Toro Co Q2 FY2024 Earnings Call

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, Julie Kerekes, a Senior Managing Director of Global Tax and Investor Relations. Please proceed, Ms. Kerekes.

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 Steffan, 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 presentation. With that, I will now turn the call over to Rick.

Thanks, Julie, and good morning, everyone. Our team continues 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 contracted-grade zero-turn mowers, given elevated field inventories heading into this fiscal year. Notably, we've made significant progress reducing dealer field inventories of lawn care equipment in both professional and residential segments. This was the 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 of $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, aligned with market growth trends and generate a strong return on investment. To that end, we have 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 of Toro TimeCutter 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 SmartPower 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 and confident in our ability to deliver at least $100 million of annualized savings by fiscal 2027 from our multiyear 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. Themes 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, streamlined 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 a 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 per 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 were expected given the 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 ground 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 normalize 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 work 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 the 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 US independent dealers and distributors take advantage of inventory floor plan financing programs to fund their purchases as 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 Witch 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 financing operates similar to a third-party bank program. From our perspective, the Toro Company's 45% noncontrolling 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 1 to 2 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 ground 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 field inventories of lawn 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 preseason 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 margins, 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 a 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 million 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 teens year-over-year. For the professional segment, we expect net sales to be up high single digits to low teens. For the residential segment, we expect substantial year-over-year growth. Moving to profitability, for the third quarter, we anticipate total company adjusted operating margin 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 multiyear 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 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-private multiyear spending. Looking at utility end markets alone, there are many positive drivers. Spending on power construction, including new and upgraded generation and transmission infrastructure, is expected to decline 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 US 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 preseason sell-in demand to be reduced given elevated field inventories following a second straight season of low 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 carrying 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 and 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 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 track line data. These partnerships, coupled with our best-in-class network of independent dealers, provide unsurpassed support to our customers and position us extremely well for further growth in this space. Fourth, we are 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 disciplined 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 long term. With that, we will open up the call for questions.

It's coming from the line of Samuel Darkatsh with Raymond James. Please proceed.

Good morning, Rick. Good morning, Angie. How are you?

Good morning, Samuel. Doing well. How are you?

I’m doing well, thank you for asking. If I may, I have three questions that I hope will be quick. First, Angie, you mentioned a strong conviction in long-term growth in your prepared remarks. Does that include your confidence that next fiscal year will also show organic total sales growth? I ask this considering that your order book in underground is expected to normalize, and there are several moving parts with landscape, retail, snow, and so on. Do you see next year as potentially a growth year?

Sam, 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; one of the key drivers being 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. So we 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 or share repurchase activity in the back half. I think, at least based on your guidance, it looks like you're anticipating, 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 be for 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 purchases 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 is about the landscape and retail field inventories at this stage. What is the timing of the expected return to normalcy for those elevated field inventories? Also, could you provide any insights regarding the elevated Red Iron DSOs? Thanks, everyone.

I will address the first part of your question regarding field inventories. Overall, the situation is developing as we anticipated, possibly even slightly better than we expected. We are more than halfway through the process of reducing field inventory in key areas. Retail is the primary factor driving this reduction, and we are experiencing strong retail activity across all channels, especially in the dealer channel, which is contributing to the decrease. Additionally, we restricted shipments into the field at that time. Looking at the broader context beyond the areas we've targeted since last year, underground inventory levels are very low. This situation remains quite constrained. We've made significant strides in our production output and getting products into the market, and this is translating directly to end customers due to the exceptional demand in that sector. On the golf side, the inventory levels are still lower than we would prefer, but we are seeing strong retail activity, and our shipments are increasing. However, the backlog remains relatively high due to ongoing demand and new orders. In the homeowner market, which includes residential and landscape contractor segments, we have made excellent progress and are aligning well with our expectations. Would you like me to elaborate on DSO?

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

Yes, good morning everyone and congratulations on the strong quarterly results.

Hi, David.

Good morning. I wanted to pick up on your response to Sam's question about just the retail being so strong? And 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 really better than the last couple of years. That's the main reason for the decrease. I can't give a specific number at this time, but new products play a significant role in that growth as well. We have unique situations with our strategies and some of our ships. For instance, Lowe's, through the mass channel, has significantly boosted our retail. The good news is the partnership there, along with our other mass partners, along with the strength of our brand and new products, is really helping to drive that. All these factors combined suggest that we are currently outperforming the market.

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.

We've analyzed the data and had some positive conversations about it over the past few days. It feels significantly better than it has in the last couple of years, and it’s approaching a more typical spring timing, perhaps even slightly better. A favorable aspect for us, compared to the past couple of years at this time, is the positive moisture conditions as we head into the summer season. The weather has been a bit cooler and lasted longer in the southern regions and key markets in the Southeast, which sets up a better scenario as we enter the traditionally drier season. Overall, this has been a good sign. The warm-up in the south was slightly quicker this year, and while there's been notable heat in the Southwest, that region isn't among our primary markets for turf-related products, except for golf courses and similar areas. In general, the situation has been positive, but it's more aligned with long-term norms compared to the previous couple of years.

Okay. And then just on unit volumes, you talked about the capacity benefits of the debottlenecking 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 debottlenecking investments on a year-over-year basis?

Yeah, they will 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?

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 aspect of 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 at the end of this time of year where they just stopped and my theory was that they 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's just helped 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 been addressed. I have one more regarding the productivity initiative. We have recorded $7.5 million year-to-date from those actions. I am curious to know more about the activities you are undertaking to streamline the business, when you expect to see the initiative gain momentum, and if you could provide some estimates regarding the total costs of the initiatives and how they might impact the upcoming reporting periods. That would be my first question. Thank you.

Sure. The transformational productivity initiatives we have, referred to as AMP for Amplifying Maximum Productivity, are expected to last three years, concluding at the end of 2026. Our goal is to achieve $100 million in annual cost savings by 2027. We are focusing our efforts in three key areas: establishing a sustainable supply base, which is primarily related to our materials sourcing initiatives; improving design to value; and optimizing our route to market. Recently, we have added a new work stream to our productivity initiative centered on working capital, particularly focusing on inventory reduction to create a meaningful impact year over year. We plan to reinvest about 50% of the savings from these productivity initiatives back into the business, whether it be in technology or enabling further productivity and innovation to drive profitable growth for the company. We did anticipate some one-time implementation costs, which have amounted to $8.3 million year-to-date, mainly from consulting fees. We expect a similar run rate for the second half of the year. Overall, the initiative has gotten off to a great start.

Would it be reasonable to incorporate this into our forecast in terms of the pro forma, scaling it across for the rest of '24, while also considering what we're seeing with the pro forma adjustments as we move into '25?

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

Okay. My next question is about the focus on working capital, which is nice to hear. Considering the improvement we saw this quarter, how should we think about the trends in the balance sheet items for the remainder of the year? Will we continue to see progress with inventory? Regarding receivables, given the success in the mass channel, will that change any of your seasonal patterns? Could you help us understand the outlook for both inventory and receivables as we move through the year and what it means for your working capital as we approach the end of 2024? That's my last question. Thanks.

AR tends to be influenced by seasonal trends and is usually higher in the second quarter, which was evident this quarter as well. Our inventory is getting better, and we believe that the most significant opportunity to improve working capital lies in inventory management. We are actively focusing on this area, particularly through our AMP work stream, and we anticipate continued improvements as the year progresses.

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

All right. Thank you.

Thanks, Ted.

Thank you. Our next question comes from the line of Eric Bosshard with Cleveland Research. Please proceed.

Thanks. A couple of things. First of all, a follow-up, just a 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, Eric. Both are positives through the dealer; we are seeing really good retail activity in both areas.

Is that sustainable, considering we've adapted to the changes that occurred, and now we can maintain sell-through growth in the dealers within those categories? Is that the appropriate way to consider it?

We can sustain. In some cases, we have additional opportunity as 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 a couple of times that you're more than halfway through the inventory rightsized. And at what point would you expect sell-in would match sell-through in this channel?

I believe our initial statement indicated that we expected it would take this year to achieve normalization. This situation is primarily due to the overabundance of our products in the second and third quarters. Since we are already more than halfway through and have completed the second quarter, we still need to manage the third quarter to reach normalization. This should position us well for the upcoming selling season. However, we will still be dealing with the issue of elevated snow inventory this fall, which is higher than we would prefer because in-season reorders did not occur last winter. Although some positive snow events at the end of the season helped slightly, our field inventory remains elevated for both residential and professional sectors, and this has been factored into our guidance.

The other issue relates to the residential mix, which I believe is connected to increased sales to Lowe's. If I’m mistaken, please correct me. I am particularly interested in consumer takeaway in the residential sector. Specifically, with your wide range of price points and the introduction of battery-powered products, I would like to know how consumer demand and takeaway have evolved this year compared to last year and relative to your expectations across different products and price points.

I believe everything has unfolded as we anticipated. Regarding the overall mix of residential, there has been remarkable strength related to Pro, which affects the profitability among the products within that segment. Ryder is the largest category, and we offer a range of pricing in Ryders. We have seen an increase in sales at the entry and mid-level price points, influenced by demand and new product introductions. Therefore, that trend is quite predictable for us.

Is that the same dynamic in Walks as it is in Ryder in terms of better success, entry mid?

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

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

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

And we have time for one more question. And it comes from the line of Tom Hayes with CL King. Please proceed.

Hey, good morning, everyone. Thanks for taking my questions.

Hey, Tom.

Rick, maybe 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, just on spending?

All quite strong, still at this point. The driver across all of those is golf participation in rounds played. Rounds played can be more variable depending on seasonal timing and so forth, but that's about plus 4% or so far this year year-to-date through April. So that portion is positive. It affects really all levels of golf for 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. Just 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?

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 in higher-end Zs or more professional Zs. That was an intentional part of our plan that we built into the year for this year, and it 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. Kerekes, 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.