Good day, ladies and gentlemen, and welcome to The Toro Company's Third Quarter Earnings Conference Call. My name is Towanda, 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. You may begin.

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 third 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 of 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 executed with discipline and agility in the third quarter as we continue to position the company for a strong future by advancing our key strategic priorities of accelerating profitable growth, driving productivity and operational excellence and empowering our people. Our team delivered top and bottom line growth in a very dynamic environment, which included continued strength in our businesses with elevated order backlog, along with an uptick in caution across Homeowner facing businesses. We drove sales growth by capitalizing on an ever-expanding portfolio of innovative products that solve our customers' most pressing needs, coupled with our best-in-class distribution networks. We also drove improved profitability as we achieve productivity and net price benefits while continuing to align production to demand trends. For the third quarter, we delivered a nearly 7% increase in net sales to $1.16 billion. Our Residential segment grew 53%, driven by increased shipments to our mass channel as expected, following aggressive destocking by that channel last year, coupled with the strategic addition of Lowe's this year. The residential segment continued to benefit from the strength of The Toro brand, successful new product introductions and better weather conditions compared to last year. Within our Professional segment, we delivered net sales growth in our underground construction and golf and grounds businesses where strong demand is keeping order backlog at high levels. We successfully drove increased output within our existing manufacturing footprint to address this sustained demand and best serve our customers. In doing so, we continue to improve backlog but still expect elevated levels for these businesses heading into next fiscal year, given the influx of new orders. This strength was offset by lower shipments of snow and ice management products and contractor-grade zero-turn mowers. This was expected given elevated field inventories…

Thank you, Rick, and good morning, everyone. We were pleased to drive productivity and price benefits in the quarter and made progress in addressing both order backlog and field inventories. While shipments of lawn care products were impacted by homeowner and dealer caution, we are confident in the strength of our market share and are well positioned for the future. Consolidated net sales for the quarter were $1.16 billion, up 6.9% from Q3 last year. Reported EPS was $1.14 per diluted share compared to a loss of $0.14 in the third quarter of last year. Adjusted EPS was $1.18 per diluted share, up 24% from $0.95. Now to the segment results. Professional segment net sales for the third quarter were $880.9 million, down 1.7% year-over-year. This decrease was primarily driven by lower shipments of snow and ice management products and lawn care equipment as we work to reduce field inventories and lower shipments of compact utility loaders with the replenishment of field levels as a result of improved output in recent quarters. This was partially offset by higher shipments of golf and grounds products and underground construction equipment as we continue to address the robust demand and significant open orders for these businesses. We also saw net price realization in the quarter. Professional segment earnings for the third quarter were $165.7 million compared to $13 million last year. When expressed as a percentage of net sales, earnings for this segment were 18.8% compared to 1.5%. The positive change in profitability was primarily due to last year's noncash impairment charges of $151.3 million as well as productivity improvements, favorable product mix with the appreciable growth in golf and ground shipments and net price realization. This was partially offset by higher material and manufacturing costs and lower net sales volume. Residential segment…

Thank you, Angie. Our business fundamentals remain strong, and we continue to execute with discipline. For our businesses with sustained strength in demand and elevated backlog and we are successfully driving increased output within our manufacturing footprint. For our businesses that are experiencing a near-term increase in caution driven by macro factors, we expect to be very well positioned as those markets recover. We continue to benefit from our strong leadership position in attractive end markets our ever-expanding suite of innovative solutions that perform necessary work with regular replacement cycles and our deep customer and channel relationships. And importantly, our team is executing well driving productivity and operational efficiency through our AMP initiatives and flexing production to align with market conditions and better serve our customers. Looking ahead, we are keeping 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 robust and order backlog to remain elevated heading into fiscal 2025. There is a very positive runway for projects to address global infrastructure needs, including communications, utilities and data centers. These projects are supported by both public and private multiyear spending. Infrastructure spending remains a positive outlier in the broader construction industry with strong growth forecasted for the foreseeable future. For specialty construction markets, which include our Toro Dingo and Ditch Witch SK lines of compact utility loaders, we are seeing a return to more typical patterns as supply and demand have come into balance with improved lead times. For rental markets, which are meaningful to our specialty construction business, expectations are for a return to mid-single-digit growth next year following 3 years of double-digit growth. As we discussed last quarter, our order backlog for compact utility loaders has normalized as expected. For…

[Operator Instructions] Our first question comes from the line of Tim Wojs with Baird.

I guess -- maybe just my first question on the backlog. If you could maybe give us just a little bit of context. I know you probably won't give us a specific number, but just maybe a little bit of context kind of relatively where the backlog exited the quarter. And then any sort of kind of context around orders like is book-to-bill over 1 within golf, underground, those types of things.

Yes, sure. I'll take that, Tim. So on the backlog, if you look at by several comparisons if you look relative to the end of last year, we've made improvements in the backlog reduced it. If you look at year-over-year, the backlog is down. And if you look sequentially, the backlog is down. The -- it's really concentrated in the 2 areas that we've talked about, the golf and grounds and the underground areas. . And the reason we have not cleared the backlog is because of the intake of orders for the orders in those businesses continue to be extremely strong. From a factory output standpoint, we've made tremendous progress this year. We are at certainly pre-pandemic levels of production, that's not record production in those plants right now. So the momentum in both of those businesses is tremendous at this point. And that's really the reason for the continued larger backlog position. We do expect for both of those general businesses for the backlog be more normalized by the end of '25. But at this point, we still believe the backlog -- certainly the backlog will extend into '25 just for those 2 businesses, where there continues to be extraordinary demand at this point.

Okay. Okay. No, that's helpful. And then just on the Lawn & Garden or the landscape business, could you just help us tie the comments together around just kind of increased macro caution there, but also kind of getting through the channel inventory. I guess, do you think you're going to land kind of in the same inventory position exiting the season and you're just taking production down to get there? Or is it -- hey, we'll probably have a little bit higher channel inventory exiting the year, but it's still a lot more manageable to next year? Just trying to kind of marry those 2 things together.

We -- I think the number that Angie quoted was 80% of the way at this point and managing that field inventory down. The caution that we saw was from homeowners, especially on larger ticket items, a little bit of trade down. So we saw a continued strength on residential mass was tremendous in the quarter. But on the higher ticket items that tend to go through our dealer network, some of which were the inventory that we're managing down. Just a little bit of caution coming in, and especially in July in the very latter part of our quarter, is what caused that slowdown. And it's really a combination of the end customers themselves, plus just the dealer restocking at that point of the year given the macro environment.

Okay. And I guess within Pro in the quarter, was the shortfall kind of relative to your guidance, specifically the landscape business? And was it really kind of tied to the weaker July shipments?

Exactly, yes.

Our next question comes from the line of Samuel Darkatsh with Raymond James.

Just a follow-on question to what Tim asked. I don't know if it was directly answered, but I think you all were looking to have normalized field inventories and ostensibly Red Iron DSOs by the end of the fiscal year. Are you still on track to do that specifically?

We're on track, and we're at 80%. We still have some of the year left to go. We may just be slightly not back to zero, but absolutely nothing like where we started this year. So relative to where we started this year by far closer to normal. Yes. We've made tremendous progress, and it's really a combination of strong retail in those businesses, drawing down our inventory. There's relatively higher general inventory from competitors, et cetera, that are a factor, but we've done what we expected to do. We'll be close to getting exactly where we expect it to be.

Got you. And then last quarter, Rick, you indicated at least an early expectation for kind of mid-single-digit organic sales growth for next year. I know you're not going to be formally giving guidance for next year for a bit. But if you could update us at least on what your thinking is for next year's sales growth and how to unpack that, maybe give a more specific framework as to what gives you confidence in your projections as it stands?

So it's a little bit similar to my -- the previous response. If you think about, I guess, the word that comes to mind is cautiously optimistic about next year. We have high confidence in the things that we're doing to position ourselves for growth next year. And the caution part is just mainly from a macro standpoint. And that was really the driver in July is the discussion as well, interest rate, there's uncertainty about interest rates, the economy. They talked about a recession there for a few weeks. The political environment, the elections, et cetera, some of those we know will be behind us. So those are -- that's on the cautious side. But from our side, we expect golf and grounds to continue to be very strong, has tremendous momentum. The underground business continues to have a long runway in terms of growth for us. And our plans are now fulfilling that demand much closer to the rate that it's coming in. We'll have a year or 2 with Lowe's as part of our general mass strategy that's honestly, it's at record levels this year from a mass standpoint, if you look across all of our partners in that category. Snow. I mean, just keep in mind, this is a time out year for snow because of the last 2 seasons. So if you have anything close to a normal snow season this year, that's going to be a positive for us the field was already stocked as we came into the season. So that was completely missing from our results in the third quarter with the exception of a very small amount of shipments. We've made the progress in reducing our field inventory in those lawn care categories that go through our dealers. Incidentally, the contractor customers have continued to be strong. It's really the homeowners where the caution has been and where that adjustment has taken place. And then just back to Lowe's, we will have the benefit of 12 months of business with Lowe's versus 10. We'll be getting into the snow season with them, and that that that's a very positive factor for us, along with all of our mass partners.

My final question real quick. Again, related to your original expectations for the quarter, maybe this is too fine a point, but the change in tax rate from 21 to 19.5. I guess that implies that the international business was considerably less robust than you thought. Was that the primary driver of the negative variance, Rick?

I'll take that one, if it's okay, Rick. Really, that was driven by a favorable geographic mix of earnings. So both foreign and some state tax mix, Sam. And then we also did a transfer pricing study that helped us a little bit there. If we think about lowering that for the year, but next year, we also expect a lower, more like 21%, probably lower than 21%, somewhere 20% to 20.5%, but we'll provide a little more color on that in December.

So International business was not materially different than your plan?

It was not. It has some of the same impacts that we saw that Rick talked about on the residential and obviously, the snow side of the business and the lawn care, but yes, mostly due to transfer pricing.

Our next question comes from the line of Michael Shlisky with D.A. Davidson & Company.

I think you mentioned, if I heard this correctly, 500 courses in 88 countries are pursuing projects to improve their facilities on the golf side. Could you maybe share with us whether that is a mix -- there's a large mix of irrigation in there? Or are they packages of both combined or just the equipment? Just give us a sense as to the kind of opportunity that Toro could get versus, let's say, how this looked to last year with the combination of irrigation and equipment projects.

Sure. Yes. So pretty much any time there's a renovation of the course itself, if it's reshaping or improving greens or expansion or reconfiguration, it's just, by definition, automatically in irrigation projects because that all gets torn up. There are also -- I don't think actually even at that 500 includes just pure irrigation upgrades. So this would be major -- either major renovations, expansions or brand-new golf that involve moving dirt. But in every case of the 500, it's impossible to touch a golf course without doing something to the irrigation. So by definition, it's both. .

Fantastic. And then just on capital allocation, it wasn't really mentioned much in your prepared comments because you update us on how the M&A market is looking these days other assets for sale? Maybe just kind of just what you're looking at size was industry-wide, that would be helpful.

With regard to M&A, as we said, the process number stops, we're always building relationships, and that continues. And our capital allocations remain the same as you can see in our investor deck, but we're always looking for opportunities that would enhance our current customer focus areas or be new opportunities. It tend to be adjacencies and product lines, but we're also open to anything that would be in our spear. We just -- we do want to -- we insist on maintaining the discipline that we have about making those selections and making sure that they enhance shareholder value is really the key for us. And why we are very discriminating about those.

Just to follow up there, Rick, are there any of the deals looking at in the tech space like a left-hand again or other [summers] or are they all equipment iron?

As a general category, technology is definitely one that we're always interested in. They tend to be smaller acquisitions that might be more entrepreneurial, but that is on our list of just primarily because of the way that we can leverage our technology across different areas. So that makes them attractive, but they tend to be small but can have a huge impact just like what can Robotics did for us.

Our next question comes from the line of David MacGregor with Longbow Research.

Rick, may be repeated reference to -- you made repeated reference to the slowdown in July. So I guess it kind of got bets the question about August. And if you can help us with kind of what we're seeing in August and how that weakness in July may flow forward?

Yes. August, I think still a little bit of caution, but probably a bit more normalized, I would say. And we've included our expectations based on what we see in our guidance for the rest of the year. It's a -- we obviously knew that snow was not going to be a factor for the fourth quarter. And we've already factored in based on the trajectory that we saw -- that we're seeing in our guidance for the fourth quarter. But still a little bit of caution from homeowners. And that's included in what we're providing so far.

Yes, I'd say we still expect to see that strong demand from underground and golf and grounds as well as we look forward. And it really positions us well for '25 we think, where we're at today.

Right. Right. I guess I wanted to ask you about productivity because that's starting to come up in discussion more frequently and we guess at this stage of the game, we're far enough along the AMP program that maybe the benefits are exceeding the upfront sort of investment costs. But if you look at the professional segment, adjusting for the year ago, noncash impairment charge, of course, your margins were actually up 50 basis points, it's probably a pretty weak top line performance. So I guess just given the magnitude of the volume decrementals and the higher raw material costs and productivity improvements, most have been pretty substantial. Can you just talk about where you are on AMP and where you are in productivity and how we should be modeling that going forward as a good guy?

Sure. Yes. Let me first start with just kind of the progress we made on AMP in Q3. We made some great progress. So we continue to identify opportunities for synergies and work alongside that team. But the 3 notable highlights that we had in the quarter were the supplier summit that Rick mentioned in the prepared remarks, we had about 100 key suppliers in. And they left here, very excited about their opportunity to partner with us on our growth aspirations. We also have some portfolio actions in the quarter. You saw the Poke divestiture. That is included in the residential segment. You see that in other income in the residential segment. And then we have some actions that we took to drive future synergies with our Spartan brand, and you'll see that in the professional segment. Overall, the rest of the expenses with our transformational office and some of the personnel associated with that and consulting expenses are sitting in other activities, David. But overall, productivity continues to be a great project for us. We continue to focus on that, and we're confident in delivering that at least $100 million by F '27.

David, I would just add -- David, I would just add, as we talked about with particularly our professional business in the underground golf and grounds areas, as those plants operate at a higher level, it really creates the opportunity to work on productivity. The absorption of the plant gets better. And so manufacturing variances left some initiatives. So that contributes to productivity as well as the specific initiatives that we have through AMP.

And we would just add that we're also leveraging our SG&A costs. So we've worked hard to control what we can.

Right. Great. Okay. Maybe I'll follow up with you a little more on that offline. But just one more if I could. And just -- you talked about material costs were higher in the quarter in both segments. Obviously, you've still got some higher contracted steel prices coming off the balance sheet and the P&L. But can you help us understand just on the timing of the P&L benefits from lower steel costs? When do we start to see that? Is it -- are we waiting for a contract reset at the beginning of the year and then a 90-day lag for it to come off the balance sheet or just how should we be thinking about timing around that, please?

Yes. With regard to commodity costs in general. I think that the biggest focus for us is actually an offshoot of our AMP initiative to work with our suppliers and partners to drive down our costs, both through just competitive pricing, but also through partnering with our suppliers to do better on cost. From a steel standpoint, I mean overall market, we did see an adjustment probably about 1.5 years ago or so, and we're in a little bit more of a plateau from a market standpoint. We still have major steel contract negotiations coming up. So that's still TBD, but we'll obviously be looking to drive as much improvement as possible on those costs.

Yes. And anything that we've seen there, we've included that in our guidance to the best of our ability.

Right. But I guess what I'm trying to really understand is just the timing. And so let's stand back from whether it's up or down and just whatever it is, the timing. Do we see that kind of a contract reset at calendar first of the year and then it's 90 days to come off the balance sheet? Or can you just help us with the timing?

That's roughly correct, although there are some continuous processes on negotiations. So it's not everything happens right on a fiscal year basis. There are negotiations through the year.

Our next question comes from the line of Eric Bosshard with Cleveland Research Company.

Just a bit of clarity on the change in the revenue guide. As I listen, you walked through all this, and there's a lot of strength in backlog and the turf growing season. There's a whole number of things going well. It seems like narrowly this is dealer sell-through and dealer orders that are homeowner driven. Is that the right way to narrow it? Or would you narrow it differently than that?

That's the right way to narrow it. That is the biggest factor through the rest of this year.

Okay. And this was an area that was -- this homeowner piece of the business has been different and worse than expected the last 15 months. Is it incrementally worse now? Was there an assumption that it was stabilizing or getting better? I'm just trying to figure out, this is a the first time we've heard about that piece of the business. I'm just trying to figure out what's different now here in the back half than either the trend or the expectation and why?

Yes. I would say that it's consistent with our expectations going back to a year ago, where we recognize based on a significant slowdown in the market at that time. And dealers coming off of 3 years where they didn't have products and had built up inventory that we needed to go through an inventory adjustment. And we have been -- that's what we've been working on for the last year. And we've made tremendous progress. We are close to being on track with our inventory reduction plan. I think we've quoted 80%, still have a few months to go in the year. And so that's really what the factor is. We're acknowledging and it's obviously seen in our revenue that there was caution that came into our customers in July and shared with our dealers about taking stock at this time of the year. That's -- the trajectory changed a little bit at the end of the year. But this is, again, the end of the summer season and much of our selling area. So it's not unusual for both customers and dealers to make decisions. It wasn't -- that's really where the factor came from. So we've been on track with reducing inventory as we suggested a year ago, been working on that. Retail, strong shipments have been much lower for us intentionally to right-sized that field inventory.

Our next question comes from the line of Ted Jackson with Northland Capital Markets.

I want to circle around inventory on the balance sheet and just kind of move around it for a bit. You're doing a good job in terms of kind of working through that. When I think about your inventory on the balance sheet and play that out over the next 12 to 18 months. And first of all is, I would expect it to eventually trend itself down to a more normal level. So my first question is, when you look at your inventory, let's say, turns or days basis, what would your definition of normal be? And then behind that is, am I correct to assume that glove in hand in terms of bringing down that inventory level on your balance sheet is you bringing down the backlog that you have with regards to underground construction and golf, point being that you're seeing such strength in orders that you have you have this amount of inventory because you've got all those businesses, you've got to kind of work through. So -- and then behind that, even as kind of -- at what point do you think you get to where that kind of normalized level is based upon, say, terms or days? And so that's my question.

So we continue to realign our inventory Ted, and we've had a sharp focus, as you know, on that all year long. We did make really good progress in the quarter. So we're down about $25 million sequentially some of that driven by WIP. So to your point on increasing output, some of that inventory is sitting in WIP. So that we can address that backlog for our customers. And we've made great progress. So we've probably about $75 million to go. We talked last quarter about kind of heading in the right direction and where we wanted our inventory dollars to be. So I'd say we are -- to get to our ideal levels, we're looking at about $75 million still to go.

And then if I could ask one more question, and it's more not even a question, it's just more of a kind of some commentary. This morning, Callaway and Topgolf announced, there's kind of a separation. And the rationale behind it is that Topgolf has had some call it, performance issues as we move past COVID-19. And I know that the golf business for you is exceptionally strong and you continue to comment yourself that rounds played or up and everything. But in the past, it's also been commented that what one of the underlying drivers that is the bringing in of new golfers through something like Topgolf. Is there anything to read with regards to what's going on, on that side of the business with regards to Topgolf in terms of kind of a longer-term, just figure that ask. That's it for me.

The -- certainly, the adjacency, it's a little bit different than our golf course business. And I know that one of the factors is that there are more players in that particular field right now just because of the strength of golf. So I haven't had a chance to look at the information that you're looking at. But what it does reflect is just the overall interest level in the game of golf and continued growth in all forms, on-course, off-course, and increasing data that says if you play off course in 1 of these forms, even on some of these so full hunting places that it does increase your interest in playing golf on a grass of course, and that's good for us.

Congratulations on the cash flow generation for the quarter. It was impressive.

Ladies and gentlemen, this concludes the question-and-answer session. I would now like to turn the call back over to Julie. Please proceed with closing remarks.

Thank you, Towanda, and thank you, everyone, for your questions and interest in The Toro Company. We look forward to talking with you again in December to discuss our fiscal 2024 fourth quarter and full year results.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Everyone, have a good day.