Good day, ladies and gentlemen and welcome to the Toro Company’s Third Quarter Earnings Conference Call. My name is Latif and I will be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today’s conference, Julie Kerekes, Treasurer and Senior Managing Director of Global Tax and Investor Relations. Please proceed, Ms. Kerekes.

Thank you and good morning, everyone. Our earnings release was issued this morning and a copy can be found in the Investor Information section of our corporate website, thetorocompany.com. In addition, we have introduced a quarterly earnings presentation as well as an updated general investor presentation, both of which are now available on our website. We hope you find these new materials helpful. On our call today are Rick Olson, Chairman and Chief Executive Officer and Renee Peterson, Vice President and Chief Financial Officer. We also have Angie Drake, our newly promoted Vice President of Finance; and Jeremy [indiscernible], who recently joined our team as 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 details 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 presentation as well as in our applicable SEC filings. We believe these measures maybe 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.

Thanks, Julie and good morning, everyone. I’d like to start by congratulating Angie on her promotion and welcoming Jeremy to our Investor Relations team. Angie most recently served as Vice President of our Construction business and was previously the Chief Financial Officer of Charles Machine Works. She is a proven leader with strong financial expertise and impressive experience in strategic planning and acquisitions. Her promotion is part of our succession planning for The Toro Company’s finance leadership. Jeremy joins us with previous Investor Relations experience, along with roles of increasing responsibility across accounting and FP&A functions at several large publicly traded companies. We look forward to the many contributions they will make in their new leadership roles. Moving to our third quarter results, we continue to execute at a high level and build upon our long history of delivering financial performance in line with our expectations. We achieved record quarterly results driven by strong professional segment performance and margin improvements. Our third quarter net sales grew by 18.8%, while our adjusted diluted earnings per share grew by 29.3% both on a year-over-year basis. We continue to see favorable demand for our innovative products, along with incremental improvements in our supply chain and manufacturing efficiency. Our top line growth was driven by net price realization as well as our ability to produce in what remains a dynamic operating environment. Professional segment demand was robust and broad-based and our team continued to focus on serving our customers well in this time of constrained supply. For our residential segment, demand was solid, moderating as expected and in line with more typical seasonal trends. Importantly, we achieved healthy single-digit growth in the residential segment and that’s on top of the higher base we have built with 2 years of double-digit growth. Turning to profitability.…

Thank you, Rick and good morning everyone. We delivered record results in the third quarter by driving operational excellence and profitability improvements. While the overall supply chain environment remains dynamic, our team continued to adapt and execute well. We grew net sales to $1.16 billion, an increase of 18.8% compared to the third quarter of last year. Reported and adjusted diluted EPS for the quarter were both $1.19, up from $0.89 and $0.92 respectively in the third quarter a year ago. Professional segment net sales for the third quarter were $886.2 million, up 23.3% year-over-year. This growth was primarily driven by net price realization, increased shipments of zero-turn and stand-on mowers and incremental revenue from our acquisition of the Intimidator Group earlier this fiscal year. This was partially offset by lower volumes in certain key product categories due to product availability constraints. Professional segment earnings for the third quarter were $166.2 million, and when expressed as a percent of net sales, 18.8%. This was up from 17% in the third quarter of last year. The year-over-year increase was primarily due to net price realization, productivity improvements and net sales leverage. This was partially offset by higher material freight and manufacturing costs and the addition of the Intimidator Group at a lower initial margin relative to the segment average. Residential segment net sales for the third quarter were $270 million, up 7.1% from last year despite unfavorable hot and dry weather patterns in certain regions this year. This builds on the 23% year-over-year growth we reported in the third quarter of fiscal 2021 and 38% year-over-year growth in the third quarter of fiscal 2020. The increase for this quarter was primarily driven by net price realization and higher shipments of zero-turn riding mowers and snow products. This was partially offset by…

Thanks, Renee. As we enter the final quarter of our fiscal year, we remain well positioned in each of the attractive markets we serve. The supply chain continues to show signs of incremental improvement. We are making operational adjustments to drive enhanced agility and flexibility. We are focused on serving our customers well and winning in our markets. Overall, end market demand remained solid. We are benefiting from the essential nature of our products as they are used to perform necessary work across outdoor environments. We’re also benefiting from our market leadership and extensive distribution and service networks. Customers recognize and trust our brands and appreciate the innovation, quality, durability and support that comes with our products. I’ll now comment on the macro factors we are seeing in our markets, which could impact future results, starting with our professional segment. For underground and specialty construction, we continue to see strong demand with both private and public infrastructure investments, providing a multiyear tailwind. With the most comprehensive underground and specialty construction equipment lineup in the industry, we are prepared to capitalize on this heightened demand. For golf, demand shows no sign of slowing down and course budgets are healthy. Rounds played continue to trend at a pace well above pre-pandemic levels. As the only company to offer both equipment and irrigation solutions and as the market leader in golf, we are poised to build on our momentum. For municipalities and grounds, we continue to see the prioritization of green spaces as well as increasing interest in zero exhaust emission products. For customers seeking sustainable solutions, we are well positioned with a growing suite of no compromise offerings geared to professionals. For snow and ice management, we are seeing healthy preseason bookings following the late-season storms earlier this year that cleared out…

Thank you. [Operator Instructions] Our first question comes from the line of David MacGregor of Longbow Research. David MacGregor, your line is open.

Good morning, everyone. And thanks for taking the questions. I guess – hi, Rick, on the walk behind mowers, the weakness there in the residential business, can you just give us a sense of how much of that is tied to big box inventory management, which might be more temporary in nature versus a change in retail POS, which may have more long-lasting consequences?

Yes. Walk-power mower is just reflecting really the seasonal demand within that business. That happens to be one of the categories that was more affected by, for example, the late spring. And then when we got into the mid-portion of the summer, it really converted to a drought situation. That just happens to be a category that’s more impacted in an immediate way by those kind of factors. So it doesn’t reflect anything more than that.

Yes. And I think it’s also important to recognize that during that same period, we saw growth in zero-turn mowers within residential as well as within pro.

Maybe just one other positive is for our Flex-Force electric mower, we really saw continued growth in that area, and that’s just – that’s part of that suite that we’re very excited about.

Right. Okay, thanks for that. And then turning to the professional side, you indicated a couple of times that supply chain is improving, which is encouraging. But it seems like it’s maybe still a drag in golf and also for Charles Machine Works. So I’m using – I’m curious what’s your best estimate for kind of get well dates would be for those supply channels for golf and Charles Machine Works. Are we looking at 2023?

Right. Yes, we are very focused on the supply chain. We have incredible demand that looks like it’s very solid well into 2023 and beyond in some cases. And so our focus is on supply chain. We have multiple meetings per day, per week focused on the top issues that we’ve got. And when I say that we’re seeing improvement, we’re seeing improvements in the bottom-line results of producing product. We are also seeing these – the top issues really go away. So we’re working further down the list. We don’t have as many engine issues as we did last year at this time, but the big challenge on the more professional side of the businesses, a lot of the components are shared across multiple markets. So it’s the common threads of hydraulic components, higher horsepower, power transmission elements, anything to do with a lot of areas having to do with electrical and electronics, so wire harnesses. We are having the same chip challenges that other markets are having as well. So it’s really – we’re working our way through the top issues further down into the list, but there are still a lot of issues that come up in different areas that we’re working through. The good news is our team has really extended beyond our sourcing team to go – or to include the design team, marketing team and working together to find solutions. So it could be alternative designs. It’s not always the supplier got better. In many cases, that’s finding a way to have an equally good design with an alternative.

Great. Thanks for that. Last question for me is just on pricing. Do you still expect price growth in 2023 will remain above normal?

Yes. As we look forward to price, the demand for our products, David, remains very solid, and it’s been very dynamic over the last number of years. But we will continue with our pricing discipline. And we price competitively, we price to market, but our competitors are also very rational from that standpoint. So our focus is to improve and restore our margins over time. So I think you can expect that as we look forward that will incorporate pricing that supports that.

Thanks very much.

Thank you. Our next question comes from Eric Bosshard of Cleveland Research. Please go ahead, Eric Bosshard.

Thanks. I have two things. First of all, you used the expression a couple of times, you are seeing normalized demand in residential. And I think you used the same expression as it relates to the landscape contractor demand. Can you just explain what normalized means?

Yes. So, if you think about the residential business specifically, that business has been an absolute champ through the pandemic period for the last couple of years. We grew that business – that team grew the business from ‘19 to ‘21 by more than 50%. And obviously, we benefited from some of the pandemic effects, but underlying that was the foundational work that we did to change that business, adding channel partners, completely rebooting the product line, the marketing messaging and so forth as we have talked about in the past. So, we are at a new plateau of that business that’s substantially higher than it was in 2019 and before. That being said, we are returning to the more normal drivers of the business, which would be the seasonal drivers, the timing of spring, the weather patterns. Is there enough moisture in the spring, how does that play out during the summer and fall. So, it’s really referring to the normal patterns that have been part of that business for a long time. And this last season actually was challenging for the residential business, starting with a late – very late spring and then converting over to a very dry summer. So, it was a challenging time in the macro environment. But it’s real – it’s returning to that normal pattern. And we grew that – we did grow that business in Q3. So, the team continues to do a great job there.

And then on the landscape contractor side, is it – it sounds like residential has done perhaps better than normal, and so it’s returning to normal. Is that the same way to view landscape contractor, or does normalization is something different there?

Landscape contractor continues to be very strong. If you are talking about the mowing aspect of that, if anything, there are a certain percentage of those products that are purchased by large homeowners as well. So, they have – there is a small portion of that business that acts more like a residential type of customer. That’s probably the reference. In terms of the broader contractors’ landscape creation, landscape contractors that maintain properties, that continues to be very strong from a pro-perspective. And in most cases, they are behind on their purchases, their capital purchases and are working to catch up. And that’s where we are working to meet that demand.

And then secondly, the sales guidance 90 days ago, it was 14 to 16 and today, it’s more than 14. And so it’s similar, but different. What’s different now versus 90 days ago that takes what appears at the top end of the range out of the discussion?

It is the residential portion. That took the range to the 14 versus 14 and 16 because of the factors I have just mentioned in the residential market.

And just building upon that from an EPS standpoint, we did raise our guidance in that area, and that’s really the improvements we are seeing from both the supply chain and operational performance across the portfolio.

Okay. And then one more if I could. In terms of – you mentioned, Rick, as it relates to landscape contractor being behind that purchase. As you mentioned earlier, I think golf demand is strong into, if not through ‘23. Can you frame or dimensionalize at all backlog or channel inventories as you start to think about – as we start to think about 2023 would either channel inventories or backlog look like relative to history or what that – how you think about that as it relates to ‘23.

Sure. I can comment on both of those. First of all, field inventory, in general for The Toro Company is significantly lower than we would like to see. There is a few exceptions. We have talked about residential and the market during the summer and the late spring, but there are some categories of residential that have started to return to more normal levels of inventory in the field across virtually all of our pro-categories and markets we do not have enough field inventory to be at normal levels. And that’s been something we have been working very closely with our channel partners to try to call the end customers do the work that they need to do in a constrained supply environment. So, we will work. As the supply chain gets better, obviously, we fulfill the end customer demand, and then we will work to bring back field inventories to a more normal level. Just speaking specifically to the backlog, we have – the demand continues to be very strong and the backlog position is higher than it was when we ended our fiscal year. We have made some progress just within the last couple of months on bringing it down from the peak, but it continues to be very strong and primarily coming from those areas we talked about previously, the underground specialty construction business, golf, and for landscape creation, also a very healthy position from a professional snow and ice management business. They all – there is a significant need for products for professional customers at this point, and we feel very confident in that demand.

Great. Very helpful. Thank you.

Thank you.

Our next question comes from Timothy Wojs of Baird. Timothy Wojs, your line is open.

Yes. Hey everybody again. Good morning. Maybe just if you think about seasonality, I think just given kind of what you have seen from kind of backlog fulfillment and things, you are kind of tracking above in the back half of the year, what would kind of be normal seasonality? I mean when would you expect, just given where you are in backlog and field inventories and things to start to see more normal seasonality for the business kind of heading into fiscal ‘23?

Yes. Maybe I can start, Rick, you can add on. I think, Tim, we expect to see probably the residential business being more normal from a seasonal perspective. But the professional business, as Rick just said, is really constrained by supply chain. So, we think that’s going to take a little bit longer for us to return to a more normal cadence. It’s difficult to predict exactly when that will occur. But for some of our businesses such as golf and grounds and underground construction, we think that’s going to take a little bit longer. For some businesses, we are seeing a little more recovery sooner such as landscape contractor. But we do think the professional business will continue to be supply constrained going into next year and some of it for a good portion of next year as well.

Just one additional point, if you think about the newer parts of our business, the Ditch Witch business, special construction, underground, snow, they have different seasonal patterns and those are new factors, especially from 2019 on. In the case of the underground business, it’s not really very seasonal. It’s not really driven by the shift in seasons for example. So, it provides a more consistent base that takes some of the variability out long-term.

Okay. That’s helpful. And then I guess as you maybe think about kind of next year, I mean from a high-level perspective, I mean relative to kind of the 25% normalized incremental margin? I mean are there any kind of high-level puts and takes that we should kind of consider as we think about next year?

We think that we will still see an inflationary environment next year. We do think that we are seeing some – the rate of inflation has begun to decline. Hopefully, that continues as well as some of the commodities we have seen kind of coming off their peaks from a future standpoint. So, we expect to see that. We will continue to focus on our supply chain. And as Rick said, really working to try to improve that. Our end markets are very healthy. All of our customers are in a great position. And we are seeing, as Rick just mentioned, the strength of our portfolio and the broad portfolio really helping us as we look at diversification. So, we feel pretty positive about next year as we go into it and do think it will be a strong year.

Okay. Good. And then just the last one, just on price and volume, is there any way to kind of break out kind of ballpark what price and unit volumes are in the quarter?

Yes. What we would look at is price was a – price realization was a major driver, Tim, to our growth as well as the Intimidator Group acquisition, factoring that in and also especially the strength of zero turns, we saw positive volume in that area as well. We are realizing the impact of the multiple price actions that we took in response to the inflation that we saw last year. So, again, that’s the driver behind price. And the professional business, as we have stated, is still supply constrained. So we – if we could build more from a professional standpoint, we would ship more and we did see growth in key product categories from a volume standpoint. So, demand overall solid, but we are seeing more of an impact of price versus volume and overall for the company.

Okay, good. Thanks for the time and good luck on rest of the year.

Thanks Tim.

Thank you. Our next question comes from Tom Hayes of Northcoast Research. Tom Hayes, your line is open.

Hey. Good morning everyone. Appreciate the time and thanks for taking my questions. Maybe, Renee, kind of – I know you guys on the margin front, called out the impact from the Intimidator Group. I was just wondering when you kind of expect that negative headwind from that acquisition to abate and move towards a more normalized cadence, if you will.

Yes. We are working on our acquisition synergies and really seeing – we are on track from an integration standpoint and seeing the benefits of those actions. We would expect – we acquired Intimidator Group, the acquisition was recorded in Q2 and going forward – I mean so certainly, there will be some impact from that first year just from an absolute standpoint. But we are making margin improvements within the Intimidator Group and do expect them to continue to improve going forward. And it’s – the zero-turn market is a really fast-growing market. So, we are also seeing the benefit, not just with an Intimidator Group, but across the whole landscape contractor portfolio. What we are also really focused on is how do we leverage our technology with Intimidator Group, but also across our other brands as well.

Okay. Great. And then maybe, Rick, obviously, there is large portions of the U.S. have been and likely will continue to be impacted by drought conditions that really don’t seem to be letting up. I was just wondering if you have seen any change in the demand for any of your irrigation products either for the residential or on the professional side?

I would really characterize them as normal demand variation that happens in these kinds of periods, which we are accustomed to in our business. So, those – it can actually be good initially for irrigation business. And at some point, where full water restrictions are put in place then it starts to negatively affect it. But we are seeing pretty normal response of what you would expect in the circumstances. We have had great growth across the areas that would be affected over the last couple of years. And so nothing unusual, but what you would expect in the drought conditions.

Alright. Appreciate it. Thanks for taking the time today.

Thank you.

This concludes the question-and-answer session. Ms. Kerekes, please proceed to closing remarks. End of Q&A:

Thank you, Latif, and thank you all for your questions and interest in The Toro Company. We look forward to talking with everyone again in December to discuss our fourth quarter and full year results for fiscal 2022.

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.