Earnings Call
Toro Co (TTC)
Earnings Call Transcript - TTC Q1 2020
Operator, Operator
Good day ladies and gentlemen and welcome to The Toro Company's First Quarter Earnings Conference Call. My name is Sara 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, Nicholas Rhoads, Managing Director of Investor Relations for The Toro Company. Please proceed Mr. Rhoads.
Nicholas Rhoads, Managing Director of Investor Relations
Thank you and good morning. Our earnings release was issued this morning by Business Wire and a copy can be found in the Investor Information section of our corporate website thetorocompany.com. On our call today are Rick Olson, Chairman and Chief Executive Officer; and Renee Peterson, Vice President, Treasurer, and Chief Financial Officer. We begin with our customary forward-looking statement policy. During this call, we will make forward-looking statements regarding our business and future financial and operating results. You all are 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 adjusted non-GAAP financial measures and metrics. Reconciliations of historical adjusted non-GAAP financial measures and metrics to reported GAAP financial measures and metrics can be found in our earnings release or on our website. The company believes these measures and metrics may be useful in performing meaningful comparisons of past and present operating results to understand the performance of its ongoing operations and how management views the business. Such adjusted non-GAAP financial measures and metrics should not be considered superior to, as a substitute for, or as an alternative to, and should be considered in conjunction with the GAAP financial measures and metrics presented in our earnings release in this call. With that, I will now turn the call over to Rick.
Rick Olson, Chairman and CEO
Thanks and good morning. Fiscal 2020 has started well, and we are optimistic about the upcoming season. The team's commitment to our strategic goals of profitable growth, productivity, and empowering people has been crucial to our sales and margin performance in the first quarter. We also announced a strategic acquisition to enhance our organic growth. In terms of our financial results, although the first quarter is usually smaller, our dedicated employees at Toro helped us achieve record net sales and earnings. We reported net sales of $767 million, a 27% increase from last year, and adjusted diluted earnings per share of $0.64, up 21%. The Professional segment saw growth driven by the acquisition of Charles Machine Works, ongoing demand for BOSS snow and ice management equipment, and price realization. In the residential segment, we benefited from the initial delivery of Zero-Turn riding Mowers to the Tractor Supply Company. We completed the acquisition of Venture Products on Monday, which manufactures under the Ventrac brand, known for its versatile turf, landscape, and snow and ice management equipment. Ventrac machines are appreciated for their adaptability and multi-season attachments. Our companies share a strong culture focused on innovation, quality, and customer service. I officially welcome the Ventrac team to The Toro Company. Regarding our operating performance, the Professional segment's net sales increased by 31%, thanks to the contributions from Charles Machine Works and positive results from BOSS golf and grounds and irrigation businesses. Charles Machine Works, with its well-known brands like Ditch Witch and American Auger, contributed significantly to our revenue this quarter. We experienced strong retail demand for our new products, including the Ditch Witch JT24 Directional Drill and SK3000 mini skid steer. The recently launched Bluelight LED Cured-In-Place lining system is gaining popularity. Nearly a year after the Charles Machine Works team integrated with The Toro Company, the process has exceeded expectations, and we are on target to achieve our synergy goals. BOSS had another solid quarter, driven by healthy demand for snow and ice management equipment due to early winter snowfall in key areas and sales of mounts and plows for new truck models. We also observed robust demand for the Snowrator, which simplifies the snow and ice management process. Our global golf and grounds business benefited from strong golf equipment demand in Europe and Asia, with notable interest in our all-electric Greensmaster eTriFlex riding greens mower, recognized for its reduced noise, maintenance, and fuel costs. Additionally, activity increased for previously deferred golf projects in the U.S. and among international markets. Our ag irrigation business reported positive results this quarter, driven by higher product demand in the Eastern United States and Mexico, bolstered by the introduction of Aqua-Traxx Azul precision irrigation tape with enhanced clog resistance. Growth in our irrigation business was supported by favorable weather conditions that spurred early demand for Irritrol products for residential and commercial uses. In the Residential segment, we experienced over 14% growth due to initial shipments of Zero-Turn Riding Mowers to Tractor Supply stores, along with positive results from our pulp-branded DIY irrigation business in Australia. In summary, we achieved strong performance for the quarter, expanded our mass retail presence with Tractor Supply Company, and completed a strategic acquisition to bolster our organic growth. I will now hand over the call to Renee for a detailed discussion of our financial results.
Renee Peterson, Vice President, Treasurer and CFO
Thank you, Rick, and good morning everyone. The Toro Company is comprised of a balanced portfolio of products to enhance our customers' productivity across the season. Charles Machine Works adds incremental revenue and is less seasonal, due to the use of these products in multi-year, infrastructure and telecom projects, such as 5G and the focus on underground installation and maintenance. Our ongoing focus on operational excellence and synergy capture should yield improved margins across the portfolio over time. This enables the company to allocate capital across a variety of alternatives, including acquisitions, dividends, debt paydown, and share repurchases. While certain factors do lie out of our control, the portfolio of businesses allows us to adjust to shifting weather situations and changes in customer demand to provide consistent long-term growth and generate healthy free cash flow. Q1 was no exception. Even though Q1 is a smaller quarter, we were able to exceed the expectations we set for ourselves, based on our ability to adjust to changes in channel demand and product mix, while maintaining our focus on our strategic initiatives of growth, productivity, and people. We reported net sales of $767 million in the quarter, a 27.3% increase from the first quarter of fiscal 2019. Diluted EPS was $0.65 for the quarter compared to $0.55 last year. Adjusted diluted EPS increased 20.8% to $0.64. For the first quarter, professional segment net sales increased 30.7% to $594.7 million. The revenue growth was primarily driven by the Charles Machine Works acquisition, which added incremental sales of $161 million. Excluding Charles Machine Works, professional segment sales were lower compared to a strong Q1 of 2019. During Q1 2020, we realized lower shipments of landscape contractor products, as we focus on managing field inventory. This was partially offset by sales across most of our professional businesses, including BOSS snow and ice management, golf and grounds and irrigation businesses. Professional segment earnings for the first quarter increased 16.5% to $102.5 million. Residential segment net sales for the first quarter were up 14.3% to $165.8 million, mainly driven by shipments of Zero-Turn Riding Mowers to Tractor Supply. Residential segment earnings were up 65% to $21.6 million, reflecting a 400 basis point year-over-year improvement in segment margins. This margin improvement was largely driven by favorable sales mix, productivity and synergy initiatives, lower commodity and tariff costs, and reduction in freight costs. In the quarter, good operating fundamentals translated to strong segment margin due to a combination of factors. We anticipate second quarter segment margin to be comparable with the first quarter and then to moderate in the second half of the year. As a result, we anticipate full year residential segment margins to be in the low teens. Moving to our operating results. Reported gross margin for the first quarter was 37.5%, an increase of 170 basis points over the prior year period. Excluding acquisition-related impacts and other nonrecurring items, adjusted gross margin increased 180 basis points to 37.6%. These increases were primarily driven by productivity improvements and synergy initiatives, increased net price realization, and lower freight commodity and tariff costs. SG&A expense, as a percent of sales increased 140 basis points for the quarter, primarily due to higher costs with the addition of Charles Machine Works and increased marketing support for the mass retail channel. Operating earnings, as a percent of net sales increased 30 basis points to 11.9%. Adjusted operating earnings, as a percent of net sales increased 20 basis points to 12.1%. Interest expense increased by $3.4 million for the quarter. This increase was due to additional debt to fund the Charles Machine Works acquisition. For the full year, we anticipate interest expense of about $33 million as a result of additional debt to fund the Charles Machine Works and Venture Products acquisitions. The reported effective tax rate was 18.6% for the first quarter and the adjusted effective tax rate was 21%. For the full year, we continue to anticipate an adjusted effective tax rate of about 20.5%. Turning to the balance sheet and cash flow. Accounts receivable totaled $321.2 million. This was up 42.4% from a year ago, as a result of Charles Machine Works and higher sales into the mass retail channel. Net inventories were up 77.4% to $739 million, primarily due to incremental inventories from Charles Machine Works and higher inventory balances in our landscape contractor business in the professional segment and higher inventories to support our expanded mass retail channel and new product introductions in the residential segment. Accounts payable increased 23.6% to $348 million, largely driven by our acquisition of Charles Machine Works. We expect depreciation and amortization for fiscal 2020 of about $95 million and capital expenditures of about $100 million. As I mentioned, we built inventory in preparation for our key selling season, while free cash flow conversion was negative for the quarter, our projection remains the same. We continue to anticipate free cash flow conversion to be about 100% for fiscal 2020. Delivering high demand products aligned with the varying seasons, as well as solutions for multiyear infrastructure projects, drives more consistent levels of profitability and increases our ability to allocate capital to fund future growth. Our disciplined capital allocation strategy allows for investment in organic and M&A growth opportunities and the return of cash to shareholders through dividends, share repurchases, and debt paydown. We continue to invest in innovation and new product development which fuels our organic growth and we are maintaining a disciplined approach to acquisitions. Venture Products is a recent example of our focus on profitable growth as we broadened our offering to customers through this acquisition. I will now turn the call back to Rick.
Rick Olson, Chairman and CEO
Thanks, Renee. Our record performance in the first quarter, customer response to our innovative new products, and the outlook for our key markets give us reason for optimism in 2020. For the full year, we continue to expect revenue of about $3.6 billion and adjusted diluted earnings per share of $3.33 to $3.40 inclusive of the Venture Products acquisition. For the second quarter, we expect adjusted diluted earnings per share of $1.28 to $1.33. As always, we have a watchful eye on factors that could pose challenges to our performance, such as unfavorable weather, trade policy and regulatory actions, and the impact of coronavirus. Given the focus on coronavirus, I'd like to spend a moment providing our current thinking on its potential effect on Toro. First and foremost, we are focused on the health and safety of our employees and other stakeholders. We are monitoring the situation and taking appropriate precautions including those recommended by government agencies. In addition, we have a number of internal planning groups that are helping us to prepare for various scenarios. In terms of our supply chain, we are closely observing the evolving situation in real-time and taking appropriate steps to minimize disruption. Our team, including those on the ground in China, is working diligently with our suppliers to maintain a steady flow of components. We currently expect a modest financial effect from supply chain disruptions in fiscal 2020. From a revenue standpoint, at this time we do not expect a material impact in 2020. We have minimal sales from geographies that have been most affected by coronavirus so far. While the situation is evolving quickly, our guidance reflects our best estimate of how these factors may affect our second quarter and full year performance. Let's review prospects for our businesses going forward. Starting with the professional segments. In golf, despite the second wettest year on record in the U.S., annual rounds played were up 1.5% in 2019. At the recent Golf Industry Show in Orlando, we unveiled a record number of turf and irrigation products for the upcoming season, such as the All-New Groundsmaster Out-Front Rotary Mower and the latest Lynx Central Control System. Additionally, we unveiled IntelliDash, a smart connected technology concept for golf superintendents. IntelliDash is a golf course management platform that integrates data from Toro products and other sources to provide real-time information, such as agronomic conditions, labor, asset location, and equipment health for managers to better run their operations. We also introduced a new suite of autonomous technologies called GeoLink Solutions. These include a Multi Pro sprayer with auto-steer capabilities and fully autonomous Reelmaster and Greensmaster concept machines. Our customers are seeking solutions to alleviate labor challenges and drive productivity, and these products can help them achieve their goals in the future. Turning to our Underground business. The outlook continues to be encouraging with strong market growth opportunities such as the 5G wireless build-out. Our new product introductions such as JT24 directional drill are showing strong early retail demand. We have the right products to support the full life cycle of pipe and cable from installation to repair and rehab. We'll showcase our brands and products at the upcoming CONEXPO trade show with representation from Ditch Witch, American Augers, Trencor, and Subsite. As some of you recently observed in Orlando during the American Rental Association trade show, the outlook for our rental and specialty construction business is strong. The American Rental Association expects U.S. rental equipment revenues to grow approximately 4% in 2020 and projects continued growth in each of the following three years. Industry fundamentals support ongoing construction spending, which should create demand for our new products. The battery-powered Toro eDingo compact utility loader garnered a lot of attention and good preseason orders at the ARA show. Additionally, the recently launched Toro TRX walk-behind trencher received three industry awards for the innovative IntelliDash smart trenching technology. Ditch Witch also exhibited at ARA and excitement remains high for the SK3000 mini skid steer. We're also excited by anticipated demand for recently introduced products for landscape contractors. These include the Z Turf spreaders, sprayers, and aerators; and Exmark Lazer and Toro TITAN zero-turn riding mowers. Additionally, the GrandStand MULTI FORCE is building momentum with contractors due to the addition of attachments for multi-seasoned use. We had a strong start to Q1 last year followed by an unusually wet selling season resulting in higher-than-anticipated field inventory at year-end. Assuming more normalized weather, we anticipate retail demand will reduce our landscape contractor field inventory this selling season. For residential, we're excited to expand product placement with the Tractor Supply Company; all of our channel partners will benefit from the refreshed brand positioning and product marketing. In addition, we expect innovative new products will contribute to our results this year. These include the redesigned TimeCutter zero-turn riding mower and the expansion of our line of 60-volt Flex-Force lithium-ion products, including a 21-inch steel deck walk power mower and a hedge trimmer. In summary, we expect to drive strong results through a focus on our key strategic priorities. These include profitable growth, productivity and operational excellence, and empowering people. Once again, thank you to our employees and channel partners for your contributions to the success we achieved in the first quarter. We appreciate your dedication and focus as we work together to deliver another successful year. We'd now like to take your questions.
Operator, Operator
Our first question comes from Mike Shlisky with Dougherty & Company. Your line is now open.
Mike Shlisky, Analyst
Good morning everybody.
Renee Peterson, Vice President, Treasurer and CFO
Good morning.
Rick Olson, Chairman and CEO
Good morning.
Mike Shlisky, Analyst
I'd like to start off with the inventories that are on your balance sheet not the ones that are in the channel, but on your own balance sheet. Those were a little bit elevated in the quarter versus previous quarters. I know you have some of the Charles Machine Works stuff in there. But is there any way you can give us a sense as to whether you've got a plan to bring that number down from a dollar perspective with the next couple of quarters here?
Renee Peterson, Vice President, Treasurer and CFO
Yes. So the biggest factor Mike is the Charles Machine Works inventory year-over-year as far as that increase as well as we had indicated our intent to kind of build a little bit ahead of the season given the introduction of a new mass retail channel partner and then some inventory from landscape contractors just given the weather situation that we had in 2019. As we look throughout the year, we do intend to bring down that inventory level. And that's included in our free cash flow conversion estimate of about 100% for the year. So the biggest driver that we'll see is that inventory level coming down as we go through the year.
Mike Shlisky, Analyst
Okay. Great. Also, I want to ask about your gross margin in the quarter. Those are some of the best we've seen in a couple of years. You have mentioned a couple of tailwinds like the cost of freight, maybe some material costs, etc. How sustainable are those items for the rest of the year do you think? Do you think you've got some of that locked in here? Or is it an uncertain environment with the pricing there?
Renee Peterson, Vice President, Treasurer and CFO
We were pleased with our gross margins in Q1 and I want to thank the team for their ongoing commitment to productivity and synergies. We experienced more favorable commodities and net price realization, which were more concentrated in the Pro business segment compared to residential. Looking ahead, we anticipate some improvement in gross margins for the year, but it won't be at the same pace as the previous year. Additionally, part of this was due to a favorable product mix in Q1, particularly in the residential segment.
Mike Shlisky, Analyst
Okay. Got it. I wanted to touch on Ventrac as well. You've closed it just this past I think it was Monday you said. But is there any change to the guidance or anything? And I was curious is it just too small kind of to move the needle? Are there a lot of one-time items to kind of watch for this year? Or is it definitely going to be a long-term accretive deal for you?
Renee Peterson, Vice President, Treasurer and CFO
Yes. I'll start just a little bit about Ventrac. So it's about $100 million in revenue based on the prior year revenue. We're only going to see a partial year this year. So it's a little bit smaller from that perspective. It is immediately accretive from an EPS standpoint excluding one-time items. So we would adjust out any acquisition or integration-related costs. The profitability is within the range of the Pro segment. So we feel really good about it. It's just relatively on the scale of Toro. It's relatively small and just early in the year for it to be additive to our guidance.
Mike Shlisky, Analyst
Okay. And maybe one more for me. I don't want to ask you for guidance beyond what you already put out there for Q2, but just on a very broad basis. Do you think that Q2 here can be your first quarter where you have a full $1 billion on your top line or higher?
Renee Peterson, Vice President, Treasurer and CFO
Yes. I mean, we will see how it unfolds. We don't give specific guidance on revenue for the quarter, but we'll see. I mean, part of it is depending on the type of spring that we have, but we feel good about it. And as we've talked about before, Charles Machine Works is less impacted by the weather. So that is a real plus for us as well.
Mike Shlisky, Analyst
Okay. Thanks. Well, congrats in advance on that, hopefully. Appreciate it.
Renee Peterson, Vice President, Treasurer and CFO
Thank you.
Rick Olson, Chairman and CEO
Thank you.
Operator, Operator
Thank you. Our next question comes from the line of David MacGregor with Longbow Research. Your line is now open.
David MacGregor, Analyst
Yes. Good morning everyone. Thanks for taking the question.
Rick Olson, Chairman and CEO
Hi, David.
David MacGregor, Analyst
To begin with the impact of the virus disruption, you mentioned that there is no expected revenue impact for 2020, but in the press release regarding guidance, you described the disruption as nominal. Can you elaborate on the potential influence of the $1.28 to $1.33 for the second quarter, considering factors like supply chain disruptions or anything else that may have been previously discussed?
Rick Olson, Chairman and CEO
Right. There are several elements to the coronavirus considerations as you can imagine. First and foremost, as we talked about the safety of our employees, so it's making sure that we are keeping logical travel guidance in place and so forth. But then you look at the supply side and the demand side. On the supply side, from the first moment that coronavirus was mentioned we've been working with our suppliers. There are a handful of key suppliers for example in China that especially matter. And we have good confidence that we go through the next 30 days with no disruptions. And then they're working on plans to bridge any possible disruptions after that that take us well into mid-summer. We get into mid-summer that's kind of a normal shutdown period for us. So we really see the key right now is bridging through the spring period. On the demand side, again the exposure in the countries that have been especially affected is very important to us, but they would not be significant to the outcome from a revenue standpoint and we could likely make up for those in other areas. I think the commentary about Ventrac is one thing on the positive side that helps us balance out some of those risks as well.
David MacGregor, Analyst
Right. Thanks for covering that. Charles Machine Works, I mean you're approaching the anniversary of that transaction by all accounts it seems to have been very successful. You talked in the press release about you're running ahead of your original expectations. My recollection was it was originally about $30 million of cost synergies over three years. Can you just give us a sense of where you are on the synergy curve? And just how much ahead of expectations you might be? And as a consequence does that $30 million become a bigger number? Or is this just a timing issue where you're pulling forward and you're still on track to do $30 million?
Rick Olson, Chairman and CEO
Yes, the $30 million is expected to be achieved over three years, and we are highly confident about reaching that target. We believe there are additional opportunities available, as we mentioned in our last call, which gives us a broader perspective on the company's potential. We are being very careful in tracking our progress and won't count those synergies until we are certain they will be achieved, but we definitely see a possibility of exceeding the $30 million target we previously discussed. In addition, the integration process is progressing well ahead of schedule following the restructuring efforts we implemented. Overall, we are either on track or surpassing our intended milestones.
David MacGregor, Analyst
Right. And just to be clear the $30 million was cost synergies none of our incremental revenue synergies anticipated above that right?
Rick Olson, Chairman and CEO
$30 million was cost synergies and we didn't get specific about revenue opportunities. But there's also a working capital benefit that we see as we work more closely with the organization relative to the team here at Toro.
David MacGregor, Analyst
I would like to address the issue with the professional landscape contractor, particularly regarding the inventory challenges we discussed last quarter. Can you provide more details about what is happening with the surplus inventory and whether you expect it to be resolved by the end of this quarter? Is there a possibility of obsolete inventory that may necessitate a write-off? Any additional information on this would be greatly appreciated.
Rick Olson, Chairman and CEO
Yes. To start, there is no obsolete inventory that needs to be written off. The narrative really began last year at this time. If you recall, the professional segment in general grew almost 13% last year, making the first quarter comparisons quite challenging. All of our professional businesses are currently experiencing growth, with the exception of the landscape contractor business. Last year, there was significant excitement due to new product launches and expectations for a strong spring. However, we shipped products that did not sell quickly at retail because it was an exceptionally poor year for weather, marking one of the wettest seasons in U.S. history. As a result, sales did not keep pace at retail, but we anticipate correcting this in the second quarter and expect growth across all professional sectors from the second quarter through the year-end. This outlook is reflected in our guidance. Overall, the first quarter unfolded exactly as we had anticipated, and this was a planned adjustment to our inventory for the year.
David MacGregor, Analyst
Okay. Thanks very much.
Operator, Operator
Thank you. Our next question comes from the line of Tom Hayes with Northcoast Research. Your line is now open.
Tom Hayes, Analyst
Good morning. Thank you for taking my question.
Rick Olson, Chairman and CEO
Good morning. Tom.
Tom Hayes, Analyst
Rick, could you share more details about the rollout to Tractor Supply? Specifically, does the initial loading apply to all locations? I’m interested in your thoughts on how this is progressing so far.
Rick Olson, Chairman and CEO
Yes, our partnership and projects with Tractor Supply are progressing exceptionally well. The relationship continues to strengthen each day, and we are on track with our expectations. In fact, we shipped more products to Tractor Supply in the first quarter than we anticipated. This shipment rate aligns with our initial agreements based on early store performance and customer feedback. Overall, everything is unfolding as planned. Importantly, this development enhances our entire residential business, allowing us to invest more in products, branding, and marketing, which benefits all our partners, including significant mass retailers and our dealer network. Most of the shipments will occur in the second quarter, and we just shipped a few more units than expected in the first quarter.
Tom Hayes, Analyst
Great. Appreciate the color. And then I guess just secondly circling back to Michael's earlier question on inventory levels. As far as channel inventory levels, it's been kind of a snow season last month or so. Maybe just your thoughts on channel inventory on the snow side of the business?
Rick Olson, Chairman and CEO
Yes, we are generally in good shape on snow inventory. The market in the Northeast was a little slower due to less snow, which has led to a higher inventory there. However, on average, our snow inventory is solid and we have had a very strong start to the season. At the same time, our share in the Midwest is very strong, where many of the early snow events occurred. Overall, we are in a good position with field inventory on both the residential side and exceptionally well on the BOSS side.
Tom Hayes, Analyst
Thank you. Appreciate the color.
Rick Olson, Chairman and CEO
Thank you.
Operator, Operator
Thank you. Our next question comes from the line of Sam Darkatsh with Raymond James.
Sam Darkatsh, Analyst
Good morning, Rick. Good morning, Renee. How are you?
Rick Olson, Chairman and CEO
Good morning, Sam. Good.
Renee Peterson, Vice President, Treasurer and CFO
Good morning.
Sam Darkatsh, Analyst
A few of my questions have already been addressed. I’d like to revisit the topic of the coronavirus. Can you give us an idea of what percentage of your overall SKUs include components from China? Are these components concentrated in any specific product category? I'm trying to understand how this might affect margins and where we might see the impact.
Rick Olson, Chairman and CEO
Yes. We wouldn't have an exact percentage of content. We have that information. We don't have it right in front of us here. It would be a bit higher exposure more on the residential side of things, just in general than it would be on the commercial side. That's not to say that there wouldn't be key components that would be part of commercial products. But in terms of the volume of COGS, it would be more on the residential through probably homeowner type of products.
Sam Darkatsh, Analyst
You mentioned that you are in close contact with some critical vendors and that you expect no disruptions for 30 days. I don't recall your exact wording regarding your plans for after those 30 days. Can you elaborate on what those plans entail? What assumptions have you made about how quickly the vendors might resume operations and what their utilization rates could be compared to the current situation?
Rick Olson, Chairman and CEO
Sure. We have plans in place across our global supply chain. While I will mention China, the same applies to Italy, South Korea, Japan, and other secondary suppliers. Our team closely monitors every part number and its timeline for arrival at our plants. Even with the six weeks of shipping time and the extended lunar New Year, we have a consistent flow of products coming in by water. The status of our key suppliers in China is improving significantly, as they're nearing 100% capacity and expect to reach it within two weeks. Additionally, we have a small plant in China that is operational. We don't anticipate any material impact on our production through March and beyond, as we have a solid plan in place. We do expect some increased freight costs since we may opt for air shipping instead of maritime transport. Currently, our challenge is securing available freight carriers, and we are actively addressing this to ensure gaps are filled. While there may be some minor, short-term disruptions in our operations, we don't foresee them being significant. It's important to note that we will be moving into the summer months, which usually involve planned shutdowns at our plants as part of normal seasonal operations. This will work to our advantage, and we are also in a good position concerning our finished goods inventory.
Sam Darkatsh, Analyst
And then my last question is more of a high-level question. If my math holds and it doesn't always, but if my math holds, it looks like guidance for the year kind of suggests organic sales growth in the low single-digit range thereabouts. I'm trying to figure out why that might be? Though I would think just looking at the easy professional comparisons next three quarters the tractor supply effects underpinning resi. I'm trying to understand, why organic wouldn't be higher than that like mid to high single digit? I know you're naturally conservative, but you mentioned the channel inventory is essentially in good shape and/or getting repaired near term both in landscape and in snow and then coronavirus you're not anticipating any material sales impact. So I'm trying to understand, why the extra conservancy as it relates to the season and the organic sales expectations?
Renee Peterson, Vice President, Treasurer and CFO
Yes. I would just say that as we look forward, it's still early in the year. And so projecting greater growth until we see how the season unfolds and what the year has just isn't normally how we would provide guidance. We just.
Rick Olson, Chairman and CEO
We'll be in a much better position in the second quarter having the experience of spring will be well along. By that point, we'll be in a better position to offer more guidance on the year. In the context of our coronavirus discussion and some of the other factors that we talked about, we're staying with our guidance for the year. If the season plays out well there may be opportunities beyond that.
Sam Darkatsh, Analyst
Thank you both very much. Appreciate it.
Rick Olson, Chairman and CEO
Thank you.
Renee Peterson, Vice President, Treasurer and CFO
Thank you.
Operator, Operator
Thank you. Our next question comes from the line of Joe Mondillo with Sidoti & Company. Your line is now open.
Joe Mondillo, Analyst
Hi good morning everyone. Just a sort of follow-up on that prior question related to weather. Could you update us at this point in time in the season how you're thinking about weather especially relative to the context of what you saw last year?
Rick Olson, Chairman and CEO
Last year, the weather was one of the worst springs I can remember during my time with Toro. In the Midwest, we experienced some of the heaviest snowfalls of the season in April, which delayed many traditional spring activities and the overall anticipation of spring into the mid-summer. This year, we have adjusted our plans to account for what we consider a normal weather pattern, expecting a typical start to spring. Currently, we have observed that the warm-up has begun in the southern regions, and we are seeing a normal progression at this time. This is the basis of our planning moving forward.
Joe Mondillo, Analyst
If we experience a typical weather pattern, I believe we would observe solid growth. Even with normal conditions, I can speak for the Northeast where it was 50 degrees yesterday and is expected to be in the 50s today, which could be even better than usual. However, even under normal circumstances, we should see significant growth compared to last year.
Rick Olson, Chairman and CEO
I think if we see a fantastic early start to spring and it flows directly into a decent summer there's opportunity for us to do better. We've built kind of a nominal level in at this point. And we were coming off a couple of years where we were excited about the spring and then April turned out to be a surprise. So we've built in what we think is the right forecast for the weather at this point, but it's back to a more normal situation.
Joe Mondillo, Analyst
Okay. Regarding the professional segment, it seems your organic revenues decreased by 5% year-over-year in the quarter. You mentioned a turnaround in the landscape and that inventories are now properly adjusted. First, do you anticipate a return to growth going forward? Second, despite the decline in organic revenues, it appears your organic margins have expanded significantly. Can you explain what the main factors were behind the organic margin expansion?
Renee Peterson, Vice President, Treasurer and CFO
Well maybe could I take the margin piece and then Rick can come back to the revenue growth. Well if we look at the margin expansion, it was good across the business and we really did see the benefit from our focus on productivity and synergies. We were in a better commodity environment from a commodity and tariff standpoint. And the net price realization helped as well but more biased towards the pro versus the residential. So we do expect to see benefits from a gross margin standpoint continue probably not at that same rate year-over-year of improvement Joe, but we do continue to expect to see improvement for the year as we go through the remainder of the year.
Rick Olson, Chairman and CEO
We anticipate that growth will be influenced by the early spring period, primarily in the second quarter. However, we expect our landscape contractor business, LCE, to begin showing growth in the third quarter and into the latter half of the year.
Joe Mondillo, Analyst
Okay, I have one last question. I know someone has already asked about the snow equipment sales. We didn’t see much snow in the Northeast, but I understand that BOSS primarily operates in the Midwest. How would you describe the snowfall in the Midwest this year? Also, just to clarify regarding the second half of this fiscal year, you mentioned that inventories are normal. Given the minimal snowfall we experienced in the Northeast, should we expect little impact on channel inventories in the latter half of the year?
Rick Olson, Chairman and CEO
No, we're not. From a Midwest perspective, we had a very strong start to the snow season this year. On average, we had probably below-average performance starting in January and February, which averaged out to a typical year, but it was a story of two extremes. The November-December timeframe was quite extreme, generating significant demand throughout retail and keeping our field inventory in good shape. However, the Northeast was an exception, experiencing the same situation for the second consecutive year, which did not lead to many incremental shipments last year.
Joe Mondillo, Analyst
Okay, great. And just lastly, Renee, could you repeat your expectations for products or residential margins? I know you.
Renee Peterson, Vice President, Treasurer and CFO
Margins. Yes, what I had mentioned is, we did expect residential margins would be similar in Q2 to what we saw in Q1, because, as Rick mentioned, the bulk of the Tractor Supply shipments will occur in Q2. So we're going to see higher growth than we would normally see in residential in the quarter. We expect the second half to moderate, so Q3 and Q4 at a lower level. And from a full year standpoint, we would expect residential margins in the low teens.
Joe Mondillo, Analyst
Okay, great. Thanks a lot. Have a great day, everyone.
Rick Olson, Chairman and CEO
Thank you.
Renee Peterson, Vice President, Treasurer and CFO
Thank you.
Operator, Operator
Thank you. Our next question comes from the line of Tim Wojs with Robert W. Baird. Your line is now open.
Tim Wojs, Analyst
Hey, everybody. Good morning.
Rick Olson, Chairman and CEO
Good morning.
Renee Peterson, Vice President, Treasurer and CFO
Good morning.
Tim Wojs, Analyst
I have two questions. So the first, just on Ventrac. Could you just talk about what the overlap between that business and your current Toro distribution businesses today? And then, I guess, how fast would or could you kind of fold that business into Toro distribution? And I guess, kind of, just talk about any plans to kind of mitigate any of those types of disruptions?
Rick Olson, Chairman and CEO
First of all, regarding the overlap, one of the reasons we've been interested in those product categories, particularly Ventrac and Venture Products Incorporated, is that they largely complement our existing product lines. The strength in multi-purpose articulated tractors enhances our landscape contractor business, which in turn benefits acreage owners. They value the multi-purpose capabilities, which allow for easy switching between snow and summer products, as well as the versatility those products offer. We've also observed significant applications for these products in manicured turf areas and golf courses, especially for rough areas and slope mowing. These applications align well with our current product offerings. As for our plans for the channels, there are two main channels through the dealer network, which overlap with some of our existing dealers and include some competitive dealers as well. The turf side operates through distribution, similar to our current commercial golf and grounds distributors. We have a plan moving forward, and we are currently in the execution phase. It's premature to discuss specifics before we implement them fully. However, we expect to select strong partners from the dealer standpoint and make optimal decisions for the turf business in the future.
Tim Wojs, Analyst
That's helpful. One of your customers in the residential sector is revamping their outdoor power aisle to place a stronger focus on lithium-ion and battery technology. I'm curious about how Toro fits into this, particularly regarding new placement compared to previous placement, and if you could discuss that reset for your team.
Rick Olson, Chairman and CEO
We are extremely excited about the transition that's taking place to electric, specifically, lithium-ion and have been very pleased with what we're doing with our channel partners. For me, personally, I just opened up magazine, I think, of Popular Mechanics or something and the Toro walk power steel deck mower was listed as the top-rated product. And I think what we're seeing is something that we talked about, which is, it's not a novelty to be a battery-powered product at this point. It's really coming back to features and benefits and performance and with alternative energy or power options. And we feel very positive about our ability to compete there and the response on the products that we've introduced so far has been very positive. So, for us, from a product standpoint and partnering with our key channel partners, we feel very good about where that can go.
Tim Wojs, Analyst
Great. Thanks for the time. Good luck on the rest of the year.
Rick Olson, Chairman and CEO
Yes. Thank you.
Renee Peterson, Vice President, Treasurer and CFO
Thanks, Tim.
Operator, Operator
Thank you. Our next question comes from the line of Eric Bosshard with Cleveland Research. Your line is now open.
Eric Bosshard, Analyst
Two things. First of all, I was not totally clear on where you see channel inventory now, especially in the landscape contractor business. I understand what happened over the last 12 months, but can you just summarize where you think channel inventories are now relative to where those customers would like them to be?
Rick Olson, Chairman and CEO
Yes, we ended last year with a higher inventory level, both internally and in the field. It's not at an unusual level compared to what we've experienced before. However, we expect to reduce the inventory during the first and second quarters. I don't have a specific number for 2020, for instance.
Renee Peterson, Vice President, Treasurer and CFO
Yes. No. But Q1 is in a strong retail quarter. So it's not as though there's a lot of retail that occurs within that quarter. So it's fairly similar to where we would have ended in Q4.
Rick Olson, Chairman and CEO
And that's really the reason why it extends into the second quarter as the first quarter is a lot about shipments, but not so much about retail except for snow.
Eric Bosshard, Analyst
Related to that underlying demand then and I understand it's a harder quarter to read. But obviously you've spent time with your customers that shows over the last 90 days or so. The underlying landscape contractor demand how does that feel now and through the year?
Rick Olson, Chairman and CEO
I just spoke with some of the representatives from our businesses in the landscape contractor area and they feel very positive about it. Particularly in the Midwest there has been good snow revenue and that has not always been the case in the past and they're optimistic about the spring. The past couple of years have been tough from a delayed project standpoint. And if we get a more normal season this year they're ready to go.
Eric Bosshard, Analyst
And then lastly, I think Renee you may have commented that there were areas of the business that were better than expected or the business in total was better-than-expected in the quarter. Can you just more narrowly define where you performed ahead of expectations in the quarter, specifically interested on the revenue line?
Renee Peterson, Vice President, Treasurer and CFO
Yes. We previously expected shipments to Tractor Supply to occur in the second quarter. However, as Rick mentioned, due to our discussions and the setup of stores for the initial rollout, some of those shipments occurred in the first quarter. This contributed to our residential growth and also played a role in exceeding expectations for the quarter.
Eric Bosshard, Analyst
Okay. Thank you.
Rick Olson, Chairman and CEO
Thank you.
Operator, Operator
Thank you. We do have a follow-up question from the line of David MacGregor with Longbow Research. Your line is now open.
David MacGregor, Analyst
Thank you for the follow-up. We've made significant year-over-year progress in the awareness and visibility of the Toro brand in the alternative energy sector. Regarding the earlier question about the Home Depot reset, Rick, could you elaborate on that market? How do you view the long-term growth rates, considering we are still in the early stages of that category? Could you also discuss the differences between the professional and residential segments? Additionally, I would appreciate your broader insights on growth opportunities in alternative energy.
Rick Olson, Chairman and CEO
If you examine the electric and battery segments of walk power mowers, you'll see they are growing, although they still represent a smaller part of the power provided for these products. While engines will remain relevant for a long time and won’t become obsolete quickly, we are very excited about our focus on alternative energy, which we prioritized several years ago alongside smart connected products and autonomy. Seeing the introduction of these products and their reception in the market is fulfilling. We believe there are significant opportunities for growth, especially as we see some of these products replace gas-powered options. Our experience has been very positive so far, with strong responses to our products. Additionally, we have the capability to leverage our experiences across different sectors. For instance, growth is happening rapidly in areas like residential walk power mowers, and we can apply that experience to other sectors, including commercial. We are optimistic about this growth trend and expect it to continue.
David MacGregor, Analyst
Can you say how much of the current offering is manufactured by you versus sourced?
Rick Olson, Chairman and CEO
With the exception of some cases in the residential area, it's manufactured by us. Technology is coming from us.
David MacGregor, Analyst
Okay. And you don't want to give us a growth rate you don't want to quantify, how you're thinking about the growth opportunity?
Rick Olson, Chairman and CEO
I wouldn't have that right now to be able to quote that to you.
David MacGregor, Analyst
Okay. Terrific. Thanks very much.
Rick Olson, Chairman and CEO
Thank you.
Operator, Operator
This concludes the question-and-answer session. Mr. Rhoads, please proceed to closing remarks.
Nicholas Rhoads, Managing Director of Investor Relations
Great. Thanks for your questions and interest in the Toro Company. We look forward to talking with you again in June to discuss our second quarter results. Thank you.
Operator, Operator
Thank you for participating in today's conference. This concludes the presentation. You may now disconnect. Good day.