Outdoor power equipment manufacturer The Toro Company‘s finance joint venture originations declined in the second quarter alongside the manufacturer’s professional sales segment.
BY THE NUMBERS: Red Iron, the financing joint venture owned 45% by Toro and 55% by Huntington Distribution Finance, experienced a decline in originations during the second quarter of its fiscal 2024, which ended May 3, according to Toro’s 10-Q filing with the Securities and Exchange Commission.
According to Equipment Finance News’ analysis of the company’s first– and second-quarter 10-Qs:
- Net receivables financed for dealers and distributors under Red Iron for Q2 landed at $740.1 million, down 7% year over year;
- Total Red Iron outstandings reached $1 billion, down 6.8% YoY;
- Total receivables due to Toro from Red Iron were $35.1 million, up 1.2% YoY;
- Net receivables financed for dealers and distributors by third-party financial institutions reached $172.9 million, up 26.9% YoY;
- Total third-party financial institutions’ outstandings finished Q2 at $190.6 million, down 1.8% YoY; and
- Toro’s total investment in Red Iron after Q2 totaled $51.7 million, down 2.8% YoY.
The financing joint venture centers around floorplan costs, Angela Drake, vice president and chief financial officer, said today during the Toro Company’s earnings call.
“As is typical for these types of financing programs, the large majority of floorplan interest payments to Red Iron and our other inventory financing partners are funded by the Toro Company as the OEM,” she said. “From the dealer or distributor perspective, Red Iron’s financing offer is similar to a third-party bank program and, from our perspective, the Toro Company’s 45% non-controlling ownership stake in the Red Iron joint venture allows us to recoup a portion of our floorplanning costs.”
Toro sales inch up
Meanwhile, Toro’s net sales and professional segment sales also declined in Q2, according to the company’s earnings presentation:
- Total net sales landed at $1.3 billion, up 0.7% YoY;
- Professional segment net sales declined to $1 billion, down 5.9% YoY; and
- The professional segment’s earnings rate as a percentage of net sales declined to 19%, down 230 basis points YoY.
WHAT THEY’RE SAYING: While the Q2 financing and sales performance beat expectations, the usage and performance of Red Iron indicates potential customer financing concerns, according to a Raymond James research note.
“The fact that Toro finds the need for an internal credit operation that effectively floorplans dealer and distributor inventories indicates that many customers may be financially constrained,” according to the note. “The longevity of this segment suggests that this risk factor is likely low, but it remains worth mentioning nonetheless.”
STATE OF PLAY: Despite the decline in Red Iron’s originations and outstandings, Toro saw improvements in its days sales outstanding (DSO) metrics, Drake said.
“We saw significant improvement in the Red Iron DSO in the second quarter,” she said. “In fact, we saw a 46-day improvement from Q1 to Q2 for lawn care.”
NOTEWORTHY: While the company experienced a slight sales increase and a decline in professional sales, its situation remains comparable to the industry as Toro continues to reduce inventory, Drake said.
“Strong retail drove liquidation, and that was coupled with lower shipments to the dealer channel,” she said. “We’re well over halfway through reducing field inventory. We also understand from Huntington Bank that we are in a similar situation as our industry and faring even a little bit better with the strength of our channel and products.”
MARKET REACTION: Shares of The Toro Company (NYSE: TTC) were up 14.40% or $11.47 from market open to $91.11 as of market close today. The Toro Company has a market capitalization of $8.31 billion.
THE BOTTOM LINE: With the supply chain normalizing and the company experiencing another quarter of sales growth, the company anticipates continuation of its near 15-year streak of annual sales growth, Richard OIson, chairman and chief executive of The Toro Company, said during the earnings call.
“The supply chain has largely returned to normal, which is enabling incremental output for our businesses with elevated order backlog,” he said.
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