The Toro Company's Q3 2025 Earnings Call: Contradictions Emerge on Landscape Contractor Performance, Tariff Mitigation, Residential Outlook, Pro Landscape Demand, and AMP Program Impact

The above is the analysis of the conflicting points in this earnings call

Date of Call: September 4, 2025

Financials Results

• Revenue: $1.13B, down 2.2% YOY (about half of decline from prior-year divestitures)
• EPS: $1.24 adjusted diluted EPS, up $0.06 YOY; $0.54 GAAP EPS, down from $1.14 prior year due to $0.62/share noncash impairment
• Gross Margin: 34.4% adjusted (vs 35.4% prior year); 33.7% reported (vs 34.8% prior year)
• Operating Margin: 13.6% adjusted, down 10 bps YOY; 5.7% reported (incl. impairment), down from 12.8% prior year

Guidance:

• FY25 net sales expected at the low end of prior guidance (flat to down 3%).
• Professional revenue up slightly YOY; Residential down mid-teens.
• Adjusted gross margin to improve YOY.
• Adjusted operating margin now expected flat to slightly below prior year.
• Professional margins to expand; Residential margins to decline.
• Adjusted diluted EPS at low end of prior range, about $4.15.
• Assumes normal weather; includes anticipated tariff impacts; targeting margin neutrality via pricing/productivity.
• Q4: strong demand in Underground Construction and Golf & Grounds; continued homeowner/channel caution.
• Interest expense ≈ $60M; capex ≈ $90M; FCF conversion ≈ 110%.

Business Commentary:

• Third Quarter Financial Performance:
• The Toro Company announced adjusted earnings per share of $1.24, exceeding expectations, despite a 2.2% decline in total consolidated net sales to $1.13 billion.

• The decline was partly due to strategic divestitures and headwinds in the residential segment.

• Strategic Focus and Margin Expansion:

• The professional segment reported a 6% year-over-year growth with margins expanding 250 basis points, reflecting strong demand for innovative products and net price realization.

• This growth was supported by operational improvements, net price realization, and productivity initiatives.

• Residential Market Challenges:

• The residential segment's net sales decreased by 28% year-over-year due to lower shipments and slower retail sales, influenced by consumer cautiousness and channel inventory levels.

• The company emphasized efforts to align field inventory with consumer confidence recovery.

• Product Innovation and Market Opportunities:

• Key product introductions included the Ventrac 45RC, Toro Spatial Adjust Irrigation Control Software, and new Exmark Lazer Z products, enhancing operational efficiency and customer value.
• These innovations are expected to drive sustained growth in golf, construction, and other professional sectors, despite residential segment challenges.

Sentiment Analysis:

• Adjusted EPS of $1.24 exceeded expectations; Professional segment sales up ~6% YOY with margin +250 bps. Residential sales down 28% YOY; segment margin fell to 1.9% from 12.2%. FY25 outlook guided to low end (EPS about $4.15; net sales low end of flat to -3%). Management cites strong Professional demand but ongoing residential headwinds and tariff impacts.

Q&A:

• Question from Michael Shlisky (D.A. Davidson & Co.): Is Professional growth being dampened by weaker consumer demand in the landscape channel, and would growth have been higher absent homeowners shopping that channel?
  Response: Landscape contractor business grew; strong contractor demand offset muted homeowner demand in the pro channel.

• Question from Michael Shlisky (D.A. Davidson & Co.): Are Professional margins entering a higher, sustainable range, and how much was AMP/mix-driven?
  Response: Professional margin expanded 250 bps, driven by mix (underground/golf), AMP productivity savings, price realization, and lower marketing.

• Question from Michael Shlisky (D.A. Davidson & Co.): Would potential rate cuts this year meaningfully improve Residential demand?
  Response: Rate cuts would likely lift consumer confidence and spur big-ticket purchases.

• Question from Sam Darkatsh (Raymond James): Residential share/placement at Lowe’s and Tractor Supply and prospects for 2026?
  Response: Market share maintained; late-season retail was solid but dealers remain cautious restocking; field inventory reduction positions Residential well for FY26.

• Question from Sam Darkatsh (Raymond James): How much will Residential margins be down this year, and what is a normal range?
  Response: FY25 Residential margins will be below last year’s 7.9%; normal range is ~8–10% over time, with improvements expected toward FY26.

• Question from Sam Darkatsh (Raymond James): Year-end backlog and Professional growth prospects for next year?
  Response: Backlog normalizing but orders healthy; expect Professional growth in 2026.

• Question from David S. MacGregor (Longbow Research): How much AMP benefit has hit the P&L and could the $100M target be raised?
  Response: $47M in-year realized savings YTD with run-rate at $75M; much offset/reinvested; will discuss an expanded AMP program at Q4.

• Question from David S. MacGregor (Longbow Research): Tariff impact and mitigation in Q3 and into Q4?
  Response: FY25 incremental tariff impact now ≈$45M (largest from steel/aluminum); targeting margin neutrality by year-end via pricing and productivity.

• Question from David S. MacGregor (Longbow Research): Upside potential for Professional margins post-Charles Machine Works recovery?
  Response: Further expansion expected through SG&A reductions, productivity, and pricing; CMW profitability has improved, though some homeowner softness affects variances.

• Question from Thomas Mahoney (Cleveland Research): How do divestitures affect implied Q4 Professional revenues; any Q3 pull-forward?
  Response: About half of Q3 sales decline was from divestitures (Pope, company-owned dealers); these impacts also affect Q4 comparisons.

• Question from Thomas Mahoney (Cleveland Research): Beyond tariffs, what cost factors should we consider into Q4 and early 2026?
  Response: Inflation, manufacturing variances from aligning production to demand, and inventory valuation adjustments remain factors.

• Question from Robert Schultz (Baird): Current Golf lead times vs normal and path to further improvement?
  Response: Lead times are much more current than last year; some models remain longer due to strong orders, but overall position is healthier.

• Question from Robert Schultz (Baird): Spartan/Intimidator sales relative to the ~$200M at acquisition?
  Response: Significantly below that level now due to higher residential exposure, underpinning the trade name impairment.

• Question from Edward Jackson (Northland Capital Markets): Are Toro and dealer inventories balanced, and what are the targets?
  Response: Field inventory: underground still building, golf near normal, residential being prudently reduced; company inventory heavy but improving with a >3 turns initial target; snow inventories elevated after two low-snow years.