Good day, ladies and gentlemen, and welcome to The Toro Company's Second Quarter Earnings Conference Call. My name is Carmen, 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, Julie Kerekes, a 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. We have also posted a second quarter earnings presentation to supplement our earnings release. On our call today are Rick Olson, Chairman and Chief Executive Officer; Angie Drake, Vice President and Chief Financial Officer; and Jeremy Steffan, Director, Investor Relations. During this call, we will make forward-looking statements regarding our plans and projections for the future. Forward-looking statements are based upon our historical performance and current expectations and are subject to risks, uncertainties and other factors that may cause actual results to differ materially from those contemplated by these statements. Additional information regarding these factors can be found in today's earnings release and in our investor presentations as well as in our SEC reports. During today's call, we will also refer to non-GAAP financial measures, which we believe are important in evaluating the company's performance. For more details on these measures, the most comparable GAAP measures and a reconciliation of the two, please refer to this morning's earnings release and our investor presentation. With that, I will now turn the call over to Rick.

Thanks, Julie, and good morning, everyone. Our team continues to execute well as we delivered second quarter results in line with the expectations we shared on last quarter's call. Once again, our team operated with dedication and agility as we adjusted production to align with demand trends, drove productivity benefits across the enterprise and capitalized on an ever-expanding portfolio of innovative products that satisfy our customers' most pressing needs. We are continuing to advance our key strategic priorities to drive shareholder value by accelerating profitable growth, driving productivity and operational excellence and empowering our people. For the second quarter, we delivered record net sales of $1.35 billion. This was driven by top line growth of 26% in our residential segment and within our Professional segment, we saw continued growth in the underground and specialty construction and golf and grounds businesses. For residential, as anticipated, exceptional growth in our mass channel more than offset the expected lower shipments to our dealer channel given elevated dealer field inventories heading into this year. The residential segment benefited from successful new product introductions and better weather conditions compared to last year. Strong demand has kept order backlog elevated in our underground and specialty construction and golf and grounds businesses. We continue to successfully drive incremental output within our existing manufacturing footprint to increase shipments of those products and better serve our customers. This strength was offset by anticipated lower shipments of contracted grade zero-turn mowers, given elevated field inventories heading into this fiscal year. Notably, we've made significant progress reducing dealer field inventories of lawn care equipment in both the professional and residential segments. This was a result of our reduction in shipments to dealers as expected, coupled with initial spring retail momentum. Moving to the bottom line, we delivered adjusted diluted earnings per…

Thank you, Rick, and good morning, everyone. As Rick said, our results in the second quarter were aligned with our outlook as our talented team continued the disciplined execution of our strategic priorities. Consolidated net sales for the quarter were $1.35 billion, up slightly from our record in Q2 last year. Reported EPS was $1.38 per diluted share, compared to $1.59 in the second quarter of last year. Adjusted EPS was $1.40 per diluted share, down as expected from $1.58. Now to the segment results. Professional segment net sales for the second quarter were just over $1 million, down 5.9% year-over-year. This decrease was primarily driven by lower shipments of zero-turn mowers, which was expected given the elevated field inventories heading into the spring selling season. This was partially offset by higher shipments of underground and specialty construction equipment and golf and ground products as we address the elevated order backlog for these businesses. Professional segment earnings for the second quarter were $190.7 million compared to $227.5 million last year. When expressed as a percentage of net sales, earnings for the segment were 19% compared to 21.3% last year. The change in profitability was expected and primarily due to lower net sales volume as field inventory levels as zero-turn mowers normalize and higher material and manufacturing costs as we continue to adjust production to demand. This was partially offset by productivity improvements. Residential segment net sales for the second quarter were $335.6 million, up 26.3% compared to last year. The increase was primarily driven by higher shipments of product to our mass channel, which was partially offset by lower shipments to our dealer channel as we work to normalize field inventory levels. Residential segment earnings for the quarter were $36.1 million, up from $22.7 million last year. When expressed as…

Thank you, Angie. We have confidence in our ability to deliver growth in fiscal 2024 and beyond. We are entering the second half of our fiscal year with good momentum. We continue to expect benefits from our strong leadership position in attractive end markets, supported by our suite of innovative solutions that perform necessary work with regular replacement cycles. We are supported by our strong business fundamentals, market leadership and deep customer and channel relationships. Our team continues to execute well and operate with resiliency as we flex production to align with market conditions and better serve our customers. The supply chain has largely returned to normal, which is enabling incremental output for businesses with elevated order backlog. Our homeowner markets also appear to be recovering and we expect to benefit from our successful new product introductions, the power of our brand and our extensive distribution networks. Looking ahead, we continue to keep a close eye on macro factors as well as demand dynamics in our specific end markets. For the underground construction market, we expect demand to remain strong. This includes a very positive runway for projects to address global infrastructure needs, supported by a robust public private multiyear spending. Looking at utility end markets alone, there are many positive drivers. Spending on power construction, including new and upgraded generation and transmission infrastructure is expected to decline by 11% in 2024. Construction spending on water treatment and storage, including pipe replacement, is expected is expected to grow by 8% this year. For sewage and wastewater infrastructure, 11% growth is expected. And for telecom, growth is now expected to exceed the initial 7% estimate for the year, driven by funding for the US government's broadband equity and access deployment program. This program is expected to distribute over $42 billion to…

[Operator Instructions] It's coming from the line of Samuel Darkatsh with Raymond James. Please proceed.

Good morning, Rick. Good morning, Angie. How are you?

Good morning, Samuel. Doing well. How are you?

I’m well, as well. Thank you for asking. If I may, three questions. Hopefully, they're pretty quick. First, Angie, I think you mentioned in your prepared remarks a strong conviction in long-term growth. Does that extend -- and I know you don't give guidance for a while for next year, but does that extend into your confidence that next fiscal year will also show organic total sales growth? And I say that in light of the fact that your order book in underground is expected to normalize. You've got a lot of moving parts with landscape and retail and snow and what have you. Is next year prospectively a growth year as you see it right now?

Sam, why don't I comment on that? I think the short answer is we do see opportunity for continued growth into next year, a couple of the factors that you mentioned, we now expect just based on the continued demand profile and continued orders that the open order position is going to extend into '25 for those key growth areas, underground and construction. It's normalized a little bit, one of the key drivers, compact utility loaders in the specialty construction area. But those big drivers, we have better outputs, but the demand just continues to come. And if you look at the drivers long term, those look very solid. And then you just think of the other factors of normalizing our shipment flow into the areas where we have high field inventory today, the strength of the mass strategy that we have today, dealers coming back online. Essentially, snow is sitting the year out for us this year relative to a poor snow season this last year. So we have a lot of opportunities still early to be very specific about that, but we feel positive about the future and long-term future in general for growth opportunities for us given our portfolio.

Thanks. Second question, mentioning that you're anticipating ramping your repo activity or share repurchase activity in the back half. I think, at least based on your guidance, it looks like you're anticipating, I don't know, somewhere around, call it, $275 million in second half free cash flow after dividends. Is it fair to assume that the bulk of that might with repo, especially with the stock at current levels?

I'd say with the improvement in cash flow that we saw in the quarter, we spent about $10 million on share repurchases. And we do expect to ramp that up in the second half and expect those purchases to exceed except those -- expect those share repurchases to exceed last year's $60 million. Now we will assess our cash position and our cash usage, and we'll make decisions based on that if we want to prioritize doing share repurchases over other things.

Got it. My last question. As it relates to the landscape and retail field inventories at this stage, what's the timing of expected -- I'll use the word normalcy of those elevated field inventory. And I guess on top of that, any color you can provide in terms of the Red Iron DSOs being elevated as well. Thanks guys.

Yeah, I'll take the first part of that. First of all, relative to field inventories, largely playing out as we had described, even going back to the third quarter last year, if not a little bit better. So if you think in terms of we're well over halfway in that process of reducing the field inventory in those key areas. The biggest driver of that, that has to be there is retail. And we're seeing very strong retail really through all those channels, but certainly in the dealer channel, it's helping to bring that down. And then obviously, we immediately restricted shipments into the field at that time. So if you look at the broader sets outside of those areas that we had targeted and talked about since last year, underground is extremely low. So that continues to be sort of hand-to-mouth. We've made dramatic improvements in our production output and getting that field out into the field, but it's immediately flowing through to end customers just based on the pretty incredible demand in that area. On the golf side, still lower than we'd like to see it, a pretty similar situation there. We are seeing very strong retail. Our shipments are up with golf but the backlog continues to stay relatively high and why is that because the demand keeps coming, the orders keep coming. So that's the situation. But the area that we had talked about really since last year, the homeowner markets, residential and homeowner portion of landscape contractor we're making -- we've made tremendous progress, and we're right on track with where we'd expect to be. Do you want to comment specifically on DSO?

Yeah. Yeah, I'll comment on the Red Iron DSO question. We saw significant improvement in the Red Iron DSO in the quarter. In fact, we saw a 46-day improvement from Q1 to Q2. For lawn care, strong retail drove liquidations, and that was coupled with lower shipments to the dealer channel, we're well over halfway through reducing field inventory, as Rick mentioned. And we also understand from Huntington Bank that we are in a similar situation as our industry and faring even a little bit better with the strength of our channel and products.

Very helpful. Thank you.

Thank you. One moment for our next question, please. And it comes from the line of David MacGregor with Longbow Research. Please proceed.

Yes, good morning everyone and congratulations on the strong quarterly results.

Hi, David.

Good morning. I wanted to pick up on your response to Sam's question about just the retail being so strong? And is there any way you can just give us a retail sales growth number for landscape contractor equipment and residential channels, not necessarily just your business, but the overall industry. But just what was retail growth in those two categories in the quarter?

We don't have -- we don't provide that specific information, but given a more normal or slightly positive spring, it's much better than it was last year, and it's really better than the last couple of years. And that's really the biggest driver in bringing it down. Sorry, I can't provide a specific or I don't have a specific number at this point, but new products are really a big part of that growth as well. Obviously, we have some unique situations with our strategies and some of our ships. So Lowe's, for example, through the mass channel has been a big boost to our retail. And the good news, it's really the partnership there, along with our other mass partners. And it's really the strength of our brand, it's the strength of our new products that's helping -- really helping to drive that. So all those things combined really where we believe that we are over-indexing the market at this point.

Okay. Is there any way of quantifying how much benefit the weather was to 2Q? You referenced the fact that you got an earlier start in some of the seasonal markets.

We've looked at the data, and we've had some good discussions about that just over the last couple of days. It is -- it feels much, much better than it did for the last couple of years, but it's actually a little bit closer to a normal kind of spring timing, a little bit better than that. And I think the positive thing for us is relative to the last couple of years where we were at this point, there's very positive moisture situation as we entered the summer season. It was a little bit cooler, a little bit longer in the south and some are very important markets in the Southeast. So that just kind of sets you up for a better situation going into what can be the drier part of the season. So that's been positive. It was a little bit faster warm up this year in the south. And if you hear about the extraordinary heat in the Southwest. The Desert Southwest is not our top areas for turf-related products, with the exception of golf and those types of areas that are aggregated. So it's been positive, but probably closer to long-run normal, certainly that it's been for the last couple of years.

Okay. And then just on unit volumes, you talked about the capacity benefits of the debottlenecking investments that you've made in golf and specialty construction. How much better do shipments get in the second half for golf and Ditch Witch as a consequence of these debottlenecking investments on a year-over-year basis.

Yeah, they would be quite positive, especially relative to the continuous ramp-up that we've seen since last year. So relative to the second half of last year, it would be substantially better.

Last question for me is just on landscape contractor. Just given the average service life and -- in landscape contractor versus some fairly depressed sales trends as of late. You'd have to believe there's some pent-up replacement demand there. What's your best estimate of that deferred replacement demand in this category at this point? And what do you think from a timing standpoint in terms of seeing that come to market?

I think we're seeing that right now. First of all, if you divided that sort of professional product category, there's really not been as much pullback, if you will, over the last year in the true professional science of landscape contractors. They wear the product out. It has to be replaced on a regular cycle. That has not really been as much of an impact. It's really the homeowner portion of that. And what we see, the good news so far is that the homeowners have come back into the buying mode relative to last year, where we saw sort of almost a cliff at the end of this time of year where they just stopped and my theory was that they seem to go traveling or whatever, that's when kind of that spending spiked at the same time. But it's coming back more into a normal mode. And then it's just helped by much better weather and seasonal conditions. So the combination of the two feels much more normal plus.

Great. Got it. Thanks very much, Rick. Good luck.

Thank you.

Thank you. One moment for our next question, and it's coming from Ted Jackson with Northland Securities. Please proceed.

Thanks very much, good morning.

Hi, Ted.

All my questions have kind of been answered. I'm going to ask one, which is around the productivity initiative. We've seen $7.5 million year-to-date with regards to that -- those actions. And I just was curious in terms of maybe providing some color in terms of the activity that you're taking there in terms of streamlining the business, when you see the initiative ramping up and maybe some kind of quantification with regards to kind of the total cost of the initiatives and kind of how it would play out over the coming reporting periods. That would be my first kind of question. Thanks.

Okay. Sure. So the transformational productivity initiatives that we have, we're calling AMP for Amplifying Maximum Productivity, and what we have stated is that we expect this initiative to last three years, so going through the end of 2026, and our plan is to -- or we expect to achieve $100 million in annual cost savings by 2027. So kind of a run rate to get us to the 2027 number. Where we're investing our time and our cost is really in kind of three focus areas, a sustainable supply base. And so that's really focused kind of on materials, and that's very heavily related to our sourcing initiatives. And then we were looking at design to value and also route to market. We've also recently added another work stream in our productivity initiative for working capital, really focusing on inventory and how we can reduce that year-over-year and make a meaningful impact. What we said is that we would probably invest or reinvest as much as 50% of that transformational productivity savings back into the business, whether that be in technology or enabling other productivity or innovation, anything that we can do to gain profitable growth for the enterprise. And you mentioned the cost. We did expect some onetime implementation costs. And year-to-date, we're at $8.3 million, and that's largely been consulting fees. And I'd say we'd expect a similar run rate through the last half of the year as well, Ted. But overall initiative -- I'm Sorry, I was just going to say it's off to a great start.

So would it be fair like if we want to incorporate this into our forecast in terms of the pro forma that we would kind of scale it across for the remainder of '24, but as we go to '25 and kind of what we're seeing with regards to the pro forma adjustments [with date] (ph).

Yeah. We have included our best estimate in our guidance. So any benefits that we expect to achieve in '24 are included in the guidance today.

Okay. Then my next question, you kind of went on it, which is nice to hear the focus on working capital is. As we think about working capital -- and by the way, it was really nice to see the improvement in this quarter. How do we think about how things are within those line items on the balance sheet trend for the remainder of the year? I mean is it -- are we going to continue to see improvements with regards to inventory? And then with regards to the receivables and what you had happen, which is clearly a result of success with the mass channel, is that -- does that like kind of change any of your seasonal dynamics on the receivables front? Or do you assume I'm asking like kind of -- could you help us kind of think through the go forward for both inventory and receivables as we kind of go through the year and what it means for your working capital for whether we exit 2024. That's my last question. Thanks.

Okay. Yes. AR is based on seasonal flow and is typically a bit higher in Q2, and we saw that again this quarter. Our inventory is improving. And we do expect to see that, our most appreciable opportunity to affect working capital is inventory. And we do have that focus on it, a focused effort, I would say, as I mentioned in the AMP work stream, and we'll -- we expect to continue to see that improve throughout the rest of the year.

Okay. Thanks very much and congratulations on the quarter.

All right. Thank you.

Thanks, Ted.

Thank you. Our next question comes from the line of Eric Bosshard with Cleveland Research. Please proeed.

Thanks. A couple of things. First of all, a follow-up, just a clarification. In terms of dealers, landscape contractor dealers, is this business in terms of sell-through, what I heard you say, I just want to make sure is that the sell-through is positive and the homeowner residential through that channel is also positive. Is that the right way directionally to think about how that piece of the business is performing?

That's correct, Eric. Both are positives through the dealer, we are seeing really good retail activity in both areas.

And is that sustainable, where we've sort of digested the shift in the change that took place, and now we're back at a point where you can sustain -- you can sustain sell-through growth in the dealers in those categories. Is that the right way to think about it?

We can sustain. In some cases, we're -- we have additional opportunity as we're ramping up production to continue to supply those areas. Just as you would imagine, with some of our new product introductions, those have been in high demand. So we're still working to meet that demand. But the positive thing is retail drives everything, creates all the opportunities. That's very strong. So it allows us to both adjust field inventory and experience the sell-through in those areas where the inventory is already normalized.

Related to this, you had commented a couple of times that you're more than halfway through the inventory rightsized. And at what point would you expect sell-in would match sell-through in this channel?

I think our original commentary was we thought it would take this year to normalize that. And it's really just a function of the overweight of our second and third quarter for these products. So it's really -- if we're more than halfway through, and we're through the second quarter, we still have the third quarter to do the normalization, and it should set us up to be in good condition as we go into the next selling season. Let's say, the item that will still be a factor this fall is elevated snow inventory. That's a little bit higher than what we would like to see just based on the in-season reorders that didn't happen in this last winter season. So we had some positive snow events in the latter part of the season, it helped a little bit, but our field inventory is still a little bit higher for both the residential and the pro side with BOSS and all that's included in our guidance. So that's all been built in.

And then the other issue is and you commented about mix in residential, which I'm guessing this relates to selling more to Lowe's. What -- and if I'm wrong, you can correct me. What I'm interested in residential is what you're seeing in terms of consumer takeaway. And specifically, you have a breadth of price points and then also the introduction of battery-powered I'm curious how consumer demand, consumer takeaway has shifted this year relative to last year relative to expectations between the various products and price points.

I think it's largely played out as we expected. I think for your -- as you mentioned in the comments, the overall mix of residential, because of the tremendous strength there for the factors we talked about relative to Pro, it is a factor then within the residential segment, there is a mix of profitable -- profitability among the products. And Ryder is the biggest category, and we have a range of pricing in Ryders. We've sold more in kind of an entry mid-level and total mix just based on based on where the demand was the new product introductions and so forth. So that's predictable in our case.

Is that the same dynamic in Walks as it is in Ryder in terms of better success, entry mid?

I think the biggest thing would be sort of the relative impact of Walk versus Ryder, and we had a very strong year so far in Walks. And we've seen a nice uptick in our 60-volt battery segments as well with really strong representation with Lowe’s in particular.

Eric, what we did see, though, the mix had an impact, but our productivity more than offsetting higher material and manufacturing costs we saw in the quarter.

That's helpful. Thank you for that. Thanks. That's all I have.

And we have time for one more question. And it comes from the line of Tom Hayes with CL King. Please proceed.

Hey, good morning, everyone. Thanks for taking my questions.

Hey, Tom.

Rick, maybe quick question on the golf industry. It sounds like it's going in the right direction. Any differences between the three primary segments, the private, semiprivate and public courses, just on spending?

All quite strong, still at this point. It's -- the driver across all of those is golf participation in rounds played. Rounds played can be more variable depending on seasonal timing and so forth, but that's about plus 4% or so far this year, year-to-date through April. So that portion is positive. It affects really all levels of golf for the most prestigious to the municipal course where I might play. So that's the driver, and we don't see a big difference across those at this point.

Okay. Just maybe one more. I think you called out on the press release that the zero-turn mowers continue to be a headwind. I was just wondering what you think needs to occur to turn that around?

The good news is the retail has been very, very strong in that category. So for us, any headwind would just be the adjustment that's taking place in our field inventory. So for us, that means less shipments of those, especially higher-end Zs are more professional [Zs] (ph). That was an intentional part of our plan that we built into the year for this year is to make that adjustment in our field inventories that was built into our plan for the start, continues to be tracking at or ahead of plan at this point.

Okay, I appreciate the color. Thank you.

Okay. Thank you.

Thank you. And this concludes the Q&A session. Ms. Kerekes, please proceed with closing remarks.

Thank you, everyone, for your questions and interest in the Toro Company. We look forward to talking with you again in September to discuss our fiscal 2024 third quarter results.

Thank you, everyone, for attending today's program. You may now disconnect.