Toro Company (The)

Ladies and gentlemen, thank you for standing by and welcome to the Toro Company Fiscal Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to turn the call over to your host, Julie Karikas, Treasurer and Senior Managing Director, Global Tax and Investor Relations. You may begin.

Thank you, and good morning, everyone. Our earnings release was issued this morning, and a copy can be found in the investor information section of our corporate website, thetorocompany.com. On our call today are Rick Olson, Chairman and Chief Executive Officer, and Renee Peterson, Vice President and Chief Financial Officer. We begin with our customary forward-looking statement policy. During this call, we will make forward-looking statements regarding our business and future financial and operating results. You all are aware of the inherent difficulties, risks, and uncertainties in making predictive statements. Our earnings release as well as our SEC filings detail some of the important risk factors that may cause our actual results to differ materially from those in our predictions. Please note that we do not have a duty to update our forward-looking statements. In addition, during this call, we will reference certain non-GAAP financial measures, reconciliations of historical non-GAAP financial measures to reported GAAP financial measures, can be found in our earnings release or on our website. We believe these measures may be useful in performing meaningful comparisons of past and present operating results and cash flows to understand the performance of our ongoing operations and how management views the business. Non-GAAP financial measures should not be considered superior to or a substitute for the GAAP financial measures presented in our earnings release and this call. With that, I will now turn the call over to Rick.

Thanks, Julie, and good morning everyone. The Toro Company has a long history of consistently delivering financial results in line with our expectations, and this quarter was no exception. For the second quarter, we drove 8.7% top line net sales growth, and that was on top of our strong 23.6% growth in the second quarter of fiscal 2021. Our top line growth was driven by net price realization, continued strong demand for our innovative products, and our ability to produce in what remains a highly dynamic operating environment. We continue to see broad-based demand across our professional businesses. We also saw solid demand in our residential segment for zero-term riding mowers, although the late spring impacted retail demand for other products. Importantly, we saw areas of incremental improvement in our supply chain. On our last call, we indicated that second quarter adjusted gross margin would be similar to our first quarter. Our team executed well and delivered a 30 basis point sequential improvement in adjusted gross margin compared to Q1. We also reported a 390 basis point sequential improvement in adjusted operating earnings margin for the second quarter as we continued to drive margins toward historic levels. Over the past couple of years, our employees and channel partners have been operating in what has been one of the most dynamic environments that many of us have ever seen. Our team has been creative, resilient, and steadfast in working to optimize the factors within our control and serve our customers well while taking care of one another. As a result of the actions our team has taken to improve our near and long-term performance, we are increasingly confident in our outlook for the fiscal year. Therefore, we are raising both our sales and earnings per share guidance for fiscal 2022. Renee will provide more insight into our improved outlook in just a few minutes. Our market leadership is underpinned by a foundation of long-term caring relationships, which are central to our purpose of helping customers enrich the beauty, productivity, and sustainability of the land. A few highlights since our last call demonstrate our dedication to this purpose. In March, Singapore's world-renowned Sentosa Golf Club announced a 10-year partnership with the Toro Company and our local distributor, Jebson & Jessen. With its pledge to become the world's first carbon-neutral golf club, Sentosa cited the importance of working with a partner who not only shares a commitment to the environment, but also supports their mission to deliver a world-class playing experience. In April, we celebrated our acquisition of the Intimidator Group with state and community leaders at our facility in Batesville, Arkansas. The Intimidator Team shares our values and is passionate about serving customers, supporting the community, and doing business the right way. This acquisition represents an incredible opportunity to share resources and technology to expand product lines and geographic reach. And importantly, we're doing so in the large and growing zero-turn mower space. The integration is off to a great start, and we believe the combination of our teams will drive value for all stakeholders. Throughout the quarter, we kept our focus on our strategic priorities of accelerating profitable growth, driving productivity and operational excellence, and empowering people. With this focus, we delivered near-term results while also capitalizing on long-term opportunities supported by our disciplined capital allocation and strong balance sheet. In our manufacturing facilities, we are seeing the benefits of lean principles and are continuing to invest in automation and capacity. We're improving our operations for enhanced resiliency, flexibility, and agility and are prepared to emerge from this dynamic period as an even more productive organization. I will now turn the call over to Renee for a more detailed review of our second quarter financial results.

Thank you, Rick, and good morning everyone. As Rick said, in the second quarter, we once again delivered on our expectations. We drove sequential improvement in profitability over Q1 as our team executed well in what remains a constrained supply environment. We grew net sales to $1.25 billion, an increase of 8.7% compared to the second quarter of last year. Reported EPS for the quarter was $1.24 per diluted share, down from $1.31 for the same period a year ago. Adjusted EPS was $1.25 per diluted share, as compared to the record $1.29 in the second quarter a year ago. Professional segment net sales for the second quarter were $925.8 million, up 11.8% from the same period last year. This growth was primarily driven by net price realization, and incremental revenue from our first quarter acquisition. This was partially offset by lower volume in certain key product categories due to product availability constraints. Professional segment earnings for the second quarter were $165.4 million, and when expressed as a percent of net sales, 17.9%. This was down from 20.2% in the second quarter last year, The year-over-year decrease was primarily due to higher material freight and manufacturing costs and the addition of our first quarter acquisition at a lower initial margin relative to the segment average, partially offset by increased price realization and productivity initiatives. Residential segment net sales for the second quarter were $319.7 million, up 1.5% from last year, building on the 20.2% growth we reported in the second quarter of fiscal 2021. The increase was primarily driven by net price realization and higher shipments of zero-churn riding mowers. This was partially offset by lower sales of walk power mowers and portable power products. primarily due to the delayed spring weather patterns across many parts of the U.S. Residential segment earnings for the quarter were $37.1 million, and when expressed as a percent of net sales, 11.6%. This was down from 14.6% for the second quarter last year. The year-over-year decrease was primarily driven by higher material freight and manufacturing costs partially offset by increased price realization and productivity improvements. Turning to our operating results, in Q2, we reported a gross margin of 32.4% and an adjusted gross margin of 32.5%, both compared to 35.1% in the same period last year. The year-over-year decreases were primarily due to higher material freight and manufacturing costs, and the addition of our first quarter acquisition at a lower initial gross margin relative to the company average, partially offset by increased price realization and productivity improvements. Sequentially, we achieved a 30 basis point improvement in adjusted gross margin when compared to the first quarter of fiscal 2022. We continue to manage the factors within our control and are making progress on net price realization and productivity initiatives. We intend to restore and improve margins over the long term. As part of this effort, we will continue to drive additional productivity and synergy benefits across the organization. SG&A expense as a percent of net sales for the quarter was 18.7%. compared to 19.4% in the same period last year. This improvement was primarily driven by net sales leverage and lower incentive expense, partially offset by higher indirect marketing expenses. Operating earnings as a percent of net sales for the second quarter were 13.7%, compared to 15.7% in the same period last year. Adjusted operating earnings as a percent of net sales for the quarter were 13.8%, compared to 15.7% in the same period a year ago. Interest expense for the quarter was $8 million, up $900,000 from the same period last year. This was driven by incremental borrowing to fund our acquisition in the first quarter of this year. The reported and adjusted effective tax rates for the second quarter were 20.6% and 20.8%, respectively, compared to 19.8% and 20.9% in the same period a year ago. Turning to the balance sheet, accounts receivable were $439 million, up 12% from a year ago, primarily driven by higher organic sales and our acquisition of the Intimidator Group. Inventory was $892 million, up 42% compared to last year. This increase was driven by higher work in process, finished goods, and parts. This reflects our efforts to procure key components and ensure service parts availability for our customers in this time of constrained supply. In addition, this includes the incremental inventory from our first quarter acquisition. Accounts payable increased 34% from last year to $567 million. This was primarily driven by higher purchase activity. In April, we borrowed $200 million under a new five-year term loan credit facility to refinance outstanding revolver borrowings used in the first quarter to fund the Intimidator Group acquisition. We intend to refinance an additional $100 million during the third quarter, and we are also prioritizing $100 million in debt pay down by the end of fiscal 2022. We remain within our gross debt to EBITDA target ratio of one to two times. We continue to follow our disciplined approach to capital allocation, supported by our strong balance sheet. Our priorities remain making strategic investments in our business to support long-term growth, both organically and through acquisitions, returning cash to shareholders through dividends and share repurchases, and maintaining our leverage goals to support financial flexibilities. These priorities are highlighted by our actions this year. including our plan to deploy approximately $150 million in capital expenditures to fund capacity, productivity, and new product investments, our $400 million acquisition of Intimidator Group in January, and our return of $138 million to shareholders year to date, with $63 million in regular dividends and $75 million in share repurchases. We continue to benefit from strong demand across our diverse portfolio of businesses. Our biggest challenge remains meeting this heightened demand in the current global operating environment. As Rick mentioned, we are increasing our full year fiscal 2022 guidance based on current visibility. We will continue to monitor developments in the macro environments and our end markets very closely and take actions as appropriate. For the full year, we now expect net sales growth in the range of 14 to 16%, up from our previous range of 12 to 14%. This increase reflects our production outlook and net price realization expectations, supported by order backlogs and continued strength in demand. We expect less variation in net sales between our third and fourth quarters. For the professional segment, we expect a full year net sales growth rate above the company average. This assumes incremental net sales from the Intimidator acquisition at the second quarter run rate. For the residential segment, we expect a full year net sales growth rate below the company average, primarily due to the late spring. Looking at profitability, we expect our positive gross margin momentum to continue. We expect higher gross margins in the second half of the year compared to the first half. For the full year, we expect gross margins to be slightly below fiscal 2021, given current macro factors and the addition of intimidated group at a lower initial gross margin than the company average. Moving to operating earnings, for the full year, we continue to expect similar adjusted operating earnings as a percent of net sales compared to fiscal 2021. We now expect the full year professional segment margin to be slightly above last year and the residential segment margin to be slightly below last year. This takes into account the operational improvements we are realizing, the impacts of continued supply chain and inflationary pressures, along with our first quarter acquisition. This also considers more normalized spending in the second half as we expect to engage more directly with our customers, along with the continued prioritization of strategic research and development investments. With this backdrop, we are also raising our full year adjusted diluted EPS guidance to a range of $4 to $4.15. we expect our third quarter adjusted diluted EPS to be slightly higher than the fourth quarter. As a reminder, our adjusted diluted EPS guidance excludes the benefit of the excess tax deduction for stock compensation, as well as one-time acquisition-related costs. Additionally, for the full year, we now expect interest expense to be about $36 million. We continue to expect depreciation and amortization to be about $120 million, free cash flow conversion in the range of 80 to 90% of reported net earnings, and an adjusted effective tax rate of about 21%. We remain well positioned as we continue to execute on our long-term strategic priorities and invest prudently in our business for the future. I will now turn the call back to Rick.

Thanks Renee. As we enter the second half of the fiscal year, end market demand remains very strong and we are well positioned in each of the markets we serve. In addition, our products are not discretionary and provide a reliable source of replacement demand. For our residential segment, our channel partners remain positive on retail demand. In addition, the arrival of seasonably warmer weather coupled with strong pre-season snow bookings should provide momentum as we move into the third quarter. In our professional segment, we continue to see broad-based demand across our markets and businesses. We anticipate demand in the underground construction market to grow even stronger as public and private infrastructure investments are prioritized around the world. The golf market is also as healthy as ever. Over the past two years, we've seen new golfers picking up the sport at an even faster rate than in the peak of the Tiger Woods era. We're seeing the return of travel to golf destinations. As the exclusive equipment and irrigation partner to St. Andrews, we will be onsite to support them as they host the historic 150th Open Championship in July. Of course, given geopolitical events, inflationary pressures, and supply chain challenges, the heightened level of uncertainty remains in the macro environment. We are keeping an eye on overall business confidence as well as consumer sentiment and spending. Our teams remain sharply focused on enterprise-wide operational excellence and collaborating with our channel partners to serve our customers well. We believe this focus and commitment coupled with our state-of-the-art innovation capabilities and extensive distribution networks will drive sales momentum and value for all stakeholders going forward. Strategic investments in alternative power, smart, connected, and autonomous solutions continue to be key future growth drivers. We're bringing our technology advancements to market and leveraging innovation across our broad portfolio. We're excited about the technology transformations that are happening in our industry, and we're even more excited about our innovation leadership as evidenced by our breakthrough tech-forward product introductions. Last week, we announced the launch of our next-generation autonomous mower designed for residential yard care. This robotic, battery-powered, smart-connected mower features the industry's first vision-based localization system with wire-free navigation. Our patented system enables quick and easy setup for homeowners without the costly installation or maintenance headaches of the traditional boundary wire system. This robotic mower joins our full suite of sustainable, no compromise solutions for homeowners. Our focus on sustainability extends beyond our products to the way we invest in our people, serve customers, and support our communities. Sustainability is fundamental to our strategic priorities and is ingrained in our purpose and actions. In 2020, we launched our Sustainability Endures platform, and we continue to commit resources and accelerate change to deliver measurable results. The upcoming edition of our sustainability report will highlight goals and metrics that we expect will drive further change for all stakeholders in a meaningful way. As part of our ongoing commitment to create a welcoming and inclusive workplace, we recently launched an employee resource group called the Women's Initiative Network. Our commitment to diversity, equity and inclusion reaches beyond our corporate walls and into our communities. In April, we announced our support of the R&A Women in Golf Charter by becoming a signatory of this industry-wide initiative. This charter aims to create a more inclusive golf culture by enabling more women and girls to realize their full potential in all areas of the game. As part of our involvement, we will provide annual apprenticeships to promote diversity in the industry. This initiative builds on our existing partnerships with organizations such as First Tee and the Annika Foundation to introduce and expand access to the game. In closing, the Toro Company has a legacy of consistently delivering value to all stakeholders. We're making steady progress on manufacturing efficiency while investing prudently to capture near and long-term growth opportunities. Going forward, we expect to remain well-positioned for further success. We expect our deep industry expertise and best-in-class distribution and service networks to strengthen our position in attractive end markets. We are prepared to emerge from this period even stronger, more efficient, and more agile. As always, our extended team is the key to the Toro Company's success. On that note, I would like to thank our employees for your dedication and resilience. I would also like to extend my gratitude to our channel partners, customers, and shareholders for your continued support. With that, Rene and I will open up the call for questions.

Ladies and gentlemen, if you have a question or a comment at this time, please press the star, then the one key on your touchtone telephone. If your question has been answered, you wish to move yourself from the queue, please press the pound key. Our first question comes from Tim Wills with Baird.

Hey, everybody. Good morning. Nice job on the results.

Good morning.

Thank you. Maybe I'm going to start with a two-part question, but maybe just on the guidance raise, maybe the 2% relative to the prior midpoint, if you could maybe outline what exactly is driving the updated guidance. And then I guess when you look at the back half of the year, it does imply a pretty meaningful ramp in the revenue contribution from the first half, so I think it's probably – You know, something like 20% growth, I think, in the back half of the year to kind of get to the midpoint of the new guide. So could you just maybe walk through the bridge or the drivers of what is kind of changing from the first half to the second half?

Sure, Tim. I'll comment on some of the drivers, and Renee can comment specifically on the guidance numbers themselves. For us, it's really a combination. The demand continues to be very strong and looks very solid into the future. And then as we mentioned in our prepared remarks, we are seeing some improvement from an integrated supply chain perspective. So that's both advancements that we're making internally plus some signs of improvement with our suppliers as well. So the combination of the two and really actually quite similar to our previous earnings release comments, What had happened at that time was really the invasion in Ukraine. So we're kind of back to where we were, having kind of digested that aspect as well.

Yeah. And as far as just the timing, looking at the guidance, if you think about it, we included Intimidator, certainly in the second half of the year, as well as continued improvement in price realization and slightly higher volume for the reasons that Rick has mentioned. Tim, if you think about the revenue sequentially, starting with maybe Q2 versus a year-over-year growth rate, we do see some seasonality. So Q2 would be higher than Q3 and a little bit of a ramp down in Q4, but less than we normally would see. So it's more muted because of the fact that we do have a lot of demand. We also have backlog and field inventory to replenish as well. Last year in the second half of the year is really when we saw the impact of the supply chain challenges really accelerate as well as inflation. So it's a little bit easier comparison year over year. But our demand remains really strong. We have a strong order backlog, and as I said, we have the field inventory. So we feel a better visibility into the second half.

Okay. Okay. That's really helpful. And then maybe on the margins in the back half of the year, maybe from an operating income perspective, I think you said kind of Q3 and Q4, there wouldn't be like a big difference in kind of the growth rates. How would you think of the margin contribution? I mean, how much of the, I guess, implied year-over-year margin accretion in the back half of the year is kind of Q3 versus Q4?

We talked about from a gross margin perspective, we expected the second half gross margin to be greater than the first half. It's hard to really split that gross margin between Q3 and Q4 just at this point in time. It's difficult to estimate to that level. We do expect that from an overall EPS standpoint that Q3 will be slightly higher than Q4. And again, we gave some information regarding both pro and residential margins from a total year standpoint. From an operating standpoint, we expect similar operating margins year over year, including the impact of intimidator acquisition. We expect pro margins will be slightly above fiscal 21 and res margins slightly below fiscal 21. Okay.

Okay, good. And then maybe just the last question for me, just on the new products, I mean, any way to kind of provide like a quantitative update on some of your new product introductions, whether it's just Revolution Series or some of the autonomous green mowers or what you're seeing in kind of battery-powered products in residential, just trying to frame how those are kind of performing and the initial feedback that you've received from customers there.

You know, I think it's still early to be able to project that accurately, but what we can say is the response has been absolutely fantastic across the board. So the revolution series that we talked about last quarter, the interest has continued. That will help to contribute later this year. The launch of the robot, you know, honestly, or the introduction of the robot far exceeded our expectations in terms of interest and the number of social media and other outlets that picked that up just way exceeded our expectations. So there's a ton of excitement. And then just in general, the investments that we're making in technology, we are just really kind of seeing what should be a steady flow of some really exciting products going forward. That also gives us confidence in the future and contributes really to your previous question as well.

Okay. Okay, good. Well, good luck on the back half of the year and a nice show, guys.

Thank you. Thank you.

Our next question comes from Sam Darkstish with Raymond James.

Good morning, Rick. Rene, how are you? Good morning, Sam. We're doing well. A couple quick questions, if I could. First off, with respect to price, could you remind us the timing and the magnitude of pricing actions? I guess I'm talking about realization as opposed to asking prices, but realization this fiscal year, and then remind us how much price rollover you're expecting for fiscal 23?

Yeah, we've been – we are realizing more price within the quarter than we had in the previous quarter, so we're continuing to see that number increase. And we're also very focused on our productivity actions. As you know, Sam, we always do everything that we can to try to mitigate cost increases and price increases as well from an overall standpoint. We've taken multiple price actions as we went through the year, so that's why we're continuing to see that price realization build. As we look into fiscal 23, we'll see some rollover because of that, but we'll also consider, you know, if normally we price going into the season, we'll have to evaluate all of that in light of the competitive environment that we're in at that point in time. But that would be, you know, potentially then there would be other pricing actions, you know, at that point in time. Over the long term, we are committed to continuing to improve our margins and to return those to our historical averages as well, you know, over the longer term.

So excluding pricing actions to come, whether normal or otherwise, just trying to get a sense of the pricing rollover next year, just from this year's actions, would it be kind of low mid-single digit, or is that the right way to think about it? excluding any prospective actions?

Yeah, I would say that it is, you know, normally we would say our price was one to two points of price. It has been higher than that. And because we've taken multiple pricing actions, there will be some element that rolls over into next year. And I mean, that's a reasonable estimate.

Okay. And then my second question has to do with inventories. Inventories, I know you were mentioning, Rene, year-on-year. I'm more interested in, I guess, sequentially because it was up 20% sequentially Q2 over Q1, and that's – seasonally, that's really unusual for you all, and I think Intimidator was in both periods. So I guess what I'm getting at is what are you – within your guidance, what are you projecting – for fiscal year-end inventories and or what are your thoughts around production versus shipments in the back half of this year as you manage that inventory level?

Okay. Well, let me answer that question, and please do, if I miss a piece of it, please do help me with that. But as I look at inventories, if you look at it sequentially, you're accurate. It's correct that Intimidator was in both of those periods of time, so that's not the driver. It really is continuing to look at WIP and managing that WIP to help us to run more efficiently from a plant standpoint. We continue to be disciplined on what we're taking in, but we are looking at long lead time items and items that are in particular short supply to be able to help us to manage. So our WIP continues to be higher than we would normally carry. Looking at year end, we have a plan to bring that down, and we would expect it to revert to a more normal level of work and process by year end. We also have some impact within the quarter of higher finished goods, primarily related to residential, and that's the impact of the late spring. We were prepared. You have to prepare for a more normal environment. We're not concerned about that because, as you know, Sam, sometimes our You know, the timing of spring can split between either Q2 or Q3, and so we're not concerned about that. We'll see, you know, a fair amount of that pick up in Q3, and we'll sell that through. But those are, I think, the two components that are a little different sequentially, and we would expect to bring down our WIP by year end. We'll need to make an assessment related to finished goods just based on the environment that we're operating in. We normally start to build some finished goods as we end the year and go into the following year from a seasonality perspective. We haven't been at that point to be able to do that in a while, so we'll make that assessment as we go through the rest of the year.

Okay, so let me paraphrase if I could. So inventories and dollars by year-end, expected to be lower versus the fiscal second quarter. That's kind of normally the case, but maybe the effect is more pronounced this year. And then your production versus shipments, I guess, I mean, seasonally, there's some differences, but on a year-on-year basis, your production is going to be less than shipments or more than shipments. Help me understand that. I'm sorry, Renee. Okay.

I would say our production will be equal to or slightly more than shipments is what we would estimate. We don't have that much. I mean, other than the residential inventory that I mentioned, we don't have that much in finished goods inventory at this point.

The significant factor is the WIP, and that's really been part of our success in being able to produce more consistently is being really prudent about making sure that If we have the opportunity to bring in key components that are on the risk list, if you will, that we would bring those in. As we gain confidence in our supply chain, we will obviously manage that back down again, but this is not an environment where you want things coming in, you know, five minutes before you need them. So that's the factor really from a WIP standpoint. Let's say just the other thing is making sure we have components before we start building a particular model, and that results in a little bit higher average WIP in itself. But the disruptiveness of the stopping and starting on our assembly lines is really one of the core issues that we've been working on.

Got you. If I can sneak one more question in, I apologize. And if you mentioned this in the prepared remarks, and I missed it, I apologize. Acquired sales in the quarter from Intimidator?

It's about 60 million, 60.5. We didn't mention it in the call. It will be in the queue as well, but 60.5 million. And we would expect a similar run rate by quarter for the second half of the year as well, Sam.

Thank you very much. I appreciate it.

Yeah, thank you.

Our next question comes from David McGregor with Longbow Research.

Yes, sir. Good morning, everyone. Good morning. First question, I wanted to ask about the second half margin improvement expectations. How much of that is working through the legacy price backlog and just getting to better price realizations on what you're shipping versus maybe volume improvements as the supply channels begin to open up?

I would say continued price realization is a component of it. As I mentioned earlier, our work on productivity is also important from that standpoint. We do see inflation continuing, but the rate of inflation moderating somewhat as we look at first half to second half. And then it does include two quarters of Intimidator versus one quarter. But all in all, when we look at all of those factors, we do expect the gross margin in the second half of the year to improve over the first half. But it really is all of those factors, including Intimidator at an initial lower gross margin, so we're offsetting that with some of those other actions as well.

Rene, just on that question before, because I've got a follow-up, but just on that question, are you able to talk about what gross margins were in the quarter excluding the acquisition, or how you're thinking about the second half or full year number excluding the acquisition?

Yeah, we haven't broken that out specifically, other than to say that it is, when we look at it, whether it's within the quarter or from a total year standpoint, From a purely gross margin standpoint, it is dilutive from an overall standpoint. But the acquisition is really doing well. They did contribute in a meaningful way, as we just talked about, from a revenue standpoint. And we talked about we do expect the acquisition to be modestly accretive, and we're seeing that as well.

Okay. Thanks for that. Also, I guess Sam was asking about the rollover on pricing into 2023, maybe just thinking about volume in the same regard. And Rick, you talked about products not being discretionary, but just given the backlogs and the delayed product availability, how much demand that you would have normally been satisfying in 2022 do you think is now likely to occur in 2023?

We do believe the backlog or the order bank has continued to grow throughout the first half of this year. And although we talked about improvement in supply chain, the demand is continuing particularly strongly. So we would expect that demand and the order bank to continue well into next year in some of our categories that we've highlighted. So examples would be the underground and construction business, the golf business, golf and grounds. Those are some of the areas that will definitely roll into next year as well.

Is there any way of putting some quantitative context around that?

We have not broken that down in terms of anticipated roll into next year at this point. Okay. The backorder position at the end of last year was $1.6 billion.

Yeah. This is normally $150.

Right. Correct.

Approximately. Big increase. So last question for me is just on share repurchase activity. And you did $75 million in the first quarter. You held off in 2Q. I realize you had some other things going on with respect to the acquisitions and financing of that and the inventory levels. But how are you thinking about your level of repurchase activity for this year?

Yeah, we always focus on our capital allocation in the order we've talked about. So internal and strategic M&A profitable growth really is our top priority as well as continuing to increase our dividends. We have focused a little bit more on debt pay down just given the Intimidator acquisition. So we talked about the fact that for the year we would expect about $100 million is our current goal around paying down from a debt standpoint. For share repurchases, we always look to offset dilution, and then we'll look at, as we close out the year, you know, part of this also depends on, as we talked about earlier, the inventory that we think we need going into next year. The company generates very good cash flow, and we're expecting that for this year as well, with 80% to 90% conversion. So, you know, we'll certainly consider share repurchases as we close out the year, or certainly would do so next year, again, with that starting with that goal of offsetting dilution, and then using that when it makes sense from an excess cash standpoint as well.

Okay. Makes sense. Thanks very much, everyone.

Thank you. Thank you.

Our next question comes from Eric Bossard with Cleveland Research.

Good morning. A couple things. First of all, on residential, you talked about late spring and Can you just talk about a couple things to give us some context to that? First of all, in terms of the updated sales guide, is residential still expected what you thought coming into the season? And then secondly, your conviction in regaining or recapturing what was lost from this quarter in the remaining quarters of the year?

Sure. Residential continues to be a very strong business. We The primary factor that we're talking about is a late spring and in the Midwest it has been historically late as much as 30 days. That is the primary factor that we're looking at. I think it's important to keep in context that the residential business has grown more than 20% for the last two years and grew 17% in the quarter. So the effects of the spring really is the primary factor, and we feel very strongly and positively about the health of that business going forward. All of the factors that we've talked about over the last couple of years are in play. The product line is refreshed. We have new channel partners that are helping to sustain that new level of growth. And then just the incredibly exciting technology introductions that are really helping to drive a lot of interest in that business with our customers. But with regard specifically to getting back the sales from the second quarter, we expect to pick up a lot of those sales in the third quarter. There is a loss period. It may not be 100% of those sales that we get back in the current period, the third quarter. but they're working hard to get those back, and it's a more favorable weather pattern in North America right now to help do that.

In terms of just to clarify within this, in terms of the increased sales guide for the full year by two points, was residential, what changed within residential and pro within that? I know you said pro would grow faster than resi, but from your original expectation, was all of the increase in pro or more than all of the increase in pro?

Yeah, we've obviously taken all those factors into consideration. More of the driver would be on the pro side.

Okay. And within that is the driver on the pro side, volume, price, or your ability to produce?

It's really all those factors. Just, you know... An example with regard to ability to produce, we have, you know, our teams have worked incredibly hard together in a collaborative way. So we've identified constraints, you know, maybe six months, a year ago, and helped to design some alternative designs that give us a little bit more flexibility. So that's what's driving some of our confidence in the rest of the year, and a lot of that has to do with professional products.

And I would just add, although the growth rates when you look at the second half are more significant from a sales dollar perspective, we really feel good having executed well in Q2. And we're seeing when we look at Q3 and Q4 a revenue that is more similar sequentially. There still is a seasonal pattern associated with it, so Q2 will be the largest quarter. But we also – you know, don't need to, like, double our production capability. It's really continuing to execute well and being able to produce product, given that we have backlog and also field inventory replenishment as well. So we feel good about that.

Okay. And another comment you made, just love some clarity on. You talked about more normalized spending with customers as you go through the back half of the year. Can you just give us perspective and context for what that is?

Yeah, I'll give you one example of that. We're very anxious to get, especially our salespeople, out making those contacts with our customers, developing and enriching those relationships. Over the last few years, although some of our conferences have returned, our trade shows, they haven't been at a full attendance level. I mean, I think everyone has been cautious and careful and will continue to be. So we'll probably have a few more people attending some of those trade shows, a few more people making on-site visits. So it's more of that customer-facing interaction that we think will increase as we go throughout the rest of this year and into the future as well, but not as much from an internal standpoint. It's more the customer-facing context. Okay.

That's helpful. Thank you. And I'm not showing any further questions. questions at this time, I'd like to turn the call back to Julie for any closing remarks.

Thank you, Kevin, and thank you all for your questions and interest in the Toro Company. We look forward to talking with everyone again in September to discuss our third quarter fiscal 2022 results.

Ladies and gentlemen, that concludes today's presentation. You may now disconnect and have a wonderful day.