Good day and thank you for standing by. Welcome to The Toro Company Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. [Operator Instructions]. I would like now to hand the conference over to your host, Julie Kerekes, Senior Managing Director of Investor Relations. Please go ahead.

Thank you. And good morning. Our earnings release was issued this morning 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 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 non-GAAP financial measures. Reconciliations of historical non-GAAP financial measures to reported GAAP financial measures can be found in our earnings release or on our website. 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 to this call. With that, I will now turn the call over to Rick.

Thanks, Julie and good morning. The Toro Company delivered record third-quarter results. We continued to benefit from robust demand in both our Professional and residential segments and our operations team went above and beyond to execute even as global supply chain challenges affected availability. Our employees together with our channel partners kept a sharp focus on serving the needs of our customers. As a result, total net sales for the third quarter were up 16% year-over-year. Professional segment net sales increased 15%, marking the second quarter in a row of double-digit growth for this segment. We saw a continued strength in landscape contractor and golf markets worldwide. Higher pre-season shipments of both snow and ice management products, and strong demand for our rental and specialty construction equipment, and then track products. Our lineup of innovative products combined with strong business confidence fueled robust demand. Residential segments net sales were up 23% and that comparison is on top of a 38% growth rate in our third quarter of last year. Growth in the quarter was driven by strong retail demand for our zero-turn and walk-power mowers. Customers also continue to respond favorably to our all-season Flex-Force 60-volt product lineup which offers power and durability with no compromise on performance. The recent actions we've taken to introduce innovative new products, refresh marketing and expand mass retail distribution continues to strengthen the Toro brand and drive positive results. As noted last quarter, we expected supply chain constraints and inflationary pressures to escalate at a rate faster than could be fully offset in the near term through pricing and other mitigating actions. Despite these challenges, both segments delivered solid earnings growth in the third quarter of professional earnings up 7.6% and residential earnings up 10.5%. I'll now touch on some of the key themes…

Thank you, Rick. And good morning everyone. As Rick said, our record results for the third quarter were driven by robust demand in both our Professional and Residential segments against the backdrop of increasing supply chain, inflation and labor pressures. We grew net sales for the quarter by 16.2% to $976.8 million. Reported EPS was $0.89 per diluted share, up from $0.82 last year. And adjusted EPS was $0.92 per diluted share, up 12.2% from $0.82 in the prior year. Both of our segments delivered record top and bottom line, third-quarter results. Professional segment net sales were up 15.2% to $718.5 million. This increase was driven by broad-based demand in landscape contractor, golf, snow and ice management, rental and specialty construction and MedTrak products. This was slightly offset by lower sales of underground construction equipment due to supply chain disruption that impacted product availability. Professional segment earnings for the third quarter were up 7.6% to $122.3 million and when expressed as a percent of net sales, decrease 120 basis points to 17%. This decrease was largely due to higher material and freight costs, partially offset by net price realization and productivity improvements. Residential segments net sales for the third quarter were at 23% to $252.1 million. This increase was primarily driven by strong retail demand for zero-turn and walk power mowers. Residential segment earnings for the quarter were up 10.5% to $31.5 million, and when expressed as a percent of net sales, down 140 basis points to 12.5%. This decrease was primarily driven by the same factors as in the professional segment. Turning to our operating results for the quarter. We reported gross margin of 33.9%, a decrease of 110 basis points compared to the same period in the prior year. Adjusted gross margin was 33.9%, down 130 basis points…

Thanks Renee. The guidance Renee just discussed reflects continuing strong demand across our end markets, as well as our current operational outlook. Looking at global key demand drivers for the remainder of the fiscal year and into fiscal 2022, we are watching consumer and business confidence levels along with developments related to COVID-19. Customer prioritization of investments to maintain and improve outdoor environments, a continuation of strong momentum in golf and government supports and funding of infrastructure investments; these end market factors should continue to drive strong demand in the fourth quarter and into next year. Our biggest challenge remains our ability to produce to meet retail demand across all of our markets, given the current operating environment. We believe constraints will begin to ease as we see improvements in key material and component availability, logistic channels, and other COVID -related factors. Our operations team remains committed to doing everything reasonably possible to meet increased production requirements and grow market share in this challenging environment. When operating constraints begin to ease, we expect to be in a better position to build field inventory from our current historically low levels. We remain focused on driving productivity and synergies prudently managing expenses and implementing market-based pricing actions as appropriate. We are well-positioned to capitalize on long-term growth opportunities with our strong cash flow, market leadership, investments in innovation and trusted relationships. A few recent examples that highlight our commitment to innovation and relationships include; for the second year in a row, a partner of the year award from Tractor Supply Company, this time as omni -channel partner. From Green Industry Pros, the selection of three of our products for their 2021 editor's choice awards sighting, innovation and utility as factors. The three products include; the X mark 96-inch lasers the diesel, the…

Thank you [Operator Instructions]. Our first question comes from the line of David MacGregor with Longbow Research. Your line is open. Please go ahead.

Yes. Good morning, everyone and congratulations also. Very difficult environment and then which to operate, so I think it was a reasonably good quarter, that being considered. I guess I was interested in maybe talking a little bit about the sales guidance, up 17%. How much of that at this point would look like Price versus volumes?

Yeah. As we look at it, David, we would say the majority relates to volume. We just continue to see very strong -- business fundamentals and very strong demand. So the majority would be volume.

I guess you made a pretty good case last quarter for why you need to protect your golf dealers on their large project bids but do you feel you've made adequate progress in passing through cost inflation in all your other product groups and how will that pass-through look different in the fourth quarter and then maybe into 1Q versus what we saw this quarter.

So just talking about pricing -- in the current, normally, we don't really have a big backlog situation that we're looking at. We usually talk about lead times, we stay very current with our orders. We are in a remarkable situation right now where we do have extended lead times combined with pretty significant cost increases, so this is a different situation and we are not in a position to protect those prices that are further out at this point. So that is part of the discussion with our customers. Obviously, there are special circumstances and so forth but this is a different environment.

And I would just add that we have taken multiple market-based pricing actions to date. We'll continue to evaluate that in this environment. David, we are seeing our quarter-to-quarter price realization improve, but we haven't fully realized all of the pricing actions. But we certainly expect to do that in the future.

All right. Because I think the thesis last quarter was that you were pushing through these price increases that have a partial impact on 3Q before having a more meaningful and pronounced impact on 4Q. I'm guessing that's still the expectation, but were there additional price increases announced since our last earnings call?

There were -- It's very specified business by business but there were additional price increases that were affected during that time period. What we're also seeing now, is the more pronounced impact from the supply chain and from inflation as well as we close out the year. Well, we'll continue to assess the situation and take action where we need to, to be able to keep our focus on serving our customers well, but also profitable growth as well.

And -- and David just adding to the earlier comments. What you said is also true. We do have -- there's variability in how quickly you can implement price increases even if we're not protecting the far-out just in orders just by the nature of the business. Some times are transactional, you can change them overnight, others are part of the negotiations or bid packages and they're just a little bit more complicated. There is still a delayed ramp-up in realizing the full price impact in our financial and we're still on that curve from the actions that we've taken so far. And we will take --

Right.

-- more actions as needed.

Okay. My second question is, with regards to the residential growth, how much of the 23% was Tractor Supply? And I know you've lapped the introductions there now, but they are adding stores and I think you're still adding listings. But you've got Tractor Supply, you've got the product refresh, there's the Flex-Force. So you've got a number of initiatives in there that would be contributing to that growth. I guess I'm trying to isolate against those initiatives what the growth was in the legacy of the residential business.

And I think you touched on it, David. It's really a broad-based growth, so certainly not unique to Tractor Supply, and over the last year, we talked about trying to parse out the drivers between the stay-at-home initiative and the other things that we're doing. We kept reminding everyone of the work that was done with the products, with the marketing, with the branding messaging, with the merchandising, along with new channel partners and as some of those strong drivers of a stay at home initiative start to win, we're seeing continued strength with those other drivers and that's the bulk of where that growth is coming from.

Okay. All right. Thank you very much.

Thank you.

Thank you.

And our next question comes from the line of Tim Wojs with Baird. Your line is open. Please go ahead.

Hey everybody. Good -- Good morning.

Good morning.

Good morning.

I guess just my first question -- circling back on the inflation side. Is there any way to frame what the annualized inflation and supply chain impacts might be on a dollar basis? Just trying to think maybe as a percentage of revenue or cost. Just trying to understand maybe where that is today if you snap the line versus where it was maybe 3 months ago, in terms of just absolute magnitude.

From an inflation standpoint, I would say that the most significant inflation that we're seeing is material and commodity inflation. In particular, steel and resins have been significant to us. But there is also inflation that we're seeing related to logistics and transportation. Again, nothing unique to Toro. All the things that you're seeing ensure across many of the companies that you cover and wage inflation has become more significant later in the year, we can break it out specifically as far as a dollar impact, but you are seeing the impact on our margins. As we talked about earlier, we are taking market-based pricing actions, any -- and focusing on productivity as well to try to mitigate that. We do expect we'll see continued price realization as we go forward. We do expect that in Q4, we're going to continue to see a lot of the same situation as far as inflation and freight and other logistics challenges and those will probably, in the short-term, accelerate a little bit and we try to include that, our best estimate, in our guidance. But it's fundamental so the business is really growing strong.

Okay. That makes sense and -- and I guess when you think about the pricing realization relative to inflation, I mean, do you think at this point you can offset it by the first quarter or by early next calendar year. How would you kind of think about it today just relative to what you're seeing?

Yeah. I mean, part of it depends on how long the inflation persists, you know, there's differing opinions on that. We'll certainly continue to be very engaged in understanding that and taking appropriate actions. We do expect we'll see continued inflation into next year. We think that the commodity piece will moderate and supply and demand eventually balance in many of those areas, the timing is the one that is a little difficult to call right now. We do think when we look at logistics, that some of the short-term freight issues will normalize. I mean, again, as supply and demand and some of the constraints and congestion we're seeing will normalize. But we think freight is probably fundamentally going to cost more in the future, I'm in labor as well. So as we look forward, we think we'll have some of these continued challenges. And again, we'll take appropriate market basis pricing actions to be able to offset those.

Okay -- Okay. And then just maybe on technology investments, the last one I have on me. Anything you can share with us about the new product development pipeline and maybe any potential announcements over the next few quarters. And really I'm thinking more on the landscape and maybe golf sides?

Sure. We continue to make investments as we have internally for the last number of years, very much focused on the key technology areas, some of which are autonomous, smart, and connected products, and the alternative power, and the acquisitions that we made earlier this year have nets of -- actually, say, far exceeded our expectations and helping us accelerate those initiatives. And I think you have a chance to see the golf show -- the last in-person golf show we had in 19, our vision of what technology looks like going forward for golf. And that was not -- those were not just concepts products for the future that reflects the direction that we're going and we are on track with our plans, and you'll see a steady introduction of products in those categories over the next several years. That's the, really the fruits of our labors in working in those areas. And that's --

Okay.

--one of the most exciting things actually that's going on right now.

Okay, great. Good luck and nice to meet you guys. Thank you.

Thank you.

Thanks.

And our next question comes from the line of Sam Darkatsh with Raymond James. Your line is open. Please go ahead

Good morning, Rick. Good morning, Renee, how are you?

Good morning Sam.

Doing well, thank you.

We are well, how are you?

I'm well, thank you. Got a couple -- 2, 3 topics. One of them is piggyback on what Tim just asked. As it stands right now, what is the expected price benefit to fiscal '22 sales on a year-on-year basis based on what you've already announced in the channel?

Yes. Certainly, our price is not at our normal range. From a price standpoint, we normally talk about 1 point to 2 points of price realization. It's certainly more significant to that. Given the fact that we've taken multiple pricing actions, as well as -- Sam, we're focused on some of our promotions and programming as well in this environment, which is down as well. As we look forward, we'll continue to assess the price and take other further actions, but it's certainly an order of magnitude greater than our normal level in this type of cost environment as well.

Can you give a sense of what order of magnitude means at least based on what has already been announced. Are we talking about 5%, 10%? What side of -- what sort of price increases have been announced?

I think Sam, those are the ranges that we're talking about, it's across a lot of different businesses that see different levels of cost impact. So it's hard to say in summary, in the midst of the price increases, but those are the numbers we talk about relative to usually talking about 1 or 2%. And that -- we always want to remind everyone as well that we're also focused on offsetting those in every other possible way that we can through productivity. The work that we did with synergy leading to the pandemic. That has been done really triggered by the Charles Machine Works acquisition set us up to be able to offset a number of the costs increases that we would've seen. It's the whole bundle but pricing is a bigger tool that we're needing to use this year than it has in the past. And we are absolutely committed to our margins as we have in the past. And every one of our businesses is driven to improve, and return to, and continue to build on our historic margins.

So if commodity prices in general -- cost inflationary pressures stabilized from today, if -- do you think that the pricing actions and the market demand would warrant your normal 25% incremental margins next year, or are those pricing actions more designed to get price-cost neutrality and, therefore, your incremental margins might be lower conceivably than the normal 25% next year?

Yeah, we'll continue same to evaluate the price and as the inflation environment unfold, you know what better information related to that, we'll always price to market. And we have a very rational market that we operate and our competitors are rational as well. We do expect that there will also be an inflationary environment going into at least the beginning of next year. And some of these other headwinds, as I mentioned, are going to be there. So we will continue to evaluate the price and take the appropriate actions. With that focus, as Rick said on certainly serving our customers, but also ensuring we're growing market share and we're doing so in a profitable manner.

Two other quickies if I could. The fourth quarter implied guidance was trimmed, although obviously, the third quarter was much better than you expected. Remind me specifically what happened with the fourth quarter, was it the timing of shipments into the third quarter, or what specifically happened with the fourth quarter versus your prior view?

Yes. No, we definitely did see -- it's hard to predict the cadence in this environment as we did see a stronger third quarter, with higher demand and really exceptional execution by our operations team, they just did a fantastic job. So a piece of it is the timing between the quarters and also just looking at the inflation environment. As I mentioned earlier, we do see that continuing to accelerate at this point in time, we do think that we'll reach equilibrium and start to normalize and come down. That we are anticipating that a number of supply chain challenges will remain including inflation in the fourth quarter with better or greater price realization as well.

My last question I promise. Rick, talk about the potential effects of infrastructure stimulus spills, specifically on Ditch Witch. I'm thinking about things like the rule of broadband and lead pipe replacement and drinking water improvements. What is Ditch Witch's exposure -- potential exposure to these specific areas.

The -- it's a great question. The fundamentals for that business are extraordinarily strong and have a long-term reach. This is -- we call that -- that's one of the areas that we're particularly challenged on the operations side right now because it shares key components with some other industries that are also seeing a great increase in demand like agriculture, construction, etc. We fully expect to work through those issues and we have an extremely concentrated effort to make sure that we can work through those challenges because the demand is incredible for that area. Before we went into the pandemic, we were talking about the conversion to 5G and the need to install the infrastructure for 5G that goes from an antenna density of ten miles down to five to 800 feet and all of those antennas need to be connected back to the main infrastructure. There's the infrastructure work that is there as a deficit that needs to be repairs that are undergrounds and repair everywhere we are. The recognition, then going into the pandemic of the broadband gaps of the haves and the have - nots and the need to bring broadband to all locations and the importance of that in equalizing economic opportunity, therefore, getting a lot of investment. And more recently, we've just been looking at -- we talked about the downside of petroleum which ad another small adjustment down. It was not significant because that reduction was taken last year. The plus side is for alternative energy. Every solar field that's put in every wind generation system that's installed onshore, offshore, needs trenching equipment and directional drills to put that together. So there is an offset and we could not be more excited about the future with the Charles Machine Works acquisition and the drivers that are there.

Thank you for that terrific color. Thank you both.

Thank you.

Thank you -- thank you. And our next question comes from the line of Ross Gilardi with Bank of America. Your line is open. Please go ahead.

Okay. Good morning everybody?

Good morning.

Good morning.

Rick, maybe you can expand a little bit on that Ditch Witch answer. Can you quantify the magnitude of the revenue declines you've seen over the last six months? I mean, it sounds like you're setting -- that business is setting up for having potentially really easy comps next year. How much longer before that business turns positive on a year-on-year basis and just with the disruption you're seeing are you just seeing a big spike in backlog in that business right now?

As we've said before, we usually don't track a lot of backlogs, but in this case, the answer is yes. We do see a significant backlog for products in the area of people standing in line for equipment. So that's therefore our extreme focus on the operations part of that equation. The reductions that we're talking about at the bigger scheme of things, I actually don't have the exact number in front of me, but it's relatively small as part of the professional business of the reduction. But the demand is extraordinarily solid and there are not too many -- really, there aren't any substitutes. We believe our competitors are in the same situation. Charles Machine Works has benefited in some ways by being part of a larger organization. We've been able to work with our long-term suppliers that help get supplies and key components to be able to build as much as we possibly can. It's not enough right now, and that's why we're focused on getting that solves.

Are we talking about low-to-mid single-digit production declines on the year-on-year basis with orders that are up strong double-digit is that a fair way to characterize what's actually happening in underground construction?

Orders are up, strong double-digits. This product is probably true. I don't have that right in front of me specific to that business in terms of the decline in shipments.

Yeah, I would say the Toro level up would be getting low and single digit, that's a Toro level.

Okay.

Yeah.

Can you talk a little bit more specifically on what's happening with gas engines? How severe are the shortages? I mean, it seems there's been some capacity rationalization with Briggs filing and some other players exiting the gas business. How are you doing on gas engines? Are you living -- do you feel like you're living hand-to-mouth? Are you having to raise prices on gas-powered equipment at a clip greater than a corporate average just to sustain margins?

Most of our product is gas or diesel power today so engines are one of the key components that cut across every single product line and as you would expect, that's one of the key constraints from a component standpoint. So, the answer is yes, that is a key constraint for us and all of those factors, I believe that you mentioned, including the price impact of extraordinary measures that our suppliers are taking to produce engines and for us to bring them in as quickly as possible, are all contributing both to supply disruptions in some case, but also the inflationary factors.

So does that feel like more of a structural headwind, Rick? I mean, I don't know a lot of people are going to be adding gas engine supply in the future? And if it does, do you worry at all that the gas power equipment priced itself out of the market at some point? If we end up in more acute, as a longer-term shortage, or do you truly view this as just the transitory issue for the next six to 12 months?

We view it primarily as the transitory issue that the supply will find its balance with the demand.

How is that though? Is that just because demand will slow, or is anybody actually adding capacity in this market?

There are opportunities to add capacity and there are also a number of engine manufacturers and alternatives.

Okay. All right. And then just my last one is just on the -- back to the implied fourth quarter, if my math is correct, I think you're implying like a 20% earnings decline on a 13% revenue increase. Can you quantify that cost headwind, specifically in the fourth quarter, in dollar terms a little more specifically? And I'm just wondering, do you go into next year with negative earnings comps in the first half of the year based on what you're seeing now?

We did mention that we do see some of the inflationary and supply chain issues continuing and in fact accelerating in the fourth quarter. We do expect that as we look through the year into '22, that some of those issues will be with us at least in the first half of the year. That being said, we'll continue to focus on what we can control and we will focus on certainly our productivity and our internal efforts but we will continue to also take market-based pricing decisions that are going to be consistent with what -- I mean, it's not unique to tour all this situation. So we're going to see it across our industry and have seen it across our industry. So we would expect that everyone will be rational and take appropriate price as well. We are really excited about the strength of our business, our demand is very solid, and the business fundamentals are strong. And again, very proud of the execution we've had year-to-date from our operations team. And we'll all stay focused on the long-term, making sure we're growing our market share, but also growing it properly and improving our margins.

Thanks very much.

Thank you.

Thank you.

Thank you. And our last question comes from the line of Eric Bosshard with Cleveland Research. Your line is open, please go ahead.

Thanks. Two things to cover. First of all, just a little bit of clarity. The inflation and challenges from the supply chain, totally understand what's going on. Can you just clarify a little bit? All those challenges were in place in 3Q and profits grew. All those challenges in place are going to be -- all the challenges are going to be there in 4Q and it sounds like through 1H. And you're talking about earnings, profits down in 4Q year-over-year, and your last comment made me think, does that mean profits are down in the first half of next year? What's so different in 4Q in the first half of next year relative to what just happened in this current quarter.

I would say two things. One is Q4 was a very, very strong quarter for us, so part of it is just -- I'm sorry. Q3 was a very strong quarter for us last year and Q4 as well last year, so I think the comparisons are just more difficult from that standpoint. If you think about the rebound that we experienced through COVID, really, the first half was more impacted by COVID and then we started to see that strong rebound in the second half of the year. So part of it is just the cadence and then if you look at a particular quarter, the comparison. We do expect to see more inflation and more supply chain disruption in Q4. It's a relatively a little bit smaller quarter for us as well but we do expect some of those issues will accelerate. As we talked about earlier, we also believe that some of those will moderate as we go into next year. That timing is to be determined based on what happens with the economy but we'll continue to -- we expect to see greater price realization in Q4 than we saw in Q3. And we expect going into next year that we'll take appropriate price actions as well.

Okay. And then secondly, in terms of backlog Ricky commented that it's a bit unusual for the backlog situation to be what it is, obviously reflecting the strength of demand relative to where supply is. Do you have visibility in terms of when you can meet that backlog and work that down?

We have -- we have an ongoing about estimates of when that will be and it's just as you would imagine by the nature of our businesses it varies pretty dramatically. The longer lead time careers would be in the areas we talked about with Charles Machine Works with the Ditch Witch business, for example, because of -- when you have components, there's still a lot of content to build those machines, so that tends to extend the lead time. Others are more a matter of when commodities become more available, we can turn those around very quickly. So it's pretty widely ranging from minimal to much longer term.

Okay. And I guess, real-time, if you would, is the backlog continuing to grow now in the last 30 days, or is the backlog peaked and now it's just a function of working it down?

The backlog is continuing to grow.

Okay. Okay.

Yeah.

Thank you.

Thank you.

Thank you and I'm showing no further questions at this time, and I would like to turn the conference back over to Julie Kerekes for any further remarks?

Thank you, Michelle, and thank you all for your questions and interest in The Toro Company. We look forward to talking with you again in December to discuss our fourth quarter and full-year results for fiscal 2021.

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.