The Toro Company ($TTC)

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 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. 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 JT 120 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 train 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 Ditchwitch 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 AM productivity program. Our strategic facility closures, reductions in salary 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 repurchase 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 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 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 wealth 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 JT 120 is really the largest drill in its category, 20,000 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 very strong, and we continue to see that data centers as much as to 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 contract equipment. What are you seeing in the way of demand change from that aspirational consumer reaching 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. 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 the $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. The -- 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. 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 to 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 disease, 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 out 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 orally 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 question or 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 in the back half of this year?

Yes. I mean I sort reinforcing what Angie said, you can kind of look at that as the status quo run rate. Maybe the only additional qualifier and 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 incorporate? 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 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% in the 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-offs trying to introduce their autonomous products on golf course is kind of going around 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 lowers 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 temper expectations and 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 congrats on the quarter. And 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 nicely. I can mention the -- yes, with a long list of questions, and it just got kicked off one by one, but I got a couple left. And just a little one is with the more normalized winter and the drawdown of the inventory -- the excess inventory is 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 do being 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 willing only 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 in all 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 behind your druthers, where you'd like to grow your business and a game -- that's my last question.

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, some 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. But -- 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. Just, 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...

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 we're 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 is 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 that 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 kits 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.