Good day ladies and gentlemen, and welcome to The Toro Company's First Quarter Earnings Conference Call. My name is Jonathan, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference call is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's conference, Julie Kerekes, Treasurer and Senior Managing Director of Global Tax and Investor Relations. Please proceed, Ms. Kerekes.

Thank you, and good morning, everyone. Our earnings release was issued this morning, and a copy can be found in the Investor Information’s section of our corporate website, thetorocompany.com. We have also posted a first quarter earnings presentation to supplement our earnings release and general investor presentation. On our call today are Rick Olson, Chairman and Chief Executive Officer; Renee Peterson, Vice President and Chief Financial Officer; Angie Drake, Vice President, Finance; and Jeremy Steffan, Director, Investor Relations. We begin with our customary forward-looking statement policy. During this call, we will make forward-looking statements regarding our plans and projections for the future. This includes estimates and assumptions regarding financial and operating results, as well as economic, technological, weather, market acceptance, acquisition-related and other factors that may impact our business and customers. You are all aware of the inherent difficulties, risks and uncertainties in making predictive statements. Our earnings release, as well as our SEC filings detail some of the important risk factors that may cause our actual results to differ materially from those in our predictions. Please note that we do not have a duty to update our forward-looking statements. In addition, during this call, we will reference certain non-GAAP financial measures. Reconciliations of historical non-GAAP financial measures to reported GAAP financial measures can be found in our earnings release and on our website in our investor presentation, as well as in our applicable SEC filings. We believe these measures may be useful in performing meaningful comparisons of past and present operating results and cash flows to understand the performance of our ongoing operations and how management views the business. Non-GAAP financial measures should not be considered superior to or a substitute for the GAAP financial measures presented in our earnings release and this call. With that, I will now turn the call over to Rick.

Thanks, Julie, and good morning, everyone. We began fiscal 2023 by delivering another record quarter with net sales up 23% and adjusted diluted earnings per share, up 49% over last year. We reported top line growth in both segments and continued to see strong demand for our innovative products, especially in key professional markets. Importantly, the supply chain continued to improve, which combined with our disciplined operational execution, drove manufacturing efficiencies and Professional segment volume growth. We achieved these results even with below-average snowfall in many key regions, a testament to our innovative product lineup and diversified portfolio. We also performed well on the bottom line, posting a 200 basis point improvement in adjusted operating earnings as a percentage of net sales year-over-year. This was driven by net price realization and productivity gains. Our team and channel partners continued to operate with their hallmark dedication, creativity, and resiliency. These characteristics are serving us well now, and we expect will serve us well in the future. With the strong start to the year, we are reiterating our full-year net sales and adjusted diluted earnings per share guidance. In addition to delivering record results in the quarter, we kept our focus on positioning the company to capitalize on long-term growth opportunities. This includes our foundational strategy of investing in the key technology areas of alternative power, smart-connected, and autonomous solutions. We believe our ability to leverage these investments across our broad portfolio will provide a competitive advantage and position us to drive accelerated profitable growth. For example, our HyperCell battery system is powering a growing suite of electric and hybrid solutions geared to professionals. This system was first introduced with the launch of our Toro-branded Revolution Series mowers and is now electrifying products across our professional portfolio. This includes Exmark-branded turf equipment,…

Good morning, everyone, and thank you, Rick. I appreciate the kind words. It's been an honor to be part of this incredible company and team for the past 12 years. I'd like to congratulate Angie on her promotion and echo Rick's confidence in her leadership. It gives me great pride to lead the CFO position in such qualified hands. I would also like to thank our investors and analysts for your support and engagement during my tenure as CFO. Now, turning to our results. As Rick said, we delivered strong performance in the first quarter, achieving record net sales and adjusted diluted EPS in what remains a dynamic operating environment. We grew overall consolidated net sales to $1.15 billion, an increase of 23.2%, compared to the first quarter of last year. Reported and adjusted EPS were $1.01 and $0.98 per diluted share, respectively, up from $0.66 for both in the first quarter a year ago. Professional segment net sales for the quarter were $880.7 million, up nearly 31% year-over-year. This increase was driven by higher shipments of products broadly across the segment, primarily due to strong demand and improvement in the supply chain, net price realization and incremental revenue from our first quarter fiscal 2022 acquisition of the Intimidator Group. Professional segment earnings for the first quarter were up 54% to $144.1 million and when expressed as a percentage of net sales, 16.4%. This was up from 13.9% in the first quarter last year. The year-over-year increase was primarily due to net price realization, net sales leverage, and productivity improvements. This was partially offset by higher material freight and manufacturing costs and the addition of the Intimidator Group had a lower initial margin relative to the segment average. Residential segment net sales for the first quarter were $264.6 million, up 3.6% over last year. The growth was primarily driven by net price realization and higher shipments of zero-turn riding mowers, partially offset by lower shipments of snow products. Residential segment earnings for the quarter were up 19% to $37.8 million. And when expressed as a percentage of net sales, 14.3%. This was up from 12.4% in the first quarter last year. The year-over-year increase was primarily driven by net price realization and productivity improvements, partially offset by higher material freight and manufacturing costs and higher SG&A expense. With that, I'll turn the call over to Angie to continue outlining our operating results and to discuss our fiscal 2023 guidance.

Thank you, Renee and hello, everyone. Before I begin, I would also like to congratulate Renee on her retirement and thank her for her support as I transition to my new role. I'm looking forward to building on the strong foundation Renee has built and working more closely with Rick and the investment community. Turning to our operating results. Our reported and adjusted gross margin were both 34.5% for the quarter, up from 32.2% for both in the same period last year. The year-over-year improvement was primarily due to net price realization and productivity improvements, partially offset by higher material, freight, and manufacturing costs and the addition of the Intimidator Group at a lower initial gross margin relative to the company average. SG&A expense as a percentage of net sales for the quarter was 22.6%, compared to 22.4% in the same period last year. This increase was primarily driven by higher warranty expense, partially offset by net sales leverage. Operating earnings as a percentage of net sales for the first quarter were 11.9% on a reported and adjusted basis. This compares to 9.8% and 9.9%, respectively, in the same period last year. Interest expense for the quarter was $14.1 million, up $7.1 million from the same period last year. This increase was primarily due to incremental borrowings to fund the Intimidator Group acquisition and higher average interest rates. The reported and adjusted effective tax rates for the first quarter were 18.6% and 21.4%, respectively, compared to 20.2% and 20.9% in the same period a year ago. Turning to our balance sheet and cash flows. Accounts receivable were $377 million, up 3% from a year ago, primarily driven by organic net sales growth. Inventory was $1.1 billion, up 36% compared to last year. This increase was driven by higher finished goods,…

Thank you, Angie. Fiscal 2023 is off to a strong start, and we are well-positioned with innovative products, trusted brands, and extensive distribution and service networks. We expect continued benefits from our well-established market leadership, along with the essential nature and regular replacement cycle of our products. In addition, we expect to benefit from our substantial order backlog. Our team continues to operate with incredible agility to optimize output in the current environment. With this, we saw higher volumes across our Professional segment during the first quarter. At the same time, the exceptional demand we continue to see in key professional markets drove a slight increase in our backlog over and above the $2.3 billion balance at the beginning of the year. Turning to the broader economy. We are keeping an eye on monetary policy actions, the geopolitical environment, and inflation. We are also watching overall business and consumer confidence and spending patterns. We believe we are well prepared to deliver positive results in this environment. I'll now comment on the macro factors we are seeing in our end markets, which could impact future results. Starting with our Professional segment. For underground and specialty construction, we expect the current robust demand to continue, supported by multi-year tailwinds from public and private infrastructure investments. The need and support for broadband and alternative power build-outs, along with the aging infrastructure is driving exceptional demand in the utility construction and rental markets. We believe we are prepared to capitalize on this demand with the most comprehensive product lineup in the industry. Additionally, we are encouraged by the supply chain improvements that enabled increased production for this business in the first quarter. For golf, we expect healthy course budgets will continue to fuel strong demand. In 2022, on-course participation was up for the fifth…

[Operator Instructions] And our first question comes from the line of Sam Darkatsh from Raymond James. Your question please.

Good morning, everyone. How are you?

Good morning, Sam. Congratulations on the conference.

Thank you and speaking of congratulations, I'd like to echo Rick's sentiments, Renee. It's been wonderful working with you over the years. Best wishes with your next chapter and Angie well-deserved promotion and look forward to working with you going forward as well.

Thank you.

Thanks, Sam.

Just a couple, I guess, general topics, if I could. I think in your prepared remarks, Rick, you mentioned that there was a slight increase in your backlog sequentially from the 2.3 billion. If we could unpack that a little bit more, what are you seeing specifically with order cancellation rates, new order trends lead times, that sort of thing to give us a sense of what's happening a little bit behind the scenes.

If you start just overall looking at the backlog, we did – we actually had a really nice volume increase. It was actually a little bit better than we expected in the first quarter. So, we were on our plan from that regard. The biggest factor was just the demand continues to be very, very strong, especially coming from our residential side. Most of it coming from the underground, specialty construction part of our business and then followed by golf and grounds. And with regard to cancellation rate, extremely low, very, very small piece of loss of backlog at this point. So, we are – we expect those lines to converge out in the future where we start to make ground on the demand, but at this point, even though we had better output, demand was greater than expected as well.

And then your supply chain constraints that are continuing to improve, is that with both electronics and hydraulics or mostly hydraulics at this point? What sorts of components or trends in component supply are you seeing, Rick?

On a broader base, the random issues have become better, but the several that we've talked about, which you refer to, specifically wiring harnesses. I think there's a worldwide issue with supply of those, but we're working very closely and believe me, very intensely with our suppliers there to improve that situation. We do see some improvement there. Hydraulics also improving more down to kind of the random misses in terms of shipments. Anything to do with electronics regarding chips, still a bit of an issue, but we're seeing some improvement there as well. I think generally, the chip industry is seeing some improvements overall. So, it's the same type of characters, right, as it was probably in our last discussion, but we're seeing steady improvement. And as we gain more confidence in the supply from the suppliers of those component parts, we are positioning ourselves to be able to take advantage of that improved supply with greater volume. We don't believe our facilities will be the constraints in the near-term. We'll be able to take advantage of that as it becomes available.

And then my last question, if I could sneak it in. The Resi segment surprised me and perhaps others in terms of in the quarter that it was better than expected. I think it might have been better than you were originally anticipating also where you thought it was going to be flat, both from a sales and a margin perspective, despite the fact that snow was soft. So, what was happening there? And then also reconcile that with it sounds like you're taking down your expectations a little bit going forward for Resi in the year. If you could just help unpack what you're seeing in that segment from a trend standpoint?

Just from a context standpoint, Residential has just been extraordinarily strong throughout the pandemic and through last year, I think roughly up 60% up from 2019. So, it's been a real performer. We have a lot of momentum with the things that we've done, with the product line, with the addition of key channel partners, et cetera, the things that we talked about before. So, there's really solid momentum. We've talked about coming into what we would call a more normal type of cycle. And for that, we really mean subject to the start of spring, some of those factors that are normally factors that we talk about, come back into the equation to a greater degree. Specifically this year, with regard to our expectations, snow was not as strong as we had planned, due to the lighter snowfall, especially in populated areas of the U.S. on the East – specifically the [Eastern United States] [ph]. But we had strong shipments of [Zs], a nice incremental shipments of back power mowers. So, across the board, the net was very positive for Residential. And it's going to be subject to, again, the normal year factors that are out there, but we're in good shape as we enter the spring season, especially with much better inventory position that we've had for the last several years. So that business is in good shape at this point.

Thank you much. I’ll get back in line.

Sorry Sam, I would just add to that on the profitability side that the past few years, we've seen both volume increases and margin increases that have helped our Residential profitability. And Q1 is historically higher from a profitability standpoint for Res, but we did have a really nice mix, as Rick talked about. We are seeing also some improvements year-over-year in the quarter due to price and productivity improvement. So, for the full-year, we expect to continue to see Residential profitability improve.

Very helpful. Thank you.

Thank you. One moment for our next question. And our next question comes from the line of Tim Wojs from RW Baird. Your question please.

Hey, everybody. Good morning. And I'd like to also echo the same sentiment to Renee. It's been great working with you, and we appreciate all the help and congrats on your roles. Maybe just put a finer point on one of Sam's questions. Just on the lead times by business, I mean, I guess, generally, over the last 3 months to 6 months, how have lead times trended maybe specifically in the underground and the golf business? Have they been pretty consistent or are you actually starting to see some of those lead times actually, kind of get better?

Yes. I would say, if you look across the spectrum of products, obviously, the Residential into the landscape contractor area, those lead times have gotten better substantially over the last probably 18 months. As you get into the larger areas of backlog, which are underground, especially construction and golf and grounds, we're seeing some improvements, but still substantially greater lead time than we would normally like to quote to our customers. And that's – fundamentally, that's our primary concern. Just making sure that we can serve our customers, which is a commitment that we have to them.

Okay. Okay. And then I guess from a cost perspective, I mean, it's one input, but I mean, steel has kind of perked up here recently. How do you – just given the industry has taken a lot of price, I mean what type of, I guess, level of inflation or reinflation would you need to see to maybe, kind of consider additional price increases?

From a price perspective, we look at necessary price increases every year. First of all, market based and then fundamentally, we've had to be more cognizant of the commodity costs. Steel is one that has – that came down fairly substantially in 2022, but we do see it more as somewhat of a plateau so there's a little bit of catch-up with some of our suppliers to take advantage of that, but it's [steel] [ph] – we don't see as much probably movements in steel as we go forward. And pricing – from a pricing standpoint, we're still elevated above where we would normally be when we talk about normal realized price. Angie or Renee any other comment on the...

Yes. Yes, I would just add to that by saying that we are beginning to see some of that inflation slowing a bit, but we are also looking for every opportunity to offset that inflation by our pricing actions or our productivity. We have done our best to include these inflationary items and our guidance going forward.

Okay. Okay. And then just the last one, just a kind of nitpicky modeling question. The other income line picked up pretty substantially year-over-year and sequentially. I guess what drove that? And how do you think about that line as you think about fiscal 2023?

Tim, this is Renee. So, as we look at other income, the two of the biggest factors that drove that variation year-over-year would be really the biggest one is the improvement that we're seeing in the Red Iron JV income. As we return to a more normal level of field inventory, that does drive more activity through the Red Iron JV and as a 45% owner, we participate in that. So that's one factor. And then there was a recovery associated with the Intimidator Group acquisition that was several million dollars. That also impacted that variance within the quarter.

Okay, great. Thanks guys.

Thank you. [Operator Instructions] And our next question comes from the line of David MacGregor from Longbow Research. Your question, please.

Yes, good morning everyone. Renee, thanks for all your help and your patience over the years. It's really truly been a pleasure working with you. Angie, congratulations, best wishes for success. I wanted to just talk about inventories and the impact [of margins] [ph]. You talked last quarter about excess raw materials and with inventory. And those inventories work their way through the P&L in 1Q, obviously. So, how much of a margin headwind did that represent? And what is the expectation for 2Q? It sounds like maybe raw material is not so much on the issue, but may still be, if you could just talk about that for us. Thanks.

Yes. As really, David, our sales cadence normalizes, what we're seeing is we're getting back into more of that normal pattern with inventory, really building inventory as we go into the spring and then seeing that depleted as we go through the season. If you look at sequentially from Q4, our inventory was relatively flat up a little bit, but we were encouraged because WIP was relatively flat. And just, I guess, stepping back and looking at it when we look at the mix of inventory, to your point, we still see a higher level of WIP inventory versus finished goods than we would ideally like. We do think as we work through the remainder of the year with the supply chain improving, that we'll see that improvement, and we'll see that mix normalize. And our backlog is strong. So, we see strong demand and the pricing associated with that backlog is current. And when we look from an overall free cash flow conversion standpoint, we've embedded our thoughts around working capital and maintained our guidance around 100% conversion. So, you're correct that we're seeing some of that higher cost inventory as we go through the year that will work its way through the system, and we'll see the benefit of some hopefully, lower commodities as well included in our guidance.

So, just on that point, it seems as though your guidance probably reflects improving price cost sequentially with each quarter as you move through the year. Is that a fair takeaway?

Yes, I think it is. We do think when we look specifically at gross margin, that what our guidance included was that gross margin will be higher in the second half of the year versus the first half. And we do expect when we look at operating margins, that we'll see improvement within the company, as well as within both of the segments.

Okay. Second question, just on golf. Given the price increases, what are you seeing in demand elasticity from smaller and medium-sized golf courses, I guess your large course customers are fine, but like a little bit about what the small customers, how they're responding to the pricing.

We're seeing honestly very strong demand across our customer base. Oftentimes, the smaller golf courses could be municipal courses, for example, and many of them have – they've not been in the revenue situation they're in today in a long time. So their budgets are very healthy. Oftentimes, I mean, there's a secondary market for our products as well. So, for the very small golf courses, that tends to be something that they're interested in. That market is actually very tight as well. There's a shortage of used equipment out there. So, we're not seeing anything other than very strong demand at this point across our customer base.

Okay. Thanks for that Rick. And last question for me, just on Landscape Contractor, you talked about the return to more typical seasonal patterns. You're running your spring sales event right now. Could you just talk a little bit about how the market is responding to that spring sales event? Or how would you characterize the market response to that promotion? And are you seeing any price elasticity there?

Yes. I mean I just spoke with some of the people directly involved with that yesterday. They've been very pleased at the response so far. There are very willing buyers out there in those markets. I think the – there's a portion of that market that would be more cautious about the economy, but they know that they have equipment that needs to be replaced on the landscape contractor professional side of the business. So, it's just a matter of timing and in this case, a small incentive had a significant impact.

And Rick, historically – have you historically seen a correlation between weaker snowfall and these guys just having less [falling] [ph] revenue to spend on equipment come to spring? Is there a correlation there we should be mindful of?

We have, and I think the – what we see this year is if they are in parts of the country where they have not had as much snow revenue. First of all, a lot of the snow revenue, snow businesses, a mixture on contracts, so they still have revenue, whether they plow the snow or not. And so, in those cases where they've got lower revenue, they will probably make their purchases for the spring as they start to get into the revenue of the spring. So, it could mean just a slightly delayed purchase cycle. And those are some of the things that we can have an impact on with some of the promotions that you mentioned.

Great. Thanks very much and congratulations on the quarter.

Thank you.

Thank you. One moment for our next question. And our next question comes from the line of Eric Bosshard from Cleveland Research. Your question please.

Hi, thanks. Two things. First of all, Rick, on the Pro side, it sounds like the quarter was better and the full-year, it sounds like it's a little bit better now than what was prior. Within this, what is leading that? What piece of the business is leading that?

From a Pro standpoint, it's really the demand coming from those key areas, which correlate to where our backlogs are. So, it would be the underground specialty construction, golf and grounds, but also strength in the landscape contract area. And so I would say across our Pro business, I can't really identify an area that's significantly looking like a down year at this point as we were projecting forward. Irrigation, maybe a little bit different mix of very strong golf and professional projects offset with a little bit lighter Res. The ag irrigation business looks very strong going forward. The snowpack in the [Sierras] [ph] is approaching 200% of normal at this time with much better reservoir. So that – I mean they've essentially got the moisture that they need for the growing season. So, some of those factors are looking positive.

Okay. And then in terms of just some context on backlog. Is this – this provides visibility into 2024, like at what point does – do you start to work down backlog or through what period of time does this backlog give you visibility and conviction in the revenues of the Pro business?

We have high confidence in our back order position and it's going to be a function of the rate at which we can improve the supply of components. As I mentioned before, we don't believe our internal capabilities are constrained at this point. They've made tremendous progress and have been extremely agile to be able to take advantage of increased volume. We do expect some areas to extend in past 2023 before we get those backlogs down. But as you can imagine, we're working exceptionally intensely with our customers and with our channel partners to make sure we cover and support our customers to the best way that we can.

And then on the Residential side, it sounds like Pro a little bit better perhaps for the year, Residential little softer, and you talked about snow. I guess, first of all, within this, is this exclusively snow? And then related to this, in terms of the spring consumer selling season, there's been obviously quite a bit of inflation in the last few years. I'm just curious how you're positioning the Residential mower business from a price standpoint and if there's any elasticity that you're either considering or experiencing?

I would, first of all say that we're going into the spring selling season in the best position that we've been for several years with regard to better, healthier field inventory as we head into that spring season. As I think we've talked about before, normal to us also means that promotions come back into play to get – motivate people to go out and shop for new products. So, those are pretty much normal for us. And that's the extent to which price would be affected is that the normal promotions would be coming back in. And all of that is included within our guidance. Snow, if we reflected slightly down, it really reflects that it's been a lighter snow season so far. So, we know that, that has some impact on the fall stocking.

Okay. Thank you very much.

Okay. Thank you.

Thank you. This concludes the question-and-answer session. Ms. Kerekes. Please proceed with closing remarks.

Thank you, Jonathan, and thank you all for your questions and interest in The Toro Company. We look forward to talking with everyone again in June to discuss our fiscal 2023 second quarter results.

Thank you ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.