Toro Company (The)

Good day, ladies and gentlemen, and welcome to the Toro Company's third quarter earnings conference call. My name is Gigi, and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session toward the end of today's conference. 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, Julie Karikas, Treasurer and Senior Managing Director of Global Tax and Investor Relations. Please proceed, Ms. Karikas.

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. We have also posted a third quarter earnings presentation to supplement our earnings release and general investor presentation. On our call today are Rick Olson, Chairman and Chief Executive Officer, Angie Drake, Vice President and Chief Financial Officer, and Jeremy Steffen, Director, Investor Relations. We begin with our customary forward-looking statement policy. During this call, we will make forward-looking statements regarding our plans and projections for the future. This includes estimates and assumptions regarding financial and operating results, as well as economic, technological, weather, market acceptance, acquisition related, and other factors that may impact our business and customers. You are all 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 and on our website in our investor presentations, as well as in our applicable SEC filings. 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. We were disappointed by our third quarter results, which came in below our expectations, largely due to a reduction in homeowner demand for residential and professional segment lawn care products. This was driven by a combination of macro factors and unusually unfavorable weather patterns. Demand was strong across the rest of our end customer base, and with that, the other businesses in our diverse portfolio delivered excellent growth. and assumptions for the third quarter and which of those did and did not come to fruition. Before I do that, it's important to note that we are encouraged by our continued market leadership and believe we are well positioned to drive long-term profitable growth in each of our attractive end markets. We're also excited by today's announcement of our partnership with Lowe's, which we expect will further strengthen our mass retail channel. We'll be discussing this development later in the call. But first, I'd like to explain what drove our lower-than-expected results for the quarter. On our June call, we shared expectations for total company net sales growth slightly below 7% in the third quarter. Instead, our net sales of $1.08 billion was a decline of 7%. We also shared expectations of adjusted diluted earnings per share slightly higher than last year's $1.19 and instead delivered 95 cents. When we provided our third quarter and updated full-year outlook on our last call, we outlined the key estimates and assumptions underlying our guidance. These included continued strong demand across key professional segment markets, steady supply chain improvement, reduced volume for solutions geared to homeowners, and more normalized weather patterns for the remainder of the year. The first assumption held. robust demand continued for products in our underground and specialty construction and golf and grounds businesses within our professional segment. The second assumption also held as the supply chain continued to stabilize. This, along with our operational execution, drove meaningful volume growth for these professional segment businesses on a year-over-year basis. While lead times are improving with more stable supply, the sustained strength in demand continues significantly elevated. This leads me to the third and fourth assumptions underlying our guidance, neither of which played out as anticipated. Achievements of lawn care solutions within both our residential and professional segments were down much more significantly than expected. This was driven by a sharp decrease in demand for homeowners during this quarter as compared to prior quarters, combined with an acceleration of channel D stocking, and this is what led to the change in performance from our previous expectations. The reduced demand from homeowners was due to a number of macro factors and weather. Macro factors included economic uncertainty, higher interest rates, and consumer spending preferences following the exceptional demand during the pandemic. With respect to weather, hot and dry weather patterns persisted across key regions. While the abnormal weather patterns delayed replacement needs, Macro factors further reduced demand from homeowners, leading to purchase deferrals and some trade downs to lower-priced models. This, in turn, led to a reduction in replenishment orders by our residential and professional segment dealer channels. Macro factors also drove an acceleration of destocking by our residential segment mass channel, where, in many cases, significant SKUs were left out of stock. For the past several quarters, we have discussed the trend toward more normalized demand patterns for solutions sold to homeowners following a period of exceptional demand during the pandemic. We believe the combination of macro factors and weather factors this quarter exacerbated the rebalancing trend. With this, we now expect dealer inventories of lawn care products to be higher than typical heading into next year. These factors also played into the intimidator group impairment charges we recorded in connection with the preparation of our third quarter financial statements. Since closing on the acquisition in January of 2022, the operating environment has been more challenging than anticipated. Even so, in its first year, the business delivered top-line growth of 16.5% compared to the 12-month period prior to the acquisition. During the third quarter of this year, the Intimidator business experienced a significant reduction in demand from homeowners who prefer professional solutions, driven by a combination of unfavorable macro factors and unusual weather patterns. As we mentioned on last quarter's call, the end user sales mix for this business includes a sizable portion of homeowners. In addition, we have also mentioned that this business has a stronger presence in southern US markets where abnormally hot and dry weather patterns have been more persistent and pronounced than other regions. These factors are reflected in our results and have also dampened our near- to mid-term outlook for this business. While the short-term has not played out as anticipated, we remain confident in our market leadership and our long-term strategy in the attractive zero-term mower space. We continue to expect benefits from our ability to leverage technology and drive efficiencies in design, procurement, and manufacturing across our three trusted brands, Exmark, Toro, and Spartan. Based on our current visibility for the fourth quarter and taking into account our third quarter results, we are reducing our full-year net sales and adjusted earnings per share guidance. Angie will share the specifics shortly. And while we spelled out the confluence of factors that have affected our near-term outlook, we're encouraged by a number of positive trends and operational initiatives. First, as I mentioned at the outset, we are seeing and expect to continue to see strong performance across much of our professional segments with notable strength in our underground and specialty construction and golf and grounds businesses. Second, Given our long history of delivering consistent, positive financial results, we are taking swift action in light of our current market dynamics. This includes scrutinizing all costs, further aligning production with demand, and driving productivity and operational excellence across the enterprise. For our construction and golf and grounds businesses, we intend to enable incremental, flexible production capacity as key component supply continues to stabilize. We expect this will improve lead times and allow us to better serve our customers. Importantly, we plan to leverage our existing manufacturing footprint to do so. And third, we're extremely excited about our new strategic partnership with Lowe's, which was announced in a separate press release this morning. Lowe's leadership position in the zero-turn-more category and strong footprint in key customer markets complements our existing channel strategy and is expected to bolster placement of our powerful 60-volt battery portfolio. Our full lineup of Toro-branded all-season outdoor power equipment will be available at Lowe's nationwide for the spring 2024 selling season. As I hand the call over to Angie, I'd like to summarize my introductory remarks by emphasizing the high confidence we have in our ability to navigate the current macro headwind. And just as importantly, the confidence we have in our ability to continue to capitalize on growth opportunities, including the demand we're seeing across many of our professional businesses and the eventual rebound expected from homeowner markets. With that, I will turn the call over to Angie to walk through the details of our third quarter performance and our updated full year guidance.

Thank you, Rick, and good morning, everyone. While our performance in the third quarter fell short of our expectations, our market leadership remained strong, and many of the businesses in our portfolio delivered excellent growth. Consolidated net sales for the quarter were $1.08 billion, a decrease of 6.8% compared to last year. Reported EPS was a loss of 14 cents per diluted share. This includes non-cash goodwill impairment charges of $151.3 million on a gross basis, offset by an associated tax benefit of $36.7 million for a net of $114.6 million. Adjusted EPS was $0.95 per diluted share. Both were down from $1.19 last year. Professional segment net sales for the third quarter were $896.3 million, up 1.1% year over year. This increase was primarily driven by higher shipments of construction and golf and grounds products and net price realization. This was partially offset by lower shipments of lawn care equipment, a reflection of reduced demand from homeowners who prefer professional solutions. Overall, the professional segment net sales growth reflects positive volume and price. Professional segment earnings for the third quarter were $13 million on a reported basis. down from $166.2 million last year. When expressed as a percentage of net sales, earnings for the segment were 1.5% down from 18.8%. The year-over-year decrease was primarily due to gross non-cash impairment charges of $151.3 million and higher material and manufacturing costs. This was partially offset by productivity improvements and net price realization. Residential segment net sales for the third quarter were $175.3 million, down 35.1% compared to last year. The decrease was primarily driven by lower shipments of products broadly across the segment. Residential segment earnings for the quarter were down 85.4% to $3.8 million. When expressed as a percentage of net sales, Earnings for the segment were 2.2%, down from 9.8%. The year-over-year decrease was primarily driven by lower volume and unfavorable product mix, partially offset by lower material costs. Turning to our operating results, our reported and adjusted gross margin were both 34.4% for the quarter, down slightly from 34.5% for both in the same period last year. The decrease was primarily driven by higher material costs, mostly offset by lower freight expense. SG&A expense as a percentage of net sales for the quarter was 22.2%, compared to 20.5% in the same period last year. This increase was primarily driven by lower net sales, higher marketing costs, and increased investment in research and engineering. Operating earnings as a percentage of net sales for the third quarter were a negative 1.8%, inclusive of the impairment charges. This compares to 14% last year. On an adjusted basis, operating earnings as a percentage of net sales were 12.2% compared to 14.1%. Interest expense for the quarter was $15 million, up $5.8 million from the same period last year. The increase was primarily due to higher average interest rates. The reported effective tax rate for the third quarter was 47.6% compared with 20.3% last year. This change was primarily due to the tax benefit from non-cash impairment charges in the current year period. The adjusted effective tax rate for the third quarter was 19% compared with 20.7%. This decrease was primarily due to an increased benefit from the geographic mix of earnings in the current year period. Turning to our balance sheet as of the end of the third quarter, accounts receivable were $391 million, up 11% from a year ago, primarily driven by payment terms and higher international sales. Inventory was $1.1 billion, up 18% compared to last year. This increase was primarily due to higher finished goods, largely driven by decreased demand for solutions sold to homeowners. Sequentially, from the end of the second quarter of fiscal 2023, inventory came down slightly, primarily driven by a reduction in work in process. Accounts payable were $407 million, down 16% compared to a year ago, primarily driven by a reduction in material purchases. Year-to-date free cash flow was $56.1 million. This reflects unfavorable working capital fluctuations year-over-year as we adjust production and cost to demand. This also reflects the timing of capital expenditures with $99 million spent year-to-date compared to $76 million in the same period last year. We remain within our one to two times target gross debt to EBITDA leverage ratio and are committed to maintaining our investment-grade credit ratings. This supports our strong balance sheet, which in turn provides the financial flexibility to fund investments that drive long-term sustainable growth. Our disciplined approach to capital allocation remains the same, with priorities that include making strategic investments in our business to drive long-term profitable growth, both organically and through acquisitions, returning cash to shareholders through dividends and share repurchases, and maintaining our leverage goals. These priorities are highlighted by our recent actions, including our plan to deploy $130 million in capital expenditures this year to fund new product investments, advanced manufacturing technologies, and capacity for growth, our dividend payout increase of 13% over last year, and our return of nearly $60 million to shareholders year-to-date through share repurchases. As we look ahead to the fourth quarter of the fiscal year, we expect continued strong demand for our innovative products in key professional segment markets. We are also encouraged by the stabilizing supply chain that is enabling increased production for our construction and golf and grounds products. At the same time, we are entering the fourth quarter with elevated field inventory levels for professional and residential segment lawn care solutions, as well as residential snow products. This, combined with the macro factors we have been discussing, are expected to dampen demand for these products in the near term. With this backdrop, and based on our current visibility, we are revising our full-year fiscal 2023 net sales and adjusted diluted earnings per share guidance ranges. For fiscal 2023, we now expect total company net sales to be similar to slightly higher than last year compared to our previous expectations for 7% to 8% growth. This reflects anticipated volume reductions for residential and professional lawn care solutions as previously discussed. This also reflects expectations for a continuation of improved production rates for construction and golf and grounds products as well as the assumption that we will experience more normal weather patterns for the remainder of the year. We expect professional segment net sales to grow mid to high single digits on a four-year basis. Looking at profitability, we continue to expect gross margin improvement in fiscal 2023 compared to fiscal 2022 and still expect our gross margin in the second half of the year to be lower than the first half of the year. We also expect gross margin in the fourth quarter to be lower than the third quarter. This is primarily driven by anticipated manufacturing inefficiencies as we adjust production volumes to demand for lawn care solutions and work to improve our inventory position as we close out the year. We expect these manufacturing inefficiencies to be partially offset by productivity gains and net price realization. In addition for the full year, We now expect total company adjusted operating earnings as a percentage of net sales to be flat to slightly down compared to last year. We now expect our professional segment earnings margin to be lower than last year, driven by the third quarter impairment charges. We continue to expect a lower earnings margin for the residential segment for the full year as compared to last year. This is a reflection of the expected reduction in volume For our other activities category, we expect the fourth quarter of fiscal 2023 to be similar to slightly higher than the average quarterly run rate year-to-date. In line with our revised net sales expectations and manufacturing adjustments, we are revising our full-year adjusted EPS guidance range to $4.05 to $4.10 per diluted share from the previous range of $4.70 to $4.80. This adjusted diluted EPS estimate excludes the impact of non-cash impairment charges as well as the benefit of the excess tax deduction for share-based compensation. Additionally, for the full year, we now expect depreciation and amortization of about $120 to $125 million, interest expense of about $59 million, and free cash flow conversion of approximately 50 to 60% of reported net earnings. We continue to expect an adjusted effective tax rate of about 21%. We believe our organization is positioned to emerge from this challenging time even stronger. We're prepared to remain nimble as we drive execution on cost reduction and productivity initiatives while continuing to prudently invest in the future We're building our business for long-term profitable growth and remain confident in our ability to drive sustained value for all stakeholders. With that, I'll turn the call back to Rick.

Thank you, Angie. Our business fundamentals remain strong, supported by our outstanding team of dedicated employees and channel partners. We have a long and proven track record of managing through economic cycles and seasons with agility and resiliency. We expect that resiliency will help us navigate through the current rebalancing of homeowner demand. While consumer rebalancing in this macro environment had a greater impact in the quarter than expected, we have a number of factors that we believe will drive positive results in the coming quarters. First and foremost, we are encouraged by very positive demand trends in other parts of the business. For example, we expect continued demand strength across the majority of our professional customer base, including professional contractors, golf courses, municipalities, sports fields and grounds, and our construction customers. Second, we believe our new strategic partnership with Lowe's is an excellent opportunity to complement and strengthen our mass channel in the residential segment. Third, the supply chain has been more stable and we expect it will continue to improve. This should enable productivity gains across our manufacturing facilities and help us drive incremental production for our backlog businesses. Finally, we're taking decisive actions to adjust our production and cost structure in the current demand environment. We believe these actions will drive near and long-term productivity and margin benefits. I'd now like to provide additional comments on the factors we're seeing in our end markets, which could impact future results. We anticipate continued strength and demand for our construction and golf and grounds businesses. We expect the drivers to be the same as we've noted previously, including infrastructure spending and support, sustained momentum in new golfers and rounds played, and the prioritization of public green spaces. Our order backlog for these businesses remains significantly elevated, and our team is focused on driving incremental outputs and reducing lead times to support our customers. Our goal is to return backlog to more normalized levels as soon as possible. For snow and ice management, we continue to expect more subdued demand heading into the upcoming season, driven by a lack of snowfall earlier this year. At the same time, early season snowfall events in key regions would typically drive an uptick in orders. And finally, looking at residential and professional lawn care solutions, for homeowners, we're watching consumer confidence, spending preferences, and weather patterns. For landscape contractors, we expect budgets to remain healthy and we'll continue to watch business confidence and other macro factors. We're also keeping an eye on inventory levels in the field inventory management actions across our channel. Despite the recent dynamics, we believe these remain excellent long-term markets for us, and our leadership position is strong. The solutions we provide for these markets are essential for turf maintenance and have regular replacement cycles. We believe we are extremely well positioned to expand share in these attractive markets with our leading brands, innovative products, and best-in-class channels. Looking longer term, we remain confident in our ability to drive sustained value for all stakeholders, guided by our enterprise strategic priorities of accelerating profitable growth, driving productivity and operational excellence, and empowering people. We continue to prioritize investments in innovation and transformational technologies, including alternative power, smart, connected, and autonomous solutions. We are leveraging these investments across our broad portfolio to accelerate new product development and capitalize on growth opportunities. A great example of this is our proprietary HyperCell battery management system, which is now powering solutions across our professional segments, including lawn care equipment, golf and ground solutions, and specialty construction products. We're excited about our new product pipeline and our ability to help our customers increase productivity while also addressing their sustainability goals. We expect our expanding suite of innovative solutions to strengthen our market leadership now and into the future, bolstered by our trusted brands and extensive distribution networks. On that note, I would like to thank our employees and channel partners for going above and beyond every day to support our customers, even in the most challenging of times. You are the key to the Toro Company's long-term success. I would also like to extend my gratitude to our customers and shareholders for your continued support. With that, we will open up the call for questions.

Thank you. Ladies and gentlemen, If you wish to ask a question, please press star followed by one one on your touch tone telephone. If your question has been answered or you wish to withdraw your question, press star followed by one one. Press star one one to begin. Please stand by for your first question. Your first question comes from the line of Michael Schliske from DA Davidson and Company.

Yes. Hello. Good morning. Thanks for taking my question. A lot to unpack here. Good morning. There's a lot to unpack here. Maybe I'll start with some questions on the Lowe's agreement. I guess, first of all, I mean, this sounds like a pretty heavy invoice you'll be giving them. It's a pretty big sell-in or stock-up order for them happening in the spring, I would imagine. Angie, was that part of the reason why maybe the free cash might be a little challenge in the near term? Do you have to build inventory and work in process in advance of that shipment? And then, you know, just some kind of sizing as to how much that first invoice could be, trying to think back to what happened with cash supply, just some sense of the sizing if you could.

Okay, sure, Mike. I'll start by, you know, answering your question on the free cash flow. I would say, no, that wasn't a big impact. impact to our free cash flow for the quarter. We have been working on our working capital metrics really all year long. Inventory is higher than we want it to be today, but not necessarily driven by the lowest impact or building up inventory for that. We do expect to see improvement throughout the year on our free cash flow. I know we've guided down now to 50% to 60% from our previous 90% to 100%. and expect that historically to get back to our conversion rate of about 100%. But it's really based on all working capital metrics, inventory, AP, and AR. Rick may want to comment further on the Lowe's piece.

Sure. As you can imagine, we're incredibly excited to have a partnership with Lowe's, and it's actually a great fit for us given a couple of factors. First of all, the strength of Lowe's, particularly in the zero-turn category, the location of their stores matches up well with that demographic. Our leadership in the area of Z's and really the combination of the two brands is really a powerful opportunity for both. Opportunity really to bring our FlexForce products to more customers was another thing that was important to us. And, you know, we value all of our long-term channel partners, but we really believe that this is the right thing to do for us and for our customers to have broader availability of the products. And it will be a substantial deal for us right off the bat in the first year. We're not specifically guiding for 24 yet, but it will be a positive impact for 24.

Okay. And just to follow up there, does what's happening at Lowe's change how you work at all with Home Depot? As far as I know, it was sort of exclusive until now, obviously. Has it changed the terms or the mix that you might have in that store going forward?

As with all of our partners, the Home Depot has been a terrific and continues to be a terrific partner for us. So we will continue to look to them and each of our partners to provide a unique value proposition for each of their customer sets. There are differences and we really want to work with each of our partners to help them grow their business as we grow as well. So we continue to view the Home Depot as a strong partner as we do our other masks and certainly our dealer channel as well, all important to us. Bringing our products and our offerings to our customers in different ways and the ways that they would like to have access to them.

Okay. And then turning to the other piece of big news, you know, how the lawn care business was impacted by dry weather. I'd be curious on the other side of things, did you have a good quarter or a good outlook here for the golf irrigation business if things are so dry but people are still playing? Do you feel people are getting a lot of usage out of their systems and they're looking to upgrade or add some new products going forward on some of the golf courses out there?

Yes. Thanks for the question. That's an excellent question. We had a fantastic quarter on the golf side of the business, and really the non-landscape contractor portion of our professional business was very strong, particularly we called out golf grounds and irrigation, but also the underground specialty construction. The big piece of with the supply chain as our plants have been able to operate more consistently. Our supply chain team has done an excellent job in working with our suppliers to get more consistent supply of components, and the plants are gearing up much closer to pre-pandemic level on a consistent basis. So that's been the driver. The demand has continued to be there across those businesses, and we've been able to meet that more significantly recently.

Okay. Thank you. I'm going to leave it there. I appreciate the help.

Okay. Thanks, Mike.

Thank you. One moment for our next question. Our next question comes on the line of Tim Walsh from Baird.

Yeah. Hey, guys. Good morning. Maybe just the first question on the lawn care business within Pro or maybe just in Pro in general. I mean, could you give us a little bit, you know, some flavor, maybe some buckets just in terms of, you know, how much the lawn care business declined in the third quarter in the Pro business? And then maybe how much the other businesses underground and golfing grounds, you know, kind of just to give us an idea of the moving pieces there.

Yeah, as I mentioned, the demand remained very strong on those other pieces. And if you look at, you know, there's different ways to look at the reduction in demand from a homeowner standpoint. If you look in the third quarter, year over year, the split was pretty even between residential and the professional side of the landscape contractor side. We built in a larger portion of that into what we said was different than we expected was more reduction on the landscape contractor side. So that was kind of the split. It was pretty evenly split between res and the professional portion landscape contractor going to homeowner. But the residential portion we had anticipated more and on the landscape contractor side that ended up being a bigger piece. The other factor that was there, Tim, was just the normal rebalancing that our channel does. And as they look at their inventory, carrying costs, the time of the season, they were looking to reduce their stock as well. So that's a factor that's kind of in between us and the end customers as well. That was a factor. But the underground specialty construction, golf grounds, those parts of the business remain strong. The underlying drivers for those infrastructures and strength of golf continue to be extraordinarily strong.

Okay. Okay, good. And then I guess just on the field inventory, I mean, it sounds like you expect to actually exit the season with higher inventory in the field. So I guess what are – the conversations that you're having with distributors and dealers just given, um, you know, I think you do have some pretty tough comps in the first half of the year, you know, for 23 and it seems like just given kind of exiting the year with higher inventory and then just higher cost to carry and those types of things. I mean, do you think it's possible that your distributors and dealers kind of take inventory into next year more on a, I guess, just in time basis or closer to the season?

Field inventory for us is really a story that's different depending on which of the categories. If you do think about those areas of high demand, our field inventory is very low. For example, the underground specialty construction what you're talking about, which is for those landscape contractor products, specifically in some categories of res, we go into a lower part or the off part of the season with higher field inventory. So we do expect that that will take into 2024 to work through that. And probably realistically, if it gets carried through the off season, it's going to be largely the second quarter season. when the demand is high enough to really bleed that off in a significant way and get back to a more normal level, just kind of working through the rebalancing of demand, the channel expectations, and what our production is.

Okay, okay, that makes sense. All right, appreciate the color, guys. Good luck on the rest of the year. Thank you. Thank you.

Thank you. One moment for our next question. Our next question comes from the line of Eric Bossart from Cleveland Research Company.

Thank you. Two things. First of all, if you go back a little bit in time, the only residential mass customer was Home Depot, and it felt like that was a strategic decision. And over the last three years, three years ago you added Tractor, now you add Lowe's. And so I'm curious, philosophically or strategically, what changed in either the market or your thinking that suggested good idea to do business with all three of these guys versus previously there obviously was a conscious decision to just sell one? What changed?

I don't know that anything has necessarily changed. We make that kind of calculation on an annual basis. We think through our strategies. We look at at particular product categories where we're looking to grow. And we value all of our long-term and medium-term partners, as you've mentioned. We just look at the opportunity that was there with Lowe's to bring our product to more customers and look at the entire picture. And we believe that it was the right thing to do for us now. And that's the We have the opportunity to bring our brand to more customers, and that ability to leverage at higher volumes is important for us as we're investing in new technologies and so forth. The level of investment in new product development becomes even greater, and to have larger scale and larger volume really is a help for all of our partners. We have a relationship with each of our channel partners, and we have an incredibly important dealer channel that we think of in every decision, and we believe we have the opportunity to grow at each of those channel types of channel partners as we go forward.

Secondly, Intimidator, I'm just curious to understand a little bit better within this. I would assume when you... when you bought the business or valued the business or pro forma the business, the revenue growth, the mid-teen revenue growth last year was probably better than you had budgeted. I guess I'm just surprised 18 months later to have a write-off of this magnitude, especially considering the first 12-month performance was, again, probably better than the pro forma. Is this inventory being written off? Is this goodwill being written off? Is there something over the medium term or what's different in the medium term that changes the the arc of this business that accounting-wise got you to having to make such a move today?

Yeah, you're right. We saw really nice growth in the first year of Intimidator Group. It was about 16.5%, so very strong growth. What we saw impact that group and that business this year was the same thing that we saw in our other residential and homeowner businesses. Our Q3 results were significantly lower than expected, Really, the summer seasonality trends that they normally see did not come to fruition, mainly due to the weather. June ended up being a really hot month, and it impacted them in kind of the southern regions that they play in. They are also largely based on customers that are homeowners who prefer to buy a professional product. That, with the macro factors that Rick discussed earlier and he had in his prepared remarks, really affected that business. So it's really Goodwill and the trade names that were impaired. It's not a write-down of their assets.

Okay. And admittedly, I don't totally understand the accounting piece of it. But what I guess I don't understand is that June was a hot month in the summer seasonality And which seems very near term to then impact how you carry the asset on the balance sheet. It just seems like a big change if it's just indeed hot weather in June and some unique seasonality. There's not something different on a sustained go forward basis. It's just as narrow as is what happened here this summer.

It's largely, for us, it's largely a math exercise and really the impact in near term on our model is more significant. So the actual results in the current quarter, for example, and then projecting just as we've talked about with the other businesses through into next year really has a more significant impact on the overall model for the business. Interest rates were also significantly higher. So you put that all together. And it indicated it was appropriate for us to have the impairments related to Goodwill and trade name that we were carrying.

Yeah, I would just also add to that. They're going into next year as well with a lot of field, a lot of channel inventory. So just like our res business.

It will take into 2024 to get through that. I will say, just not to get lost in this discussion, we still feel incredibly positive about the Intimidator group. And the Spartan business, we have no regrets about that becoming part of the Toro company and have very strong expectations for that business going forward.

Okay.

Thank you.

Thank you. One moment for our next question. Our next question comes from the line of Tom Hayes from CL King.

Hey, good morning, everyone. Appreciate the time today. Hey, Rick, you mentioned a couple of times in your prepared remarks that it sounds like the supply chain is getting better. Can you just maybe elaborate a little bit on that and kind of where you think, you know, is there further improvement we could see going forward?

Thanks for the question. We have seen really significant improvement in supply chain, especially if you're looking at a year-over-year basis. It's been a steady improvement. The categories we've talked about over the last several quarters, wiring harnesses, hydraulic components, chips, et cetera, we're still having periodic issues with those, but the frequency and the duration of those issues impacting our plants is much less. before the pandemic in many cases. We've also been able to shift production of our products to plants that have lesser demand for some of the reasons we just talked about. And in fact, some of those abilities were really developed during the pandemic. So we've become a little bit more flexible that way. And I would just say, having been out to a number of our plants within the last 30 days, there is a different sense than we had just a short time ago that, you know, the products are running down the lines consistently. Plants are, you know, busy and producing products very consistently, and just it's physically noticeable that we're back in a much better position. We still have a ways to go in some areas, and especially some particular facilities and lines, but in general, a much different situation than we were in 12 months ago.

Okay, and then maybe just as a follow-up on the residential side, I'm just wondering if you're seeing the broad-based decline in activity in the quarter. Was that spread across both the traditional gas-powered engines and the battery products, or was maybe one a little bit better than the other?

It was spread across both. Yep, pretty similar response.

Okay, appreciate the call. Thank you.

Okay, thank you.

Thank you. One moment for our next question. Our next question comes in the line of David McGregor from Longbow Research.

Yeah, good morning, everyone. Thanks for taking my question. Good morning, Rick. Can we just start by, for context's sake, what percentage of this population of the LCE business today do you think is the residential customer buying up versus what percentage is the professional landscape contractor? Just try to get some context for what's going on here.

In the landscape contractor category in general across the three brands, The residential, what we would call, I think you said residential, but we would say homeowner because it's typically a homeowner that has acreage that would justify a machine like that from a capacity standpoint or just the desire to get a professional product. But it is an appreciable portion of those businesses, and it ranges a little bit differently across the brands. The X mark is a higher percentage. larger contractors, but still has an element of homeowners. On the other end of the spectrum, a higher percentage is homeowners on the Spartan brand, and then Toro is kind of in between. We don't break out the specific numbers because most of our competitors are private companies in these areas, and we know that they look for information when we talk about it publicly, but it's an appreciable portion.

Okay. I guess, is there any way to just talk about where you are seeing some strength here in golf and in construction equipment? Obviously, you've got a very substantial backlog that you continue to ship against, but could you speak to what you're seeing in order patterns in terms of incoming orders? And are you seeing any inflection or slowing or cancellation in orders, specifically maybe smaller courses or smaller dealers?

Yeah, the order flow continues to be very strong across those backorder categories. Again, golfing grounds, underground construction. And just as a, you know, thinking of the same kinds of questions, we just recently went through a kind of an aging review in our backorders. And the majority by far of the backorders are actually in the current year. So that's something that's changed. It really speaks to the idea of, Although the overall backorder number has only come down slightly, it's been refreshed as we've been able to fulfill orders. New orders have been coming in. Lead times have been improving. So those kind of multi-year orders that we're trying to fulfill are much smaller than they were a couple years ago.

So when you say that the backorders, the majority of those backorders are in the current year, are you saying 4Q are going to – we're going to work down a very large portion of your current backlog in 4Q.

I would just say the composition of what we refer to as back orders or open orders were generated this year as opposed to last year or the year before. You mean the incoming order as opposed to when you expect to ship? When exactly, yeah, when the order was placed. So it speaks to the aging of those orders.

Right, as we still work out of kind of the COVID era, it still takes some time to do that. So we're still working through orders that have come in in 21 and 22.

Okay, I got it. Thank you for that distinction. And then is there any way to isolate within the margins the impact of manufacturing curtailments versus everything else that's going on?

No, we are seeing manufacturing variances affect us. but we don't break it out specifically.

And to that point, obviously, when we see a decline in demand, the first thing we do is make adjustments within our plans to make sure we're not producing product that we don't need and making any expense adjustments that we need to make sure we're right-sized relative to the market opportunity. But in Q3 and Q4 manufacturing,

from the bottom sure sure that makes sense last question for me uh during the quarter you had kind of a short two-week period where you did not have any retail promotions and it was kind of a gap between one sales event and the other uh what did you see in the way of pos elasticity during that period i'm just trying to get a sense of how impactful incentives might ultimately be in terms of helping you kind of elevate demand here in clear inventory or whether the market has just become maybe a little more insensitive to incentives, but just maybe what did you see during that period that would inform that thought?

We're returning to a more normal situation, and I would say the programs that we run do have an impact, so it is helpful in demand generation, etc., but it's really returning to more normal kind of pre-pandemic type of response. We just hadn't been running those kind of promotions during the pandemic due to lack of availability of product. So we're back to a more normal situation where we use those throughout the season to help drive or stimulate demand just on a normal basis. And they have been working. Thanks very much.

And they have been working. Yes. Thank you.

Thank you. One moment for our next question. Our next question comes from the line of Joshua Wilson from Raymond James.

Good morning. Thanks for fitting me in. Good morning, Josh. Just one clarification on the backlog before I get to some other questions. You said it was down slightly versus three months ago. Is that right?

That's correct. Yes, we're down slightly from year end.

Okay. And then as it relates to the new relationship with Lowe's. Are there going to be any product exclusives or anything like that in the relationship? And then separately, do you have a sense of who you're displacing at Lowe's?

With regard to specific SKUs, that becomes part of the discussions with each of our channel partners. So you would expect there would be some at any of our partners, including Lowe's. And with regard to displacement, we really can't speak to that. That's really within the discussion of the Lowe's with their other suppliers. But we are extraordinarily excited about the opportunity that Lowe's presents for us here as we go forward.

And do you have any sense of the net gain or loss in shelf space between Lowe's and Home Depot?

We don't at this point. As you can imagine, we're pretty early in the relationship, and all those details are being worked out right now. We're not really guiding to what's going to happen in 24. We'll be much more specific in December.

Got it. Thank you very much. Thank you.

Thank you. One moment for our next question. Our next question comes from the line of Ted Jackson from Northland Securities.

Thanks. Down to the wire for me.

Hi, Ted.

How are you? I just got a couple of follow-up questions, all the main ones I wanted to have been asked. So first, just quickly on lows, is it fair to assume, I know you're not giving guidance, but we would see the impact of lows in, you know, the second quarter of the next fiscal year, just in terms of their, how it would, you know, impact your business and their getting stock in place with regards to, you know, the season and such?

Yeah, I think, Ted, you'll begin to see that in the spring 2024 selling season.

Again, given that your second quarter is April, second quarter is where we would be looking for that impact to start showing up.

Yeah, although we don't really know what the guidance will be at this point, but that's a good assumption.

Yeah, I'm just talking about timing. And then the other question on inventory, you made a commentary that inventories are higher because of the weakness on the homeowner side of lawn care. and that you felt that that would be normalized by the time you got, I mean, I think you basically kind of said second quarter of 24 also. Can you give a little definition of, you know, what the term normal means? Is that like on a turns basis, a days of inventory basis? Is it on a dollar basis? Is kind of, you know, what's the bogey there?

Yeah, I think it would be really on all those bases. But we mentioned the second quarter. Just in general, we believe it will take time into fiscal 2024 to normalize, to use that term again. And the biggest opportunity is in the second quarter just because of the traditional scale of sales as a percentage of the year for those types of products. So that's when the volume drops. becomes large enough to really impact the field. In the meantime, we're working with our channel partners to make sure that we've got the right stock levels and they're making decisions based on their own business metrics. So that's really what we refer to, but normal to us would be back to the more historical days inventory on hand, those kinds of metrics that we typically look at. And we're beyond those-

The new kid on the block, which is me, doesn't have the history with the company. What is the historical norm in terms of days of inventory?

That depends on both the channel and the specific brand and the flow of the product. So I can't say that specifically in general.

If I were to look back at a year, could you give me a year? I can calc it out, like what you'd say would be a typical year that I would want to go look at for a reference point.

Yeah, we might be able to cover some of that a little bit later. I think that we are still trying to figure out what some of that normal means post-COVID as well. But, you know, just to give you some comfort, we are seeing something good. We're making good progress in WIP, and we have seen the inventory come down two quarters in a row, so... We do believe to be in a better position in F24.

And I was referring to field inventory there, so they're probably two different matters, yeah.

Yeah, I wouldn't be able to see that one as much, I'm sure. My last thing, and I will step aside at that, but this is, you know, I know we're not getting into guidance with Lowe's or anything else, but I don't recall, have you ever provided any kind of color of the percentage of your top line that comes from mass markets? And if so, what is it?

We have not given specific numbers. A number of years ago, when we were a smaller company, we reported the numbers based on the need to do so because it was more than 10% of our business. But we don't do that since we've become larger. But it's a significant piece of our business. It's a significant part It's going to be a good portion of that.

Okay. I guess that's all I can ask for. All right. Thanks very much. Okay. Thank you. Thank you.

Thank you. This concludes the question and answer session. Ms. Karikas, please proceed to closing remarks.

Thank you all for your questions and interest in the Toro Company. We look forward to talking with everyone again in December. to discuss our fiscal 2023 fourth quarter and full year results.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.