Toro Company (The)

Good day, ladies and gentlemen, and welcome to the Tor Company's third quarter earnings conference call. My name is Tawanda, and I will be your coordinator for today. At this time, all participants are on 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. Julie Karakis, Treasurer and Senior Managing Director of Global Tax and Investor Relations. You may begin. Thank you and good morning, everyone. Our earnings release was issued this morning and a copy can be found in the investor information section of our corporate website, thetorocompany.com. We have also posted a third 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 Steffens, Director of 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 presentation. With that, I will now turn the call over to Rick.

Thanks, Julie, and good morning, everyone. Our team executed with discipline and agility in the third quarter as we continued to position the company for a strong future by advancing our key strategic priorities of accelerating profitable growth, driving productivity and operational excellence, and empowering our people. Our team delivered top- and bottom-line growth in a very dynamic environment, which included continued strength in our businesses with elevated order backlogs along with an uptick in caution across homeowner-facing businesses. We drove sales growth by capitalizing on an ever-expanding portfolio of innovative products that solve our customers' most pressing needs, coupled with our best-in-class distribution networks. We also drove improved profitability as we achieved productivity and net price benefits while continuing to align production-to-demand trends. For the third quarter, we delivered a nearly 7% increase in net sales to $1.16 billion. Our residential segments grew 53%, driven by increased shipments to our mass channel, as expected, following aggressive destocking by that channel last year, coupled with the strategic addition of lows this year. The residential segment continued to benefit from the strength of the Toro brand, successful new product introduction, and better weather conditions compared to last year. Within our professional segment, we deliver net sales growth in our underground construction and golf and grounds businesses, where strong demand is keeping order backlog at high levels. We successfully drove increased output within our existing manufacturing footprint to address this sustained demand and best serve our customers. In doing so, we continue to improve backlog but still expect elevated levels for these businesses heading into next fiscal year, given the influx of new orders. This strength was offset by lower shipments of snow and ice management products and contractor-grade zero-turn mowers. This was expected given elevated field inventories in our dealer channel and industry-wide. As summer progressed, we saw macro factors drive more caution from homeowners and dealers than originally anticipated. These factors included general consumer uncertainty, high interest rates, and the current geopolitical environment. This uptick in caution resulted in trade down activity and purchase deferrals, which led to lower than expected shipments of residential and professional segment lawn care products during July. Even so, we continue to execute on our objective of normalizing dealer field levels for these products and once again made significant progress in both the professional and residential segments. We are now about 80% of the way back to normal for dealer field inventory levels for these products. Moving to the bottom line, we delivered adjusted diluted earnings per share of $1.18. an increase of 24% over last year's $0.95. This increase reflects our progress in driving productivity and manufacturing efficiencies, along with positive net price and prudent management of SG&A. Importantly, our free cash flow improved substantially compared to last year, a reflection of our disciplined execution and focus on working capital. Based on our visibility for the remainder of the year and considering the expected continuation of increased caution in our homeowner-facing markets, we are revising our full-year fiscal 24 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. I'd like to comment specifically on our key priority of driving productivity and operational excellence. As our team did an outstanding job in delivering productivity gains this quarter, we remain on track to deliver at least $100 million of annualized run rate savings by fiscal 2027 from our multi-year productivity initiative named AMP for amplifying maximum productivity. As we've discussed, we intend to prudently reinvent of the savings to further accelerate innovation and long-term growth. As a part of our AMP initiative, we recently held a wide-scale supplier summit with more than 100 key suppliers represented. We shared our vision for the future with transformational productivity being an enabler of further innovation, investments, and growth. Based on the feedback we've received, suppliers left the summit engaged and excited to partner with us on our product development and productivity objectives. We also made targeted portfolio adjustments this quarter with AMP to further position the company for profitable growth. These include the sale of our Australia-based Polk Products residential garden watering and irrigation business and the rebranding of our Intimidator and Envy products. This rebranding allows us to leverage marketing investments and capitalize on the strength of the Spartan brand name. We are already realizing benefits from AMP, and we expect these benefits to accelerate over the next two years. Importantly, everything we are doing with AMP helps us fuel our existing strategic priorities of accelerating profitable growth, driving productivity and operational excellence, and empowering our people. 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. We were pleased to drive productivity and price benefits in the quarter and made progress in addressing both order backlog and field inventories. While shipments of lawn care products were impacted by homeowner and dealer caution, we are confident in the strength of our market share and are well positioned for the future. Consolidated net sales for the quarter were $1.16 billion, up 6.9% from Q3 last year. Reported EPS was $1.14 per diluted share, compared to a loss of $0.14 in the third quarter of last year. Adjusted EPS was $1.18 per diluted share, up 24% from $0.95. Now to the segment results. Professional segment net sales for the third quarter were $880.9 million, down 1.7% year over year. This decrease was primarily driven by lower shipments of snow and ice management products and lawn care equipment as we work to reduce field inventories, and lower shipments of compact utility loaders with the replenishment of field levels as a result of improved output in recent quarters. This was partially offset by higher shipments of golf and grounds products and underground construction equipment, as we continued to address the robust demand and significant open orders for these businesses. We also saw net price realization in the quarter. Professional segment earnings for the third quarter were $165.7 million, compared to $13 million last year. When expressed as a percentage of net sales, earnings for the segment were 18.8%, compared to 1.5%. The positive change in profitability was primarily due to last year's non-cash impairment charges of $151.3 million, as well as productivity improvements, favorable product mix with the appreciable growth in golf and grass shipments, and net price realization. This was partially offset by higher material and manufacturing costs and lower net sales volumes. Residential segment net sales for the third quarter were $267.5 million, up 52.6% compared to last year. The strong growth was primarily driven by higher shipments of products to our mass channel. Residential segment earnings for the quarter were $32.6 million, a substantial increase from $3.8 million last year. When expressed as a percentage of net sales, earnings for the segment were 12.2%, up significantly from 2.2%. The year-over-year increase was largely due to net sales leverage, productivity improvements, and net price realization, primarily driven by lower floor plan costs. This was partially offset by product mix and higher material and manufacturing costs. Turning to our operating results for the total company. Our reported and adjusted gross margin were 34.8 and 35.4% respectively for the quarter. This compares to 34.4% for both in the same period last year. The increase was primarily due to productivity improvements and net price realizations. This was partially offset by higher material and manufacturing costs and segment mix with growth weighted to residential. SG&A expense as a percentage of net sales for the quarter improved slightly to 22%, a 20 basis point improvement over the same period last year. The improvement was primarily driven by net sales leverage and lower marketing costs, partially offset by higher incentive expenses. Operating earnings as a percentage of net sales for the quarter were 12.8% compared to a negative 1.8% in the same period last year. On an adjusted basis, operating earnings as a percentage of net sales were 13.7%, a 150 basis point increase over 12.2%. Interest expense for the quarter was $14.5 million, down from $15 million last year. The decrease was primarily due to lower average outstanding borrowings, enabled by our significant improvement in free cash flows. The reported effective tax rate for the third quarter was 17.3%, compared with 47.6% a year ago. The decrease was primarily due to the tax impact related to non-cash impairment charges last year, combined with a more favorable geographic mix of earnings this year. The adjusted effective tax rate for the third quarter was 18%, compared with 19% last year. This also reflects a more favorable geographic mix of earnings. Turning to our balance sheet, accounts receivable were $523.3 million, up 36.2% from a year ago, primarily driven by increased shipments to our mass channel, as well as payment terms to that channel. This increase was as expected, given our strategic partnership with Lowe's, which continues to provide positive momentum within the residential segment. While not a part of our accounts receivable balance, we once again saw significant improvement in red-iron DSOs, a decrease of about 30 days. This is a reflection of our progress in rebalancing dealer field levels of lawn care products as sell-through continues to exceed sell-in. Inventory at the end of Q3 was $1.08 billion, down 3% compared to last year, and slightly lower sequentially from last quarter. The year-over-year decrease was driven by a reduction in both lawn care equipment finished goods balances and work in process. These reductions were partially offset by higher levels of compact utility loaders as those inventories normalized and higher levels of snow and ice management products, as expected, given last winter's lack of snowfall. Accounts payable were $437.8 million, up 7% from last year. primarily driven by the timing of material purchases. Year-to-date free cash flow was $270.5 million, an improvement of over $200 million compared to last year. 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. We expect that same cadence this year. For the full year, we are confident we will deliver a free cash flow conversion rate of at least 100% based on reported net income. This is significantly higher than the past two years and back in alignment with our 10-year historical average. Importantly, our balance sheet remains strong. Our leverage ratio is within our stated target of one to two times on a gross basis, and we continue to have investment-grade credit ratings. This provides financial flexibility to fund investments that drive attractive returns. 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 $115 million in capital expenditures during fiscal 2024. This will support new product investments advanced manufacturing technologies, and capacity for growth within our existing footprint. Our next priority is to return capital to shareholders, both through our regular dividend and share repurchases. We've increased our dividend 6% this year and have consistently grown our dividend payout over time. This demonstrates the conviction we have in our strong and sustainable future cash flows. With respect to share repurchases, We continue to fund repurchases with excess free cash flow while maintaining our leverage goals. We've invested almost $110 million through Q3 to repurchase nearly 1.2 million shares, while also paying off our outstanding revolver borrowings. And we plan to continue repurchasing shares in the fourth quarter. This is a reflection of our substantial improvement in cash flow this year, along with our strong conviction in future growth opportunities. As we close out the fiscal year, we continue to expect benefits from the sustained strength in demand and significant order backlogs for underground construction products and golf and grounds equipment. For these businesses, field inventory levels remain lower than ideal and backlog remains elevated, although we continue to make good progress. On a total company basis, order backlog has improved from the $1.97 billion balance at fiscal 2023 year end. It is lower both on a year-over-year basis and sequentially from last quarter, but still much higher than what we would consider normal. We will provide an updated year-end figure in our annual 10-K filing in December. For both segments, we expect to continue making progress in normalizing field inventories of lawn care and snow products, although levels remain elevated both for us and industry-wide. We factored this dynamic into our estimates. We've also factored in expectations for a continuation of the increased macro caution we started seeing in July for our homeowner-facing businesses. With this backdrop, and based on our current visibility, we are making some adjustments to our guidance. For the full year, we now expect total company net sales growth of about 1%. For the professional segment, we now expect full-year net sales to be down low single digits. which implies mid-teens growth for the fourth quarter. For the residential segment, we continue to expect net sales to grow at a rate significantly higher than the total company average for the full year. We expect fourth quarter residential net sales to be down low single digits on a year-over-year basis. Looking at profitability, we now expect adjusted gross margins and adjusted operating earnings as a percentage of net sales to be slightly lower than last year, a reflection of product mix. Turning to segment profitability, we continue to expect both the professional and residential segment earnings margins to be higher than last year on a full year basis. For the professional segment, we now expect a similar earnings margin to last year when you exclude last year's impairment charges. For the residential segment, we expect a high single-digit margin for the full year. For the other activities category, We continue to expect higher expense compared to fiscal 2023. This reflects a return to more normal incentive compensation. For the fourth quarter, we expect an expense similar to Q1. With that, we now expect full-year adjusted diluted EPS in the range of $4.15 to $4.20. Additionally, for the full year, we continue to expect depreciation and amortization of about $120 to $130 million, and interest expense of about $60 million. We now expect an adjusted effective tax rate of about 19.5%, driven by a more favorable geographic mix of earnings. We continue to build our business for long-term profitable growth. This includes prioritizing innovation investments that we believe will deliver outstanding returns, driving sustainable margin expansion with disciplined execution, including our AMP initiative, and leveraging the talents of our team and the power of our best-in-class distribution networks. We are confident in our ability to drive significant benefits and opportunities for all of our stakeholders. With that, I'll turn the call back to Rick.