Toro Company (TTC) reported its third-quarter 2024 earnings, showcasing a strong performance with an adjusted earnings per share (EPS) of $1.18, significantly exceeding the forecasted $0.9729. The company's consolidated net sales reached $1.16 billion, reflecting a 6.9% increase year-over-year. Despite challenges in some segments, the results underscore Toro's ability to capitalize on growth opportunities, particularly in its Residential Segment, which saw a substantial increase in sales.
Key Takeaways
- Toro Company reported an EPS of $1.18, beating the forecast by 21.2%.
- Consolidated net sales increased by 6.9% year-over-year to $1.16 billion.
- Residential Segment net sales surged by 52.6%, while Professional Segment sales declined slightly.
- The company launched new products, including an electric rotary mower, enhancing its innovative portfolio.
- Despite macroeconomic uncertainties, Toro remains optimistic about future growth.
Company Performance
Toro Company demonstrated robust performance in Q3 2024, with significant year-over-year growth in net sales and EPS. The Residential Segment was a standout, with a 52.6% increase in net sales, driven by strong consumer demand. However, the Professional Segment experienced a slight decline of 1.7%, highlighting mixed results across different areas of the business.
Financial Highlights
- Revenue: $1.16 billion, up 6.9% year-over-year.
- Earnings per share: $1.18, up 24% from the previous year's $0.95.
- Gross margin: 34.8% reported, 35.4% adjusted.
- Free cash flow year-to-date: $270.5 million, an improvement of over $200 million.
Earnings vs. Forecast
Toro Company's EPS of $1.18 surpassed the forecast of $0.9729 by approximately 21.2%. This beat is significant compared to previous quarters, indicating strong operational performance and effective cost management.
Market Reaction
While specific stock data was unavailable, the substantial EPS beat and positive sales growth in key segments likely contributed to a favorable investor sentiment. The lack of stock data precludes detailed analysis, but the market's response to such earnings typically trends positively.
Company Outlook
Looking forward, Toro Company projects full-year net sales growth of around 1%, with expectations for the Residential Segment to outpace the company's average. The adjusted EPS guidance is set between $4.15 and $4.20. The company anticipates normalized field inventories by the end of fiscal 2025, reflecting confidence in overcoming current challenges.
Executive Commentary
CEO Rick Olson emphasized the company's leadership in attractive markets, stating, "We continue to benefit from our strong leadership position in attractive end markets." CFO Angie Drake expressed confidence in achieving significant savings, saying, "We are confident in delivering at least $100 million by F-27." Olson also highlighted positive infrastructure spending trends, "Infrastructure spending remains a positive outlier in the broader construction industry."
Q&A
During the earnings call, analysts inquired about backlog improvements and macroeconomic impacts on consumer behavior. The company acknowledged ongoing backlog challenges in golf and underground construction but noted improvements. Macro (BCBA:BMAm) caution primarily affects homeowner purchases, but demand in other sectors remains strong.
Risks and Challenges
- Supply chain issues could impact future production and inventory levels.
- Market saturation in certain segments may limit growth potential.
- Macroeconomic pressures and consumer caution could affect sales, particularly in the homeowner market.
- Continued backlog in specific areas may hinder immediate operational efficiency.
- Competitive pressures in key markets require strategic innovation and investment.
Full transcript - Toro Co (TTC) Q3 2024:
Towanda, Conference Call Coordinator: Good day, ladies and gentlemen, and welcome to the Tuohr Company's Third Quarter Earnings Conference Call. My name is Towanda, 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 Kerikis, Treasurer and Senior Managing Director of Global Tax and Investor Relations. You may begin.
Julie Kerikis, Treasurer and Senior Managing Director of Global Tax and Investor Relations, Toro Company: 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 3rd 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 Steffens, 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 2, please refer to this morning's earnings release and our investor presentation. With that, I will now turn the call over to Rick.
Rick Olson, Chairman and Chief Executive Officer, Toro Company: Thanks, Julie, and good morning, everyone. Our team executed with discipline and agility in the Q3 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 achieved productivity and net price benefits, while continuing to align production to demand trends.
For the Q3, we delivered a nearly 7% increase in net sales to $1,160,000,000 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 (NYSE:LOW) 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 in our dealer channel and industry wide. As summer progressed, we saw macro factors drive more caution from homeowners and dealers than originally anticipated. These factors included general consumer uncertainty, high interest rates and the current geopolitical environment. This uptick in caution resulted in trade down activity and purchase deferrals, which led to lower than expected shipments of residential and professional segment lawn care products during July.
Even so, we continue to execute on our objective of normalizing dealer field levels for these products and once again made significant progress in both the professional and residential segments. We are now about 80% of the way back to normal for dealer field inventory levels for these products. Moving to the bottom line, we delivered adjusted diluted earnings per share of $1.18 an increase of 24% over last year's $0.95 This increase reflects our progress in driving productivity and manufacturing efficiencies along with positive net price and prudent management of SG and A. Importantly, our free cash flow improved substantially compared to last year, a reflection of our disciplined execution and focus on working capital. Based on our visibility for the remainder of the year and considering the expected continuation of increased caution in our homeowner facing markets, we are revising our full year fiscal 2024 guidance.
Angie will walk through those details shortly. Throughout the quarter, we advanced our enterprise strategic priorities to drive shareholder value for the long term. I'd like to comment specifically on our key priority of driving productivity and operational excellence. As our team did an outstanding job in delivering productivity gains this quarter, we remain on track to deliver at least $100,000,000 of annualized run rate savings by fiscal 2027 from our multi year productivity initiative named AMP (OTC:AMLTF) for amplifying maximum productivity. As we've discussed, we intend to prudently reinvest up to 50% of the savings to further accelerate innovation and long term growth.
As a part of our AMP initiative, we recently held a wide scale supplier summit with more than 100 key suppliers represented. We shared our vision for the future with transformational productivity being an enabler of further innovation, investments and growth. Based on the feedback we've received, suppliers left the summit engaged and excited to partner with us on our product development and productivity objectives. We also made targeted portfolio adjustments this quarter with AMP to further position the company for profitable growth. These include the sale of our Australia based pulp products residential garden watering and irrigation business and the rebranding of our Intimidator and Envy products.
This rebranding allows us to leverage marketing investments and capitalize on the strength of the Spartan brand name. We are already realizing benefits from AMP and we expect these benefits to accelerate over the next 2 years. Importantly, everything we are doing with AMP helps us fuel our existing strategic priorities of accelerating profitable growth, driving productivity and operational excellence and empowering our people. With that, I'll turn the call over to Angie to discuss our financial results and guidance before I return to provide commentary on the outlook for our businesses.
Julie Kerikis, Treasurer and Senior Managing Director of Global Tax and Investor Relations, Toro Company: 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 $1,160,000,000 up 6.9% from Q3 last year. Reported EPS was $1.14 per diluted share compared to a loss of $0.14 in the Q3 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 3rd quarter were $880,900,000 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 Q3 were $165,700,000 compared to $13,000,000 last year. When expressed as a percentage of net sales, earnings for the segment were 18.8% compared to 1.5%. The positive change in profitability was primarily due to last year's non cash impairment charges of $151,300,000 as well as productivity improvements, favorable product mix with the appreciable growth in golf and grass shipments and net price realization. This was partially offset by higher material and manufacturing costs and lower net sales volume. Residential segment net sales for the Q3 were $267,500,000 up 52.6% compared to last year.
The strong growth was primarily driven by higher shipments of products to our mass channel. Residential segment earnings for the quarter were $32,600,000 a substantial increase from $3,800,000 last year. When expressed as a percentage of net sales, earnings for the segment were 12.2%, up significantly from 2.2%. The year over year increase was largely due to net sales leverage, productivity improvements and net price realization, primarily driven by lower floor plan costs. This was partially offset by product mix and higher material and manufacturing costs.
Turning to our operating results for the total company. Our reported and adjusted gross margin were 34.8% 35.4% respectively for the quarter. This compares to 34.4% for both in the same period last year. The increase was primarily due to productivity improvements and net price realizations. This was partially offset by higher materials and manufacturing costs and segment mix with growth weighted to residential.
SG and A expense as a percentage of net sales for the quarter improved slightly to 22%, a 20 basis point improvement over the same period last year. The improvement was primarily driven by net sales leverage and lower marketing costs, partially offset by higher incentive expenses. Operating earnings as a percentage of net sales for the quarter were 12.8% compared to a negative 1.8% in the same period last year. On an adjusted basis, operating earnings as a percentage of net sales were 13.7%, a 150 basis point increase over 12.2%. Interest expense for the quarter was $14,500,000 down from $15,000,000 last year.
The decrease was primarily due to lower average outstanding borrowings enabled by our significant improvement in free cash flows. The reported effective tax rate for the 3rd quarter was 17.3% compared with 47.6% a year ago. The decrease was primarily due to the tax impact related to non cash impairment charges last year combined with a more favorable geographic mix of earnings this year. The adjusted effective tax rate for the 3rd quarter was 18% compared with 19% last year. This also reflects a more favorable geographic mix of earnings.
Turning to our balance sheet. Accounts receivable were $523,300,000 up 36.2% from a year ago, primarily driven by increased shipments to our mass channel as well as payment terms to that channel. This increase was as expected given our strategic partnership with Lowe's, which continues to provide positive momentum within the residential segment. While not a part of our accounts receivable balance, we once again saw significant improvement in Red Iron DSOs, a decrease of about 30 days. This is a reflection of our progress in rebalancing dealer field levels of lawn care products as sell through continues to exceed sell in.
Inventory at the end of Q3 was $1,080,000,000 down 3% compared to last year and slightly lower sequentially from last quarter. The year over year decrease was driven by a reduction in both lawn care equipment finished goods balances and work in process. These reductions were partially offset by higher levels of compact utility loaders as those inventories normalize and higher levels of snow and ice management products as expected given last winter's lack of snowfall. Accounts payable were $437,800,000 up 7% from last year, primarily driven by the timing of material purchases. Year to date free cash flow was $270,500,000 an improvement of over $200,000,000 compared to last year.
As a reminder, the majority of our operating cash flow is typically generated in the second half of our fiscal year based on seasonal flow. We expect that same cadence this year. For the full year, we are confident we will deliver a free cash flow conversion rate of at least 100% based on reported net income. This is significantly higher than the past 2 years and back in alignment with our 10 year historical average. Importantly, our balance sheet remains strong.
Our leverage ratio is within our stated target of 1 to 2 times on a gross basis and we continue to have investment grade credit ratings. This provides financial flexibility to fund investments that drive attractive returns. Our disciplined approach to capital allocation remains unchanged with our first priority to make strategic investments in our business to drive long term profitable growth both organically and through acquisitions. We are acting on this priority with our plan to fund $115,000,000 in capital expenditures during fiscal 2024. This will support new product investments, advanced manufacturing technologies and capacity for growth within our existing footprint.
Our next priority is to return capital to shareholders, both through our regular dividend and share repurchases. We've increased our dividend 6% this year and have consistently grown our dividend payout over time. This demonstrates the conviction we have in our strong and sustainable future cash flows. With respect to share repurchases, we continue to fund repurchases with excess free cash flow while maintaining our leverage goals. We've invested almost $110,000,000 through Q3 to repurchase nearly 1,200,000 shares, while also paying off our outstanding revolver borrowings.
And we plan to continue repurchasing shares in the Q4. This is a reflection of our substantial improvement in cash flow this year, along with our strong conviction in future growth opportunities. As we close out the fiscal year, we continue to expect benefits from the sustained strength in demand and significant order backlogs for underground construction products and golf and grounds equipment. For these businesses, field inventory levels remain lower than ideal and backlog remains elevated, although we continue to make good progress. On a total company basis, order backlog has improved from the $1,970,000,000 balance at fiscal 2023 year end.
It is lower both on a year over year basis and sequentially from last quarter, but still much higher than what we would consider normal. We will provide an updated year end figure in our annual 10 ks filing in December. For both segments, we expect to continue making progress in normalizing field inventories of lawn care and snow products, although levels remained elevated both for us and industry wide. We factored this dynamic into our estimates. We've also factored in expectations for a continuation of the increased macro caution we started seeing in July for our homeowner facing businesses.
With this backdrop and based on our current visibility, we are making some adjustments to our guidance. For the full year, we now expect total company net sales growth of about 1%. For the Professional segment, we now expect full year net sales to be down low single digits, which implies mid teens growth for the 4th quarter. For the Residential segment, we continue to expect net sales to grow at a rate significantly higher than the total company average for the full year. We expect 4th quarter residential net sales to be down low single digits on a year over year basis.
Looking at profitability. We now expect adjusted gross margin and adjusted operating earnings as a percentage of net sales to be slightly lower than last year, a reflection of product mix. Turning to segment profitability. We continue to expect both the Professional and Residential segment earnings margins to be higher than last year on a full year basis. For the Professional segment, we now expect a similar earnings margin to last year when you exclude last year's impairment charges.
For the Residential segment, we expect a high single digit margin for the full year. For the other activities category, we continue to expect higher expense compared to fiscal 2023. This reflects a return to more normal incentive compensation. For the Q4, we expect an expense similar to Q1. With that, we now expect full year adjusted diluted EPS in the range of $4.15 to $4.20 Additionally, for the full year, we continue to expect depreciation and amortization of about $120,000,000 to $130,000,000 and interest expense of about $60,000,000 We now expect an adjusted effective tax rate of about 19.5%, driven by a more favorable geographic mix of earnings.
We continue to build our business for long term profitable growth. This includes prioritizing innovation investments that we believe will deliver outstanding returns, driving sustainable margin expansion with disciplined execution, including our AMP initiative and leveraging the talents of our team and the power of our best in class distribution networks. We are confident in our ability to drive significant benefits and opportunities for all of our stakeholders. With that, I'll turn the call back to Rick.
Rick Olson, Chairman and Chief Executive Officer, Toro Company: 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, 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 initiative 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 multi year 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 golf and grounds, we expect to continue to see their prioritization of equipment and irrigation purchases supported by healthy budgets and new course development.
Worldwide, there are more than 500 significant new and renovation golf projects in the pipeline across 88 countries. And rounds played data continues to reinforce that the golf industry has had a positive reset. For the 1st 6 months of 2024, U. S. Rounds played were 2% ahead of last year's pace, which is notable given 2023 was the highest year of U.
S. Rounds played in history. Our worldwide market leadership position and new product pipeline to address the golf and grounds market is also as strong as ever. This includes our new Groundsmaster E3200 fully electric upfront rotary mower. This machine leverages our proprietary Hypercell battery system to enable increased productivity with significantly quieter operation, 0 exhaust emissions and no compromise on cut quality.
With these sustained strength in orders, we continue to see in our golf and grounds equipment, we expect order backlog to remain higher than normal for this business into fiscal 2025. For landscape contractors, we continue to expect stable retail demand driven by regular replacement activity with some pockets of price sensitivity given the interest rate environment and high field levels across the industry. For homeowners, we expect macro uncertainty will continue to drive caution, including trade down activity given higher interest rates. We expect demand to be driven by regular replacement needs and certainly favorable turf growing conditions would be beneficial. For snow and ice management, pre season sell in demand has been reduced as expected following a second straight season of below average snowfall.
However, contractor budgets are in good shape following a better turf growing season and if more normal snowfall patterns return in fiscal 2025, we would expect in season orders to pick up as well. The overall consensus is climate patterns are positioned to shift from El Nino to La Nina this year. If that happens, it could be more favorable for snow prospects. We continue to strengthen our position in this market with innovative solutions that help contractors achieve great results while reducing labor requirements. This includes our new entry level Scout Snow Raider, the latest addition in our powerful and versatile Sidewalk Warrior lineup.
This new model has garnered much enthusiasm and initial production is already sold out. Before we take questions, I'd like to reiterate why we are so excited about the future and what we see as the greatest growth opportunities as we fulfill our corporate purpose of helping customers enrich the beauty, productivity and sustainability of the land. The opportunities before us are the results not only of our work in fiscal 2024, but the many years of diligence developing our diversified and complementary portfolio of businesses, our leading market positions and our deep customer and channel relationships. First, we are excited about our underground construction business, where we are extremely well positioned as a worldwide market leader with the most comprehensive equipment and brand lineup in the industry. In addition, together with our best in class channel, we have very deep relationships with our customers.
These relationships coupled with the sophisticated technology required are difficult to duplicate. What makes these competitive differentiators even more compelling are the near and long term positive market demand dynamics. As a leader in this space, we are capitalizing on the rapidly growing demand for data communications infrastructure and energy grid modernization as well as the global focus on replacing aging infrastructure. 2nd, much like our underground construction business, our golf business is exciting due to the winning combination of our strong market leadership and long term market fundamentals. Here, we also have deep relationships with our customers and channel partners and a lineup of industry leading products and solutions, including our full suite of reduced and 0 exhaust emission offerings.
Importantly, we have a distinct competitive advantage as the only company to offer both equipment and irrigation solutions for this market and as the worldwide market leader in both. Fueling our growth in golf is the sustained global momentum. We are prepared to capitalize on this opportunity with continued innovation and our best in class service and support network. 3rd, we continue to strengthen our multi brand leadership in the important zero turn mower space. This represents the largest single lawn care category for both our professional and residential segments.
We've enhanced our market leadership position through investments in our innovative product lineup and the strategic development of our independent dealer networks and mass partnerships. Our momentum in this space positions us extremely well for further growth, especially as these markets return to normal strength. 4th, we have a proven ability to leverage our technology and innovation investments across our broad portfolio. This enables the accelerated development of new products that help our customers drive productivity and superior results, while enhancing the Toro Company's competitive advantage and ensuring market leadership into the future. We will continue to drive a return on innovation with prioritized investments in the key technology areas of alternative power, smart, connected and autonomous solutions.
And finally, we have a talented team that is determined to capitalize on all of our opportunities with discipline and build on our long history of delivering consistently strong financial performance. We have the best network of strategically aligned channel partners focused on going above and beyond to serve our customers every day. We have built a strong and agile organization that has been resilient through many macro cycles. We are ready to seize the opportunities that lie ahead to drive value for our customers, our channel partners and our shareholders in both the near and long term. With that, we will open up the call for questions.
Towanda, Conference Call Coordinator: Thank Our first question comes from the line of Tim Wojs with Baird. Your line is open.
Tim Wojs, Analyst, Baird: Hey, everybody. Good morning.
Rick Olson, Chairman and Chief Executive Officer, Toro Company: Hi, Joe. Good morning.
Tim Wojs, Analyst, Baird: 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?
Rick Olson, Chairman and Chief Executive Officer, Toro Company: Yes, sure. I'll take that, Tim. So on the backlog, if you look at by several comparisons, so 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 two 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. So 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, if 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 to be more normalized by the end of 2025. But at this point, we still believe the backlog certainly the backlog will extend into 2025 just for those two businesses where there continues to be extraordinary demand at this point.
Tim Wojs, Analyst, Baird: Okay. Okay. No, that's helpful. Thanks. And then just on the lawn and 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 than next year? Just trying to kind of marry those two things together.
Rick Olson, Chairman and Chief Executive Officer, Toro Company: We I think the number that Angie quoted was 80% of the way at this point in 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 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, 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 customer themselves plus just the dealer restocking at that point of the year, given the macro environment.
Tim Wojs, Analyst, Baird: 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?
Rick Olson, Chairman and Chief Executive Officer, Toro Company: Exactly, yes.
Tim Wojs, Analyst, Baird: Okay. Okay, great. I'll hop back in queue. Thanks for the time.
Rick Olson, Chairman and Chief Executive Officer, Toro Company: Okay. Thank you.
Towanda, Conference Call Coordinator: Please standby for our next question. Our next question comes from the line of Samuel Darcash with Raymond (NS:RYMD) James. Your line is open.
Samuel Darcash, Analyst, Raymond James: Good morning, Rick. Good morning, Angie. How are you?
Rick Olson, Chairman and Chief Executive Officer, Toro Company: Good morning, Tim.
Samuel Darcash, Analyst, Raymond James: Yes, 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?
Rick Olson, Chairman and Chief Executive Officer, Toro Company: 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 0, 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, etcetera, that are a factor, but we've done what we expected to do. We'll be close to getting exactly where we expected to be.
Samuel Darcash, Analyst, Raymond James: 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?
Michael Chieczynski, Analyst, D.A. Davidson and Company: Yes. So it's a
Rick Olson, Chairman and Chief Executive Officer, Toro Company: 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 was well interest rate, there's uncertainty about interest rates, the economy, they talked about recession there for a few weeks.
The political environment, the elections, etcetera, 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 plants are now fulfilling that demand much closer to the rate that it's coming in. We will have year 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 two 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 Q3 with the exception of a very small amount of shipments. We've made the progress in reducing our field inventory and 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's a very positive factor for us along with all of our mass partners.
Samuel Darcash, Analyst, Raymond James: Thank you for that answer. 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?
Julie Kerikis, Treasurer and Senior Managing Director of Global Tax and Investor Relations, Toro Company: I'll take that one, if it's okay, Rick. Really, that was driven by 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 lower, more like 21%, probably lower than 21%, somewhere 20% to 20.5%, but we will provide a little more color on that in December.
Samuel Darcash, Analyst, Raymond James: So international business was not materially different than your plan?
Julie Kerikis, Treasurer and Senior Managing Director of Global Tax and Investor Relations, Toro Company: 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.
Samuel Darcash, Analyst, Raymond James: Got it. Thank you very much.
Rick Olson, Chairman and Chief Executive Officer, Toro Company: Appreciate it.
Towanda, Conference Call Coordinator: Thank you. Thank you. Thank you. Please standby for our next question. Our next question comes from the line of Michael Chieczynski with D.
A. Davidson and Company. Your line is open.
Michael Chieczynski, Analyst, D.A. Davidson and Company: Yes. Hi, good morning. Thanks for taking my questions. I think you mentioned, if I heard this correctly, 500 courses in 88 countries are pursuing projects to improve their facilities on the Gulf 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 book for you last year with the combination of irrigation and equipment projects?
Rick Olson, Chairman and Chief Executive Officer, Toro Company: Sure. Yes. So pretty much any time there's a renovation of the course itself, if it's a 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 that 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 for the irrigation. So by definition, it's both.
Michael Chieczynski, Analyst, D.A. Davidson and Company: Fantastic. And then just on capital allocation, it wasn't really mentioned much in your prepared comments. Could you just update that somehow the M and A market is looking these days? Are there assets for sale? Maybe just kind of your just as to what you're looking at size wise and industry wise?
That will be helpful. Thank you.
Rick Olson, Chairman and Chief Executive Officer, Toro Company: With regard to M and A, as we say, the process never 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. They tend to be adjacencies, product lines, but we're also open to anything that would be in our sphere.
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.
Michael Chieczynski, Analyst, D.A. Davidson and Company: Just to follow-up there, Rick, are there any of the deals you're looking at in the tech space like a left hand again or other similar products or are they all equipment iron?
Rick Olson, Chairman and Chief Executive Officer, Toro Company: 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 yes, that is on our list of just primarily because 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 left hand robotics did for us.
Michael Chieczynski, Analyst, D.A. Davidson and Company: Sure. Thanks. I appreciate that. I'll pass it along.
Rick Olson, Chairman and Chief Executive Officer, Toro Company: Thank you, Mike.
Towanda, Conference Call Coordinator: Please stand by for our next question. Our next question comes from the line of David MacGregor with Longbow Research. Your line is open.
Michael Chieczynski, Analyst, D.A. Davidson and Company: Yes, thanks and good morning everyone.
Tim Wojs, Analyst, Baird: Hi, David.
Rick Olson, Chairman and Chief Executive Officer, Toro Company: Rick, you
Michael Chieczynski, Analyst, D.A. Davidson and Company: made repeated reference to hey, good morning, Mick. You made repeated reference to the slowdown in July. So I guess it kind of begs 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 have flowed forward?
Rick Olson, Chairman and Chief Executive Officer, Toro Company: 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 Q4 and we've already factored in based on the trajectory that we saw that we're seeing in our guidance for the Q4. But still a little bit of caution from homeowners and that's included in what we're providing so far.
Julie Kerikis, Treasurer and Senior Managing Director of Global Tax and Investor Relations, Toro Company: 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% where we're at today.
Michael Chieczynski, Analyst, D.A. Davidson and Company: Right, right. Thanks for that. I guess, I wanted to ask you about productivity because that's starting to come up in discussion more frequently. And I would guess at this stage of the game, we're far enough along in 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, non cash impairment charge, of course, your margins were actually up 50 basis points despite a pretty weak top line performance.
So I guess just given the magnitude of the volume decrementals and the higher raw material costs, productivity improvements must 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?
Julie Kerikis, Treasurer and Senior Managing Director of Global Tax and Investor Relations, Toro Company: 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 three 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 had some portfolio actions in the quarter. You saw the Pope 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 $100,000,000 by F-twenty 7.
Rick Olson, Chairman and Chief Executive Officer, Toro Company: 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 plants gets better. And so manufacturing variance is less of an issue, so that contributes to productivity as well as the specific initiatives that we have through.
Julie Kerikis, Treasurer and Senior Managing Director of Global Tax and Investor Relations, Toro Company: And we would just add that we're also leveraging our SG and A costs. So we've worked hard to control what we can.
Michael Chieczynski, Analyst, D.A. Davidson and Company: Right, right. Okay. Maybe I'll follow-up with
Rick Olson, Chairman and Chief Executive Officer, Toro Company: you a little more on
Michael Chieczynski, Analyst, D.A. Davidson and Company: 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, we've still got some higher contracted steel prices coming off the balance sheet and through the P and L. But can you help us understand just on the timing of the P and 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?
Rick Olson, Chairman and Chief Executive Officer, Toro Company: 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 partner to drive down our costs both through just competitive pricing, but also through partnering with our suppliers to do better on costs. From a steel standpoint, I mean, overall market, we did see an adjustment probably about a year and a half ago or so. And we're in a little bit more of a plateau from a market standpoint. We still have major steel contracts negotiations coming up.
So that's still TBD, but we will obviously be looking to drive as much improvement as possible on those costs.
Julie Kerikis, Treasurer and Senior Managing Director of Global Tax and Investor Relations, Toro Company: Yes. And anything that we've seen there, we've included that in our guidance to the best of our ability.
Michael Chieczynski, Analyst, D.A. Davidson and Company: 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 1st of the year and then it's 90 days to come off the balance sheet? Or can you just help us with the timing?
Rick Olson, Chairman and Chief Executive Officer, Toro Company: That's roughly correct, although there are some continuous processes of negotiation. So it's not everything happens right on a fiscal year basis. There are negotiations through the year.
Michael Chieczynski, Analyst, D.A. Davidson and Company: Okay, great. Well, thanks very much and good luck.
Towanda, Conference Call Coordinator: Thank you. Thank you.
Ted Jackson, Analyst, Northland Capital Markets: Thank you.
Towanda, Conference Call Coordinator: We'll stand by for our next question. Our next question comes from the line of Eric Bosshard with Cleveland Research Company. Your line is open.
Rick Olson, Chairman and Chief Executive Officer, Toro Company: Thank you.
Eric Bosshard, Analyst, Cleveland Research Company: Just a bit of clarity on the change in the revenue guide. As I listen, you walk 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?
Rick Olson, Chairman and Chief Executive Officer, Toro Company: That's the right way to narrow it. That is the biggest factor through the rest of this year.
Michael Chieczynski, Analyst, D.A. Davidson and Company: Okay. And this was an
Eric Bosshard, Analyst, Cleveland Research Company: area that was this homeowner piece of the business has been different and worse than expected for 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 isn't 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?
Rick Olson, Chairman and Chief Executive Officer, Toro Company: Yes. I would say that it's consistent with our expectations going back to a year ago, where we recognized 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 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 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 the reducing inventory as we suggested a year ago, been working on that. Retail's strong shipments have been much lower for us intentionally to right size that field inventory.
Eric Bosshard, Analyst, Cleveland Research Company: Okay. That answers my question. Thank you.
Rick Olson, Chairman and Chief Executive Officer, Toro Company: Okay. Thank you.
Towanda, Conference Call Coordinator: Please standby for our next question. Our next question comes from the line of Ted Jackson with Northland Capital Markets. Your line is open.
Ted Jackson, Analyst, Northland Capital Markets: Good morning. Thanks for taking my question.
Julie Kerikis, Treasurer and Senior Managing Director of Global Tax and Investor Relations, Toro Company: You bet.
Tim Wojs, Analyst, Baird: Good morning.
Michael Chieczynski, Analyst, D.A. Davidson and Company: I want to circle around
Ted Jackson, Analyst, Northland Capital Markets: the inventory on the balance sheet and just kind of want to noodle 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, 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 at, 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 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 is 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.
Julie Kerikis, Treasurer and Senior Managing Director of Global Tax and Investor Relations, Toro Company: So we continue to realign on 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 $25,000,000 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 $75,000,000 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're to get to our ideal levels, we're looking at about $75,000,000 still to go.
Ted Jackson, Analyst, Northland Capital Markets: And then if I could ask one more question. And it's really more not even a question, it's just more of a kind of some commentary. This morning, Callaway and Topgolf announced that 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-nineteen. And I know that the golf business for you is exceptionally strong and you continue to comment yourself that rounds played are 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 figured that out. And that's it for me.
Rick Olson, Chairman and Chief Executive Officer, Toro Company: The certainly, it's an adjacency. It's a little bit different than our golf course business. And I know that one of the factors is 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 one of these forms, even some of these social putting places that it does increase your interest in playing golf on a grass golf course and that's good for us.
Ted Jackson, Analyst, Northland Capital Markets: Okay. Well, thanks for taking my questions. And by the way, congratulations on the cash flow generation for the quarter. It was impressive.
Julie Kerikis, Treasurer and Senior Managing Director of Global Tax and Investor Relations, Toro Company: Thank you. Thanks.
Towanda, Conference Call Coordinator: Thank you. 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.
Julie Kerikis, Treasurer and Senior Managing Director of Global Tax and Investor Relations, Toro Company: Thank you, Towanda, and thank you, everyone, for your questions and interest in The Toro Company (NYSE:TTC). We look forward to talking with you again in December to discuss our fiscal 2024 Q4 and full year results.
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