technology cures up to 5x faster than traditional steam, hot water or ambient care 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 to $4.65 and up from our prior range of $4.50 to $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 4 key areas: supply-based transformation, design to value engineering, route-to-market optimization and operational efficiencies. The program has delivered meaningful benefits across each of these areas and have 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 noncash 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 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% to 6.6%, up from the prior range of 4% to 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 lapped 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 to $4.65, up from our prior range of $4.50 to $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.

Thank you, Angie. I'd like to start today by recognizing and thanking Rick for his leadership, partnership and unwavering commitment to The Toro Company and its people. Rick has led the organization through a remarkable period of transformation and growth. His vision is strengthened the portfolio. And under his guidance, the company has successfully navigated the many macro and geopolitical challenges of the past 10 years.

Today, the company is in a position of strength and poised to capture the opportunities ahead. The team did just that in the third quarter as evidenced by our adjusted operating earnings growth of 11%. This was underpinned by our constant focus on operational excellence. One example was our recent Supplier Summit, which brought together more than 180 organizations. The event reinforced our dedication to building strong supplier partnerships that support supply continuity, innovation and productivity. Direct engagement between leaders of The Toro Company and our supplier partners creates opportunity to identify and accelerate continuous improvement initiatives. And to strengthen long-term partnerships that create value for both The Toro and our customers.

Relationships have always been a strength of the total company, and our Golf business is one great example. In early August, we welcomed 36 golf course leaders to our headquarters, representing top courses from across North America. Participants raved about our engineering and manufacturing operations and we're highly enthusiastic about our emerging technology demonstrations in the areas of automation, artificial intelligence, electrification and connected solutions. The investment we make in people and relationships continues to pay dividends. After 2 years of exceptional double-digit growth, Golf continues to perform in line with our expectations this year. More importantly, the industry's underlying drivers remain strong. We've now placed hundreds of autonomous products across golf facilities worldwide, including the Turf Pro, Range Pro and GeoLink Autonomous Fairway Mower.

Toro's Autonomous Solutions demonstrated their capabilities on one of golf's biggest stages when Shinnecock Hills hosted the 126th U.S. open. During Tournament Week, the Turf Pro 500 and Range Pro 100 operated together in the practice area with the Range Pro autonomously collecting golf balls while the Turf Pro simultaneously maintained the turf. This showcased how automation can help customers to optimize labor resources even under the most demanding conditions.

I'm very proud of our team for the successful launch of our GeoLink Autonomous Fairway Mower. This product combines the trusted excellence of our renowned quality of cut with advanced autonomous technology to help golf courses maintain superior playing services, all from a smartphone app, and allowing the ground screw to track on or more units as they perform other work on the course. While we've already made considerable progress with this technology, I'm even more excited about what's to come. Next spring, we will add another model, the larger Reelmaster 5010-H as we accelerate the commercialization of our autonomous platform launches. We're also seeing excellent adoption of other new product introductions within Golf. The new electric greens roller is already sold out for 2026. This reflects customer appreciation for both its intuitive controls and the built-in pass alignment feature that helps the crew achieve uniform and repeatable results.

In addition, the fact that it's all electric eliminates the risk of oil leaks on sensitive putting surfaces. Demand across our businesses continues to be broad-based, strong adoption of new products, continued healthy conditions in golf and sustained strength in underground and specialty construction position us well to deliver on our updated full year guidance. Looking forward, our team remains highly focused on key strategic initiatives that will deliver long-term sustainable value for customers and shareholders alike.

Now I'll turn the call back over to Rick for some closing remarks.

Thank you, Edric. During the past decade, I have had the privilege of leading The Toro Company and working alongside an extraordinary team of dedicated and talented employees. Together, we have accelerated growth, doubling revenues and expanding into new markets. We completed 10 strategic acquisitions, including our largest ever in Charles Machine Works. These investments strengthened and diversified our portfolio, making us more resilient and reducing our reliance on weather patterns and consumer purchase cycles.

The strong performance by Ditch Witch, Ventrac and Tornado this quarter reflects the positive impact of the strategy and the value it creates for all stakeholders. We also significantly advanced our technology capabilities, whether helping customers reduce downtime through fleet management solutions, addressing labor challenges with autonomous technologies are offering high-performance gas and electric product options we continue to innovate. Today, we are expanding these capabilities with AI-enabled business processes and product innovations such as our spatial adjust precision irrigation technology. Our team remains focused on execution and delivering value for customers. Our end markets are healthy, inventory levels are well positioned, and we continue to see encouraging demand trends across the business.

I would like to thank our employees, channel partners and shareholders for their continued partnership, dedication and trust. I am confident in our ability to deliver on our updated full year guidance and to finish the year strong. I am also confident in The Toro Company's future with Edric at the helm. He is an exceptional leader who understands our business, customers and people. And I know that he and the team will continue to build on our momentum, leading the company into its next chapter of growth and success. Now we'll open up the line for questions.

[Operator Instructions] And your first question comes from the line of David MacGregor of Longbow Research.

It seems like -- and Rick, thanks for all the help over the last years span, but really been a pleasure working with you, and I wish you well with whatever comes next. I wanted to -- I guess, I wanted to explore the Ditch Witch business, the underground construction business. And it seems as though there's been a more of a normalization perhaps now as well as some of the benefits from the productivity program. But I wonder if you could just talk about where we are right now in terms of margin contribution there and the extent to which maybe there's further upside yet to be achieved?

Yes. Thanks for asking about the underground business, we are extraordinarily excited about the underground business and particularly the future runway for opportunity there, both for growth, which is driven by the market demand across -- we talk about data centers, but also utility works broadband, et cetera. But the opportunity is to continue to grow in profitability internally with the work that we've done the trajectory from the acquisition to now is pretty remarkable from a profitability standpoint. We see more opportunity there.

If you look specifically, data centers, for example, as an example, we're just looking at a case study -- it's not so much the work that's done on the site. It's the work that's done to get the data, the power and the utilities to the site. Just an example, in Frederick, Maryland, 14 miles, 25 drills, 160 people that took to get the data only to that 10-month project. So Data centers are a deal for us, but it's just one slice of the demand that we see in that area. So that would be more of a drill and a trencher type of opportunity. And then I think we -- you just heard us feature the relining capabilities with our patented Blue Light system that's multiple times faster than other methods for rehabilitating.

So -- and then lastly, just the impact of Tornado. And as we've talked about previously, those are our key tools on the drill sites or underground sites that's adjacent to our products, but they also open up nodes to new opportunities of growth just for soft excavation in general as that becomes more important than required in many areas.

Great. And just to build on that, I guess, you've done the tornado acquisition here. Can you just talk about the extent to which maybe underground is growing as a priority within your capital allocation process? And the extent to which we might expect inorganic growth to continue there.

It is a high priority for us, and it cuts across different investment categories or the largest investment currently in our plants is taking place to unleash unlock more capacity within our facilities for the Ditch Witch business, and it is a high priority from a nonorganic perspective as well. We think there are -- continue to be opportunities for small, medium and large opportunities within that category as we go forward. So if you're exactly right, it does go to the top of our list in several of those categories just based on the opportunity and the runway for continued growth.

Right. And my second question, I wanted to just explore the AMP program here because you've reached $125 million in terms of program to date. I'm not sure what you've got planned, whether there's a formal AMP 2.0 program or whether this is just something you're going to continue to leverage off going forward. But if you think about the -- I realize it's a little early to be talking about 2027. But just from a construct standpoint, you talked about 8% sort of EPS 8% to 10% EPS growth is part of your algorithm, but it seems like there's some unrealized drop the earnings line from the AMP program as well. And so I guess I'm thinking about 2027 earnings. And I'm just thinking whether there's a carryover benefit from AMP that should be supplemental to that 8% to 10% sort of algorithmic growth next year and we see maybe an above our average level of bottom line growth.

Thanks for the question, David. I'm really pleased with how the AMP initiative has worked for us and created really durable earnings and margin improvements throughout our business. But we also have said, I think, many times that the timing could not have been better as it helped us offset some of the tariff-related impacts and inflationary impacts that we've seen over the past few years.

We did mention in our prepared remarks that we expect to achieve our $125 million run rate savings by year-end. We've actually made it there and still have a productivity pipeline in place and expect that to continue in the future. I think as we look forward, once we -- what we would say, we're not ready to guide you for F '27, but we would certainly say that this has created a durable earnings margin potential for us. And what you're referring to is our 8% to 10% kind of near-term growth expectations for EPS. The fact that we had to offset use some of those savings to offset tariffs and commodity inflation, we're not realizing all of that in this year in F '26. But as we move forward and realize those run rate savings as we move into F '27, we should be able to see continued margin expansion, to your point.

And our next question comes from the line of Mike Shlisky of the D.A. Davidson & Co.

Yes. And I just want to echo Rick, I want to echo thank you for all the information over the last decade or so, it's just been great working with you and talking with you now has been tremendous and [indiscernible] to all of us has been great. So I really appreciate it.

To answer my questions -- [indiscernible] my question, I want to follow up on David's question about the program. It sounds like you've gotten to where you wanted it to be and even better. But you've always had kind of a name strategic initiative that the team works on internal [indiscernible] is not guidance, this is on target, couple of years away. It actually pretty much reached the state of that goals. Is there a new name program in the works? And could it actually be a sales-related growth program rather than the margin that we want this coming time around?

Mike, it's Edric here. And thanks for the question. We've actually been giving that a lot of consideration and are working on what's next. So as Angie alluded to all the way back when we kicked off the AMP program, our intention and our hope was that the initiative would ultimately become just more ingrained in the culture and something that we'd operationalize over time. And so we don't expect to deviate or lose ground on that. But we are, in fact, looking at what might be next and not ready to announce anything specific today, but we do anticipate having another initiative and likely will have some element of growth that's part of that.

Great. I also want to ask about some of the details on the Golf business. I guess you had a lot of detail to kind of say about autonomous growth and just broadly to being a strong business. You didn't mention much about irrigation. And I've been hearing a lot about both taking on some pretty big projects and some courses around the U.S. Can you comment on how that's been going order-wise, installation wise and also globally, how is [indiscernible] performed for Toro this year?

Thanks for asking. Irrigation has remained strong for us. We've been mentioning in several of the previous calls, just about the significant pipeline of projects and demand remains really, really strong there. And that's fueled by things we've talked about before, a number of courses that have reached really the end of their useful life for their irrigation system. And so they're looking at doing upgrades and replacements and tapping into some of the new technology that we've developed.

So the demand remains really strong and the installation rate has been somewhat gated as we've talked about, by availability of crews to do the work, and that continues to be the case. But we're seeing projects on the books and bids taking place as far out as 2029. So it's been a good year this year, and we expect that demand and momentum to continue.

Our next question comes from the line of Tim Wojs of Baird.

Rick, it's been great working with you. Edric, congrats on being on a [indiscernible] going forward. Maybe just first question for me. It sounds like the [indiscernible] garden or the professional contractor business had some pretty good volume growth this quarter. How much of that was kind of snow? How much of that was kind of product specifics in Toro? And I guess as you're kind of exiting the season and the contractor side, how would you kind of assess field inventories at this point, just given we've seen some areas that you're out here over the past few months?

Sure. If you just look at landscape contractor in general, really broad-based demand across really the categories that you mentioned. We saw very strong demand from -- for our Boeing products throughout the summer, contractors came into the prime mowing season this year feeling healthy from a healthy snow season in the prior year. So it came in -- they came in good condition. We were in a good position from a field inventory standpoint. And really, landscape contractor was a key driver for the quarter.

The BOSS shipments that go on to those same contractors, many of them are the same. We're very strong. And it was great to see some of the categories beyond pause, the liquid de-icing and the snow reader products really were strong contributors to that as well. So I think that gets to the last part of the question. It is the innovation and the new products that caused the overperformance probably relative to the market there. The excitement about the refreshment of the Exmark products like the Radius Zero Turn Mower. And the area that we talked about that is a contractor pool that we haven't talked about a lot about in the last a couple of years as Ventrac. Ventrac acquisition from 2020, one of the strongest contributors in terms of percentage growth in the quarter. And I mentioned in the prepared remarks the importance of attachments and it's a super versal machine the latest, it sounds like a small deal, but defense post streaming, if you can do that autonomously or automatically, that's a huge productivity pickup for a contractor and even someone that has an acreage or something like that. And what it does is it drives tractor sales.

And so it's innovation tied to a healthy market tied to the strength of our portfolio that drives that for us. And the homeowners, I will say homeowners with acreage that are part of that. They had a decent year. It was -- they're a little bit more responsive if you get into drier conditions during the latter part of the season. So a little bit, a little bit slower there.

Okay. And do you feel like the field is okay exiting kind of the season? Or how would you describe that?

We entered in good condition. We are leaving in great condition. So it sets us up for a direct impact of demand as that starts in the spring.

Okay. Okay. I know it's not a huge part of your business, but just as you -- as investors are kind of thinking about more headlines around super [indiscernible], how are you guys kind of planning that internally? And how does your customer base kind of think about planning for potentially warmer kind of northern temperatures in the rent care?

Tim, we're trying to prepare for any potential outcomes. If you've studied the history as we have around what happens when there isn't El Nino, in particular, the strong El Nino, certainly, there are areas that get less snowfall. Other areas receive more than normal as the atmosphere continues to warm. We know that it holds more moisture. And so it sets up the possibility for more extreme snow events.

So I'd say as we go into the season, we're prepared for the season. We're not going to overextend ourselves but we're not going to overreact in either direction. And you may remember last year, we set ourselves up when we had a better snow season than perhaps expected that we were able to react quickly and add some product that ultimately flow through to retail we're making sure that we've set ourselves up with the same ability to respond if conditions warranted, but also on the other side, balancing against -- not wanting to get back into where field inventory becomes a problem if the weather pattern plays out in a way that we don't have strong snowfall.

Okay. Okay. Understood. And then just 2 questions on margins. So first, on the Pro margin, I know down year-over-year. If you would take out tornado, how did the Pro margins perform on a year-over-year basis? And then second, the $5 million less of tariffs that's in guidance, which quarter did that kind of get taken out of? Was it Q3 or Q4 or bold?

Yes. Tim, this is Angie. So your question on Pro margin, Tornado does have an impact, as we had mentioned at acquisition time. that we would see sales growth coming from that, the inorganic sales growth but that it wouldn't have a strong impact on margin in year 1. So there is a little bit of a negative impact to our overall operating margin from the Tornado acquisition. And the IEEPA refund, the $5 million is coming out of Q4. So as we think about our guidance and implied guidance for Q4, that really comes out with the residential operating margin for the most part.

And our next question comes from the line of Sam Darkatsh of RJA.

Edric, again, congratulations on the new post. And Rick, I'm going to obviously, echo what everybody else has said. It's been an absolute pleasure working with you over the years. It's been a heck of a ride, too, and I'm very hopeful that our paths cross again very, very soon.

A few questions here. First off, as it relates to the Canadian retaliatory tariffs. Have you been able to ballpark or ring fence what the general impact might look like at this point? I know it probably affects tornado at a minimum and whether that is included within your fourth quarter guidance?

Yes, Sam, I can speak to that a bit. So the -- obviously, the tariff situation is an ever unfolding ever dynamic situation. But based on what is already taken place and what's going into effect here in the near term, really minimal impact to our business. And that just has to do with which tariffs apply to our product lines that we import. So there's some yet to unfold discussions Rick that's taken place that could change things for next year, and we'll monitor that closely. But we have factored everything into our Q4 guidance and the impact is relatively minimal.

And then on the export side as it relates to the retaliatory side of things, it has, in some cases, caused our channel partners to ask about making adjustments to the flow of product as they prepare for their upcoming seasons. And so we're working closely with them to manage that -- to manage that flow product as well. So I'd say, the summary, comment is everything is contemplated in the updated guidance and relatively minimal impact here in the near term.

Got it. And then the second question, Angie, you could help a little bit with a bridge. I know it's early and way too early for fiscal '27 guidance per se. But just some line items or factors that are a bit exogenous as it relates to gross tariffs year-on-year refunds year-on-year. I'm coming up with somewhere around a refund headwind somewhere around $10 million to $15 million and a gross tariff headwind of somewhere around $20 million to $40 million year-on-year. Is that math generally accurate? I know you're going to be offsetting it with AMP, you'll offset it with pricing. I'm just trying to get a sense of the gross cost headwinds next year.

Yes. I could speak to that one as well, Sam. And the -- I'm trying to see where you may have come up with those numbers. I can probably follow what you might be assuming there. I'd suggest maybe if we take a step back, we're reaching a point where I think it's not particularly useful to look at the tariff number as a stand-alone number anymore. And I say that because as you alluded to, there are productivity things that we've put in place. We've made some strategic sourcing decisions. We've continued to make adjustments to our manufacturing network.

And so when you net all of those things out, even with a slight adjustment in the timing of refunds, as we look forward, we don't expect next year for tariffs to have a meaningful impact really in one way or the other, rather than it just becomes part of the overall inflationary message. And as you alluded to, we won't do formal guidance until next quarter, but I'd be happy to share how we're thinking about next year, which is we expect to carry in really strong momentum as we start F '27. We expect our markets to remain strong and continued demand from across the entire portfolio. We talked a bit about AMP Angie reinforce there as we move some of this year's run rate savings into next year's in-year savings. That will help to be a part of offsetting headwinds, whether they're tariff related or otherwise.

We're expecting our residential business to return to double-digit profitability as we've been signaling for a while. We're on track to do that. And at the end of the day, expected it will continue to expand margins overall. And we'll do all of that while continuing to add growth to the company, and that's growth fueled not only by the market strength that I described, but also by new product introductions. So we're just really excited about next year, to be perfectly honest. And the tariff piece is something we've got a team that's paying attention to, but that's not presenting any kind of outsized influence on our thinking.

This concludes the question-and-answer session. Ms. Hille, please proceed to closing remarks.

Thank you, everyone, for your questions and interest in the Toro Company. We look forward to talking with you again in December to discuss our fiscal 2026 fourth quarter and full year results.

Thank you for your participation in today's conference. This concludes the program. You may now disconnect.

Good day, ladies and gentlemen, and welcome to The Toro Company's second quarter earnings conference call. My name is Josh, and I will be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's conference, Heather Hille, Vice President, Corporate Affairs and Investor Relations. Please proceed, Ms. Hille.

Good morning, everyone, and thank you for joining us for The Toro Company's Second Quarter 2026 Earnings Conference Call. I'm 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 second quarter results, which were released earlier this morning and discuss our priorities and outlook for the remainder of fiscal 2026. Following their remarks, we'll 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 second 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. The Toro Company continued its strong start to the year, exceeding expectations with second quarter top line growth of 8% and adjusted EPS of $1.60. This is the second consecutive quarter of double-digit adjusted earnings growth, driven by strong demand and improving margins.

We remain focused on our key strategic priorities, accelerating profitable growth, driving productivity and operational excellence and empowering people. This disciplined approach is delivering results.

Demand was broad-based across our portfolio. Residential net sales grew 4% and Professional net sales grew by 9%. Within Professional, we drove mid-single-digit sales growth in golf and grounds, high single-digit sales growth in landscape contractor and we are particularly excited to have achieved low double-digit organic sales growth in underground and specialty construction.

A key highlight in underground construction continues to be the JT120 Horizontal Directional Drill. Designed for maximum uptime, it features advanced capabilities that increase operator efficiency and job site safety. It is built to handle long bores and difficult terrain with ease, and customer response has been strong, with a robust and growing order pipeline.

At CONEXPO in March, we highlighted another example of customer-driven innovation. Orange Intel is a customizable fleet management and job site intelligence system. It provides Ditch Witch customers with the ability to optimize productivity, manage maintenance and uptime, enhance security and integrate all this information across the full job life cycle. We are helping our customers leverage job site data as a critical enabler to improve their productivity and profitability.

Our integration of Tornado is progressing well. Growth is slightly better than anticipated, contributing over 2 percentage points to top line sales. We see a long runway of growth for this business as the need for soft excavation is significant and growing. An increasing number of states and countries have requirements around safely uncovering underground utilities. We expect this trend to continue as the ability to mitigate infrastructure damage during excavation gains awareness.

Moving on to landscape contractors. After a more normal snow season, they entered Q2 in a healthy position. This helped drive strength across our Toro, Exmark and Ventrac brands. Spring conditions were more typical this year, which provided a favorable year-over-year comparison to the late spring last year, where some second quarter sales fell into the third quarter due to the delayed timing of spring.

In golf, strength continues to come from our core products, greens mowers, fairway mowers and contour rotary mowers. While we are still in the early stages of growth with our autonomous portfolio, customers continue to recognize how our suite of solutions complements their existing fleets, increases productivity and unlocks new efficiencies in their labor force.

Looking at the results across our portfolio, it was particularly impressive that the team achieved our second quarter performance despite macroeconomic and geopolitical headwinds and increased inflationary pressures. In this dynamic environment, we continue to strengthen our capabilities with a specific focus on productivity and operational excellence.

As a result, in Q2, Residential margins significantly improved to nearly 10% and Pro margins improved to over 20%. At the center of this improvement is our AMP program. Launched in the beginning of fiscal 2024, AMP continues to exceed expectations, reinforcing a productivity mindset across the company.

We accomplished all of this while reducing our field inventory, which remains healthy in the Professional segment with underground and golf largely normalized. Inventory levels for landscape contractor and residential are somewhat below our desired levels as we work to meet pockets of elevated demand, particularly for zero-turn mowers.

Taking everything into account, healthy demand, improved lead times, normalized field inventories and expanding margins, we are raising our full year guidance. We now expect full year sales growth in the range of 4% to 6.5% and adjusted EPS in the range of $4.50 to $4.62.

Our performance in the first half of 2026 increases our confidence in our ability to deliver strong results for the full year, even in a dynamic external environment. With that, I'll turn the call over to Angie for more details on the quarter and our outlook.

Thank you, Rick. The team's strong execution in the second quarter drove better-than-expected results. Top line sales were $1.42 billion, up 8.1% or 5.7% organically. This growth, combined with our focus on productivity and operational excellence, drove adjusted operating margins of 14.4%, up 70 basis points. This represents our highest operating margin in the past 12 quarters and reflects the impact of our AMP productivity program.

Our strategic facility closures, reductions in salaried workforce and divestitures of non-core businesses and product lines have contributed to the strong margin improvement. As we reduce costs and improve efficiencies through AMP, we are also investing in the business.

One example is our new paint system at the Perry, Oklahoma facility, which will increase efficiency and capacity to support the strong demand in the underground construction market. Working capital improvements drove free cash flow of $266 million, an increase of $181 million year-over-year, primarily due to lower inventory levels.

Free cash flow conversion was 125%. This continues our strong track record of cash generation and enabled us to return $361 million to shareholders through share repurchases and dividends in the first half of the year.

And finally, our second quarter adjusted tax rate was 21.7%, 300 basis points higher than last year, driven by the geographic mix of earnings. As a net result for the second quarter, we increased adjusted EPS 13% to $1.60. This strong result was better than expected and driven by Professional segment volume and profitability.

Now let me dive deeper into each segment. Professional segment net sales in the second quarter were $1.1 billion, up 9.1% or 6% organically. Professional segment earnings were $224 million at a margin of 20.3%, up 40 basis points. This was driven by volume, productivity and net price realization partially offset by material cost.

Residential segment net sales in the second quarter were $310 million, up 4.1% organically. Residential segment earnings were $30 million and margins were up 430 basis points to 9.8%. This was driven by net price realization, productivity and volume partially offset by material, manufacturing and freight costs.

In addition to strong operational execution across both segments, our financial management of the balance sheet continues to provide us with optionality as demonstrated by our leverage ratio of 1.4. Looking forward, we will continue to focus on driving top line growth and productivity as we navigate the uncertain macroeconomic and geopolitical environment.

Our strong performance in the second quarter gives us the confidence to raise our guidance. We now expect top line growth of 4% to 6.5% versus our prior guidance of 3% to 6.5%. This reflects strength in our Professional segment which we now expect to grow in the range of 5% to 7% for the year.

After a strong second quarter, the outlook for full year residential sales growth has improved, and we expect it to be about flat, even as consumer confidence and inflation continue to be challenging.

We are raising full year adjusted earnings per share to be in the range of $4.50 to $4.62, up from the prior range of $4.40 to $4.60. This tighter range and higher midpoint reflect our outperformance in the first half of the year and reduced downside risk.

Let me take a moment to share the drivers of this increase by walking from our previous guidance midpoint of $4.50 to our new guidance midpoint of $4.56. We are flowing through our second quarter beat of $0.10 per share and factoring in new headwinds from material and fuel inflation.

We estimate the impact from inflation will be approximately $0.16 per share. This is offset by planned productivity and pricing actions driving approximately $0.16 of favorability. In addition, tax is trending higher for the year due to our geographic mix of earnings or an approximate $0.04 impact to EPS. All of these factors result in the $0.06 increase to our midpoint.

We have also evaluated the impact of the April 6 changes for Section 232 tariffs and the benefit of anticipated tariff refunds. Since the vast majority of our manufacturing occurs within the United States, the net impact of these 2 items would be negligible to our full year guidance. We continue to evaluate the most recent changes to the tariff landscape, including the news from earlier this week.

For the third quarter, we expect total company sales to be up mid-single digits. We expect Professional to be up mid-single digits and Residential to be up low single digits. Keep in mind that year-over-year comparisons are impacted by a late spring last year that shifted sales from Q2 into Q3.

Also, Q2 is typically our peak margin quarter, as it has the highest volume, best factory utilization and a favorable sales mix. We anticipate normal seasonality this year with Q3 total company margins lower than Q2. Pressures from inflation and tariffs will be more acute in Q3 as the mitigation actions we're taking will not be fully in place until Q4.

And we are monitoring weather conditions across the country, where a strong start to spring has given way to potential drought conditions in some key markets. As a result of these factors, we expect third quarter total company adjusted EPS up mid-single digits. The main driver for this adjusted EPS growth rate is a higher year-over-year tax rate and the comparison versus a strong Q3 last year.

The team is executing well. We are driving productivity through our AMP initiative and taking advantage of strong demand across the portfolio. For the full year, we now expect high single-digit adjusted EPS growth and free cash flow conversion of at least 120%.

Now I'll turn the call over to Edric to highlight the progress we are making on operational excellence.

Thank you, Angie. As you heard, we delivered our highest level of operating margin in 3 years through a relentless focus on productivity and operational excellence. We'll continue to drive meaningful gains through our AMP program, by leveraging lean principles, Kaizen events and continuous improvement projects.

Our AMP program remains on track to deliver $125 million in run rate savings by the end of this fiscal year. But AMP is about even more than cost savings. Another critical element is the manner in which our teams are leveraging technology to enhance capabilities and drive innovation.

Last month, we held our annual technology forum, a dynamic platform to accelerate product innovation and technical excellence by connecting subject matter experts and thought leaders across the company. This event featured the next generation of technological advancements in electrification, smart connected products, autonomous solutions, AI and manufacturing efficiency.

Examples range from leveraging industrial collaborative robots to using AI-enabled vision systems and machine learning tools to verify component accuracy. Further upstream, we're using augmented reality to quickly verify weld specifications and completeness. All of this ensures consistency, reduces the risk of delays and continues to enhance overall product quality.

There's more we can and will do to continue driving efficiency and innovation. Delivering consistent results in this environment requires us to constantly ask ourselves how can we do this better. It's a question we never stop asking.

Now back to Rick for some closing comments.

The rate of change at The Toro Company cannot be overstated. Our technological advances are building off a foundation more than 10 years in the making. We continue to make incredible progress in shaping our future and advancing our core products through innovations in electric, smart connected and autonomous solutions.

We see the use of AI accelerating our capabilities across all our platforms from enhancing autonomous vehicle navigation systems to more sophisticated R&D prototyping and simulation as well as back office process efficiencies in procurement, legal and finance. We are empowering our team to think differently about how we work and how we help our customers succeed in their work.

I want to thank the team and our channel partners for their customer focus and our strong operational execution in the first half. This performance and our ability to capitalize on our opportunities give me confidence that we will deliver on our second half expectations.

With that, we'll take your questions.

[Operator Instructions] Our first question comes from David MacGregor with Longbow Research.

Congratulations on a really strong performance. My first question is just on kind of the seasonal sell-in. And you came into 2026 with leaner channel inventories than was the case in recent years. As a result, if a dealer was buying in to reach their typical seasonal stocking targets, they would have needed to buy in more units than we've seen over the past few years. So how did that dynamic contribute to 2Q unit growth? And how much of an offset were maybe extended lead times on Mexican manufacturing products or any other drivers or factors that would be included there?

Let's say the best way to describe it, David, is that we were back to a more normal situation. So as you recall, the commentary from the last couple of years, we had a higher field inventory that we're working through. We had maybe just a little tail of that left as we entered the spring season, but we were in good shape to supply the demand.

Demand was even beyond what we expected, but we had good flow coming out of all of our facilities. Any kind of change in flow from Mexico or anywhere else was normal distribution flow within our system. So I think the best way to describe it is a pretty normal quarter from a Residential standpoint, particularly.

Okay. Let me just follow up with a question on Ditch Witch, if I could. And I know there's been a lot of work done there recently around productivity. But can you just talk about shipment growth at Ditch Witch? And how does that compare to sort of growth in orders, sort of the book-to-bill, I guess, if you will?

And also just on Ditch Witch, shipments pick up and begin to normalize or as they begin to normalize, I guess, what are your expectations for growth in the parts and service business? And can you grow your parts and service penetration in a way that moves the needle on total Ditch Witch margin contribution to the Pro segment? And do you feel you have the dealer support the channel inventory appropriately staged to grow your parts and service market share?

As we talked about, the Ditch Witch business and the underground business in general was a very strong contributor to the quarter, double-digit, low double-digit growth contribution from a top line standpoint. And that really was a combination of two things.

First of all, incredible sustained demand, which we see well out into the future. And then secondly, the group that deserves a lot of credit is our operations team and the plants that have determined how to, in some cases, double our production to be able to meet the demand.

And we see strength across the entire line, but the two products that we've talked about recently continue to be extremely popular in the marketplace. The JT21 is the more recent one. That's actually a small compact horizontal directional drill that you might see in your neighborhood installing fiber to the home. And obviously, with all the work that's taking place there, extreme demand.

It's actually a little bit cautionary projects because we were replacing the de facto standard in the marketplace already, but we've made it better. It's gotten smart features on it that are great with new operators and so forth. It is connected through Orange Intel. That's really a great example of all of the technology areas that we've been working at. It's been extremely well received.

The JT120 is really the largest drill in its category, 120,000 pullback pound forces -- force, excuse me, that's used on broader projects, cross-country, power utility, broadband, fiber optic projects going under rivers, et cetera.

So demand is very strong, and we continue to see that data centers as much as the work on the data center, it's all the work to get power to the data center to get all the fiber, incredible amount of fiber to the data center from the trunk and also water would be the third.

So it's kind of everything to feed the data center. So very strong demand, strong contributors to the quarter. Great products pay off for the innovation investments and very strong runway into the future.

Right. And can you just talk about the parts and service business and the opportunity to grow that?

Parts and service goes with it. And one of the things that Edric and team has been focused on is really making sure that we get all of our parts as a percentage of total sales. So we see even more opportunity to accelerate that. We get a good share today, but we see even more opportunity to grow in that area. And obviously, it's a important contributor to our profitability and helps us invest in future innovation as well.

Great. Last question for me is just on the prosumer and the landscape contractor equipment. What are you seeing in the way of demand change from that aspirational consumer reaching up into the Pro segment?

Yes. We actually had a discussion about that yesterday. We -- there is an element with a true homeowner more of a traditional residential customer that they are probably buying down. They're probably hitting the lower end of our range a little bit more.

When you get into homeowners that are buying professional landscape contractor grade products, the real kind of higher end of that probably is not affected as much. They're still going to go out and buy the product that they want, maybe at sort of the lower end where people are sort of reaching into that range that they still are a little bit more cautious at this point.

The good news with the landscape contractor and again, contributed high single digits to our growth in the quarter is that the landscape contractors, the true contractors have been healthy throughout the entire cycle of pandemic and post pandemic, and they continue to be very strong today.

They came into the season off a strong snow season. So they came in a healthy position. Many of the contractors do both. And we see that playing out in the demand. And again, great response to the investments in technology and new products that they're really hitting those hard.

Our next question comes from Bobby Schultz with Baird.

Just curious on the updated tariff assumptions. Is there any way to frame the annualized impact from tariffs, just given $120 million gross assumption is just for '26?

Yes. It's a great question, Bobby. Let's -- there's the opportunity to make this really complicated. I'm going to do my best to keep it relatively simple, and then Angie can chime in with what it ultimately means flowing through to our guidance. While the environment remains dynamic, the punch line is going to be when it's all said and done, there's minimal impact to our current fiscal year.

And if we rewind to when we talked a quarter ago, we were only a couple of weeks removed from the Supreme Court decision that ultimately led to the termination of the IEEPA tariffs. At that time, we did not have visibility to the refund process. And so we weren't counting on any refunds within the fiscal year.

We also made the assumption at that time that the use of Section 122 and other trade laws would largely offset whatever went away. And so when it was all said and done, our gross tariff estimate at that time remained at $100 million, and we didn't make any other adjustments from a net perspective.

So since then, so what you're alluding to, of course, the Section 232 tariffs were restructured on April 6. That had a modest unfavorable impact but not a really significant number. The combination of that, plus some additional indirect impact for -- related to some of the products for which we're not the importer of record. If you apply all of that to an also increase in our sales, remember, the net result ended up adding up to about $20 million, that's why you're now seeing the gross estimate of $120 million.

But we also received more clarity on the refund process. I'll emphasize more clarity, not complete clarity. Remember that for us being largely U.S.-based in our manufacturing, the IEEPA tariffs were not as big of an impact to us. But all in, we do anticipate about a $20 million refund now during the course of this fiscal year.

And then maybe just briefly to the couple of new announcements this week as it relates to the agricultural and industrial equipment tariff reduction, that doesn't have any direct impact on us, at least as currently drafted. The HTS codes that apply to our products are not on that list. So that's generally neutral.

And then the most recent changes related to Section 301 would potentially have some very small unfavorable impact. But as you heard Angie say in the prepared remarks, the impact on our full year all-in is really negligible. The $20 million increase is offset by the $20 million refund. So grand total, relatively unchanged.

And Angie, do you want to speak to the treatment on the tariffs?

Sure. I would also just add that, that $20 million in additional tariffs is expected to carry through in our run rate. So if you think about how that would affect us going forward, we would expect that to be as we look forward, about $120 million in total tariff expenses as we go forward. When we think about the refund, our expectation is to accrue about $8 million of that anticipated refund in our Q3 and the remainder would come in Q4.

Awesome. I appreciate the detail there. And then if -- could we talk about the sell-through, what you're seeing there on the landscape contractor business in resi. Did you guys see any impact from weather? We've heard that it's just been a pretty dry spring in the Southeast. I'm just curious if you saw any impact from that.

With regard to the sell-through, we saw very strong sell-through actually. So we're -- as a result, field inventories are in great shape at this point. We're actually a little bit lower than we'd like to be in some of the categories, Residential Zs, I think, are a little bit off our target a little bit. We're still working on that. And Edric, I know that you've worked at some -- looked at some of the weather impacts here just recently. Do you want to comment on that?

Yes. Certainly, we're paying attention to those areas of drought that you're referencing. Ironically, when you look at our complete portfolio, even if that has the potential to drag on some of the resi and contractor stuff that you're referencing, that same lack of rain means better weather. So rounds played, if you've been tracking that, are actually tracking 5% above last year, which, as you'll recall, was another all-time record.

So while there is potential for a drag in one area, it's probably driving additional opportunity for our customers in another area to invest. Less disruption to job sites as we look at some of the specialty construction area. So all in, we're not seeing anything that has us overly concerned, but we're absolutely paying attention to that.

Our next question comes from Samuel Darkatsh with RJF.

Just a couple of clarification questions, Edric, on the tariff commentary that you provided just in the prior questioner. First, I recognize that you've got $120 million in total gross tariffs in fiscal '26. Can you give us a sense based on your current thinking what that might be for fiscal '27? Would that step up because of the $20 million that's hitting you in the back half this year?

Yes. I mean, I start by reinforcing what Angie said, you can kind of look at that as the status quo run rate. Maybe the only additional qualifier to put on to that is that assumes generally steady state in terms of the tariff regulations and steady state in terms of our actions.

And as we look at that tariff environment, we're constantly assessing what we might do differently, whether that's related to sourcing or manufacturing or anything else. So right now, we would expect the run rate is higher than we did 90 days ago. But that doesn't mean we'll allow that to sit still without us doing some work to make sure we can offset it.

Got you. And then related to that, apologies for the granular question here. But the $20 million in refunds, it sounds like that's going to be included within the adjusted EPS? And if so, does that get accounted for within the individual segments P&L? Or is that going to be in corporate? Or how does that actually translate when you ultimately report it?

Great question, Sam. And yes, so that $20 million refund will be included in the EPS and the guidance that we've provided today, and will be impacted into the P&L individually. So we expect our -- the Pro segment to take about 70-ish percent of that tariff refund based on their volumes and the tariffs paid and the rest of that would go to Residential.

Got it. And then International was a particular bright spot in the quarter, especially compared to last quarter where it was down fairly sharply. Now I know you had a little bit of an easier sequential comparison. But can you point to something that really switched to the positive in the fiscal second quarter internationally?

Yes. Certainly, I can do that. The factor that was on the positive side is the impact of Tornado, which has been at or ahead of our plan for the year. So Canadian as part of the international calculation or Canada, I should say, was greater than we would have expected, obviously, without Tornado.

We still see softness, particularly in Europe and particularly on the Residential side, that was actually a reducing factor in our Residential results, specifically European Residential. So the biggest positive in international and the difference maker really was Tornado, which we continue to see very strong demand for, and that business is about split, about 50%, Canada, 50% United States.

Got it. My last question. The third quarter Residential margin expectation, are we looking at double-digit margins resi realistically in the third quarter?

Well, I believe what we guided to there is that we would see that being higher than last year, of course, but we're continuing to see improved margins, both on sales, but it's a combo. It's a price realization, productivity gains and volume recovery that are helping us there.

Q2 is typically our larger quarter. So that will -- it will just be slightly higher than last year, not as high as what you're seeing in Q2, Sam, for Residential margin. But what we are seeing is that our sustainability of improving those margins is going to continue to be based on ongoing productivity and really pricing in this competitive market.

So a similar bump year-on-year as what you saw in the second quarter, just adjusting for the lower margin last year?

Yes, that's correct.

Our next question comes from Michael Shlisky with D.A. Davidson & Company.

Just looking at the new outlook of resi for relatively flat for the full year, flat better than it was before, but it is still only flat. Looking at '27, some of those pandemic sales for back in 2020 will, at that point, be 7 years old. I'm curious whether you think actually this year and a good part of last year, if there's a pent-up demand that just needs some minor macro to kind of create some tailwinds for resi in 2027.

I think some of that has yet to play out specifically. But you're right, those products that were purchased back in 2020 are reaching for some of our customers, the age of replacement. So that should start to at least not be a headwind. And I think based on the analysis that we've talked about before, if you take that whole cycle into account, we're sort of back to the normal longer-term growth rate for residential.

So we're kind of back on the rails of that growth rate. So more normalized and then seeing opportunities also for growth as the market kind of shakes out as well, potentially some opportunities. But we see, first of all, the profitability getting back to a level that we feel much better about and being able to sustain that and then opportunities to get back to kind of a normal growth rate, if not a little bit better than that.

Great. Then I wanted to turn to some of your comments on autonomous products in your golf business. It does sound very promising. I've been hearing about some folks out there, other smaller start-ups trying to introduce their autonomous products on golf courses kind of going around and demoing things.

I imagine Toro and new dealerships are demoing things as well. Just kind of curious whether you think -- I guess, when all said and done and autonomous make a bigger splash as a chunk of sales, whether you think you've got a good chance to maintain or increase your market share compared to the ICE mowers you already get out there.

That's a great question, Mike. The -- we talked over the last couple of quarters about some of the new product introductions, and we're definitely seeing more and more both demos and now starting to see some of the retail flow through. We've tried to temper expectations in immediate revenue there, just as people try and figure out how they're going to incorporate autonomous solutions into their overall operations.

I would say anecdotally or qualitatively, we're continuing to see maybe even more enthusiasm there. So I'd say we're optimistic, but just taking care that we're not putting too much weight on that in the immediate near-term future while we see how adoption plays out.

Our next question comes from Ted Jackson with Northland.

Echo the congrats on the quarter. I also want to say it's nice to hear someone talk about their inventories being below where they'd like them to be. You don't hear that very much. So it's nice to hear.

I came into the call with a long list of questions, and it just got ticked off one by one, but I got a couple left. And just a little one is with the more normalized winter and the drawdown in the inventory -- the excess inventory in snow, do you view the channel inventory in snow is now at a normalized level? Or is there any more work that would need to be done when we get to the next season?

We do, Ted, view the field inventory for snow to be at a normal level. In fact, we're coming off a good season last year, and as we talked about, the professional stocking takes place typically in our third quarter and a portion of the residential stocking takes place in the fourth quarter typically. Timing can be back and forth a little bit. But we do expect at least a normal kind of stock in the latter half of the year that's built into our guidance at this point.

Okay. And then another one is, it's not like you guys go out and just willingly buy stuff, but you're a regular acquirer of businesses. The Tornado business is just -- looks like a fabulous acquisition. When you look at the opportunity funnel, the things that you want to do, are you -- is there any particular -- can you maybe give us some color around what you're most excited about, where you want to grow your business the most?

Is it more on some of the kind of the construction side of the house given the Tornado acquisition and your exposure with Ditch Witch? Or is it more on the turf and the golf kind of stuff? Maybe a little color around how you think about it strategically if you had your druthers, where you'd like to grow your business inorganically. That's my last question.

Yes. There are a handful of priorities for us. I mean, first of all, most importantly, is our disciplined approach to the acquisition process. So we always have opportunities. We have many opportunities. But they have to be the right fit for us, and they obviously have to be at the right price. So strategy and economic viability are the big ones.

So for us, that means something in the vicinity of areas where we already play and win. So Tornado, as you said, is a perfect example. It's -- those are products that are on our job sites for horizontal directional drills. And we know them well, we have done a joint venture with them or our partnership with them to supply products to us. So it's a logical extension.

We had high confidence that we would win there. And it just opens up, in this case, a lot of new nodes of new business opportunities as those products are used in other applications as well. So it's a good example of where we focus. We focus on areas that we know and that have opportunities to expand markets and businesses that we believe have a strong runway and profit picture into the future. So that would be priority one.

We have other priorities, but one of the areas I would just mention again, across the board, we're interested in technology because that's part of our strategy is to leverage our technology across sometimes even disparate markets but be able to take advantage of that technology.

We did that with our robotics acquisitions a few years ago, and we see opportunities to do that. And then we leave it mostly to our corporate business development team, but we're open to legs that we may not have as part of our strategy today, but we try to keep our core teams focused on where we can win and where we have a right to win. So I hope that gives you some sense.

Ted, just one addition to that. They're going to be more on the Professional side as we have talked about that in the past, but I neglected to mention that.

Our next question comes from Eric Bosshard with Cleveland Research Company.

On the golf business, any sense that you can give us on backlog and order trends, what you're seeing from dealers and customers in that business?

Yes. I would share that just as we said a quarter ago, we've probably been a little bit pleasantly surprised at the strength of the demand and the orders coming in. And it's not that we at all were not thinking golf was strong, but we all together talked about what demand profile might look like, could there be an air gap after so much growth, and we really haven't seen that. Demand has hung in really nice on the equipment side. So a bit above our expectations there.

And on the irrigation side of the business, we've talked now for multiple quarters about the long pipeline of projects that are still ahead of us, and that continues to be true. So really, really happy actually with the demand within golf specifically. And then more broadly, we've talked about how some of those same product lines extend into non-golf but other high-end grounds applications where we're seeing some good demand as well.

And then secondly, you talked about record levels of profitability for the business. And considering $120 million of tariffs, I'm sure you looked through like the offsets to the tariffs, and obviously, you have AMP. But how do you offset all the tariffs and sustain this level of profitability or generate this level of profitability?

It's really been the things that we've talked about. And to give Angie credit, we started our AMP project back at a time where we didn't know we were going to have tariffs or some of these other inflationary factors. We were kind of working to get back some of the inflation that happened during COVID.

But the timing of AMP could not have been better. It has just been an incredible benefit to us to have the productivity machine already in motion by the time when these costs and additional tariffs came along. So we have been able to offset tariffs in most cases, and we've been able to improve productivity more broadly.

And as a result, we're just -- we're seeing the impact of the work that we've done over the last few years, whether it's AMP specifically and part of AMP being reducing our footprint, the restructuring that we have done, the pairing of our portfolio, the pruning of our portfolio.

All those things, it's been hard work for the team, especially during a time when one of our markets was down cycling. But we're seeing the payoff now in improved margins. And that's going to -- that -- we believe that, that's going to extend in the future.

You can see it showing up in our cash flow. 125% free cash flow conversion in the quarter. And the ability to return cash to shareholders with $190 million of share repurchases, dividends of $38 million. Just -- it gives us confidence in the future. So the fact that we had the productivity machine going when some of these hit us has just been incredibly helpful, and it really helps us into the future.

This concludes the question-and-answer session. Ms. Hille, please proceed to closing remarks.

Thank you, everyone, for your questions and interest in The Toro Company. We look forward to talking with you again in September to discuss our third quarter 2026 results.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

Good day, ladies and gentlemen, and welcome to The Toro Company's First Quarter Earnings Conference Call. My name is Daniel, and I will be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today's call, Heather Hille, Vice President, Corporate Affairs and Investor Relations. Please proceed, Ms. Hille.

Good morning, everyone, and thank you for joining us for The Toro Company's First Quarter 2026 Earnings Conference Call. I'm Heather Hille, Head of 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 first quarter results, which were released earlier this morning and discuss our priorities and outlook for the remainder of fiscal 2026. Following their remarks, we'll open the phone lines for a question-and-answer session.

As a reminder, any forward-looking statements that we make this morning are subject to risks and uncertainties, including those described in today's earnings release, investor presentation and most recent SEC filings and may cause actual results to differ materially from those contemplated by these statements.

Also in our remarks, we'll refer to certain non-GAAP financial measures, which we believe are important in evaluating the company's performance. Reconciliations of all non-GAAP numbers to the most directly comparable GAAP number are included in this morning's press release, which, along with the first quarter presentation containing supplemental information is posted in the Investor Information section of our corporate website.

With that, I will now turn the call over to Rick.

Thanks, Heather, and good morning, everyone. Throughout the first quarter of 2026, our teams remain diligently focused on executing our strategic priorities. We capitalized on market opportunities and customer demand, drove operational excellence and leveraged our portfolio of leading brands for profitable growth and competitive advantage. At the same time, we invested in value-creating technology and innovation. As a result, we beat expectations in both segments and increased consolidated net sales by more than 4% to $1.04 billion. Our outperformance was driven by strong execution in both our professional and residential segments, which allowed us to capitalize on incremental demand for snow and ice products and continued growth in underground and specialty construction.

We reported better-than-expected adjusted earnings per share of $0.74, up from $0.65 a year ago due to higher earnings in our Professional segment, which represents about 80% of our portfolio. We expanded our hydrovac excavation solutions through our acquisition of Tornado infrastructure equipment, further strengthening our capabilities. We continue to implement our multiyear AMP program, which is fueling sustainable productivity improvements and has contributed $95 million in cost savings toward our aggregate goal of $125 million.

We generated free cash flow of $14.6 million, resulting in an impressive free cash flow conversion rate of 22% in a quarter where our seasonal preparations typically result in a net use of cash. And we repurchased approximately $95 million of common stock, reflecting our commitment to return value to shareholders. In summary, through strong execution of our strategic priorities throughout the first quarter, we drove favorable sales and earnings growth and further strengthened our financial position.

During the first quarter, our teams were prepared to deliver snow and ice products and capitalize on incremental demand as a series of winter storms hit in major population areas. This operational agility and strong execution not only contributed to excellent Q1 top line growth, but also positions us well for robust performance in these categories in the back half of this year.

Adding to this optimism is our fresh line of BOSS plows with new cold front technology, or CFT, which has been well received by customers. The innovative CFT system integrates cloud and spreader functionality and is engineered for effortless connections, smart performance and maximum efficiency. We also continue to invest in underground and specialty construction, reflecting our expectations of multiyear growth in these businesses. Our efforts underscore our focus on broadening our offering to drive both near- and long-term results.

During the first quarter, horizontal directional drills, like the innovative JT21, which launched last year, contributed to our sales upside. We expect customer demand to remain strong. We were very excited to welcome Tornado to The Toro Company during the quarter. As a natural adjacency to our existing businesses, its complementary offering enables us to expand our growth opportunities in this market. And this spring, we look forward to showcasing our recently launched Ditch Witch SK1000, a compact stand-on skid steer with increased lifting capacity and reduced maintenance making it ideal for utility work as well as landscaping.

To preserve our profit margins and remain price competitive, we continue to pursue deliberate strategies through our AMP program to drive sustainable productivity improvements, cost savings and net price realization. Through the AMP improvements, we are working to moderate the effect of higher material and manufacturing costs and fully offset the effect of tariffs.

We're also carefully managing inventory at all stages of production, as evidenced by our healthy net inventory position at the end of the first quarter. This was a key driver of working capital improvement. While external factors like the economy, geopolitical environment and weather are ongoing considerations, we are committed to maintaining our discipline and aligning our inventories with expected demand as the year unfolds. These actions are strengthening our operations and driving improved financial results, and our teams and channel partners are highly motivated to build on this momentum. I want to thank them for their ongoing commitment to advancing our product and technology innovations as well as our cost savings and productivity initiatives.

Now Angie will share additional insights on our first quarter results and provide our outlook for the year.

Thank you, Rick, and good morning, everyone. Before getting into the details of our results, I'll highlight 3 key takeaways from our first quarter performance. First, we delivered better-than-expected top line growth in both our professional and residential segments through disciplined execution that enabled us to capitalize on seasonal demand opportunities. Second, we delivered adjusted EPS above expectations and prior year through deliberate productivity improvement initiatives that drove favorable operating leverage. And third, our positive free cash flow and strong balance sheet position underscore our commitment to financial discipline and returning cash to shareholders. In short, our consolidated first quarter results demonstrates the strength of our portfolio and market-leading innovation, our commitment to operational excellence and our thoughtful strategic and financial stewardship.

Now let's dig into some of the details. Consolidated net sales for the first quarter were $1.04 billion, up 4.2% from prior year and better than expected as sales in both the professional and residential segments exceeded our guidance. Professional segment net sales in the first quarter were $824 million, while Residential segment net sales were $206 million. Both segments benefited from higher shipments of snow and ice products and net price realization.

Strength in underground construction, including the successful integration of Tornado and growth in our landscape business, also contributed to top line growth in the Professional segment. We delivered a 9.8% consolidated adjusted operating earnings margin in the first quarter, up from 9.4% a year ago.

Both Professional segment earnings of $137.6 million and Residential segment earnings of $13.2 million exceeded our expectations. Year-over-year results in both segments reflect net price realization and the favorable impact of our ongoing productivity improvement and cost savings measures. This was partially offset by higher material and manufacturing costs. Finally, our first quarter adjusted EPS was $0.74, which exceeded both our prior year adjusted EPS of $0.65 and our previous outlook for this period.

Now turning to our balance sheet and cash flow results. Our balance sheet continues to afford us meaningful strategic optionality, enabling us to focus our capital investment on initiatives that generate profitable growth. Our current leverage ratio of 1.5x remains healthy and well within our stated target range. Our free cash flow for the quarter was $14.6 million, a year-over-year increase of more than $80 million, resulting in a free cash flow conversion rate of 22%. We achieved this performance through meaningful inventory improvement driven by our integrated business planning process and seasonal demand for snow products. As a result, our inventory turnover improved to 2.8x in the quarter. Additionally, we returned $133 million to shareholders in the quarter through dividends and share repurchases, demonstrating continued confidence in our ability to generate cash.

Looking ahead, we remain focused on capitalizing on top line growth opportunities, thoughtfully managing our balance sheet and cash flow and integrating AMP operating efficiency benefits that support our $125 million run rate target by the end of 2026.

We are raising our sales and earnings outlook for fiscal 2026 based on our strong execution and the strength of our first quarter performance. We are increasing our expectation for total company net sales growth to 3% to 6.5%. This reflects, first, Professional segment net sales that are expected to grow mid-single digits; and second, Residential segment net sales that are expected to be flat to down 3%. This is an increase from our prior residential segment net sales guidance, reflecting strong Q1 results and an improved outlook for the balance of the year.

We are also raising our full year 2026 adjusted earnings per share guidance to be in the range of $4.40 to $4.60. This outlook assumes a higher total year adjusted gross margin rate, consistent with our prior guidance and underscoring our ability to navigate cost pressures while investing in innovation, higher adjusted operating earnings margin, which reflects annual Professional segment earnings margin between 18.5% and 19.5% and an improved outlook for the Residential segment earnings margin between 6.5% and 8.5%, interest expense of approximately $60 million and adjusted effective tax rate of about 21% and capital expenditures of $90 million to $100 million.

Furthermore, we now expect an improved free cash flow conversion rate of at least 120%. For the second quarter of 2026, we expect total company net sales to increase mid-single digits from the same period in 2025 with mid-single-digit net sales growth expected in both segments. Professional segment earnings margin in the second quarter is expected to be similar to a year ago, while Residential segment earnings margin is expected to approach double digits. For the total company, we are expecting mid-single-digit adjusted earnings per share growth in Q2. As a reminder, our second quarter is typically the largest of the year.

As evidenced by our strong first quarter performance, we are managing our business to take advantage of our strengths as well as market opportunities while mitigating external pressures. With our team's continued commitment to providing innovative solutions that create value for our customers, and drive operational excellence across our business portfolio, I am confident in our ability to deliver sustainable, profitable growth for the long term.

With that, I'll turn the call over to Edric.

Thank you, Angie, and good morning, everyone. Our results in the first quarter demonstrate our competitive positioning and business resilience, our market-leading innovation and our team's skillful execution of key initiatives. Together, these factors provide a solid foundation for future success. With our strong balance sheet and free cash flow, we continue to invest in technological innovations and growth markets that provides significant value for customers and The Toro Company.

Let me share a few examples. We are actively pursuing opportunities to capitalize on the growing global demand for underground construction equipment which is being fueled by aging infrastructure, new data centers and a rise in energy and telecommunications projects.

CONEXPO, which is North America's largest construction trade show, is taking place this week. At the show, we are exhibiting our broadest offering ever of underground and specialty construction solutions. With our recent acquisition of Tornado, which is a natural complement to our existing products, we are poised to extend our reach and impact within this category and beyond. In golf, grounds and irrigation, we're building a pipeline of innovations that help customers maximize workforce productivity and reduce costs.

Last November, we introduced our AI-enabled spatial adjust software, which has proven to be in the words of our customers an absolute game changer. This water management system is simultaneously helping to preserve one of our most precious resources, delivering more consistent playing conditions and bolstering subscription service offerings that provide incremental recurring revenue for The Toro Company.

This spring, we are further expanding our water management suite with the launch of our new RXC irrigation controller. This reliable and contractor-friendly irrigation solution provides modular expandability, advanced flow monitoring, and smart features such as predictive weather-based scheduling, seasonal adjustments and intuitive programming. Innovations like this enable our customers to better manage costs, can serve water and maintain the condition of the ground in their care.

And finally, by coupling targeted acquisitions and strategic partnerships with years of our own internal development, we are incredibly excited that we now offer the market's broadest range of autonomous turf maintenance solutions. We've accomplished this by leveraging multiple localization and navigation technologies across an array of high energy and low energy product platforms. While most of these innovations are still early in their growth life cycle, we're very optimistic about their future potential.

At the same time, we're also excited about the near-term opportunities within our core businesses. For example, following the strong performance of our snow categories during Q1 and given the current health of the channel, we're confident about the prospects for those product lines in the second half of this year.

Finally, our team's commitment to operational excellence and optimization of our global supply chain will continue to help us mitigate increases in materials and manufacturing costs, streamline our supply chain operations and manage our inventory with exceptional success. Through the steadfast engagement of our team, we are building strong momentum for future growth.

Now Rick has a few closing remarks.

Thank you, Edric. In closing, I want to underscore our confidence in The Toro Company's strategic direction and continued profitable growth. Our actions are enhancing our customers' performance, strengthening our competitive advantage and increasing our operational efficiency. Through our disciplined approach to capital allocation and balance sheet flexibility as well as our commitment to strong free cash flow we are well positioned to deliver significant value to all our stakeholders for many years to come.

Now Edric, Angie and I would be happy to take your questions.

[Operator Instructions] Our first question comes from Sam Darkatsh with Raymond James.

A few quick questions, if I could. First off, [indiscernible] sales were up 7% in the quarter. Can you give us a sense of what that was organically excluding the Tornado effects?

Yes. So the largest portion of the increase in the quarter would be snow and the portion specifically attributed to [indiscernible].

Yes. We also saw improved underground and pro contractor shipments. So -- and then, of course, you said Tornado. So excluding Tornado, it would be snow and an underground contractor and golf and grounds. I'm sorry, underground, construction and pro contractor.

So figure maybe 5% or so is organic and a point or 2 would be Tornado, would that be fair?

That's probably close. What I failed to mention though is that we did see some of that offset by some softness that we saw in international. So -- but yes, overall, I think 1% to 2% is probably fair. What we had mentioned in Q4 is that Tornado would contribute about 2% growth for sales. So inorganic growth will be about 2%. And our sales were -- we were expecting to be about $100 million for the year. So pretty well in line with what our expectations were for Q1.

Got you. And then on an all-in basis, what was snow and ice? I understand it's a relatively attractive margin category in both segments for you. Can you help us contextualize what -- how much snow and ice was up in the quarter?

Yes. It was -- we did -- as Angie said, we had strength across our businesses. On the 2 -- if you look at the 2 reporting segments, it was the largest portion of each of those segments. On the residential portion, it would be the largest, but also offset by some shipments of spring products that will be a little bit later rolling into the second quarter. So there was some offset there, but it was definitely the largest portion of the increase there.

Interestingly, on the residential side, as we talked about, there was field inventory in place. So retail was even stronger than the shipments [indiscernible]. Shipments, if you look at a 10-year average, they're about on average on the Residential side. On the Professional side, a little different story. The shipments were well above the 10-year average. And in both cases, it just puts us in a very positive field inventory position as we go into the second half of the year. That gives us confidence in the preseason fills both for the Professional and the Residential side as we go into the third and the fourth quarter. So the largest portion of each of the segments was snow but really strength across the businesses. And in the case of Residential, kind of back to a more normal snow shipment year for us.

Got you. And then my last question has to do with the annual guide. Your -- the 6.5% high end of your range. I'm trying to -- first off, I'm trying to get there with the Professional and Residential guide, Professional up mid-single, high end of the Residential is flat. Obviously, that doesn't get you to 6.5%. So in order to get to 6.5% would Pro be closer to high single-digit growth? Or would Resi turn positive? I'm just trying to get a sense of how to think about the high end of the range, Angie.

Yes, Sam, I think what we can talk to the pieces of that would be as we think about the full year, Tornado, we expect to contribute about 2%. We expect to get a little bit more than our average 1% to 2% on net realized price. And then the balance of that will be driven by organic growth, and that will be largely in the Professional segment and in the categories that we talked about earlier, underground, professional contractor, golf and grounds and a strong second half snow [indiscernible].

Our next question comes from Tim Wojs with Baird.

Maybe just to kind of piggyback off Sam's question. Just I guess you raised the Residential guide, but you didn't raise the Professional guidance. Is that just kind of going from one end of the range to the other end of the range? Or is there something in Pro that's kind of offsetting some of the upside that you saw in the quarter in Q1?

I'd say that from the Pro, we probably saw a little more softness in international than we expected. So we are having to offset some of that. But the rest of it is really largely as we expected in the professional segment for the year. We raised Resi because we did see some upside in snow that was a little higher than we expected in Q1 based on some of the snow events that we saw across the country.

And then I guess -- the one question, just when you look at your snow contractor base and your lawn and garden kind of contractor base, do you have any sort of sense as to what the overlap between the 2 is? And if strong snow does kind of help the Professional landscape business and vice versa?

There is a lot of overlap. So I think what you're kind of getting at is if you come into the spring season, with contractors that do both snow and summer work, they're going to come in, in a healthy position, and we would anticipate that, that would be the case for the contractors. And one thing to keep in mind is contractors have really been strong throughout the cycle, where we had some softness with the homeowners that were buying professional products. So they've been pretty solid throughout. And the current strength is also being bolstered by the new products that we're introducing, for example, in the Exmark area, the Lazer that was introduced 2 years ago and the [indiscernible] are both selling very, very strongly. So that put those factors together, and it's a very positive position for landscape contractor on the pure Pro side.

Got you. Okay. Okay. That's helpful. And then the last one I have, just as we kind of did our golf kind of checks this quarter, we got back kind of an abnormally high response rate around autonomous adoption. And I guess, could you just review for us kind of where you are in autonomous and golf and if there's any sort of kind of KPIs around how big autonomous is, how it's growing kind of the products that golf courses are [indiscernible], I think that would be really helpful.

Yes, great question, Tim. The -- our -- the response you got is not surprising. There's a lot of interest. And that wouldn't surprise any of us knowing that labor represents such a significant portion of golf course budgets and that for a lot of golf courses, they're finding it difficult to find and attract the labor. So that's clearly the driver it has been for some time. We've seen -- it's kind of difficult to find a golf course that hasn't at least experimented with some autonomous solutions. And I think they're still looking for how that ultimately fits into to their business.

And so some of what we're excited about, we've been investing in this category because of those drivers for a long time. And as I mentioned in the prepared remarks, we're pretty excited now that we cover all the bases. So if somebody is looking for that traditional robot style, whether that's for around the club house or smaller areas of the [indiscernible], we have that. If they're looking for still low energy, but a more productive piece, we now offer that product as well.

If they're looking to rather than [indiscernible] collect balls on the range, we've got a version of that platform that does that piece. And then we're also now offering products up in the higher energy range. So if it's about owing that longer term that, again, you might find in the rough, but they're looking for an even more productive machine and one with the traditional Boeing technology. We've got the platform for that and then all the way down to the fairway mower. So we're pretty excited there. As we said, it's still early days on people, I'd say, being all in across the board but we only expect additional interest and growth in that area.

Our next question comes from David MacGregor with Longbow Research.

This is Joe Nolan on for David. I was just wondering with the bottlenecking investments and other investments you've made in the Ditch Witch business, just can you talk about how much improvement you're seeing on margins today in that business and how much more improvement we could see in 2026?

Yes. Angie can comment specifically, but we continue to see really from the time of the acquisition in 2019, steady growth in our profitability in that business, and it's -- and it's from a number of factors, obviously, leveraging across the scale of The Toro Company, but just also the continued improvement by that business. So we're back in the soundly in the range of the professional profitability at this point.

And the investments that you mentioned like the new paint system and others within the facility are helping us to continue to fuel the growth that we see across a lot of drivers within that business. So business continues to be healthy. We've continued to make solid profit improvements, and we're very optimistic about the outlook for that business going forward with the long runway.

Got it. That's encouraging. And then on the international business, you mentioned some weakness there. Could you just expand on what markets that's in and just how that's factoring into your guidance?

Yes. Broadly across our businesses, that's the one area that's a little bit behind where we would expect them to be at this point in the year just through the first quarter. And I just looked at that detail actually this morning that it's kind of broadly across a number of areas, both in Europe and in Asia across multiple categories. So it's more just kind of a general economic environment sort of situation. Our team is still optimistic that they'll pull that be on track for the year, but we just see some softness there so far this year that we wanted to pass on commentary.

Got it. And then just one last one for me quickly. On M&A, can you just talk about what you're seeing in terms of valuations and just also update us on within the existing enterprise where you see the greatest opportunity to build with inorganic growth?

Our approach to M&A has remained pretty consistent through the year. So the activity has always taken place, building opportunities for M&A. We've stayed pretty focused in areas where we know we can compete and win. So it's close to our existing businesses. And if you pick those out, it's going to be likely on the professional side, and we see opportunities within -- as evidenced by the Tornado acquisition within the underground specialty construction, particularly but also opportunities for technology investments and adjacencies that might be there as well.

But the key point is [indiscernible] continues on an ongoing basis. Valuations have been high, but some signs of moderating a little bit, just recent data points. So nothing necessarily statistically valid there, but valuations may be moderating a little bit.

Our next question comes from Eric Bosshard with Cleveland Research Co.

Two things, if I could. First of all, with leverage at now 1.5, I'm curious how you're thinking next 12, 18 months -- there's been a handful of acquisitions, tuck-in acquisitions and some bigger ones. But I'm curious, as we move forward, what the strategy is with the leverage opportunity -- is just buying more stock? Is it more acquisitions? If you could just start on that would be helpful.

Yes. Thanks for the question. Our capital allocation strategy remains the same. We first invest in research and our new products and innovations. We invest in opportunities for productivity improvement and technology within our facilities. We obviously look for opportunities with M&A and then of course, we fund our dividends and typically would buy back stock at the end of that list.

With regards to M&A, we are -- we have the capacity and we have the interest in M&A of all sizes. It's really for us the process that we go through and the discipline that we maintain in that process. So we're always open to M&A. But it's really the process and the opportunities and the timing for potential sellers [indiscernible] the gauging factor.

So did that answer your question?

Yes, that helps. The second question is from a field inventory perspective on both the Pro and Residential side, curious what that looks like presently and also the appetite for loading in both the Pro and the Residential side from your partners?

Yes. We're actually in a very healthy position from a field inventory standpoint. There are -- even in a normal situation, there will be differences by businesses. So some a little high, some a little low and those businesses are working to adjust those just with the normal flow. But I would say we're pretty normalized at this point. And with regards to your question about channel fill, and really, as we mentioned earlier, [indiscernible] confidence in the second half of the year [indiscernible] snow. In particular, the professional products would be going into the preseason in the third quarter and the residential products in the fourth quarter. So it does give us confidence in the second half, derisk some of those factors [indiscernible] second half.

Our next question comes from Michael Shlisky with D.A. Davidson Company.

[indiscernible] does the heavy snowfall that we saw most of this winter, does that lead to a potential greener spring, assuming temperatures are somewhat normal?

It does, Mike. So yes, obviously, snowfall leads to early spring moisture that gets, obviously, the growth started early in the spring. So it's typically a positive. And we've seen a solid snowfall across the U.S. Interestingly, on average, a little bit below just because of the extremes. The West had little snow if you think about some of the ski locations. The Midwest was kind of mixed relative to normal, and then you experienced on the East Coast really exceptional winter. So that would also influence the effect that you talked about, so less snow in the West would be less positive going into the spring.

Got it. Turning to CONEXPO. I really enjoyed that -- checked out the booth the other day at CONEXPO, the Ditch Witch booth. And I was curious about something I saw there called the [indiscernible] Intel system, which was like an interesting fleet management kind of telematics type of system. The other brands that you have similar systems like [indiscernible] 360, for example. I was curious how you feel about your offerings compared to the competition both of those other offerings on shared infrastructure that maybe other people can't really replicate? And are there any other digital offerings on the way like [indiscernible] or other digital offerings that might have a good subscription tailwind tier?

Yes. Great observation, Mike, and thanks for the question on that as well. We get more excited every day with the development of those things. In addition to the ones you referenced in [indiscernible] 360 would be another one that we're using on the golf and ground side of the business. So some of those grew up in different places, [indiscernible] is something that has existed with the Ditch Witch brand and the former Charles Machine Works Company even prior to the acquisition by The Toro Company.

But now all of those teams are working together. We execute something within the company that we call our technology forum that brings all of our technology practitioners together to share and continue to codevelop. So going forward, what you hinted at is absolutely likely that you'll see more and more commonality, let's say, an ability for customers who work across different segments of our product lines to be able to use some common infrastructure. So lots and lots of the stuff going on now and excitement for the future there.

Great. Maybe one last one on the golf business. I think last quarter, you said that ground would be a little bit more of a growth area than gold. Just golf have [indiscernible] such tough comps and ground [indiscernible] been a little bit of a kind of -- it was hard to meet that demand when golf was so strong. A quarter later, do you still feel that way? Or golf courses are -- is ground still going to be a bigger driver than it was before? I would also be curious about the outlook for international golf courses versus domestic?

Yes. Another good question. So I'd say we're probably feeling a bit more optimistic on both fronts in golf and grounds. Our efforts in grounds are showing benefits. You remember well that, that was something that we were intending to put more energy toward. On the golf side, we've done some recent research that's showing actually continued growth in equipment purchase expectations and the budget to support that. So we were prepared for some, I guess, you'd say softening of the incredible growth trajectory that we've been on, seeing that normalize more. And it has, but the incoming orders have been a bit more brisk than we probably anticipated. So I'd say we're probably more optimistic than we were 3 months ago in that regard.

And just your thoughts on global golf as opposed to domestic. Any differences there?

Yes. Yes. Yes. Connecting back to Rick's earlier comments, things haven't been as strong. Now participation internationally has been really good, just as it has been in the U.S. There's still money going into the industry. But we've seen a bit more softness there. Development remains pretty strong. Now given some of the geopolitical things that are going on in the world, we were prepared that, that may slow and defer some of the projects in certain regions. But generally, we think things are just connected back to the macroeconomic environment not being quite as strong and maybe a bit less investment internationally than we're seeing in the U.S. Nothing that we're alarmed about, but something that we're watching closely.

Thank you. This concludes the question-and-answer session. Ms. Hille, please proceed to closing remarks.

Thank you, everyone, for your questions and interest in The Toro Company. We look forward to talking with you again in June to discuss our second quarter 2026 results.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

Good day, ladies and gentlemen, and welcome to the Toro Company's Fourth Quarter Earnings Conference Call. My name is Gigi, and I'll be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's conference, Heather Hille, Vice President, Corporate Affairs and Investor Relations. Please proceed, Ms. Hille.

Good morning, everyone, and thank you for joining us for the Toro Company's Fourth Quarter and Year-end 2025 Earnings Conference Call. I'm Heather Hille, Head of 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 fourth quarter and full year results, which were released earlier this morning and discuss our priorities and outlook for fiscal 2026. Following their remarks, we'll open the phone lines for a question-and-answer session.

As a reminder, any forward-looking statements that we make this morning are subject to risks and uncertainties, including those described in today's earnings release, investor presentation and most recent SEC filings and may cause actual results to differ materially from those contemplated by these statements. Also in our remarks, we'll refer to certain non-GAAP financial measures, which we believe are important in evaluating the company's performance.

Reconciliations of all non-GAAP numbers to the most directly comparable GAAP numbers are included in this morning's press release, which, along with the fourth quarter presentation containing supplemental information is posted in the Investor Information section of our corporate website.

With that, I'll turn the call over to Rick.

Thanks, Heather, and good morning, everyone. Our team remains focused on leveraging our diverse portfolio of leading brands, controlling what we can control and driving operational excellence. In doing so, we delivered fourth quarter sales and adjusted EPS that exceeded our expectations, achieved full year professional segment earnings margin of 19.4%, demonstrating the resilience and quality of our core businesses that represent about 80% of our portfolio, generated record free cash flow of $578 million, a conversion rate of 146%, returned $441 million to shareholders through dividends and share repurchases, increased our AMP savings target to $125 million by the end of 2026 and continued investing in technology and innovations that enhance our customer productivity.

We beat our sales expectation for the fourth quarter, reporting consolidated net sales of $1.07 billion. Fourth quarter Professional segment margin grew to 19.2%. This increase was driven by sustained momentum in the underground construction business and better-than-anticipated growth in snow and ice management. Adjusted diluted earnings per share for the fourth quarter were $0.91. This reflected year-over-year earnings improvement in both segments, offset by higher expense related to the restoration of employee incentive compensation.

For the full year, we hit the higher end of our net sales guidance reporting total consolidated net sales of $4.5 billion. That was down 1.6% from fiscal 2024 with a significant portion of this decrease attributable to the strategic divestitures of company-owned dealers and our pulp product line. We delivered adjusted earnings per diluted share of $4.20, beating both our current year EPS guidance of about $4.15 and $4.17 reported last year. These results were incredibly strong given the challenging environment of the past 2 years.

Through our focus on key growth markets and deliberate actions to improve productivity, we are strengthening our competitive position and accelerating our performance. Specifically, we continue to invest in our golf and grounds and underground specialty construction businesses, reflecting a multiyear secular growth trajectory we anticipate for those markets.

Our acquisition of Tornado Infrastructure Equipment, which closed last week is a great example of the strategic investments we are making to better serve customers facing complex infrastructure projects. Tornado is a leading manufacturer of vacuum excavation and industrial equipment solutions for the underground construction, power transmission and energy markets. Their products are designed to safely excavate around critical infrastructure to minimize the risk of damage. We are excited to expand our geographic presence and product portfolio as we welcome Tornado to the Toro Company.

Additionally, we continue to protect both our profit margins and market competitiveness through significant productivity improvement and thoughtful net price realization. Our multiyear amplifying maximum productivity, or AMP program has already delivered annualized run rate cost savings of $86 million. Some of the actions that are driving these savings include strategic facility closures, reducing our operational footprint by more than 1 million square feet, a reduction in salaried workforce of nearly 15%. And divestitures of noncore businesses and product lines totaling approximately $60 million in revenue.

These actions, combined with thoughtful supply chain strategies and selective price increases enabled us to mitigate the effect of tariffs and maintain strong margins in fiscal 2025. Additionally, we are pleased to announce that we are increasing our AMP run rate savings target to $125 million or more by the end of 2026, up from our original target of at least $100 million. We're also carefully managing inventory levels across the spectrum from raw materials to finished goods. As our lead times have recovered to more normal levels, customers are ordering closer to need, positioning us for a clean start as we enter 2026.

Largely due to improvements in working capital, our free cash flow for the year was a record $578 million. This resulted in a free cash flow conversion rate of 146%. And we continue to launch products at the forefront of innovation and alternative power, smart connected products and autonomous solutions that differentiate our offerings and drive significant customer value.

Our Autonomous GeoLink Fairway Mower is receiving very positive reviews. It's another excellent example of our expanding technology portfolio. In particular, golf course and commercial customers who are facing labor shortages and budget constraints have expressed their excitement about the tremendous efficiencies inherent in the Mower's Autonomous capabilities. Customers are also enthusiastic about our Toro GrandStand Multi Force, a stand-on mower that allows them to attach a plow, power broom and bagging system. The result is higher productivity across all seasons.

And for landscapers and homeowners with acreage, we recently introduced our Exmark Radius, a zero-turn mower with product styling and features that mirror the highly successful Lazer Z. Collectively, our actions are enhancing our customer productivity, strengthening our operations and market-leading position and sustaining our profitable growth. I want to thank our employees and channel partners for their diligence in advancing our product innovations and technology-driven solutions and supporting our efficiency initiatives.

Now Angie will share additional insights for our fourth quarter and full year results and provide our outlook for 2026.

Thank you, Rick, and good morning, everyone. We delivered strong fourth quarter results that exceeded our expectations and demonstrated the strength of our diversified portfolio, market-leading innovation and commitment to operational excellence.

As a result, our full year 2025 sales and earnings also outperformed our guidance. Both the professional and residential segments contributed stronger-than-anticipated sales across multiple businesses, which drove favorable year-over-year operating leverage in the fourth quarter.

Professional segment net sales in the fourth quarter were $910 million, virtually equal to last year's exceptionally strong performance. Net price realization and higher shipments of underground construction and snow and ice products nearly offset anticipated lower shipments in golf, grounds and zero turn mowers, as well as the impact of prior year divestitures.

Professional segment earnings for the fourth quarter were $174.7 million, up 2.9% year-over-year. The resulting earnings margin in the quarter was 19.2%, up 60 basis points from last year, primarily due to net price realization and productivity improvements. This was partially offset by higher material and manufacturing costs and lower net sales volume.

For the full year, professional segment net sales, which comprised about 80% of the total company, rose 1.9% to $3.62 billion. Full year professional segment earnings were $702.5 million and earnings margin was 19.4%. This was up from $638.9 million and 18% in fiscal 2024, underscoring our commitment to cost improvement and our purposeful cost reduction measures.

In our Residential segment, fourth quarter net sales were $147 million, which were 5.1% lower than the prior year, but exceeded our expectations due to net price realization and higher shipments of snow products, reflecting channel enthusiasm for pre-season stocking.

Additionally, through our deliberate measures to reduce costs, improve productivity and achieve pricing, we delivered higher-than-expected fourth quarter residential segment earnings and outperformed prior year results by $13 million. For the full year, residential segment net sales were $858.4 million, down 14% from prior year. Full year earnings were $35.8 million, 4.2% of segment net sales. This compares with fiscal 2024 earnings and earnings margin of $78.4 million and 7.9%, respectively.

Now turning to our consolidated results for the fourth quarter and full year. Consolidated net sales for the quarter of $1.07 billion were down 0.9% from Q4 last year. Due to lower shipments in both segments and prior year divestitures partially offset by net price realization.

For the full year, net sales were $4.51 billion, essentially in line with 2024 net sales, adjusting for the impact of divestitures. Our fourth quarter adjusted gross margin of 34.5% improved from 32.3% in the prior fiscal year. Primarily due to net price realization and productivity improvements, partially offset by lower net sales volume, higher material and manufacturing costs and product mix.

Full year adjusted gross margin was 34.1% compared to 33.9% in fiscal 2024. This increase was primarily due to net price realization and productivity improvements partially offset by lower net sales volume, higher material and manufacturing costs and inventory valuation adjustments. SG&A expense for both the quarter and the year was 22.5% of net sales, a 30 basis point increase from Q4 a year ago and up 80 basis points from full year 2024. The change for both periods was primarily due to lower net sales volume, partially offset by cost savings.

In summary, our fourth quarter adjusted earnings per diluted share were $0.91, compared to $0.95 in the prior year. The change was driven by higher expense related to restored employee incentives, mostly offset by an increase in both professional and residential segment earnings. For the full year, adjusted earnings per diluted share were $4.20 compared to $4.17 in fiscal 2024. Primary drivers include higher professional segment earnings and share repurchases, partially offset by lower residential segment earnings.

Turning to our cash flow and balance sheet. Our free cash flow for the year was a record $587 million, a meaningful year-over-year increase that was largely due to net favorable changes in working capital. This resulted in a free cash flow conversion rate of 146%. Additionally, we returned $441 million to shareholders in fiscal 2025 through dividends and share repurchases demonstrating continued confidence in our ability to generate cash and our commitment to value creation.

Our balance sheet remains strong, and it continues to provide financial flexibility. Our leverage ratio of 1.3x is healthy and well within our stated target range. We continue to take a disciplined approach to capital deployment. By prioritizing strategic investments that drive profitable growth through both organic opportunities and acquisitions, we have generated strong positive momentum in our return on invested capital.

Looking ahead to fiscal 2026. We are thoughtfully balancing the strength and growth opportunities within our businesses with the ongoing pressures of the macro environment. We are excited about our recent acquisition of Tornado and the longer-term growth trajectory of the vacuum excavation industry, and we are poised to execute on the continued strong demand for our underground construction business. This demand is being driven by new infrastructure installation projects and ongoing maintenance of existing networks.

We are continuing to leverage our leadership in golf course equipment and irrigation and are being proactive in attracting new customers and opportunities for our grounds business. Recent snowfall in key regions across the country is an encouraging find. And we are prepared to capitalize on the favorable weather trends, and we remain committed to delivering on our new higher AMP target by 2027.

At the same time, we remain cautious about macro factors, including inflation and interest rates that may continue to pressure consumer confidence. However, we believe the steps we have taken position us well to benefit as the environment improves.

For fiscal 2026, we expect annual total company net sales to rise 2% to 5% reflecting professional segment sales that are expected to grow mid-single digits and residential segment sales that are expected to decline low to mid-single digits. We anticipate total company adjusted gross margin to improve in 2026, underscoring the strength of our business model and our ability to navigate cost pressures, while continuing to invest in innovation. And we expect this adjusted gross margin improvement, combined with our continued focus on productivity and prudent management of tariffs and other inflationary pressures to drive higher adjusted operating earnings margin for the year.

This total company outlook reflects a range of 18.5% to 19.5% Professional segment earnings margin in 2026 and a range of 6% to 8% Residential segment earnings margin as we build on our 2025 progress. Our guidance also reflects mid-single-digit earnings growth for the near term with a clear path to higher growth over time, as we execute on margin expansion and innovation priorities.

As a result, we expect full year 2026 adjusted earnings per diluted share to be in the range of $4.35 to $4.50. This assumes interest expense of approximately $65 million and adjusted effective tax rate of about 21% and capital expenditures of $90 million to $100 million.

Furthermore, we remain committed to returning value to shareholders through dividends and share repurchases and are confident in our ability to generate cash. As we announced last week, we have raised our quarterly dividend from $0.38 to $0.39 and our Board of Directors authorized the repurchase of up to an additional 6 million shares of TTC's common stock. We expect to repurchase shares at a rate similar to last year and anticipate a free cash flow conversion rate of greater than 110% in 2026.

Our outlook for first quarter performance reflects the natural seasonality of our business and our current conservative view of economic factors, including homeowner and consumer sentiment. We expect total company net sales in Q1 to be up slightly from prior year with pro segment sales up mid-single digits and res segment sales down high teens. Professional segment earnings margin is expected to be flat in the quarter and residential segment earnings margin is expected to be lower.

For the total company, adjusted earnings per diluted share are expected to be flat to slightly lower than last year's first quarter. As a reminder, from an earnings perspective, our first quarter is typically the smallest of the fiscal year and can carry seasonal cost headwinds. With the growing traction of our AMP initiatives, we expect margin momentum to build as we move through 2026. Though the environment continues to pose some challenges, we are steadfast in our approach to driving operational excellence and thoughtfully managing factors within our control.

We are confident this discipline, combined with continued innovations that improve our customers' productivity will drive sustained profitable growth and deliver meaningful shareholder value.

With that, I'll turn the call over to Edric.

Thank you, Angie, and good morning, everyone. As evidenced by our better-than-expected results for the year, our decisive actions are enabling us to increase the resilience of our business and to build momentum for future growth. We're strengthening our product portfolio and competitive positioning by strategically investing in technology solutions and markets with strong multiyear growth drivers like golf, grounds and underground construction.

Our pipeline of new products and features that provide value for our customers is robust. And we're excited by the future potential of several innovations that are still early in their growth life cycle. For example, golf course superintendents will benefit from two new Software-as-a-Service irrigation products. Our Lynx Drive Central Control System is a mobile version of our industry-leading platform that is changing the way superintendents manage golf course irritation. It gives users increased flexibility and control allowing them to address issues in real time and to improve their efficiency through enhanced communication capabilities, both while on the move.

Our AI-enabled spatial adjust software, which was released in November, integrates with Toro irrigation systems for even more precise water management. It works with TurfRad, soil moisture sensors, to optimize the amount of water used on fairways. Automatically recommending daily water application rates to achieve the user-defined target moisture level. Feedback from users who participated in our pilot program was extremely positive, including frequent mention of both improved term uniformity and playing conditions.

Driven by what we expect to be a third consecutive year of record U.S. golf rounds played, we have experienced exceptional growth in golf equipment sales and irrigation projects.

In addition to the continued momentum in golf, we're also increasing our focus on grounds opportunities within municipalities, universities, sports fields and other markets. We're also actively pursuing opportunities to capitalize on the growing demand for underground obstruction equipment, which is being propelled by aging infrastructure, the growth in data centers and energy and telecommunications projects.

Our Tornado acquisition is an exciting development in this space, building on our existing relationship with Tornado as a strategic supplier to Ditch Witch. It enables us to expand our reach and capitalize on accelerated growth in vacuum excavation. Furthermore, we're executing on our commitment to operational excellence through disciplined implementation of our AMP productivity program and optimization of our global supply chain.

Our efforts have helped us mitigate increases in materials and manufacturing costs, streamline our supply chain operations, and better align our production capacity with demand. We also continue to prioritize our relationships with key partners, and we're committed to building on our legacy of engagement to ensure mutual success and customer satisfaction. Last month, we hosted our Toro University hands-on training event for more than 300 members of our distributor partners who span geographies and markets. We equip them to sell and service our new products so that customers realize the exceptional value we collectively deliver.

In addition, we recently celebrated an incredible 100-year relationship with a key distributor partner, Smith Turf & Irrigation. This long-tenured partnership is a testament to the importance we place on building and sustaining strong relationships. As we look ahead, the factors that contributed to our growth for 111 years will continue to be critical drivers of our performance. Investing in growth markets and innovation, maintaining our operational discipline and focus on productivity improvement and keeping our customers' needs front and center with support from loyal partners.

All of these remain key priorities of the Toro Company's strategy and culture and they are absolutely foundational to our future success.

Now Rick has a few closing remarks.

Thank you, Edric. To close, I want to emphasize our confidence in the Toro Company's trajectory. The steps we are taking to enhance our customers' performance and increase our efficiency will strengthen our competitive advantage and drive continued profitable growth.

In addition, we are being proactive and purposeful as we maintain a disciplined approach to capital allocation, balance sheet flexibility and strong cash flow. Together with our strategic focus on key growth markets and operational improvements, these actions give us confidence that the Toro Company is positioned to deliver significant value to all our stakeholders for many years to come.

Now, Edric, Angie and I would be happy to take your questions.

[Operator Instructions] Your first question comes from the line of David MacGregor from Longbow Research.

I want to start off by just asking a couple of questions around the guidance. The sales growth, 2% to 5%, Tornado is going to add a couple of hundred basis points. I'm guessing you got a couple of hundred basis points of pricing in there as well. The implication for volume is still, I guess, a negative outlook. Can you just kind of walk us through the individual lines of business and just talk about the volume expectations for next year, even if just anecdotally rather than quantitatively?

Yes. Sure. I can walk through a few of those. First of all, yes, you did point out a good portion of the growth on the top line is due to the Tornado acquisition. But organically, we also can see continued strength on the pro side with the underground business continuing to be strong. Golf will continue to be strong as we talked about in the prepared remarks. And really starting last quarter, but again, this quarter, we see the landscape contractor, particularly the true contractors, not as much the homeowner with acreage, but the true contractors through our Exmark brand, for example, really coming back strong and contributing to growth. We expect that to continue.

And on the residential side, this is an extraordinary cycle that we've gone through that started at the beginning of COVID. I think if you could just draw that sign wave, the point where it crossed the midpoint was really the middle of 2023, so we -- that homeowner business has kind of been in recovery since then. And we are at the right side of that curve on the way back, but the rate at which that happens really will be determined by things like consumer confidence, the macroeconomic environment, interest rates and so forth.

So we've built a little bit more muted expectations on that side. So it's really a combination of all of those things that is what we're looking at for next year. We've built in our best estimates. We've included the strong start to snow. But as that plays out through the rest of the season, that could be a positive for us if that trend continues. But we've worked everything into our guidance at this point. Does that answer your question, David?

Yes. If I could just maybe drill in on the residential level for a moment. You're guiding first quarter down high teens. I'm guessing, you're factoring in some kind of an improvement here because you're guiding to the full year down low single to mid-single digits. So I guess what do you see improving in residential in 2Q through 4Q? Are you expecting a restock in the channel to help you out there. Just maybe talk about how you're thinking about that guide improvement?

I was just going to jump in and say, yes, we're comping to 8% down in prior year, but we do expect some continued homeowner caution, as Rick mentioned, with the macro environment continues to be what it is. But we have seen continued progress on productivity and cost savings, which are going to help our margin a little bit. But overall, the snow, as Rick mentioned, could be favorable to us in residential as we've seen some -- we've got some encouraging signs helping us right now.

Okay. Maybe you could shift and just ask you a couple of questions around the AMP program. You've popped up the guide from $100 million to $125 million. So congratulations on the progress there. I mean, can you just talk about the source of the extra $25 million that wasn't in the first phase that you now see as being achievable? And do you need volume growth to get to that kind of performance?

Yes. Thank you for asking. We continue to be really excited about the AMP initiative that we started in 2024 and did raise that target to have full run rate savings by the beginning of F '27 to $125 million. We're going to see that savings continue to come from the work streams that we have talked about initially. And those are really supply-based design to value route to market. And then our operational efficiency.

We made significant improvement in F '25, and we'll continue to see -- it just achieved better results than we expected to through F '25 and so the momentum, we're going to continue to see that go forward. And we don't believe we need increased volume to get that. We've got a lot of engines working in that initiative right now and want to continue on that momentum.

And initially, you had thought you'd take 50% of the gains to the bottom line, the other 50% would be reinvested. Could you just update us on where you are with that as of today? And how that target might change, revolve with the increase in the goal to $125 million?

Sure. Yes. We really expect to continue the same and reinvest up to as much as 50% of that. We probably had to over-index a little bit on the investment in the last couple of years, especially in F '25 just due to the headwinds that we saw with tariffs, inflation, some transition expenses with some of our product moves and network optimization.

But what we did continue to do is also take some of those funds and reinvest in innovation and technology to set ourselves up for future growth. So we would expect to continue to see that savings be somewhat reinvested up to the 50% level, but, we have realized $75 million of those savings in F '25 and through the program to date, almost $80 million.

Great. Great news there. Last question for me, just how you're thinking about raw material costs for '26?

Yes. So from our raw material costs, we expect to see some inflation early in the year, maybe kind of settling out about midyear. But overall, we built all of those things to the best of our ability into our guidance.

Our next question comes from the line of Joshua Wilson from Raymond James.

First, could you run through the different product categories and give us a sense of where channel inventories currently stand?

The -- I think we could go through each segment. But just overall, I would say, especially relative to the commentary for the last couple of years, we're in good shape from a channel inventory standpoint. Residential, it's very much tied to the earlier comments about how that flows this year and the rate of recovery. But really across the board, we are in good shape from a field standpoint. That helps us, for example, when we talk about snow, but field inventory is in a good place.

So we should see the benefit of snow plays out. We really saw the benefit of that in the fourth quarter where our -- especially our commercial contractors, we're seeing the outlook for snow and started to order because field inventory was in a better position that directly translated into orders for us.

On the underground side, we're back closer to a better healthy position there, slightly lower than it should be. And the rest of the business, I would say, businesses, I would say, is -- are in normal range. If you took an individual model here and there, it would be plus or minus from where we'd like to have it, but much closer back to normal operating with field inventory. So we're in good shape with field inventory. It's been a lot of work by a lot of people to make that happen, but we're in good shape today.

That's good to hear. And I know you said your lead times have normalized. Could you give us a quantification of where your backlog was in the year?

Yes. We actually had backlog improved by $400 million year-over-year. We typically give those results at the end of the year. And last year, we were sitting at $1.2 billion. So had a $400 million improvement in backlog.

So overall, we feel like we're in really good shape. It's probably even still a little elevated to where we thought we would be at this time last year. But very strong demand continues in golf and grounds, underground construction and in our other businesses. And one of the key points there, I think, is that our lead times have come in. So folks may not be ordering and putting their orders on as far out as they once were, because just as a reminder, that is really all open orders at a point in time.

I'm sorry, just -- just piling on what Angie said, it really reflects our improvement in lead time. So we're -- lead times in some categories that were around 2 years, we're now able to deliver more closer to normal, historically, 60, 90 days type of period. So the confidence we're gaining back the confidence of our customers to be able to order when they need it.

And then looking at the 26% margin guidance for Professional of 18.5% to 19.5% versus the 19.4% you just reported, what are the positives and negatives that are leading you to that range year-on-year?

Yes. On the positive side, some of the same benefits that we've seen from AMP that we've talked about, some of that will be offset with mix that isn't quite as strong in '26 as it was in '25, and that just has a lot to do with which product lines. We prioritize the production and ultimately shift to the field.

And then the other thing I would add is just the addition of Tornado. So we will see some top line growth from Tornado in the professional segment. However, it is not being fully accretive to the operating margin in the first year just due to acquisition costs and transaction costs. However, it is accretive to EBITDA.

Our next question comes from the line of Ted Jackson from Northland.

I have a couple left. Congrats on the quarter, first of all. Yes. I mean, I want you to know that I own two Toro snow blowers and they've been getting heavy use so far this year. Heavy use. So first of all, the performance, you had a step-up in incentive comp this year. I mean that's a good problem to have. When you look at your guidance for '26, what are your assumptions around incentive comp? And how does that compare to '25?

Yes, great question. That was a change as you look at Q4 year-over-year, our corporate expenses were a bit higher because of the easy comp that we saw in F '24 because of incentives being restored. We have built back in normal incentive plans for our F '26 plans. So those coming back in at a normal rate, which they have not been -- were not over the past couple of years.

And what would like if we're to say like a normal rate, like, I don't know, some kind of percentage. Like, how would you define that just to kind of give us a baseline?

Well, we typically try to budget those or build those into guidance at 100%. So that is -- whatever those incentive targets are, that would be 100%.

Okay. And then I'm just shifting over to tariffs. I mean you provided some good color with regards to your expectations of their impact for this coming fiscal year and then what you -- what you've seen in the last few fiscal years.

As you kind of look through those assumptions, maybe give some highlights in terms of what's driving that and where you might see any kind of areas that could -- you could further mitigate that impact and what that might be? And then just how -- given how fluid tariffs have been over the last year, maybe just the confidence level you feel with regards to that outlook? And that's it for me.

Yes. Maybe just overarching, first of all, we've had a very focused team working on tariffs since the latter part of 2024 anticipating tariffs. And throughout '25, as we mentioned in the remarks, we were able to offset the effect through productivity strategic moves and through selective price increases to be able to offset.

As we look forward, so in 2025, we have a total of about $65 million in tariffs. That included '20 to '25 that were there all the way back to 2018. If we look at the same number for 2026, that number is about $100 million. And it really primarily reflects a full year of the tariffs that we experienced in 2025 plus a small factor of a few additional tariffs. If you break that down for 2026, it's roughly 50%-ish, a little bit more than that is 232 primarily steel and aluminum tariffs.

The second largest category would be China-related tariffs. And we have a small exposure to China. We systematically reduced that exposure since 2018, but still due to the size of the tariff, it's #2, but it's somewhere in the 15%, something like that. The remainder are general tariffs across different countries, the reciprocal tariffs. So that's kind of how it breaks down.

With regard to variability of tariffs, we will be making sure that we understand the 232 and some of the details of how those are calculated, making sure that we're accurate and optimized, mitigate those to the best of our ability.

And then part of what you mentioned, Ted, in terms of the unknown of tariffs is built into our guidance. So we -- it is reflected that there could be variability. We don't have the worst case built in. We don't have a best case built in either, but it is reflected in the way that we've guided for next year.

This concludes the question-and-answer session. Ms. Hille, please proceed to closing remarks.

Thank you, everyone, for your questions and interest in the Toro Company. We look forward to talking with you again in March to discuss our first quarter 2026 results.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

Good day, ladies and gentlemen, and welcome to The Toro Company's Third Quarter Earnings Conference Call. My name is Marvin, and I'll be your coordinator for today. [Operator Instructions]. As a reminder, this conference is being recorded for replay purposes. I'd like to turn the presentation over to your host for today's conference, Heather Lilly, Managing Director, Corporate Affairs. Please proceed, Ms. Lilly.

Good morning, everyone, and thank you for joining us for The Toro Company's Third Quarter 2025 Earnings Conference Call. I'm [ Heather Hilley ], Head of Investor Relations. On the line with me today are Rick Olson, Chairman and Chief Executive Officer; Edric Funk, who was recently President and Chief Operating Officer; and Angie Drake, Vice President and Chief Financial Officer. Rick, Edric and Angie will provide an overview of our quarter results, which were released earlier this morning and discuss our priorities and outlook for the remainder of the year. Following their remarks, we'll open the phone lines for a question-and-answer session.

As a reminder, any forward-looking statements that we make this morning are subject to risks and uncertainties, including those described in today's earnings release, investor presentation and most recent SEC filings, and may cause actual results to differ materially from those contemplated by these statements. Also in our remarks, we'll refer to certain non-GAAP financial measures, which we believe are important in evaluating the company's performance. Reconciliations of all non-GAAP numbers to the most directly comparable GAAP number are included in this morning's press release, which, along with a third quarter presentation containing supplemental information, is posted in the Investor Information section of our corporate website. With that, I will now turn the call over to Rick.

Thanks, Heather, and good morning, everyone. We delivered third quarter adjusted earnings that exceeded our expectations, though persistent headwinds in our Residential segment require us to take a prudent approach to our full year outlook.

As a leader in the innovative solutions for [ environment ], we are well positioned to benefit from powerful secular growth trends, including record Golf participation and multiyear infrastructure investment cycles. The benefit of these trends is enhanced by our focus on leveraged technology investments and operational excellence, which we believe will drive significant value for our customers and shareholders. Our third quarter results reflect the strong positioning. We strategically capitalized on continued momentum within our Professional segment, especially for our Underground Construction and Golf and Ground Solutions, where robust demand for our innovative products and net price realization drove 6% year-over-year growth with margins expanding 250 basis points year-over-year.

Total consolidated net sales in the quarter were $1.13 billion, down 2.2% from the same period 1 year ago. Half of this decline was due to prior year strategic divestitures of non-core assets. While impacted by headwinds in our Residential segment, our commitment to operational excellence and strength in Professional enabled us to achieve adjusted earnings per share in the quarter of $1.24, exceeding our expectations.

Although our full year guidance reflects near-term consumer caution and Residential market pressures, which Angie will detail shortly, I am confident in The Toro Company's trajectory. We are seeing sustainable margin improvement in our Professional segment, demonstrating our ability to drive profitability even in a mixed demand environment. Channel inventory is clearly meaningfully, particularly in Residential, setting up a cleaner foundation for the 2026 selling season. Our order books remain healthy in key Professional categories, and we continue to launch innovative products that resonate with our customers.

Most importantly, the secular trends driving our Golf and Infrastructure businesses remain intact with multiyear visibility that supports our growth investments. These factors, combined with our productivity initiatives position us to emerge stronger as markets normalize. To support this trajectory, we further intensified our operational improvements to control costs and identify additional opportunities for greater efficiency. We moderated the impact of higher material and manufacturing costs through initiatives that drove productivity improvements and realization of net pricing gains. We also continued to benefit from our AMP productivity program, which has now delivered $75 million in annualized cost savings and remain on track to deliver at least $100 million by 2027.

Additionally, although supply chain strategies we began implementing in 2018 are limiting our exposure in the current global tariff environment, we continue to monitor and respond to their impact on our business. While we are protecting our profit margins through thoughtful and selective price increases as necessary, we're also working diligently to ensure our products remain competitive by omitting the effects of tariffs through productivity improvements.

Within Golf, growing participation levels are sustaining already strong momentum in driving incremental equipment and irrigation investments. And Underground Construction is benefiting from a compelling runway of infrastructure projects. By maintaining our position at the forefront of innovation in alternative power, smart connected products and autonomous solutions we continue to drive significant customer value and differentiate our offerings.

Our Professional businesses continue to capture share in markets experiencing structural growth. After recent BMW championship, we showcased our innovative Toro Spatial Adjust Irrigation Control Software paired with [indiscernible] moisture sensing technology. Industry professionals experienced these groundbreaking precision turf management solutions firsthand. Following the event, attendees expressed strong enthusiasm for these cutting-edge advancements and their potential to transform golf course maintenance through meaningful water usage reductions.

During the third quarter, we began shipping the all-new Ventrac 45RC offering dual operation modes for steep terrain whether seated on the tractor or operating remotely from up to 500 feet away. This advanced system combines intuitive controls with industrial-grade durability to enhance the remote operation experience in demanding environments. We launched two new Specialty Construction products Attract eDingo and Attract Electric Ultra Buggy establishing the most comprehensive, fully electric material handling and compact utility loader portfolio in the market. We continue to build on the strong performance of our Underground Construction portfolio with steady improvement in output and favorable customer response to new directional drills and vacuum excavators including the innovative JT21 Drill, the ATJT 120 and the WA hydrovac.

We have invested in R&D and capacity while divesting noncore construction assets to sharpen our focus and effectively meet demand. The innovation and superior quality of our Exmark-branded equipment, combined with favorable weather in key regions, drove higher-than-anticipated landscape contractor orders during the third quarter. Customers value the performance and durability of the Laser [indiscernible] lineup and productivity-enhancing features, including our exclusive Adapt technology for quick tool-free deck adjustments.

Before turning the call over to Angie, I'd like to acknowledge the participation of Edric Funk on this call, and I hope you will join me in welcoming him today and in the future. A 29-year veteran of The Toro Company, most recently as Group Vice President of Golf Grounds and Irrigation. Edric has been appointed President and Chief Operating Officer; and has assumed responsibility for all global businesses and our integrated supply chain operations. I'm excited to be collaborating with Edric in his new capacity and know his leadership will propel our company's profitable growth and competitive position.

I want to thank our employees and channel partners for their ingenuity and resourcefulness in advancing the product innovations and technology-driven solutions that enhance our customers' productivity. These advancements are critical drivers of our profitable growth and reinforce our confidence in The Toro Company's future. Now Angie will provide additional details and insights on our third quarter results and outlook for the remainder of the year.

Thank you, Rick, and good morning, everyone. We delivered solid operational performance in the quarter with adjusted diluted EPS of $1.24, $0.06 above the same period last year and better than our internal expectations. Consolidated net sales for the quarter were $1.13 billion, down 2.2% from Q3 last year. As we annualize on the prior year divestitures of company-owned dealers and [indiscernible] products, which account for about half of the quarter sales decline.

Reported EPS of $0.54 per diluted share included a noncash impairment charge of $0.62 per diluted share or $81 million pretax compared to $1.14 in the third quarter of last year. This impairment of the Spartan trade name is the result of persistently lower homeowner demand and slower market recovery. Our third quarter segment results reflect the variability in demand environments across our markets. Driving growth in the Pro segment and creating challenges for the residential segment.

Professional segment net sales for the third quarter were $931 million, up about 6% year-over-year, driven primarily by higher shipments of Underground Construction and Golf and Grounds products and net price realization. We achieved this growth in the quarter despite the unfavorable current year revenue impact from our 2024 strategic divestitures of company-owned dealers. Professional segment earnings for the third quarter were $199 million, up 20% year-over-year, resulting in an earnings margin of 21.3% up from 18.8% in the prior year. We delivered this 250 basis point increase in profitability through a combination of productivity improvements, net realization, net sales leverage and our purposeful initiatives to reduce costs. These favorable contributors were partially offset by higher material and manufacturing costs.

Residential segment net sales for the third quarter were $193 million, down 28% year-over-year. This was due to lower shipment across the segment as homeowners deferred big ticket purchases. In addition, channel partners remain cautious about inventory in the current environment due to continued volatility in consumer confidence. We are encouraged by the meaningful reduction we have seen in [indiscernible] as distribution partners sell through current stocks. This inventory level positions us well for the 2026 spring selling season. Residential segment earnings for the quarter were $4 million or 1.9% of sales compared to $33 million or 12.2% of sales last year. The decrease was primarily due to lower volume higher sales [indiscernible] and incentives to drive demand and inventory valuation adjustments, partially offset by productivity improvements.

While Residential remains challenged by macro factors, our decisive actions to rightsize operations and reduce field inventory position us for improved performance of consumer confidence returns.

Now turning to our operating results for the total company. Our reported and adjusted gross margins for the quarter were 33.7% and 34.4%, respectively, compared to 34.8% and 35.4%, respectively, in the same period last year. Year-over-year changes on both the reported and adjusted basis were primarily due to lower net sales volume, higher material and manufacturing costs and inventory valuation adjustments, partially offset by productivity improvements, net price realization and favorable product mix.

SG&A expense as a percentage of net sales for the quarter was 20.8%, a meaningful improvement from 22% a year ago. Given decline in net sales for the quarter, this result was particularly compelling, driven by deliberate AMP program measures as well as lower marketing costs. Operating earnings margin, including the noncash impairment charge, was 5.7%, down from 12.8% in the same period last year. On an adjusted basis, operating earnings margin was down 10 basis points to 15.6% due to lower volume. The third quarter reported effective tax rate was 7.4% compared with 17.3% last year. The decrease was primarily due to the impact of noncash impairment charge and a more favorable geographic mix of earnings this year, partially offset by lower tax benefits recorded as excess tax deductions for stock-based compensation in the current year period.

The adjusted effective tax rate for the third quarter was 17.3% compared with 18% a year ago. Free cash flow through the third quarter was $292 million, a year-over-year increase that was largely due to net favorable changes in working capital. This resulted in a free cash flow conversion rate for the quarter of 90%.

During the quarter, we invested $90 million in share repurchases, bringing our year-to-date total to $290 million. This reflects our confidence in cash generation and our commitment to returning value to shareholders while maintaining balance sheet flexibility for continued investment in technology innovation and new product development. Year-to-date, our actions have generated favorable momentum in our return on invested capital.

Looking ahead to the fourth quarter of fiscal 2025. We are excited about the continued strong demand and stable supply for our Underground Construction and Golf And Grounds businesses. At the same time, we anticipate continued pressure both from home owner demand and channel cautions that affected our third quarter results. With this backdrop and based on our current visibility, inclusive of anticipated tariff impacts, I will lay out our full year guidance.

For fiscal 2025, we expect total company net sales to be at the low end of our guidance range of flat to down 3%. We expect Professional segment revenue to be up slightly year-over-year while the Residential segment is expected to be down mid-teens. We continue to expect total company adjusted gross margin to improve on a year-over-year basis. We now expect adjusted operating earnings margin to be flat to slightly lower than prior year. Looking at segment profitability. We continue to expect Professional segment earnings margins to expand versus the prior year. However, economic headwinds from homeowners are expected to pressure Residential segment earnings margins resulting in a year-over-year decline.

Finally, we expect adjusted diluted EPS to be at the low end of our prior guidance range at about $4.15. These projections also assume normal weather patterns aligned with historical averages for the remainder of the fiscal year. Additional elements of our full year guidance includes interest expense of up $60 million capital expenditures of about $90 million and an increase in our free cash flow conversion guidance to about 110%. The strategic actions we discussed our AMP transformational productivity initiative and our tariff mitigation strategies are delivering immediate benefits and positions us for improved operating leverage as markets normalize. Our Professional segment continues to perform well. Our innovation pipeline remains robust, and our strong cash generation supports our investments in continued growth as well as returning capital to shareholders. We are resolutely managing factors within our control as we navigate the current environment, and we remain keenly focused on turning our business to sustained profitable growth.

With that, I'll turn the call over to Edric.

Thank you, Angie, and good morning, everyone. I'm excited to join you this morning, and I look forward to engaging with all of you in the coming months. Since joining The Toro Company in 1996, I've had the privilege of working with and leading talented teams across all our segments to strengthen our competitive advantage, advance our technology innovation and accelerate the development and delivery of exceptional solutions for our customers.

As I transitioned from my most recent position, leading Golf Grounds and Irrigation [indiscernible] the diligent efforts of our team in driving innovation and delivering profitable growth. Our partnership with the Ryder Cup which will be held this month at the Bethpage Black Course in New York, exemplifies our market leadership and provides a global platform to demonstrate technologies that are already generating significant commercial interest. We also recently launched our new GeoLink Mow Autonomous Fairway Mower. This introduction complements the robotic platforms that we released earlier this year and is another example of leveraging technology across the company to deliver customer value solutions.

As I begin my new role, I'm excited for the opportunity to partner with our leadership team to strengthen the performance and resilience of our business. We're doing that by strategically investing in value-generating technology and innovation and by optimizing our global supply chain operations. We're already taking decisive steps with our AMP productivity program tariff mitigation initiatives and prudent capital investment strategies to position the company for accelerated growth when the macro environment recovers. While both streamlining our footprint and aligning our production capacity with demand have resulted in lower current year revenue, we are confident these are the right strategic decisions for business. We are laser-focused on levering earnings growth, independent of revenue expansion, and we're committed to investing in the core businesses and growth opportunities that ensure enduring value for all our stakeholders.

Now Rick has a few closing remarks.

Thank you, Edric. The Toro Company is positioned to deliver long-term value through our focus on key growth markets and operational improvements. As we navigate a challenging environment, we are being proactive and purposeful in taking steps to accelerate our performance. We are strengthening our product innovation and technology leadership with a continuous pipeline of new offerings that elevate our customers performance. We are aggressively pursuing opportunities for greater operational efficiency that align our costs and capacity with near-term demand. We are focused on returning value to shareholders by maintaining a disciplined approach to capital allocation, balance sheet flexibility and strong cash flow. Now Edric, Angie and I would be happy to take your questions.

[Operator Instructions] And your first question comes from the line of Michael Shlisky of D.A Davidson and Co.

I wanted to start with a Professional segment question and how it relates to the consumer. Has the professional landscape channel, which has some consumers that on the large acreage side have come over to buy from new dealers. Is that part of your business still putting for that next leg up -- is the consumer challenges? So I guess i was kind of wondering what you have had organic growth even higher Professional had not been for that small trust of consumer does shop in the Professional channel?

Comments about the landscape contractor business. In total, that business actually grew in the third quarter, and that was the combination of a very strong demand from Professional contractors themselves. Particularly responding to the new products that one of those, which I mentioned, the Exmark new laser, which is kind of a flagship of Exmark and be kind of the standard in the industry. So the latest version of that products -- great response to that.

And then that strength of demand from the true contractors made up from still muted demand from homeowners that would typically be in that market. So Overall, we grew landscape contractors. That was a combination of strong contractor demand and lower homeowner demand. The homeowners are acting much more like they do in the Residential side at this point. So good question.

Great. And then sticking with Professional. This was a -- it looks like a record third quarter for Professional from a margin perspective, and this is going back a bunch of years in my model, you noted things like having lower marketing costs and some of your comments in your press release. I guess is that part of the AMP program or are those permanent reductions? Or are those just temporary? Just trying to see if Professional has entered a new and a higher margin range going forward after this great performance here. I also be curious about mix and Professional, whether that was a role on the strong margin as well?

Yes. Mix did have an impact the quarter. We continue to see strong demand from our Underground and Golf and Grounds businesses and saw increased production output as well. So that made an impact there. We did have a very strong quarter, up 250 basis points on operating margins for the Professional segment. So it continues to be a strong story there.

And yes, your question about AMP. AMP did have an impact. We saw strong impacts year-over-year in our cost savings related to transformational productivity efforts. A lot of that coming into the Professional segment, but overall total company. So we took, let's say, in our quarter, we had $21 million worth of in-year realized savings from AMP. So year-to-date or project to date, that's actually at $51 million for F '25 or sitting at $50 -- $47 million in realized savings for the year.

Great. And maybe the last one I've got for you. If we see a rate cutter even two, before the end of the year, the calendar year, I guess, would that improve the rest outlook and any kind of decent size way or do you just see a cadence of rate cuts going to 2026 to really see the consumer responds to lower interest rates?

We would all be speculating exactly on how the consumer would respond, but they're looking for a trigger to be more positive, but potentially part of the lower consumer confidence that we see right now. The fact that interest rates are higher. So interest rate cut or the start of cutting would -- you would have to imagine would be seen as a positive to consumers, give them some confidence to make those bigger ticket purchases, which they've [indiscernible] with them to do in the last -- really the last couple of years.

And our next question comes from the line of Sam Darkatsh of RJA.

So a few questions. First off, your Residential business. So I guess I'll just ask it as relates to your market share of sell-in and sell-through. I know two of your big retailers, Lowe's and Tractor Supply, both called out the lawn and garden category as being a positive, favorable category for them. So how are you feeling about your market share? Your floor plan -- your floor space at those retailers and your prospects for growth in the those two customers next year?

I think importantly, we have maintained our market share through an incredibly sort of extreme cycle through the last few years. This is a business that historically is growing over a couple of decades by 3%. And within the last 5 years, we've had some plus 20s and some minus similar amounts. So this is something that we've experienced before.

The positive thing is that we have maintained our market share through that process. So it really reflects the cycle that the market is going through. Specific to our year-over-year business and related to Lowe's specifically for us, it's kind of a tough comp for us from a shipment standpoint. Our business, to a large extent, driven by the Lowe's selling was up 53% in the last third quarter. That's from a comp standpoint. And in the current environment, it's the hesitant homeowners that we talked about along with all consumers at this point on big ticket items that has them more hesitant to make purchases.

The good news is that retail has been strong through the latter part of the season. It was a slow start to the season. So the retail some of which you're seeing reported in those retailer reports has been strong later in the season. That's for us, made up for some of the slow starts in the early portion of the season. But what you see is a hesitancy, particularly by dealers to restock at this point in the current environment. So most of the dynamic, again, holding market share seen the benefit of longer retail with those channel partners. And the good news is even though they're not taking more stock, we are further adjusting the field inventory, which is both up for a healthy of F '26.

And then my follow-up or segue question to that, Angie, you mentioned, and this is no surprise, obviously, but the Residential margins are expected to be down this year. To what degree are you expecting the margins to be down? What do you peg as, I guess, "normal resi margins" at this point? And what's the likelihood that 2026 is going to look like that sort of normal margin profile in the segment?

Yes. As we talk about residential margins, we said that those would be -- for the full year, those would be lower year-over-year from last year's 7.9%. So we do expect those to be a little lower with all of the things that we've talked about impacting those Residential margins this year and this past quarter.

From a normal basis, Sam, those are typically somewhere in that 8% to 10% margin range. Although we expect to get to that over time, we likely will not in F '25 and we expect to get closer to that sometime in the near future. I think like Rick said, it really -- what is -- the actions that we've taken this year have really set us up for a stronger F '26, whether those are or onetime reductions like E&O, things like that, that will set us up for a better F '26.

And then my last question, and I apologize if you covered this in your prepared remarks and I missed it. What are your expectations now for year-end backlog and the prospects for Pro growth next year?

Yes. We would expect year-end backlog to be substantially reduced from previous years as we work down to the more normal order cycle and lead times. There are a lot of dynamics there. The time frame in which customers are ordering is also pulling in back more towards normal. So I think we previously had commented that the Underground Construction categories would extend well into 2026. Golf and Grounds should be close to normal, although the recent order trends indicated that will spill into next year in some categories as well. So continued good prospects for growth, but returning more to normal [indiscernible] versus driven by the back order overload.

So you're still thinking '26 as a growth year comfortably for Pro?

For Pros. Yes.

Yes. Demand in Golf and Ground and Underground. Expect the Professional that we talked about earlier with our landscape areas. The contractor is still very strong as well, and we've got a good book of orders in front of us.

Our next question comes from the line of David MacGregor of Longbow Research.

Yes. I guess I wanted to start off just on the AMP program, you'd expect it to reinvest 50% of the benefit and take the remaining 50% to the bottom line. So $75 million that you referred to this morning, what's been taken to the bottom line so far?

David. So the $75 million is program-to-date savings. So that's run rate savings, so those will be annualized cost savings that we expect to get in the future. For our project today, actually, I'll go back to our F '25 in-year realized savings, which means what we should have expected to see potentially in the P&L and that this year is $47 million to date through 2025.

A lot of that is impacting the P&L in the ways of things that you're seeing with SG&A savings, some of the footprint rationalization we've have done, capacity. But we're also having to offset some of the costs that we're seeing in this homeowner volume reduction and tariff headwinds, overall under absorption and some lower volumes, but we're using some of that also to fuel our continued innovations in technology. So you're not seeing those directly related to AMP because we are reinvesting a big portion of that this year into the other things that I've mentioned.

And even though it goes to offset some of the specific challenges this year with lower volume, et cetera, in Residential. Those are run rate savings, so they will continue in the future and where we start to get relief from some of those factors where we're spending it today, those benefits will still be there in the future.

Right. And I guess you're talking about 2027 at the end of 2027, but you appear to be, at least on a run rate basis, 3 quarters of the way through this program already. I guess the obvious question is the potential to see this target raised over the remaining 2 years of the planning horizon?

Yes, you're exactly right. So we're very excited about the progress that we've made with our AMP initiative, and we've had great success to date, we're tracking well ahead of -- with our $75 million of run rate savings towards that $100 million goal. So when we give our guidance in Q4, I think we'll be prepared to talk about AMP 2.0 or AMP Square.

Okay. Sounds good. I look forward to that. Second question is on tariffs. I guess, just talk about your success to date with tariff mitigation and what impacted tariffs -- I guess, net of mitigation actions have on third quarter margins?

Yes. If you -- just a little commentary from where we picked up or picking up from last earnings call. Last call, we talked about roughly 3% of COGS being the impact that we estimated at that point from tariffs for the year in F '25. That equates to about $90 million. And just one note on the $90 million that would also be inclusive of existing tariffs that were there since 2017, '18 time frame. So the actual incremental in '25 due to new tariffs would have been [ $75 ] million at that time.

At this point, we are estimating that the equivalent incremental tariffs would be about $45 million. And what's interesting is the split, how that breaks down has shifted. So our second quarter call, it was mostly about China, even though we had small exposure. There was an exceptionally large tariff that was on the horizon that we have built in. Today, the largest portion is steel and aluminum based on the general tariffs there, even though the vast majority of our steel comes from the U.S. It does -- we are affected because of the very high rate even on a small percentage that does not -- and then that would be followed by an equal measure of China, the baseline reciprocal tariffs and a small portion of Mexico from Mexico and China, maybe $5 million out of that. Thankfully, our products have been USMCA compliant they have been from the start in Mexico and are currently not subject to significant tariffs there.

I know the IEPA or the reciprocal tariffs are sort of a point of debate right now. How much within that $45 million would be the IEPA?

Not that we've broken it out specifically to address the IEPA, we haven't broken it out.

We can get that information?

We can.

Okay. Great. And then how much incremental pricing and mitigation traction should hit the P&L in the fourth quarter?

So in the second quarter, we expected to offset the dollar for dollar tariffs at this point. We see a potential path by year-end to be able to maintain our margins as well through a combination of the productivity measures that Angie talked about, plus the careful pricing that we did in this environment as well. So we see a way to be margin neutral by the end of the year.

Margin neutral by the year-end. Okay. Good. Last question for me. I guess I just want to go back to Sam's question on Residential and exploring the margin potential there. and have that conversation around the Professional segment margins. And I'm just thinking back prior to April 2019, Charles [indiscernible] acquisition, and Toro was, I guess, generating consistent 20% margins in the Professional segment, as I recall. Charles Machine work is obviously dilutive and margins dropped to mid-teens levels, but you've been making pretty steady progress on rebuilding those margins to -- now despite sort of the headwinds in the landscape contractor, the Professional segment margins are running at a kind of a 19% annual trajectory.

So I guess the question is how much upside is realistically achievable in Pro segment margins given the remaining recovery opportunities that may still exist at Charles Machine Works and Underground Construction. And I guess on top of that, a recovery in the larger landscape contractor business?

We do have opportunity to expand those margins. As you noticed, our SG&A spend is down. We've made purposeful cost reductions in those areas. We're continuing to see productivity improvements. We're getting the net rate realization -- of the tariff mitigation efforts, pricing that we implemented and also additional pricing and then also some lower marketing costs. But the piece of the homeowner that carries over into our Professional segment is also impacting us somewhat there creates us -- creates some manufacturing variances and capacity utilization. So as we think about those types of things and what we can take forward, there will be improvements as we continue to go forward.

And just to acknowledge the first thing you said, I think, is Charles Machine Works and Ditch Witch specifically has made tremendous progress in moving up from a profitability standpoint. So I just want to acknowledge the work that's been done there by our team.

And just one thing I would add. As you've noticed with our transformational activity initiative, we are making some portfolio adjustment. We are looking at SKUs just this past quarter, we looked at some assets that could be potentially non-core assets and with Trencor and the [indiscernible] boring products and are moving those out as we see necessary.

So within the progress this quarter on Professional margins, that 250 basis points of improvement, how much of that was productivity benefit versus price cost and volume leverage and cost cuts?

Well, it's all price up. We saw productivity improvements being an impact. So both of those are pretty big factors as well as part of the mix.

Our next question comes from the line of Thomas Mahoney of Cleveland Research Company.

I wonder if you look through the moving pieces in the 4Q revenue guidance. I guess, first, is there a way -- it does look like the Pro segment could be implied down year-over-year. Is there a way to size the divestiture impact inside that and just speak through if there's -- in the remaining business, if there's any instance where maybe some has been pulled into the third quarter that comes out of the fourth quarter, anything along those lines?

We did mention in Q3 that half of the decline in Q3 was related to the divestitures year-over-year. So that not only includes the [indiscernible] divestiture, which is in the residential segment, but also the many owned dealers in the Underground Construction space. So it was half of contract. -- that's part of the fourth quarter. And yes, it will be part of the fourth quarter guide as well.

And American Augers remains in the future, not a part of the fourth quarter guidance?

So just to correct that. So American Augers is still part of the Underground Construction. This is just a product line. It's called Auger Boring. It is just a very small component. It's not a horizontal directional drills. So the Auger Boring piece is what we sold off as well as the large Trencor Trenchers. So those are the two pieces that will come out of the Underground Construction group.

Understood. And then from a from a cost basket perspective, -- is there anything outside of tariffs to be sure to consider as we move through the second half of the year and into '26? Or do you view the incrementals as you frame them up here, pretty complete in terms of the cost and the cadence that you're thinking about looking into next year?

I think the thing that you should continue to consider, you mentioned tariffs, the inflation that also comes along with that. And then also the manufacturing variances that have been related to us really aligning our production and demand. So as we look at those plants that are producing Residential and homeowner products, and really aligning the -- plus the inventory valuations that we've completed. So I think those are part of the factors that you'll have to consider for cost in Q4 and early '26.

And our next question comes from the line of Bob Schultz of Baird.

Most of mine have been answered already, but maybe just one on the Golf side first. Could you give us an update on where lead times are today? And just remind us on how that compares to what normal lead times are and give your -- what sort of line of sight do you have to see continued lead time improvement there?

Yes. Good question Bobby. I'm happy to give you a little insight there. As I think you know, lead times have become extremely extended as we navigated some of the supply chain disruptions. We've talked before about as we got to the end of this fiscal year, we thought we'd be getting pretty close to current.

And as Rick mentioned earlier, as orders continue to come in strong, there are still going to be individual models where that lead time is longer than normal. But we're getting to a point where we're much more current. We're certainly more current on our own production. We also have to realize, though, that ultimately, the product is prepped for delivery to the customers from our channel partners. And there are still cases there where some of them are working that product through, but it's much more current and a much more healthier position than we were, say, this time last year.

Got it. And then on Spartan Mower, I think when you guys acquired Intimidator, its annual sales were about $200 million. Any high-level way to frame what the Intimidater group sales are today relative to that $200 million?

Yes. It is now part of the Landscape Contractor Group, but just rough ballpark, I mean, it's significantly less than that because it is significantly less than it was at the time of acquisition because it has a higher penetration of homeowners. So that's probably the biggest factor. It is substantially down from where it was at the time of acquisition. That relates to the impairment that we've [indiscernible].

That was Bobby, particularly hard hit because there are a lot of more residential buyers, like Rick said. We do believe there is value in providing a suite of zero-turn mowers that are complementary to both Toro and Exmark and this addresses a geography and a customer base that we serve. We don't serve well today.

Our next question comes from the line of Ted Jackson of Northland.

I've got a couple of questions around inventories, both on your balance sheet and the dealer itself. And so just starting with the Toro inventory levels, would you view your current inventory levels as being kind of balanced to demand or still work being done there? And then when you think about your inventory levels what would be kind of your target when that could be either like days inventory turns?

Now my sense is that you still may be little heavy there -- would like to get a sense in terms of where that stands and kind of what the target is? And maybe some color in terms of how you expect to get there?

And on the dealer side, you're positioning yourself the set up for a solid season in 2026. And you made a reference to efforts that we're going to allow you to bring the dealer inventory further to ensure that you are positioned. So maybe some discussion with regards to kind of dealer inventories. Where they are now? What your are going to be put them to where it sounds like you want them to be when we get to spring and then maybe just because we're coming up to winter, some discussion with regards to I don't know, mix is with regards to snow products and such as well?

Ted, maybe I could start out talking about the field inventory and then Angie can finish up talking about our own balance sheet inventory. So if you look broadly across our businesses, we've made really good progress in the right directions for each of those. So first of all, Underground is an area that we've been very short of field inventory. We've made good progress there, but we still have some distance to go to have the right stock at our dealers and available for immediate delivery if they need that. So we have made good progress. We still have more to go to add to our field inventory in Underground.

Golf and Grounds is about right at this point. But similar to Edric's comments in some categories, we still are short field inventory. Many of the categories we're in good shape at this point and the product is flowing through with good velocity through those through those distributors right now, those dealers and distributors.

And on the Residential side, good progress because of the factors that we talked about as you said, set up well for next year, we will continue to manage that very prudently with our channel partners to make sure that we match the retail as we go forward here. So that's really our that's really our plan at this point.

Our inventory... Go ahead, if you have a question.

Just a little more clarity in there. So when you talk about the lining and being the Residential making good progress and being aligned. Making sure it's aligned for the spring selling season. I mean, that would imply that you feel -- I mean, do you feel like it's still a little heavy and then you have some things to do?

I mean how is that going to be aligned for the spring selling season, given where we are in the we're at the end of the season now, because we're getting at with that is like -- is there any actions that Toro is doing to bring those into alignment? Is it -- is it kind of where you want it to be given your view for '26 and there's really nothing else to do. I mean I guess that's kind of -- I'm just a little lost on that one. That's all.

Yes. I think in a general sense, we'll continue to work with our channel partners like dealers on promotional activities to help move the product through at this time of the year. We are in a much better position than we were last year. We'll continue to still help our dealers drive retail at this time here given spring is a few months away.

And then just keep in mind that we're coming off 2 years of low snow in our key markets. That cuts across our Residential business, the BOSS business and some portion of Ventrac. So we do have snow inventory. In some cases, that's been there for a season or even two. So that is part of the sort of dealer capacity inventory that's out there they may talk about if they're describing our inventory. At this point, sort of a normal preseason snow load that's out there in the channel. It's just that it was loaded in last year or the year before.

Our inventory has made progress. As you know, Ted, it's been a focus area for us for the full year. But we made good progress sequentially. So we're down since last quarter and down a bit since year-end as well. Working first and foremost to kind of get back to our -- the levels that we expect and probably driving those turns above 3. We still feel like we're a bit heavy on our total inventory.

For Q3, finished goods actually went up a little bit. Some of that in good inventory as we continue to get more inventory produced for our Underground business and commercial to be able to fill some of that backlog. But sequentially, it was down. Our WIP inventory continues to come down on a year-over-year basis and then also sequentially. So we're making good progress. We know we still have work to do there, but it continues to be a focus area as well.

So in your target, then it would be around 3 turns. Obviously, just on average over, lets say, the course of the year. That's kind of where you're trying to get yourself to?

I'd say that's my first step. I'd like to get there first and then continue to make it better.

This concludes the question-and-answer session. Ms. Hilley, please proceed to closing remarks.

Thank you, everyone, for your questions and interest in The Toro Company. We look forward to talking with you again in December to discuss our fiscal 2025 fourth quarter and full year results.

Thank you for your participation in today's conference. This does conclude the presentation. You may now disconnect. Good day.