Earnings Call
Toro Co (TTC)
Earnings Call Transcript - TTC Q2 2023
Operator, Operator
Good day, ladies and gentlemen, and welcome to The Toro Company's Second Quarter Earnings Conference Call. My name is Tanya, 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 call is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's conference, Julie Kerekes, Treasurer and Senior Managing Director of Global Tax and Investor Relations. Please proceed, Ms. Kerekes.
Julie Kerekes, Treasurer and Senior Managing Director of Global Tax and Investor Relations
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 our second quarter earnings presentation to supplement our earnings release and general investor presentation. On our call today are Rick Olson, Chairman and Chief Executive Officer; Angie Drake, Vice President and Chief Financial Officer; and Jeremy Steffan, Director of Investor Relations. We begin with our customary forward-looking statement policy. During this call, we will make forward-looking statements regarding our plans and projections for the future. This includes estimates and assumptions regarding financial and operating results, as well as economic, technological, weather, market acceptance, acquisition-related and other factors that may impact our business and customers. You are all aware of the inherent difficulties, risks and uncertainties in making predictive statements. Our earnings release, as well as our SEC filings, detail some of the important risk factors that may cause our actual results to differ materially from those in our predictions. Please note that we do not have a duty to update our forward-looking statements. In addition, during this call we will reference certain non-GAAP financial measures. Reconciliations of historical non-GAAP financial measures to reported GAAP financial measures can be found in our earnings release and on our website in our investor presentations, as well as in our applicable SEC filings. We believe these measures may be useful in performing meaningful comparisons of past and present operating results and cash flows to understand the performance of our ongoing operations and how management views the business. Non-GAAP financial measures should not be considered superior to or a substitute for the GAAP financial measures presented in our earnings release and this call. With that, I will now turn the call over to Rick.
Rick Olson, Chairman and Chief Executive Officer
Thanks, Julie, and good morning, everyone. We delivered record top and bottom line results in the second quarter. Net sales were up 7% and reported net adjusted diluted earnings per share were up 48% and 26% respectively over last year. Our top line growth was driven by strong professional segment performance, especially in the key areas of construction and golf and grounds, where we achieved volume gains from increased production along with continued robust demand. Our ability to increase output was driven by our disciplined operational execution and efficiencies gained from continued supply chain improvements. For our Residential segment, sales volumes were pressured by unfavorable weather patterns and macroeconomic factors. Once again, the actions we have taken to diversify our portfolio and leverage our scale proved beneficial and we delivered overall net sales growth in the quarter. Moving to our bottom line performance, our team delivered a 250 basis point improvement in adjusted operating earnings as a percentage of net sales for the quarter year-over-year. This positive result was driven by net price realization, favorable mix and productivity gains. While we remained in an inflationary environment, the overall rate continued to slow with notable improvements in freight costs. We delivered strong results in the quarter while also positioning the company for long-term profitable growth. Our market leadership is built on a foundation of long-term customer relationships and offering the best innovative products. This foundation is central to delivering on our purpose of helping our customers enrich the beauty, productivity and sustainability of the land. An example of this leadership is the extension of our commitments to the National Recreation and Park Association Business Council. This partnership explores, shares and deploys solutions that benefit both parks and recreation and the business sector, with an ultimate goal to build stronger communities. We're excited to continue working closely with the council as we strive to solve common challenges together in a way that enhances the quality of life for all. Another example is our recent selection as turf partner for Bay Hill Club & Lodge, as well as Latrobe Country Club, two courses connected with the legendary Arnold Palmer. We are honored to partner with these storied clubs as they continue Mr. Palmer's legacy of providing a top-notch experience for members, guests, and golf professionals. We delivered a strong first half of the year, and we believe we are well positioned to carry that momentum into the second half. While the macro environment remains dynamic, we are accustomed to growing our business for long-term success through all kinds of economic and weather cycles. We intend to continue operating with our hallmark discipline and resiliency while advancing our strategic priorities. With this focus, we expect to grow our market leadership in both the near-term and the long-term. With that, I will turn the call over to Angie for a more detailed review of our second quarter financial results.
Angie Drake, Vice President and Chief Financial Officer
Thank you, Rick, and good morning everyone. As Rick said, we delivered strong performance in the second quarter achieving record net sales and diluted EPS amid a backdrop of unfavorable weather patterns and a very dynamic operating environment. This performance highlights the benefits of our attractive and broad portfolio with the large majority of our solutions geared to professional end markets. We grew overall consolidated net sales for the quarter to $1.34 billion, an increase of 7.2% compared to last year. Reported EPS was $1.59 per diluted share, up 28.2% from $1.24. Adjusted EPS was $1.58 per diluted share, up 26.4% from $1.25. Professional segment net sales for the second quarter were $1.07 billion, up 15.4% year-over-year. This increase was primarily driven by higher shipments of products broadly across the segment with notable strengths for construction and golf and grounds products and net price realization. Professional segment earnings for the second quarter were up 37.6% to $227.5 million. When expressed as a percentage of net sales, earnings for the segment were 21.3%, up from 17.9%. The year-over-year increase was primarily due to net price realization, favorable product mix, productivity improvements, and net sales leverage. This was partially offset by higher material and manufacturing costs. Residential segment net sales for the second quarter were $265.8 million, down 16.8% compared to last year. The decrease was primarily driven by lower shipments of products broadly across the segment, partially offset by net price realizations. Residential segment earnings for the quarter were down 38.7% to $22.7 million. When expressed as a percentage of net sales, earnings for the segment were 8.6%, down from 11.6%. The year-over-year decrease was primarily driven by lower sales volumes, higher marketing expense, and higher manufacturing costs. This was partially offset by net price realization and lower freight costs. Turning to our operating results, our reported and adjusted gross margins were both 35.8% for the quarter, up from 32.4% and 32.5% respectively. The year-over-year improvement was primarily due to net price realization, favorable product mix, and productivity improvements partially offset by higher material and manufacturing costs. SG&A expense as a percentage of net sales for the quarter was 19.5% compared to 18.8% in the same period last year. This increase was primarily driven by higher marketing expense, partially offset by net sales leverage. Operating earnings as a percentage of net sales for the second quarter were 16.3% on both a reported and adjusted basis. This compares to 13.7% and 13.8% respectively in the same period last year. Interest expense for the quarter was $14.7 million, up $6.7 million from the same period last year. This increase was primarily due to higher average interest rates. The reported and adjusted effective tax rates for the second quarter were 20.6% and 21.1% respectively compared to 20.6% and 20.8%. Turning to our balance sheet as of the end of the second quarter, accounts receivable were $462 million, up 5% from a year ago, primarily driven by higher international net sales and partially offset by lower Residential segment net sales. Inventory was $1.1 billion, up 26% compared to last year. This increase was primarily due to higher finished goods, work in process, and service parts, largely driven by inflation and component supply constraints, so essentially from the end of the first quarter of fiscal 2023, inventory was relatively flat, but our composition improved with work in process slightly lower. Accounts payable were $515 million, down 9% compared to a year ago, primarily driven by a reduction in inventory purchases. Year-to-date free cash flow was a $1.3 million use of cash. This was primarily driven by seasonal working capital needs, including higher work in process and service parts levels as we continued to navigate current supply chain dynamics and better serve our customers. It also reflects the timing of capital expenditures with $63 million spent year-to-date compared to $36 million in the same period last year. We've remained well within our one to two times target gross debt-to-EBITDA leverage ratio and are committed to maintaining our investment grade credit rating. This supports our strong balance sheet, which in turn provides the financial flexibility to fund investments that drive long-term sustainable growth. Our disciplined approach to capital allocation remains unchanged with priorities that include making strategic investments in our business, both organically and through acquisitions, returning cash to shareholders through dividends and share repurchases, and maintaining our leverage goals. These priorities are highlighted by our recent actions, including our plan to deploy $150 million in capital expenditures this year to fund new product investments, advanced manufacturing technologies, and capacity for growth. Our dividend payout increased by 13% over last year, and our return of nearly $25 million to shareholders year-to-date through share repurchases. As we look ahead to the second half of the fiscal year, we expect continued strong demand for our innovative products in key professional segment markets. We are also encouraged by the incremental supply chain improvements that we expect will continue to enable increased production for our construction and golfing grounds products. At the same time, we will continue to closely monitor macro-economic dynamics and we will be prepared to remain agile through a range of possible outcomes in the near-term. With this backdrop and based on our current visibility, we are narrowing our full-year fiscal 2023 net sales and adjusted diluted earnings per share guidance ranges. For fiscal 2023, we now expect net sales growth in the range of 7% to 8% compared to 7% to 10% previously. This reflects expectations for a continuation of improved production rates for construction and golf and grounds products. This also includes anticipated volume reductions for our Residential segment as well as for professional products sold to homeowners due to unfavorable weather patterns experienced year-to-date and macroeconomic trends. This also assumes more normal weather patterns in the second half of the year. We continue to expect Professional segment net sales to grow at a rate higher than the total company average for the full year. For the Residential segment, we now expect fiscal 2023 net sales to be down mid-teens as a percentage compared to fiscal 2022. We continue to anticipate a more typical quarterly sales cadence with Q2 and Q3 being our larger quarters. Looking at profitability, we continue to expect gross margin improvement in fiscal 2023 compared to fiscal 2022. With the revision to our net sales guidance, we now expect our gross margin in the second half of the year to be lower than the first half of the year. This is primarily driven by anticipated manufacturing inefficiencies as we adjust production volumes to demand for products geared to homeowners and work to improve our inventory position as we close out the year. We expect these manufacturing inefficiencies to be partially offset by productivity gains and net price realization. In addition, for the full year, we continue to expect improvement in total company and Professional segment adjusted operating earnings as a percentage of net sales compared to last year. We now expect a lower earnings margin for the Residential segment for the full year as compared to last year. This is a reflection of the expected reduction in volume. For our other activities categories, we expect the third and fourth quarters of fiscal 2023 to be similar to the average quarterly run rate of the first half of the year. In line with our revised net sales expectations, we are narrowing our full-year adjusted EPS guidance range to $4.70 to $4.80 per diluted share from the previous range of $4.70 to $4.90. This adjusted diluted EPS estimate excludes the benefit of the excess tax deduction for share-based compensation. Additionally, for the full year, we now expect depreciation and amortization of about $125 million to $130 million, interest expense of about $57 million and free cash flow conversions of approximately 90% to 100% of reported net earnings. We continue to expect an adjusted effective tax rate of about 21%. Turning to the third quarter of fiscal 2023, we expect total company net sales to grow at a rate slightly below the low end of our full-year guidance range. For the Professional segment, we expect a net sales growth rate similar to the second quarter growth rate for that segment. For the Residential segment, we expect a meaningful reduction in the third quarter net sales year-over-year given the dynamics we mentioned. From a profitability perspective for the third quarter, we expect gross margins and adjusted operating earnings margins on a total company basis to be similar to the same period last year. For the Professional segment, we expect the third-quarter earnings margin to be similar to slightly higher than the same period last year. For the Residential segment, we expect the third-quarter earnings margin to be lower than the same period last year, driven by expected lower volume and associated manufacturing inefficiencies as we adjust production to demand. We expect our third-quarter adjusted diluted earnings per share to be slightly higher than they were for the same period last year. We believe we will continue to realize the benefits of a diversified portfolio of products that address attractive end markets bolstered by our extensive distribution and support network. Even with the current and expected future macro and weather dynamics, we expect to deliver 12% to 14% growth year-over-year in our full-year adjusted diluted EPS, a testament to these benefits and our engaged team. We are building our business for long-term profitable growth and remain confident in our ability to drive the same value for all stakeholders. With that, I'll turn the call back to Rick.
Rick Olson, Chairman and Chief Executive Officer
Thank you, Angie. As we enter the second half of the fiscal year, we are encouraged by the expected continuation of strong demand across key professional segment markets, an improving supply chain situation, and the arrival of seasonably warmer weather. We believe we are well positioned in each of the attractive end markets we serve with our innovative product lineup supported by the best team of employees and channel partners. I would like to share some additional color on order backlog as this has been a topic of interest. Traditionally, order backlog has not been a meaningful metric for our company, given typically shorter lead times for our products. As previously reported, our order backlog was $2.3 billion at the end of fiscal 2022. For historical perspective, our order backlog at the end of fiscal 2020 was $370 million. While some of the increase can be attributed to the growth of our business and overall inflation and seasonal variation can also be a factor, the current balance remains significantly elevated over what we would consider normal. The majority of our backlog continues to be for construction and golf and grounds products in our Professional segment. This is a result of the robust demand we've experienced for these products, coupled with a high level of supply chain disruption that has contributed to extended order fulfillment and influenced customer order patterns. Importantly, we achieved volume growth across these categories during the second quarter with disciplined execution supported by an improving supply chain. At the same time, we continue to experience significant demand for these products. With this pace of new orders, our open order book at the end of the second quarter increased slightly compared to the end of the first quarter, remains higher than the balance at the end of fiscal 2022. Given this dynamic, we expect backlog to remain elevated throughout and beyond this fiscal year. Our team remains focused on optimizing output and reducing lead times to support our customers and return backlogs to a more normal level as soon as possible. Turning to the broader economy, we continue to keep an eye on monetary policy actions, the geopolitical environment and inflation. We're also monitoring overall business and consumer confidence and spending patterns. In addition, we're watching developments in the banking sector including any tightening of credit conditions. As part of our normal business practice, we leverage our scale and banking relationships to offer access to attractive financing options for our channel and end customers. We expect this funding will continue to operate smoothly and believe the credit quality of our customers remains strong. We're keeping in close contact with our banking partners as we continue to monitor developments. I'll now comment on the macro factors we are seeing in our end markets, which could impact future results, starting with our Professional segment. For underground and specialty construction, we expect robust demand to continue supported by multi-year public and private infrastructure investments. These investments include broadband and alternative power buildouts, as well as solutions to address the aging infrastructure. We believe we are in a strong position to capitalize on this demand, with the most comprehensive product lineup in the industry. For golf, we expect a continuing strength in rounds played and overall interest in the game to support healthy course budgets and drive strong demand. We remain extremely well positioned in this attractive market as the only company to offer both equipment and irrigation solutions, and as the longstanding market leader in both. For municipalities and grounds, we anticipate continuing prioritization of green spaces and interest in zero exhaust emission products supported by healthy budgets. Our deep relationships and growing suite of sustainable solutions position us well to serve this market. For snow and ice management, we expect a more subdued pre-season selling in as lack of late-season snowfall has left channel inventories at higher levels relative to last year. Having said that, our strong presence in the Midwest where snowfalls were better is expected to provide some offset. Moving to the Residential segment, we are watching weather patterns along with consumer confidence and spending preferences. We're also monitoring how the current environment affects channel inventory levels. While the accelerated demand of the pandemic has normalized, we expect this segment to continue to benefit from regular replacement cycles driven by the non-discretionary nature of our products. Importantly, we also expect the benefits from our refreshed product lineup, expanded channel and strong brands to remain a competitive advantage for the long-term. While we anticipate and plan for a range of macroeconomic outcomes in the near term, we believe our organization is well equipped to deliver positive results in this environment. We have a long track record of managing through economic cycles and weather patterns with agility and resiliency and expect continued benefits from our growing scale and broad portfolio. Our record performance here today demonstrates these benefits and our adaptability. We offer integrated solutions that perform necessary work with regular replacement cycles in attractive end markets. These factors, along with our talented team and best-in-class distribution and service networks, give us confidence in our ability to grow our market leadership over the long-term. We believe we remain well positioned to drive value for all stakeholders in both the near and long-term, guided by our enterprise strategic priorities of accelerating profitable growth, driving productivity and operational excellence, and empowering people. On that note, I would like to thank our employees and channel partners for going above and beyond every day to support our customers and deliver great results. You are the key to The Toro Company's success. I would also like to extend my gratitude to our customers and shareholders for your continued support. With that, we will open up the call for questions.
Samuel Darkatsh, Analyst
Good morning, Rick. Good morning, Angie. How are you?
Rick Olson, Chairman and Chief Executive Officer
Good morning, Sam. Good. Well, how are you?
Samuel Darkatsh, Analyst
I'm well. Thank you for asking. A couple, two, three quick questions if I could. First off the sequential commentary around backlog obviously is very encouraging. Could you talk about what you're seeing with respect to cancellation rates, both in absolute terms as well as relative to 1Q and year end if you could, Rick?
Rick Olson, Chairman and Chief Executive Officer
Yes, good question. I did have a chance in fact within the last 24 hours to circle back through and check on cancellation rates. We're seeing an extremely low level of cancellation rates. That's really not been a factor and really, I mean, the great news is we are seeing additional output from our factories, and perhaps maybe the better news is the demand is coming in even more strongly, so we're exceeding in some respects our output from our factories. But the demand coming from the professional businesses, underground, specialty construction, golf, and grounds has been outstanding. So it has done more than we expected.
Samuel Darkatsh, Analyst
So even though it's in absolute terms extremely low, no take higher in cancellation rates sequentially from last quarter?
Rick Olson, Chairman and Chief Executive Officer
No, no.
Samuel Darkatsh, Analyst
Okay, terrific. And then my other question as it relates to the residential business, I think if my math holds at least, your guidance now suggests maybe, I don't know, about $150 million or so in lower sales residential than you had previously contemplated, but your guidance at least at the midpoint is only down about a nickel which is much less than the normal residential decremental margin might suggest. So is the offset better than expected Pro volumes and margins, or is the offset where the lower residential sales that you're expecting are coming at lower ticket or lower margin type of products?
Rick Olson, Chairman and Chief Executive Officer
The offset is the strength of the Pro business with those higher margins that you referred to and the ability to get more product produced to fulfill the demand. So that's really the offset for the lower numbers that we're projecting for residential.
Samuel Darkatsh, Analyst
If I could ask one more quick question, Rick, could you discuss your residential market share? It seems that nearly everyone is experiencing similar trends, particularly in terms of sell-through and product placement at retail. What do you observe in comparison to your peers, as much as you can share?
Rick Olson, Chairman and Chief Executive Officer
We feel very positive about our market share position. It truly reflects the effort we've put in over the past several years to build a strong and relevant technology portfolio. We've observed strength across our channels; alongside our important mass partners, our dealer network has also shown remarkable strength. In fact, there was exceptional performance in the second quarter of this year from our dealer business, which has done very well.
Samuel Darkatsh, Analyst
Thank you, thank you both.
Operator, Operator
And one moment for our next question. Our next question will come from Tim Wojs of Baird. Your line is open, Tim.
Timothy Wojs, Analyst
Hey good morning everybody.
Rick Olson, Chairman and Chief Executive Officer
Good morning Tim.
Timothy Wojs, Analyst
Maybe just to start, Rick, could you maybe just give us a little bit of color or context in terms of just how much improved the production rates are in construction and kind of golf and grounds and what's really driving that? Is that just some of the supply chain kind of easing in some of the bottleneck areas? Is it just better productivity? I mean can you just maybe add a little bit of context of kind of where it is today versus where it was six months ago and kind of what you're expecting for the back half?
Rick Olson, Chairman and Chief Executive Officer
I think it's actually one of the big stories for us in this quarter is the amount of growth that's coming from actual unit volume. I know with inflation and so forth over the last number of years, there's been a lot of price that's gone into the revenue line. In this case, it's significantly driven by volume that reflects the success within our production facilities. Our own production facilities had gotten better some time ago, but it's really been the supply chain, the suppliers specifically. And we've mentioned over the last couple of quarters, it's narrowed down to some key categories, that's still true. So the availability of those components is still pacing our production output at this point, but it's getting steadily better and volume was the driver of our revenue growth this quarter, which is pretty significant relative to the last number of quarters.
Timothy Wojs, Analyst
Okay. And do you expect incremental improvements in the back half of the year or are you kind of expecting that the back half looks more like the second quarter?
Rick Olson, Chairman and Chief Executive Officer
We examine all factors thoroughly and incorporate them into our guidance, but we anticipate ongoing improvement in our operations as our suppliers become more capable.
Timothy Wojs, Analyst
Okay. Okay. Good. And then maybe just on the Pro landscape business, just kind of, I guess, two questions there. How would you kind of characterize the field inventory levels within the kind of Pro part of that business, I guess is the first question. And then I guess the second question, just when you think about the overall kind of Pro landscape business, how much of that would you assign to the homeowner versus the actual professional?
Rick Olson, Chairman and Chief Executive Officer
Yes. Regarding the inventory question, we have struggled for several years to maintain sufficient inventory in the field. Currently, we have at least normal, and in some cases, higher inventory levels than what may be ideal for the landscape contractor business. This situation encompasses three brands: Toro, Exmark, and Spartan. The homeowner segment constitutes a significant part of our business, particularly those with large acreage or land that warrants a more professional product. However, demand from homeowners has decreased. In contrast, demand from professional landscape contractors for our products remains very strong. This is reflected in the higher field inventories, which means there is a lower inventory of the more professional-grade products.
Timothy Wojs, Analyst
Okay. That's helpful. And then maybe just a last question. Is there any way to think about how much your 60V products now represent as a percentage of the overall Residential business?
Rick Olson, Chairman and Chief Executive Officer
I don't have a specific number for the 60V products. However, if you consider that the Residential business makes up about 20% to 25% of our overall business, it represents one of the smaller categories.
Timothy Wojs, Analyst
Okay. Okay. Good. I appreciate the color and the time. Good luck at the back half of the year, guys. Thanks.
Rick Olson, Chairman and Chief Executive Officer
Okay, thank you. I appreciate the questions.
Operator, Operator
One moment for our next question. And our next question will come from David MacGregor of Longbow Research. Your line is open.
David MacGregor, Analyst
Yes. Good morning everyone. Congratulations on getting the golf and the special construction velocity, but I think that's a good sign. Yes. I mean that's got to be a weight off your mind. I wanted to just maybe pick up on Tim's question on landscape contractors. Can you just talk about what you're seeing in terms of retail demand patterns? I mean it looks like you've set a back-to-back sales events and landscape contractors to extend now through July 31 or pretty late into the season, which just suggests the majority of that business in this category this year is going to be incentivized. Is the demand elasticity increasing in that category? And if so, do you make any adjustments for that in your revisions you made to guidance?
Rick Olson, Chairman and Chief Executive Officer
As part of our usual process for developing our guidance, we incorporate our best insights regarding various programs, which have recently returned to focus. They haven't played a significant role in recent years, but particularly until late spring, we expect more regular retail activity to shift towards the latter part of the year. So, that might explain what you're observing in some of the programs. Regarding field inventory, I would note that for all professional products, current inventory levels are much lower than ideal, especially in the half of the LTE we consider true professional products. The entry-level segments, which are often bought by homeowners preferring professional-grade items, present a slightly different scenario.
David MacGregor, Analyst
Okay. And you talked in your prepared remarks about increased marketing expense. Is this really where you're seeing it, just trying to support the residential and the landscape contractor business, some of these more consumer-facing businesses?
Angie Drake, Vice President and Chief Financial Officer
Yes. We've seen those marketing expenses normalize, but we have had a targeted marketing campaign in our residential group, which is really for kind of the long-term benefits of our premium brand and that was planful. But yes, we are beginning to see some of those more normal targeted promotions for the sales side of things.
David MacGregor, Analyst
Okay. And I want to ask about inventories. Your April 30 inventory levels remained pretty much in line with the previous quarter. I noticed in your guidance, you're sort of thinking 90% to 100% conversion now. I guess from a timing standpoint, how are you thinking about sort of the timing? And maybe we're talking about extending into 2024, but how are you thinking about the timing of liquidation of the excesses getting back down to more sort of typical turns?
Angie Drake, Vice President and Chief Financial Officer
Yes. I'll first start with probably saying that our inventory is really not where we want it to be. We have a very sharp focus on that this year to really reduce the amount of inventory that we have. We did see some improvement in our composition over the quarter where our WIP actually went down a bit. The majority of our inventory now is sitting in finished goods. And as we think about the cash flow, we do expect to see stronger cash flow based on all of our working capital factors in the second half.
Edward Jackson, Analyst
Good morning, thanks for taking my questions. I'm just going to ask really quick ones. First, just to kind of beat the inventory horse. If I listened to all the commentary from all the questions that have been asked so far, is it fair to assume that as we look into the back half of 2023 and going into 2024 we should see kind of turns or days improve and at an absolute level, the inventory number go down and free up some of your inventory and drive some free cash flow?
Angie Drake, Vice President and Chief Financial Officer
Yes. We expect inventory to continue improving and for turnover to increase. Currently, our finished goods inventory is primarily in the residential area, which is where we saw the increase. However, we have a significant need in our Professional segment to transition finished goods inventory into our channels for field inventory, which presents an opportunity to convert work-in-progress into finished goods. We've made good progress in work-in-progress and anticipate entering fiscal 2024 in a better position, overall reflecting our current outlook.
Edward Jackson, Analyst
I care a lot about free cash flow, so this is an important question. Regarding gross margin, we have seen some improvement, and the revenue mix has been beneficial. Price realization is also having an impact. Looking ahead to this year and into 2024, will these trends continue? Is there a chance that our margins will return to more historic levels, perhaps between 34% and 35%, as we catch up with inflation? Additionally, how does the mix between Professional and Residential play into this?
Angie Drake, Vice President and Chief Financial Officer
We haven't provided guidance for fiscal year 2024 yet, but reflecting on our fiscal year 2023 guidance, we do anticipate an improvement in gross margin. However, we initially indicated that our first half would be lower than the second half; now we expect the opposite, with the first half being better than the second due to manufacturing adjustments driven by reduced volume. Our gross margin for the third quarter will be similar year-over-year to what we experienced in the second quarter. We continue to observe overall productivity enhancements across our plants, alongside modest improvements in our supply chain, which are contributing to better output.
Edward Jackson, Analyst
So without putting words in your mouth, but putting words in your mouth, just sort of generically as we kind of roll through the things, improving supply chain, catching up with regards to cost inflation, et cetera, et cetera, that it's fair to assume not like on a quarter-by-quarter basis, but just generally speaking, just a better margin environment for Toro as we kind of roll through the next year or two.
Angie Drake, Vice President and Chief Financial Officer
We do expect fiscal '23 margin improvement, and we'll continue to focus on long-term margin improvement as we go forward.
Julie Kerekes, Treasurer and Senior Managing Director of Global Tax and Investor Relations
Yes, Ted, this is Julie. That relates to our Red Iron joint venture, and that will just kind of move up and down as our balances with them move up and down throughout the year. So we can discuss that further when we talk. I think we're talking several but yes, yes.
David MacGregor, Analyst
Yes, thanks for taking the follow-up. Rick, just sort of backing away from the quarter and looking at some longer-term drivers here, could you just give us an update on where you are with the autonomous offering in Residential? And I guess two things, what are the opportunities here to expand distribution and put the product in front of more consumers? And secondly, I guess based on kind of the early feedback you're getting, what are the consumers focusing on with your product as the sources of competitive differentiation?
Rick Olson, Chairman and Chief Executive Officer
Sure. One thing I want to mention is that in the context of our other products, we view our Residential offering as part of a broader suite of robotic solutions moving forward. That particular platform is one of them, but we've also highlighted our progress in the golf sector and what we're doing for landscape contractors at industry trade shows. As these needs evolve, we might see a blend of solutions. The residential solution you're referring to is currently in limited operation in the field, and we plan to expand its availability throughout this year and into early next year. The key feature that stands out is its ability to function in various conditions with minimal interference from obstacles like tree canopies and GPS access. It employs advanced optical systems to understand its surroundings, and despite the technical challenges, we believe this provides significant value to our customers and enhances their satisfaction.
David MacGregor, Analyst
Interesting. And I guess, battery and hybrid products overall, you're targeting 20% of motorized product sales by 2025. Where is that percentage today?
Rick Olson, Chairman and Chief Executive Officer
I think the exact percentage is slightly above 6% at this moment. We have publicly shared our goal to reach 20% by 2025. As you can see, we are steadily releasing electric battery solutions across all our markets. We face challenges in meeting the demand for fully battery-operated zero-emission products in golf, including green mowers, walk and rides, utility vehicles, and people movers with lithium-ion solutions. We just introduced the Revolution on the landscape contractor side, and Exmark will be releasing similar products. Our residential line, the 60V Flex-Force platform, has been consistently launched, and on the construction side, the eDingo and Ultra mud buggy, which are electric battery-operated, have created new opportunities for indoor operations. We are very excited about our progress with electric battery products. One key factor in reaching our percentage goal is consumer acceptance of electric solutions. We will continue to provide both electric and battery options, acknowledging that during economically challenging times, the initial cost can be a considerable factor in decision-making. We remain fully committed to achieving our goal and are ensuring we have the necessary solutions in place to succeed.
David MacGregor, Analyst
Right, right, thank you for that. Last question from me is just on the acquisition pipeline. You've done fairly significant transactions in 2019, 2020, 2021, 2022, nothing so far in 2023. I know that window kind of opens and closes over time based on a number of factors. Just wondering how you're thinking about the acquisition opportunity right now within the bigger capital allocation thought process and what the pipeline looks like right now in terms of the next maybe three to four quarters?
Rick Olson, Chairman and Chief Executive Officer
We have discussed our capital allocation process multiple times, and we maintain a disciplined approach to it. Our priorities remain consistent, with acquisition opportunities and M&A as key elements. This process is ongoing, and even after completing a significant acquisition, we are already in discussions with other potential opportunities the very next day. The volume of opportunities available has not significantly changed. What matters most to us is not the number of opportunities but rather our discipline in ensuring that any acquisitions we pursue will be ones we are satisfied with in the long run. We are pleased with the acquisitions we have made over the past few years.
David MacGregor, Analyst
Thanks very much, and good luck.
Rick Olson, Chairman and Chief Executive Officer
Okay. Thank you.
Julie Kerekes, Treasurer and Senior Managing Director of Global Tax and Investor Relations
Thank you, Tanya, and thank you all for your questions and interest in The Toro Company. We look forward to talking with everyone again in September to discuss our fiscal 2023 third-quarter results.
Operator, Operator
Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.