Detailed Narrative
AMP Program Driving Productivity and Margin Expansion
The company's AMP program, launched in early fiscal 2024, continues to exceed expectations and is on track to deliver $125 million in run-rate savings by the end of this fiscal year. This initiative, leveraging lean principles and continuous improvement, has been instrumental in driving significant margin improvements, with Q2 adjusted operating margins reaching 14.4%, the highest in 12 quarters. The program's success has enabled the company to offset inflationary pressures and invest in the business, such as the new paint system at the Perry, Oklahoma facility.
Strong Demand in Underground and Specialty Construction
The Underground and Specialty Construction segment achieved low double-digit organic sales growth, driven by robust demand for products like the JT 120 horizontal directional drill and the JT21 compact drill. Customer response has been strong, with a growing order pipeline, particularly for projects related to data centers, power utilities, and fiber optic installations. The Orange Intel fleet management system is also enhancing customer productivity and job site intelligence in this area.
Successful Integration and Growth of Tornado Acquisition
The integration of Tornado is progressing better than anticipated, contributing over 2 percentage points to the company's top-line sales. The business benefits from significant and growing demand for soft excavation, driven by increasing state and country requirements for safely uncovering underground utilities. This trend is expected to continue as awareness of mitigating infrastructure damage during excavation grows, providing a long runway for growth.
Golf and Grounds Segment Performance
The Golf segment continues to show strength in core products, including greens, fairway, and contour rotary mowers. While autonomous solutions are in early stages, customers recognize their potential to complement existing fleets, increase productivity, and improve labor efficiency. Demand in non-Golf high-end grounds applications is also strong, contributing to the overall positive performance of the Professional segment.
Residential and Landscape Contractor Market Dynamics
Landscape contractors entered Q2 in a healthy position following a normal snow season, driving high single-digit sales growth across Toro, Exmark, and Ventrac brands. Residential sales benefited from more typical spring conditions compared to the delayed spring last year. While field inventories for landscape contractor and residential are somewhat below desired levels due to elevated demand, particularly for zero-turn mowers, the overall market is normalizing, with a return to longer-term growth rates expected.
Technological Advancements and Innovation
The Toro Company is accelerating product innovation and technical excellence through initiatives like its annual technology forum. This includes advancements in electrification, smart connected products, autonomous solutions, and AI. Examples range from leveraging industrial collaborative robots and AI-enabled vision systems for manufacturing efficiency to using augmented reality for weld specifications, all aimed at enhancing product quality and reducing delays.
Tariff Landscape and Financial Impact
The company's gross tariff estimate for fiscal 2026 is $120 million, up from a prior estimate of $100 million. However, an anticipated $20 million refund from the termination of IEEPA tariffs means the net impact to full-year guidance is negligible. The company continues to evaluate recent changes to the tariff landscape, including Section 232 and Section 301, but expects the run-rate tariff expense to be around $120 million annually, with ongoing mitigation efforts.