Toro Company (The)

Good day, ladies and gentlemen, and welcome to the Toro Company's Second Quarter Earnings Conference Call. My name is Carmen, and I will 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 towards 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, Yuli Caracas. a Senior Managing Director of Global Tax and Investor Relations. Please proceed, Ms. Caracas.

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 second quarter earnings presentation to supplement our earnings release. 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. During this call, we will make forward-looking statements regarding our plans and projections for the future. Forward-looking statements are based upon our historical performance and current expectations and are subject to risks, uncertainties, and other factors that may cause actual results to differ materially from those contemplated by these statements. Additional information regarding these factors can be found in today's earnings release and in our investor presentations, as well as in our SEC reports. During today's call, we will also refer to non-GAAP financial measures, which we believe are important in evaluating the company's performance. For more details on these measures, the most comparable GAAP measures, and a reconciliation of the two, please refer to this morning's earnings release and our investor presentations. With that, I will now turn the call over to Rick.

Thanks, Julie, and good morning, everyone. Our team continued to execute well as we delivered second quarter results in line with the expectations we shared on last quarter's call. Once again, our team operated with dedication and agility as we adjusted production to align with demand trends, drove productivity benefits across the enterprise, and capitalized on an ever-expanding portfolio of innovative products that satisfy our customers' most pressing needs. We are continuing to advance our key strategic priorities to drive shareholder value by accelerating profitable growth, driving productivity and operational excellence, and empowering our people. For the second quarter, we delivered record net sales of $1.35 billion. This was driven by top-line growth of 26% in our residential segment. And within our professional segment, we saw continued growth in the underground and specialty construction and golf and grounds businesses. For residential, as anticipated, exceptional growth in our mass channel more than offset the expected lower shipments to our dealer channel, given elevated dealer field inventories heading into this year. The residential segment benefited from successful new product introductions and better weather conditions compared to last year. Strong demand has kept order backlog elevated in our underground and specialty construction and golf and grounds businesses. We continue to successfully drive incremental output within our existing manufacturing footprint to increase shipments of those products and better serve our customers. This strength was offset by anticipated lower shipments of contractor-grade zero-turn bulk Notably, we've made significant progress reducing dealer field inventories of lawn care equipment in both the professional and residential segments. This was a result of our reduction in shipments to dealers as expected, coupled with initial spring retail momentum. Moving to the bottom line, we delivered adjusted diluted earnings per share of $1.40. This compares to last year's record $1.58. The change year-over-year was largely a result of segment mix given the significant growth in residential this quarter, as well as product mix within the residential segment. We were pleased to have been able to offset some of this effect with productivity benefits and prudent management of SG&A. Based on our performance in the first half of the year and our current visibility for the remainder of the year, we are reaffirming our full year fiscal 2024 net sales and adjusted diluted earnings per share guidance. Angie will walk through those details shortly. Throughout the quarter, we advanced our enterprise strategic priorities to drive shareholder value for the long term. First, we maintained a sharp focus on accelerating profitable growth. One important component of this strategy is innovation to solve customers' most pressing needs, align with market growth trends, and generate a strong return on investment. To that end, we recently introduced a number of new products that are providing truly unique solutions in our markets. To briefly highlight a few examples, our new generation Toro Time Cutter and Titan Zero Turn mowers have been extremely well received by customers. These new mowers are already driving share gains and enhancing our market leadership position in this space. This is a testament to our customer focus, brand strength and dependability, as well as our extensive distribution network, including mass channel partners and our best-in-class independent dealers. We've also raised the bar with our new TX1000 Turbo Compact Utility Loader. This machine introduces a smart power feature that optimizes engine, auxiliary, and traction torque for an unparalleled operator experience. Another example is our recently introduced Ditch Witch AT120 for the accelerating underground construction market. This industry-leading machine, which leverages 30 existing and pending patents, is the world's most powerful all-terrain horizontal directional drill. The AT120 enables productivity while at the same time reducing job site noise. Our internal team voted the AT120 as our new product of the year. This honor reflects the product's advanced features and its importance to our long-term strategy. Second, we continue to drive productivity and operational excellence across the organization. Our outstanding team delivered strong productivity gains this quarter, while at the same time operating with flexibility as we adjusted production to meet demand dynamics across our portfolio. Importantly, we remain on track in confidence in our ability to deliver at least $100 million of annualized savings by fiscal 2027 from our multi-year productivity initiative named AMP for amplifying maximum productivity. As we've discussed, we intend to prudently reinvest up to 50% of the savings to further accelerate innovation and long-term growth. And third, we continue to foster a culture of empowering people. A great example is our annual TTC Technology Forum, which empowers our internal technology community to connect and collaborate to inspire unique customer and enterprise solutions across the organization. Teams at this year's forum included advanced battery technology, integrated data usage, robotic navigation, and advanced manufacturing technologies. A highlight was sharing developments in predictive and generative AI models to enable new product features, streamline workflows, and unlock powerful data insights for both the Toro company and our customers. We will remain focused on our three strategic priorities going forward. We are building on strong momentum as we enter the second half of the year. With that, I'll turn the call over to Angie to discuss our financial results and guidance before I return to provide commentary on the outlook for our businesses.

Thank you, Rick, and good morning, everyone. As Rick said, our results in the second quarter were aligned with our outlook as our talented team continued the disciplined execution of our strategic priorities. Consolidated net sales for the quarter were $1.35 billion, up slightly from our record in Q2 last year. Reported EPS was $1.38 for diluted share, compared to $1.59 in the second quarter of last year. Adjusted EPS was $1.40 per diluted share, down as expected from $1.58. Now to the segment results. Professional segment net sales for the second quarter were just over $1 million, down 5.9% year over year. This decrease was primarily driven by lower shipments of zero-turn mowers, which was expected given elevated field inventories heading into the spring selling season. This was partially offset by higher shipments of underground and specialty construction equipment and golf and grounds products, as we addressed the elevated order backlog for these businesses. Professional segment earnings for the second quarter were $190.7 million, compared to $227.5 million last year. When expressed as a percentage of net sales, earnings for the segment were 19% compared to 21.3% last year. The change in profitability was expected and primarily due to lower net sales volume as field inventory levels of zero-turn mowers normalized and higher material and manufacturing costs as we continue to adjust production to demand. This was partially offset by productivity improvements. Residential segment net sales for the second quarter were $335.6 million, up 26.3% compared to last year. The increase was primarily driven by higher shipments of product to our mass channel, which was partially offset by lower shipments to our dealer channel as we worked to normalize field inventory levels. Residential segment earnings for the quarter were $36.1 million, up from $22.7 million last year. When expressed as a percentage of net sales, earnings for this segment were 10.8%, up from 8.6% last year. The year-over-year increase was largely due to net sales leverage and productivity improvements. This was partially offset by product mix and higher material and manufacturing costs. Turning to our operating results. Our reported and adjusted gross margin were both 33.6% for the quarter. This compares to 35.8% for both in the same period last year. The decrease was primarily due to unfavorable segment mix given the exceptional residential segment growth, product mix within residential, and higher material and manufacturing costs. This was partially offset by productivity improvements. SG&A expense as a percentage of net sales for the quarter was 19.7%, compared to 19.5% in the same period last year. The increase was primarily driven by slightly higher corporate expenses, mostly offset by lower marketing costs. Operating earnings as a percentage of net sales for the quarter were 13.9%, and on an adjusted basis were 14.2%. These compare to 16.3% on both a reported and adjusted basis in the same period last year. Interest expense for the quarter was $16.7 million, up $2 million from last year. The increase was primarily due to higher average outstanding borrowings and higher average interest rates. The reported effective tax rate for the second quarter was 19.2%. compared with 20.6% a year ago. The adjusted effective tax rate for the second quarter was 19.8%, compared with 21.1%. The decrease for both was primarily due to a more favorable geographic mix of earnings. Turning to our balance sheet, accounts receivable were $623.1 million, up 34.9% from a year ago. primarily driven by increased shipments to our mass channel for the spring selling season, as well as payment terms to that channel. This increase was as expected, given our new strategic partnership with Lowe's. As a reminder, our accounts receivable balance consists of sales to our mass channel partners, irrigation customers, and many of our international dealers and distributors. The majority of our U.S. independent dealers and distributors take advantage of inventory floor plan financing programs to fund their purchases, as is customary in our industry. We offer programs with third-party financial institutions, as well as through our Red Iron joint venture with Huntington Bank. Red Iron offers financing for the majority of our domestic dealers and distributors of lawn care, snow and ice management, and golf and ground solutions. as well as Toro branded specialty construction products. Additionally, there are other third-party institutions that provide inventory financing for a small portion of those dealers and distributors, some international channel partners, as well as the majority of our ditch-rich underground construction distribution partners. As is typical for these types of financing programs, the large majority of floor plan interest payments to Red Iron and our other inventory financing partners are funded by the Toro Company as the OEM. These payments are reflected in our net sales results and are always considered when we provide outlook commentary. From the dealer or distributor perspective, Red Iron's financing operates similar to a third-party bank program. From our perspective, the Toro Company's 45% non-controlling ownership stake in the Red Iron JV allows us to recoup a portion of our floor planning costs. In accordance with GAAP, our share of JV income is reported within the other income line of our income statement. Now, back to the balance sheet. Inventory at the end of Q2 was $1.11 billion, down 2% compared to last year, and slightly lower sequentially from last quarter. The decrease was driven by lower residential segment finished goods balances due to increased shipments to our mass channel. This was partially offset by higher balances of snow and ice management products, as expected, given the lack of snowfall this past winter. Accounts payable were $512.4 million, relatively flat compared to a year ago. Year-to-date free cash flow was $95.6 million, an improvement of almost $100 million compared to last year. We are making progress on normalizing working capital and are emerging from our peak needs season. As a reminder, the majority of our operating cash flow is typically generated in the second half of our fiscal year, based on seasonal flow, and we expect that same cadence this year. For the full year, we continue to expect a free cash flow conversion rate of about 100% based on reported net income aligned with our 10-year historical average conversion rate. Importantly, our balance sheet remains strong. We ended the quarter within our gross debt to EBITDA leverage ratio target of between one to two times. This, along with our investment-grade credit ratings, provides the financial flexibility to fund investments that drive long-term, sustainable growth. Our disciplined approach to capital allocation remains unchanged, with our first priority to make strategic investments in our business to drive long-term profitable growth, both organically and through acquisitions. We are acting on this priority with our plan to fund $125 million in capital expenditures during fiscal 2024 to support new product investments, advanced manufacturing technologies, and capacity for growth. Our next priority is to return capital to shareholders. both through our regular dividend and share repurchases. We have consistently grown our dividend payout over time as our earnings have grown, which reinforces our conviction in our strong and sustainable growth and future cash flows. Year over year, we have increased our dividend by 6%. With respect to share repurchases, our approach has been to fund repurchases with excess free cash flow while maintaining our leverage goals. To that end, With the improvement in cash flow this quarter, we reduced our outstanding revolver borrowings by $170 million and spent $10 million to repurchase shares. We plan to continue ramping up share repurchases in the second half of the fiscal year, as we have strong conviction about our future growth opportunities. Looking ahead to the remainder of the fiscal year. In our professional segment, We continue to expect benefits from the sustained strength in demand and substantial order backlogs for underground construction products and golf and grounds equipment. For these businesses, field inventory levels remain lower than ideal. We made slight progress in reducing open orders during the second quarter, driven by the actions we've taken to drive increased output. On a total company basis, our order backlog remains elevated. And with our progress in reducing lead times, backlog is down slightly from the $1.97 billion balance at fiscal 2023 year-end and lower on a year-over-year basis. In our residential segment, we continue to expect benefits from the strength in our mass channel. For both segments, we are focused on normalizing dealer-filled inventories of bond care solutions and snow and ice management products. and have considered the expected impacts of this focus in our guidance. We are also assuming normal seasonal weather patterns for the second half of our fiscal year, including temperature and moisture levels. With this backdrop, and based on our first half performance and current visibility, we are reaffirming the full year net sales and adjusted diluted EPS guidance we shared on our last earnings call. We continue to expect low single-digit total company net sales growth and expect higher shipments of lawn care solutions to our mass channel to offset a reduction in pre-season shipments of snow and ice management products. For the professional segment, we continue to expect net sales growth at a rate slightly lower than the total company average. For the residential segment, we expect net sales to grow at a rate significantly higher than the total company average. Looking at profitability, we now expect adjusted gross margin and adjusted operating earnings as a percentage of net sales to be similar to last year, a reflection of the expected change in product mix with lower snow shipments. Turning to our segments, we continue to expect both the professional and residential segment earnings margins to be higher than last year. For the professional segment margin, we also expect a slight improvement over last year's margin, exclusive of impairment charges. For the other activities category, we continue to expect higher expense compared to fiscal 2023. This is the result of our expectations for a return to more normal incentive compensation. For the second half of the year, we expect a quarterly run rate similar to Q1. With that, we continue to expect full-year adjusted diluted EPS in the range of $4.25 to $4.35. Additionally, for the full year, we continue to expect depreciation and amortization of about $120 to $130 million and an adjusted effective tax rate of about 21%. For interest expense, we now expect about $60 million for the full year. Moving to the third quarter of fiscal 2024. We anticipate total company net sales to be up high teams year over year. For the professional segment, we expect net sales to be up high single digits to low teams. For the residential segment, we expect substantial year over year growth. Moving to profitability. For the third quarter, we anticipate total company adjusted operating margins to be higher than the same period last year. We also expect the professional segment earnings margin to be higher on a year-over-year basis and similar sequentially to our second quarter fiscal 2024 result. We expect the residential segment earnings margin to be much higher year-over-year and lower sequentially from the second quarter. Overall, we expect our third quarter fiscal 2024 adjusted diluted EPS to be meaningfully higher than last year and slightly higher than the Q3 record $1.19 we achieved in fiscal 2022. We continue to operate with discipline and build our business for long-term profitable growth. Our multi-year productivity initiative, AMP, is gaining momentum, and we are confident in our ability to drive significant benefits and opportunities, including profitability improvements. With that, I'll turn the call back to Rick.

Thank you, Angie. We have confidence in our ability to deliver growth in fiscal 2024 and beyond. We are entering the second half of our fiscal year with good momentum. We continue to expect benefits from our strong leadership position in attractive end markets supported by our suite of innovative solutions that perform necessary work with regular replacement cycles. We are supported by our strong business fundamentals, market leadership, and deep customer and channel relationships. Our team continues to execute well and operate with resiliency as we flex production to align with market conditions and better serve our customers. The supply chain has largely returned to normal, which is enabling incremental output for our businesses with elevated order backlog. Our homeowner markets also appear to be recovering and we expect to benefit from our successful new product introductions, the power of our brand, and our extensive distribution networks. Looking ahead, we continue to keep a close eye on macro factors as well as demand dynamics in our specific end markets. For the underground construction market, we expect demand to remain strong. This includes a very positive runway for projects to address global infrastructure needs supported by robust public and private multi-year spending. Looking at the utility end markets alone, there are many positive drivers. Spending on power construction, including new and upgraded generation and transmission infrastructure, is expected to climb by 11% in 2024. Construction spending on water treatment and storage, including pipe replacement, is expected to grow by 8% this year. For sewage and wastewater infrastructure, 11% growth is expected. And for telecom, growth is now expected to exceed the initial 7% estimate for the year, driven by funding for the U.S. government's broadband equity and access deployment program. This program is expected to distribute over $42 billion to provide high-speed Internet access to underserved areas. For specialty construction markets, we are seeing a return to more typical patterns as supply and demand come into balance with much improved lead times. We expect this trend to continue. With this stabilization, we anticipate our open order book for these products to normalize by the end of fiscal 2024. For golf and grounds, we expect to continue to see healthy budgets and the prioritization of equipment and irrigation replacement. We are seeing post-pandemic increases in participation extend to golf tourism, where the number of golf travelers in 2024 is projected to exceed 12 million for the third straight year, a level about 20% above the historical average. For landscape contractors, we continue to expect steady retail demand with some pockets of price sensitivity given the interest rate environment. For homeowners, retail activity for the 2024 spring season is off to a good start, and as I mentioned, we're pleased to see some recovery after last year's pause. We expect demand to be driven by regular replacement needs, and certainly a continuation of more normal temperature and moisture levels would be favorable. For snow and ice management, we expect pre-season sell-in demand to be reduced, given elevated field inventories following a second straight season of below average snowfall. Before we go to Q&A, I'd like to take this opportunity to share why we're so excited about the future and what we see as the greatest growth opportunities as we move ahead. Our corporate purpose is to help customers enrich the beauty, productivity, and sustainability of the land. Our success is built on a long history of caring relationships based on trust and integrity. This provides an exceptional foundation for our market leadership in high value spaces, as evidenced by the strength of our diversified and complementary portfolio of businesses. First, we are excited about our underground construction business. We believe the near and long term prospects for this business are extremely compelling, given the rapidly growing demand for data communication infrastructure and energy grid modernization, as well as the global focus on replacing aging infrastructure. For investors wanting exposure to this end market, we are very well positioned as a worldwide market leader with the most comprehensive equipment and brand lineup in the industry and our best-in-class channel. The strength of our deep relationships, the complexity of the technology and innovation in our products, and the runway for growth all make this an extremely attractive space for us and our shareholders. Second, our golf business continues to strengthen and grow. There is sustained global momentum in this space, which is supporting healthy courses and new developments. Like underground construction, our deep relationships and lineup of industry-leading innovative products and solutions, including our full suite of reduced and zero-emission offerings, make this market attractive for us and our shareholders. We have a distinct competitive advantage as the only company to offer both equipment and irrigation solutions for this market and as the market leader in both. The enthusiasm for the game shows no sign of slowing down We are prepared to capitalize with continued innovation in our best-in-class service and support network. Third, we have multi-brand leadership in the attractive zero-turn mower space, which is the largest single lawn care category for both our professional and residential segments. We have significantly strengthened our market position over the past few years, supported by the investments that we've made in our innovative product lineup and the strategic development of our dealer and mass partnerships. For example, our expansion in 2020 with the tractor supply company helped us reach farm and ranch customers. This valued partnership continues to grow as we focus on engineering products to address their unique customer needs. Most recently, our expansion into Lowe's aligns us with the single largest retailer of zero-turn mowers. Their strength in this category is exceptional, with share that is more than 50% higher than any other retailer based on the latest trackline data. These partnerships, coupled with our best-in-class network of independent dealers, provide unsurpassed service and support to our customers and positions us extremely well for further growth in this space. Fourth, We're excited about our ability to leverage our technology and innovation investments across our broad portfolio. We continue to prioritize investments in key technology areas of alternative power, smart, connected, and autonomous solutions. This will enable accelerated development of new products to help our customers be successful and provide distinct competitive advantages for the Toro company. And finally, It comes down to our discipline, execution, and consistent financial performance. We have reported year-over-year growth in net sales and adjusted diluted earnings per share for nearly 15 years. We believe this is a result of our disciplined and effective approach to capital allocation, our dedicated team of employees and channel partners, our broad and strategically aligned distribution networks, and our guiding principle of doing what we say we will do. We've built a strong and agile organization that has been resilient through many macro cycles, and we are ready to seize the opportunities that lie ahead to drive value for our customers, our channel partners, and our shareholders in both the near and the long term. With that, we will open up the call for questions.

Thank you, and ladies and gentlemen, if you wish to ask a question, please press star 1-1 on your touch-tone telephone. If your question has been answered or you wish to withdraw your question, press star 1-1 again. Please stand by for our first question, please. One moment, please. This is coming from the line of Samuel Dart Cash with Raymond James. Please proceed.

Good morning, Rick. Good morning, Angie. How are you? I'm doing well. How are you? Well, as well. Thank you for asking. If I may, three questions. Hopefully they're pretty quick. First, Angie, I think you mentioned in your prepared remarks strong conviction in long-term growth. Does that extend? I know you don't give guidance for a while for next year, but does that extend into your confidence that Next fiscal year will also show organic total sales growth. And I say that in light of the fact that your order book and underground is expected to normalize. You've got a lot of moving parts with landscape and retail and snow and what have you. Is next year prospectively a growth year as you see it right now?

Dan, why don't I comment on that? I think the short answer is we do see opportunity for continued growth into next year. A couple of the factors that you mentioned, we now expect just based on the continued demand profile and continued orders that the open order position is going to extend into 25 for those key growth areas, underground and construction. It's normalized a little bit of one of the key drivers, compact utility loaders in the specialty construction area. But those big drivers, we have better outputs, but the demand just continues to come. And if you look at the drivers long term, those look very solid. And then you just think of the other factors of normalizing our shipment flow into the areas where we have high field inventory today, the strength of the mass strategy that we have today, dealers coming back online. Essentially, snow is sitting the year out for us this year relative to a poor snow season this last year. have a lot of opportunities still early to be very specific about that, but we feel positive about the future and long-term future in general for growth opportunities for us given our portfolio.

Thanks. Second question, mentioning that you're anticipating ramping your repo activity, your share repurchase activity in the back half. I think at least based on your guidance, it looks like you're anticipating ramping I don't know, somewhere around, call it $275 million in second half free cash flow after dividends. Is it fair to assume that the bulk of that might go to repo, especially with the stock at current levels?

I'd say with the improvement in cash flow that we saw in the quarter, we spent about $10 million on share repurchases, and we do expect to ramp that up in the second half. and expect those share repurchases to exceed last year's $60 million. Now, we will assess our cash position and our cash usage, and we'll make decisions based on that if we want to prioritize doing share repurchases over other things.

Got it. My last question, as it relates to the landscape and retail field inventories. At this stage, what's the timing of expected, I'll use the word normalcy, of those elevated field inventories? And then I guess on top of that, any color you can provide in terms of the red iron DSOs being elevated as well. Thanks, guys.

Yeah, I'll take the first part of that. First of all, relative to field inventories, Largely playing out as we had described, even going back to the third quarter last year, if not a little bit better. So if you think in terms of, you know, we're well over halfway in that process of reducing the field inventory in those key areas. The biggest driver of that that has to be there is retail. We're seeing very strong retail demand. really through all of those channels, but certainly in the dealer channel, it's helping to bring that down. And then obviously we immediately restricted shipments into the field at that time. So if you look at the broader sets outside of those areas that we had targeted and talked about since last year, underground is extremely low. So that continues to be sort of hand to mouth. We've made dramatic improvements in our production outputs and getting that field out into the field, but it's immediately flowing through to end customers just based on the pretty incredible demand in that area. On the golf side, still lower than we'd like to see it. Very similar situation there. We are seeing very strong retail. Our shipments are up with golf. The backlog continues to stay relatively high. Why is that? Because the demand keeps coming. The orders keep coming. So that's the situation. But the area that we had talked about really since last year, the homeowner markets, residential and homeowner portion of landscape contractor, we've made tremendous progress and we're right on track with where we'd expect to be. If you want to comment specifically on DSO,

Yeah, I'll comment on the red iron DSO question. We saw significant improvement in the red iron DSO in the second quarter. In fact, we saw a 46-day improvement from Q1 to Q2. For lawn care, strong retail drove liquidation, and that was coupled with lower shipments to the dealer channel. We're well over halfway through reducing field inventory, as Rick mentioned. 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.

Very helpful. Thank you.

Thank you. One moment for our next question, please. And it comes from the line of David McGregor with Longbow Research. Please proceed.

Yes. Good morning, everyone, and congratulations on the strong quarterly results. I just want to pick up on... Good morning. I wanted to pick up on your response to Sam's question about just the retail being so strong. Is there any way you can just give us a retail sales growth number for landscape contractor equipment and residential channels? Not necessarily just your business, but the overall industry, but just what was retail growth in those two categories in the quarter?

We don't provide that specific information, but given a more normal or slightly positive spring, it's much better than it was last year. And it's really better than the last couple of years. And that's really the biggest driver in bringing it down. Sorry, I can't provide a specific or I don't have a specific number at this point, but new products are really a big part of that growth as well. Obviously, we have some unique situations with our strategies and some of our shifts. So Lowe's, for example, through the mass channel has been a big boost to our retail. And the good news, it's really the partnership there, along with our other mass partners, And it's really the strength of our brand. It's the strength of our new products that's really helping to drive that. So all those things combined really where we believe that we are over-indexing the market at this point.

Okay. Is there any way of quantifying how much benefit the weather was to 2Q? You referenced the fact that you got an earlier start in some of the seasonal markets.

No, we, we've, uh, we looked at the data and we've had some good discussions about that just over the last couple of days. It is, it's, um, it feels much, much better than for the last couple of years, but it's actually a little bit closer to normal, normal kind of spring timing, a little bit better than that. Uh, and I think the positive thing for us is, uh, relative to the last couple of years where we were at this point. There is very positive moisture situation as we enter the summer season. It was a little bit cooler, a little bit longer in the south, and some are very important markets in the southeast. So that just kind of sets you up for a better situation going into what can be the drier part of the season. So that's been positive. It was a bit faster warm-up. uh, this year in the South. Um, and that, you know, if you're, if you hear about the extraordinary heat and, uh, the Southwest, uh, the desert Southwest is not, uh, you know, our top areas for turf related, um, products with the exception of golf and those types of areas that are irrigated. So it's, uh, it's been, it's been positive, but probably closer to long run normal. Uh, certainly that's been for the last couple of years.

Okay. And then just on unit volumes, you talk about the capacity benefits of the de-bottlenecking investments that you've made in golf and specialty construction. How much better do shipments get in the second half for golf and ditch witch as a consequence of these de-bottlenecking investments on a year-over-year basis?

Yeah, they would be quite positive, especially relative to the continuous ramp-up that we've seen since last year. So relative to the second half of last year, it would be substantially better.

Last question for me is just on landscape contractor. Just given the average service life in landscape contractor versus some fairly depressed sales trends as of late, you'd have to believe there's some pent-up replacement demand there. What's your best estimate of that deferred replacement demand in this category at this point? And what do you think from a timing standpoint in terms of seeing that come to market?

You know, I think we're seeing that right now. First of all, if you divided that sort of professional product category, there's really not been – as much pullback, if you will, over the last year in the true professional side. So landscape contractors, they wear the product out. It has to be replaced on a regular cycle. That has not really been as much of an impact. It's really the homeowner portion of that. And what we see, the good news so far is that the homeowners have come back into the buying mode relative to last year where we saw sort of almost a cliff event this time of year where they just stopped and My theory was that they all seemed to go traveling or whatever. That's when kind of that spending spiked at the same time. But it's coming back more into a normal mode, and then it just helps by much better weather and seasonal conditions. So the combination of the two feels much more normal plus. Great. Got it.

Thanks very much, Rick. Good luck. Thank you.

Thank you. One moment for our next question. And it's coming from Ted Jackson with Northland Securities. Please proceed.

Thanks very much. Good morning. Hi, Ted. All my questions have kind of been answered. I'm going to ask one, which is around the productivity initiative. We've seen $7.5 million year-to-date with regards to those actions. And I just was curious in terms of maybe providing some color in terms of the activity that you're taking there in terms of streamlining the business when you see the initiative wrapping up and maybe some kind of quantification with regards to, you know, kind of the total cost of the initiatives and kind of how it would play out over the coming reporting periods would be my first kind of question. Thanks.

Okay, sure. So the transformational productivity initiative that we have, we're calling AMP for Amplifying Maximum Productivity. And what we have stated is that we expect this initiative to last three years, so going through the end of 2026. And our plan is to or we expect to achieve $100 million in annual cost savings by 2027, so kind of a run rate to get us to the 2027 number. Where we're investing our time and our cost is really in kind of three focus areas. a sustainable supply base, and so that's really focused kind of on materials, and that's very heavily related to our sourcing initiatives. And then we're looking at design to value and also route to market. We've also recently added another work stream in our productivity initiative for working capital, really focusing on inventory and how we can reduce that year over year and make a meaningful impact. What we said is that we would probably invest or reinvest as much as 50% of that transformational productivity savings back into the business, whether that be in technology or enabling other productivity or innovation, anything that we can do to gain profitable growth for the enterprise. And you mentioned the cost. We did expect some one-time implementation costs, and year-to-date we're at $8.3 million, and that's largely been consulting fees And I'd say we'd expect a similar run rate through the last half of the year as well, Ted. But overall, that initiative – I'm sorry. I was just going to say it's off to a great start.

So, would it be fair, like, if we want to incorporate this into our, you know, our forecast in terms of the pro forma that we would, you know, kind of scale it across for the remainder of 24, but we go to 25 and, you know, kind of what we're seeing with regards to the pro forma adjustments would be –

Yeah, we have included our best estimates in our guidance. So any benefits that we expect to achieve in 24 are included in the guidance today.

Okay. Okay, then my next question, and you kind of went on it, which is nice to hear, you know, the focus on working capital is, as we think about working capital, and by the way, it was really nice to see the improvement in it this quarter. How do we think about how things within those line items on the balance sheet trend for the remainder of the year? Are we going to continue to see improvements with regards to inventory and then with regards to the receivables and what you had happen, which is clearly a result of you know, success with the MASH channel, is that, does that, like, kind of change any of your seasonal dynamics on the receivables front? Or do you assume I'm asking, like, kind of, would you help us kind of think through the go-forward for both inventory and receivables as we kind of go through the year and what it means to be a working capital for when we exit 2024? That's my last question. Thanks.

Okay. Yes, AR is based on seasonal flow and is typically a bit higher in Q2, and we saw that again this quarter. Our inventory is improving, and we do expect to see that. Our most appreciable opportunity to affect working capital is inventory, and we do have that focus on it, a focused effort, I would say, as I mentioned in the AMP work stream, and we expect to continue to see that improve throughout the rest of the year.

Okay, thanks very much, and congratulations on the quarter.

All right, thank you. Thanks, Doug. Thank you. Our next question comes from the line of Eric Boshart with Eclipse Land Research. Please proceed.

Thanks. A couple things. First of all, a follow-up, just clarification. In terms of dealers, landscape contractor dealers, is this – business in terms of sell-through, what I heard you say, I just want to make sure, is that the sell-through is positive and the homeowner residential through that channel is also positive. Is that the right way directionally to think about how that piece of the business is performing?

That's correct. Both are positive through the dealer. We're seeing really good retail activity in both areas.

And is that sustainable? We've sort of digested the shift and the change that took place, and now we're back at a point where we can sustain, you can sustain sell-through growth in the dealers in those categories. Is that the right way to think about it?

We can sustain. In some cases, we have additional opportunities. We're ramping up production to continue to supply those areas. Just as you would imagine with some of our new product introductions, those have been in high demand, so we're still working to meet that demand. But the positive thing is retail drives everything, creates all the opportunities. That's very strong, so it allows us to both adjust field inventory and experience the sell-through in those areas where the inventory is already normalized.

Related to this, you had commented, couple times that you're more than halfway through the inventory right size. At what point would you expect sell-in would match sell-through in this channel?

I think, you know, our original commentary was we thought it would take this year to normalize that. And it's really just a function of the overweight of our second and third quarter for these products. So it's really, if we're more than halfway through and we're through the second quarter, we still have the third quarter to do the normalization and it should set us up to be in good condition as we go into the next selling season. Let's say the item that elevated snow inventory. That's a little bit higher than what we would like to see just based on the in-season reorders that didn't happen in this last winter season. So we had some positives, snow events in the latter part of the season. That helped a little bit, but our field inventory is still a little bit higher for both the residential and the pro side with BOSS, and all of that's included in our guidance. So that's all been built in.

And then the other issue I was curious, and you commented about mixed and residential, which I'm guessing this relates to selling more to Lowe's. And if I'm wrong, you can correct me. What I'm interested in residential is what you're seeing in terms of consumer takeaway. And specifically, you have a breadth of price points and then also the introduction of battery-powered. I'm curious how consumer demand, consumer takeaway has shifted this year relative to last year, relative to expectations between the various products and price points?

I think it's largely played out as we expected. I think as you mentioned in the comments, the overall mix of residential because of the tremendous strength there for the factors we talked about relative to pro. is a factor. And then within the residential segment, there is a mix of profitability among the products. And, you know, riders is the biggest category and we have a range of pricing and riders. We've sold more in kind of the entry mid-level and total mix just based on, you know, based on where the demand was, the new product introductions and so forth. So, That's predictable in our case.

Is that the same dynamic in walks as it is in riders in terms of better success entry mid?

I think the biggest thing would be sort of the relative impact of walk versus riders. And we had a very strong year so far in walk. And, you know, we've seen a nice uptick in our 60-volt battery segment as well with really strong representation with the Lowe's in particular.

Eric, what we did see, though, the mix had an impact, but our productivity more than offset any higher material and manufacturing costs we saw in the quarter.

That's helpful. Thank you for that. Thanks. That's all I have.

Thank you. And we have time for one more question. Any calls from the line of Tom Hayes with CL King. Please proceed.

Hey, good morning, everyone. Thanks for taking my questions. Rick, maybe it's a quick question on the golf industry. It sounds like it's going in the right direction. Any differences between the three primary segments, the private, semi-private, and public courses on spending?

All quite strong still at this point. The driver across all those is golf participation and rounds played. Rounds played can be more variable depending on seasonal timing and so forth, but that's about plus 4% or so, so far this year, year to date through April. So that portion is positive. It affects really all levels of golf, from the most prestigious to the municipal course where I might play. So that's the driver, and we don't see a big difference across those at this point.

Okay. Yes, maybe one more. I think you called out on the press release that the zero-turn mowers continue to be a headwind. I was just wondering what you think needs to occur to turn that around.

You know, the good news is the retail has been very, very strong in that category. So for us, Any headwind would just be the adjustment that's taking place in our field inventory. So for us, that means less shipments of those, especially higher-end Zs or more professional Zs. That was an intentional part of our plan that we built into the year for this year is to make that adjustment in our field inventory. So it was built into our plan from the start, continues to be tracking at or ahead of plan at this point.

Okay, I appreciate the color. Thank you.

Okay, thank you. Thank you. And this concludes the Q&A session. Ms. Caracas, please proceed with closing remarks.

Thank you, everyone, for your questions and interest in the Toro Company. We look forward to talking with you again in September to discuss our fiscal 2024 third quarter results.

Thank you, everyone, for attending today's program. You may now disconnect.