Q4 2019 Earnings Call
Start followed by the zero and a coordinator we'll be happy to assist you.
As a reminder, this conference is being recorded for replay purposes, I would now like to turn the presentation over to your hosts for today's conference Nicholas Roads Director of Investor Relations for the Toro Company. Please proceed mr. roads.
Thank you and good morning or earnings release was issued this morning by business wire and a copy of the earnings release can be found in the Investor information section of our website the Toro company Dotcom.
On our call today, or recalls and chairman and Chief Executive Officer, Rene Peterson, Vice President Treasurer, and Chief Financial Officer.
We could we begin with our customary forward looking statement policy. During this call. We will make forward looking statements regarding our business and future financial and operating results.
Youre, all aware of the inherent difficulties risks and uncertainties and making predictive statements our earnings release as well as our SEC filings details some of the important risk factors that may cause our actual results to differ materially from those in our predictions.
Please note that we do not have a duty to update our forward looking statement.
In addition, during this call we will reference certain non-GAAP financial measures reconciliations of historical non-GAAP financial measures to reported GAAP financial measures can be found and our earnings release or on our website.
The company believes these measures may be useful in performing meaningful comparisons of past and present operating results to understand the performance of its ongoing operations and help management views the business.
Such non-GAAP financial measures should not be considered superior to as a substitute for or as an alternative to and should be considered in conjunction with the GAAP financial measures presented and our earnings release and this call with that I will now turn the call over to Rick.
Thanks, and good morning.
Thanks to the dedicated efforts of our employees and global Channel partners. We delivered strong 2019 results that included record net sales and earnings per share.
Results were primarily driven by the transformational Charles Machine works acquisition strong demand for boss professional store and ice management equipment solid residential snow thrower sales and positive contributions from our landscape contractor and specialty construction businesses.
In the context of weather related headwinds and trade policy uncertainty, we delivered on our financial guidance.
We met our net sales guidance and we're at the high end of our adjusted earnings per earnings per share expectations for the year.
For the full year, we generated record net sales and exceeded the $3 billion Mark for the first time.
We also delivered earnings per share of $3 up 12.4% over prior year.
In a year, where we closed our largest acquisition we were still able to return cash to shareholders, while investing in our people productivity and future profitable growth.
Turning to our core operating performance for the year, our professional segment generated revenue of $2.4 billion, reflecting incremental contributions from the Charles machine works acquisition as well as strong retail demand and new product introductions from boss, Exmark, and our rental and specialty construction business.
And the second quarter, we completed the acquisition of Charles Machine works, our market leader with products covering the full lifecycle of underground pipe and cable. This includes horizontal directional drills walk and ride Trenchers compact utility loader is vacuum excavators asset locators and pipe rehabilitation such.
Loosens.
With these enhanced underground construction capabilities, we can can better provides services to our customers, who profitably while profitably and purposefully growing our business.
Charles Machine works through its family of businesses with I counted comic brands, such as ditch, which American augers, Trencor subside hammerhead and radius generated strong incremental revenue.
We introduced new products, including the ditch, which grew 24 directional drill and S.K. 3000 stand on compact utility loader.
Customers are enthusiastic about these new products as we saw at two key recent industry Expos.
Additionally, hammerhead the Trenchless pipe rehabilitation solution provider launch the Blue light Levy cured in place lining system in North America.
We're excited by this advanced technology and its growth potential.
Lastly, our Charles Machine works integration continues to progress well.
We have retained top talent and are on track to achieve or exceed expected synergies.
Moving to our legacy businesses key boss milestones in 2019 included record revenue due to strong demand for snow equipment and parts.
This resulted from late heavy snowfalls last winter and pre season bookings for the current selling season.
In addition, we saw increased shipments of our new snow operator.
Customers appreciate the productivity gains there achieving with this new product.
It turns a mall type person job of plowing insulting sidewalks into a one person operation.
Applaud the effort and focus of the boss team.
This business has been a strong performer and has been growing above the company average since its acquisition in 2014.
Exmark sales increased for the year driven by several new exciting product introductions as includes the new Star US stand on zero turn mowers, and new lawn solutions products from ours, the turf line of Sprayers, Spreaders and Air Raiders.
The Z turf line originated from our LP Rich acquisition.
Our rental and specialty construction business also posted strong results. This reflected the introduction of the dingo, TX sell 2000 compact utility loader and strong channel demand for the Dingo, TX 1000.
Additionally, we saw strong rental channel bookings in the back half of the year.
At the recent international construction and utility equipment acquisition, we received positive customer feedback on our new Trx walk behind Trencher family.
These products offered core growth innovative Intel a tranche technology and intuitive feature that automatically adjust track speed based on trenching condition.
Turning to our residential segment, we had positive growth growth for the year with increased snow thrower sales to both mass retail and dealer partners.
Heavy snowfall across the Midwest last spring and pre season selling during Q4 contributed to the strong performance.
We also saw productivity benefits, some pricing actions offset higher input costs.
New introductions were positively received in the year and included the redesign power clear and power Matt Snow throwers. We also had good customer feedback on our newly launched suite of Flex force lithium ion battery powered products with all season capability from mode to snow.
The residential team's focus on innovation productivity people and channel should position us well in this important segment.
Next I'd like to share updates on several strong strategic enterprise investments.
First we are focused on key emerging technology areas that include alternative energy products that use battery and hybrid power.
Smart connected products and autonomous technologies.
Progress is on track in each of these areas and we have established product roadmaps apps that give us confidence that these investments can support future growth.
Second in addition to our continued lean investments we are focused on several incremental productivity initiatives to fund future growth.
These include investments in manufacturing automation robotics and capacity expansion and investments in automation in our distribution centers.
Third we are making capability investments to better support our business needs. For example, we've established a technology acceleration centre in India.
This strategic hub augments, our current new product teams in software engineering and supports the development of smart connected products.
Additionally, we are implementing integrated business planning capabilities to more effectively align our business plans and resources with desired outcomes.
We'll continue to make investments in innovation and technology to ensure our leadership in the marketplace.
In summary, we delivered strong performance for the year invested in our people and our business to drive innovation and productivity returned cash to shareholders and complemented our organic growth with strategic acquisitions.
Ill now turn the call over to Rene for a more detailed discussion of our financial results.
Thank you reckon good morning, everyone.
We have reported revenue of $3.138 billion in 2019, 19.8% increase from 2018.
This was largely driven by strong professional segment revenue led by the Charles Machine works acquisition.
Boss snow and ice products and Exmark branded turf equipment.
Diluted EPS totaled $2.53 for the full year compared to $2.50 in 2018.
Adjusted diluted EPS increased 12.4% to $3.
For the quarter revenue increased to $734.4 million, primarily driven by the Charles Machine works acquisition box product sales and channel demand for new golf product introductions in the quarter.
These include the real math green faster and rail Master Mahler's.
And our cross vehicles.
Diluted EPS was 35 cents compared to 36 cents last year.
Adjusted diluted EPS increased 50% to 48 cents.
For the year professional segment net sales increased 25.5% to $2.443 billion.
For the fourth quarter professional segment net sales increased 46.9% to $588.2 million.
Sales growth was mainly driven by the acquisition of Charles Machine works.
Which added incremental sales of $465.2 million for the year and $194.7 million for the quarter.
Excluding the Charles Machine works acquisition legacy professional segment sales were up 1.6% for the year.
Professional segment earnings for 2018 were $380.9 million compared with $399.8 million in the same period last year.
Primarily reflecting higher expenses related to the Charles machine works acquisition.
This included onetime purchase accounting adjustments.
And the impact of our strategic decision to wind down the Toro branded underground construction portfolio in the third quarter.
Professional segment earnings for the fourth quarter were $61.2 million essentially flat with the fourth quarter of last year.
Residential segment net sales for 2019 were up 1% to $661.3 million.
Reflecting higher net sales of walk power mowers Snow throwers Empire.
For the fourth quarter residential segment net sales increased 1.8% to $135.7 million.
Primarily due to strong sales.
Our product.
Residential segment earnings for 2019 were up 0.5%.
$65.2 million.
Residential segment earnings for the fourth quarter were up 104.7%.
To $13.9 million.
Largely as a result on pricing and productivity initiatives.
Moving to our operating results.
Reported gross margin for 2019 was 33.4%.
Fine of 250 basis points over the prior year.
This was mainly a result, a purchase accounting charges associated with the Charles Machine course acquisition and the unfavorable impact of higher commodity and tariff related costs for the year.
Excluding the charges machine works acquisition related impacts and other nonrecurring items.
Adjusted gross margin was 35.1% a decrease of 80 basis points over the prior year.
For the fourth quarter gross margin increased to 33.4% from 33.2% in the prior period.
As the impact from acquisition related charges was offset by positive effects from pricing actions at lower year over year commodity and freight costs.
Adjusted gross margin increased 130 basis points to 34.5% in the quarter.
For fiscal 2020, we expect to see gross margin improvement.
SGN expense as a percent of sales increased 130 basis points for the year.
Primarily due to the acquisition of Charles Machine marks.
For the quarter SJ expense as a percent of sales increased 230 basis points.
Reflecting acquisition and integration related expenditures.
And higher intangible amortization related to the Charles Machine works acquisition.
Increased warranty claims and several of our businesses.
And growth in engineering expense for new product development.
As a result for the year, our reported operating earnings as a percentage sales were 10.4%.
Compared with 14.2% in 2018.
Adjusted operating earnings as a percent of net sales were 12.9% for the year.
Fourth quarter reported operating earnings as a percent of sales were 5.9% compared with 8% a year ago.
For the quarter adjusted operating earnings as a percent of sales were 8.4%.
Interest expense increased by $9.7 million for the year and by $3.5 million for the quarter.
These increases were due to the additional debt to fund the child machine works acquisition.
Net other income was up $7.5 million for the fiscal year, largely due to realized gains on actuarial valuation change change changes for our pension and postretirement plans.
And higher earnings from our equity investment in Red Iron.
For fiscal 2020, we expect net other income to be about $13 million.
Which is approximately 50% lower than fiscal 2019.
The largest driver of this decrease is the realized gain on the actuarial valuation changes in fiscal 2019, which is not expected to repeat in fiscal 2020.
In addition, we have negotiated new terms with our inventory finance partner beginning in fiscal 2020 that will result in higher net sales and lower other income from our equity investment in Red Iron.
The reported effective tax rate was 14.9% and 12.4% for the full year and fourth quarter respectively.
The adjusted effective tax rate for the full year and the quarter were 19.3 and 17.7% respectively.
For fiscal 2020, we expect an adjusted effective tax rate of about 20.5%.
Turning to the balance sheet and cash flow.
We ended the quarter with $151.8 million of cash and cash equivalents.
And $700.8 million of debt.
Our balance sheet continues to provide us with flexibility to invest in innovation acquisitions and productivity initiatives, while returning value to shareholders.
As expected our working capital increased as of yearend due to the inclusion of Charles Machine works and we saw increases in inventory payables and receivables.
We expect higher depreciation and amortization as a result, or the Charles machine works acquisition of about $95 million for fiscal 2020.
Capital expenditures are estimated to be about $100 million.
Free cash flow conversion was about 89% for the year towards the high end of our guidance range of 80% to 90%.
In fiscal 2020, we expect free cash flow conversion to be about 100%.
We remain focused and disciplined with our capital allocation strategy.
In 2019, we completed the Charles Machine works the acquisition invested over 200 million in R&D and capital expenditures.
Repurchased $20 million of Toro stock and paid $96 million in dividends.
The strength of our business is funding investments in innovation productivity and growth while also returning value to shareholders.
We increased our quarterly dividend by 11.1% for fiscal 2020 and continue to have ample capacity under our authorization.
We remain committed to executing on our disciplined capital allocation strategy going forward.
Ill now turn the call back to Rexford comments regarding our outlook.
Thanks Ray.
Building on the record performance in 2019, our 2020 guidance reflects a full year of Charles machine works anticipated volume growth continued product introductions and additional productivity gains.
Total company revenue for 2020 is forecasted to be about $3.6 billion, an increase of nearly 15%.
This reflects growth in both our professional and residential segments.
Our adjusted diluted earnings per share for 2020 is forecasted to be in the range of $3.33 to $3.40 on higher volumes and improved productivity.
For the first quarter, we expect adjusted diluted earnings per share of approximately 58 cents.
Keep in mind that even with the Charles Machine works acquisition, our business remains seasonal and our first and fourth quarters are typically smaller.
Let's review prospects for our various businesses starting with the professional segment strong pre season bookings and early winter conditions in key markets. Those have helped our snow and ice management business get off to a good start.
We expect growth from our boss from boss during the season with continued success of the snow rater.
Additionally, new truck models favor incremental demand for new snowplows, an ice management's equipment.
The outlook for our underground businesses encouraging was strong market growth opportunities such as the Fiveg wireless buildout.
Our family of ditch, which products are the contractor tools of choice to support this expansion in major cities interconnection rural customers with high speed Internet.
Fiveg deployment, which is in its infancy require substantially more fiber infrastructure than past wireless broadband solutions.
Our new product introductions, such as the J.T. 24 directional drill offer our customers the power productivity and versatility there are looking for in support of fiber installation projects.
We have the right brands and products to support the full lifecycle of pipe and cable from install to repair and rehab.
We believe our customer valued innovations will continue to make us the equipment provider of choice for infrastructure utility gas wastewater and technology projects.
Don't look for our rental and specialty construction business continues to be strong.
Key indicators are trending positive with a stable housing environment and healthy us consumer.
Additionally, the American rental association expects North American rental equipment revenues to grow in each of the next five years.
It's important for our business as we launched several new products. These include the ditch, which S.K. 3000, many skid steer the Toro dingo, TX sell 2000 compact utility loader and the Toro Trs walk behind trencher.
Also our new lithium ion battery powered eating go provides customers the ability to work indoors free of exhaust emissions without sacrificing power or performance.
In golf given the recovery in year to date golf rounds played and our new product introductions. We're encouraged by the prospects for fiscal 2020, we're ready for the season with new products such as the Greensmaster 1000, Walgreens more the greensmaster each reflects all electric writing Greens mower and the.
Cross turf tractor.
Lastly, we see positive indications the weather delayed golf irrigation projects should materialize in fiscal 2020.
We're excited by the upcoming product and technology innovations that will be introduced at the golf industry show in January .
We're also excited by anticipated demand for recently introduced products aimed at our landscape contractor customers.
These include the turf Spreaders sprayers, and irrigators, Exmark startups, and Toro tightened zero turn mowers.
More consistent weather patterns.
With more consistent weather patterns, we expect strong retail to reduce our landscape contractor field inventory during the first half of the fiscal year.
For the residential segment, we expect continued strong demand for snow throwers. Additionally, we're very encouraged by the early excitement and positive feedback for our turf business.
Including the recently introduced full line of time cutters zero turn more zero turn mowers, our strategic partnership with the tractor supply company, which provides us with broader customer reach and our refreshed approach to brand positioning and product marketing.
Lastly, an update on our current multiyear employee initiative vision 2020.
With the transformational acquisition of Charles Machine work, our financial profile has changed and so must our vision 2020 financial goals.
We will complete vision 2020 in this third and final year with a revised enterprise wide performance goal of adjusted operating earnings of 485 million.
At the end of fiscal 2020, we expect to transition from vision 2022, a new multi year employee initiative will provide information on the new initiative during our Q4 earnings update in December 2020.
In summary, we expect to continue to drive strong results through our focus on our key strategic priorities of profitable growth.
Productivity and operational excellence and empowering people.
Once again, thank you to our employees and channel partners for their contributions to the success, we achieved in fiscal 2018 and for the continued dedication in the new year.
We'd now like to take your questions.
Ladies and gentlemen, if you have a question.
Please press the star followed by the one on you touched on telephone. If your question is financial you wish to remove from the Q press the pound key.
And our first question comes from Josh Chan with Baird. Your line is open.
Hi, good morning, right printing thanks, good morning.
Morning, just wanted to start off with the the tractor supply comment you made it then right.
Just wondering how impactful it might be in terms of good morning, 20 guidance and how should we think about the timing of that agreement and kind of flowing through.
Got a tractor supply is significant driver of our results for 2020.
It will really start to see the shipments kit in beginning in the second quarter and into the third quarter. So it's not as much impact in the first quarter and just from a market standpoint, it really extends our reach into.
Geographies that have not been as well served.
We have a strong dealer network network, but from a mass standpoint, it really tractor supply continues on into more rural and smaller town environments. Both so we're very excited about it and it looks like it's going to be a great partnership.
Okay, alright, thanks to that and if I can switch to the professional segment.
Looking at them margins in the quarter I know that there are some nonrecurring impacts that.
Outlined in the press release, but they kind of split between the corporate and professional segment. So I wonder.
How should we think about sort of the nonrecurring charges and how much did that impact that professional segment margins, particularly this quarter.
Josh if you look at our earnings release and a reconciliation of non-GAAP information just speaking maybe to the operating lines operating earnings line, we've got roughly about 80 million of.
Onetime expenses in 2019, I would take that and probably split that about 25% of that goes to other.
And then about the remainder 75% goes to the professional segment, so that would be a good split for years.
Alright.
Thanks, and then if I look into 2024 professional margins I guess you how much synergies are you expecting from Charles Machine works and then I would assume that you would expect to the rest of the business to also have improved margins is that the right way to think about it yes, we guided to enough in our.
IR package that we do expect gross margins to improve as we look at at 2020, and what we would expect from just a synergy standpoint first of all is we have talked about $30 million on synergies Brad kind of ratably over three years, we really feel good about our situation with synergies we've.
Step back and looked at it more holistically across the organization. So to the point that you were making its not all going to show up just in the professional segment is what we're absolutely see improvement on the way we're approaching it across the entire organization. So.
We should also consider though as we look at margins for next year, we just talked about tractor supply great partnership and we're really excited about that however, just keep in mind. The residential margins are a little bit less than we would see and we also have a full year of Charles machine works, which also has a little bit of an a negative impact on overall.
Margins.
All right that that makes sense.
And then I think last one from me does does your guidance assume any stock buybacks in the U.
Yes, there is some limited buybacks as you know we had focused post Charles machine works acquisition on paying down our debt and we really are ahead of our original schedule for that so we feel good about that so all things being equal we would look at share repurchases a little bit later in the hair.
Alright, great yeah. Thanks, Thanks for the color thanks for the time.
Thank you extra thank you.
Thank you and our next question comes from Mike Shlisky with Dougherty and company. Your line is open.
Good morning, guys 49.
Maybe just first follow quickly on tractor supply.
Certainly there's going to be some organic tailwind given you have to sell into almost 2000 stores and in the spring time.
But as far as what's being sold in the stores I mean, these are probably going to be some higher acreage customers and.
In those stores is there anyway to kind of.
Bracket for us whether you will see margins that are kind of maybe not the same is professional but a little bit higher than the as residential given that there might be some heavier duty.
You know price there.
Yes, I think we are as we said before very excited about tractor supply and we would expect the margins to be similar.
In those categories, you're right sensitive since they do tend to.
Have higher concentrations in rural areas.
There's a lot of interest in R&D line for example, but we also have a complete line of the turf products and.
Potential to expand on that as well so it will be quite a complete line there and we will tend to focus more on.
Products for larger properties, but we'll have the complete product line there as well.
Okay.
And then should be able to construction equipment.
I haven't seen at least on the heavier construction side that a lot of companies have.
Kind of range in production this winter to get their dealership inventories in line with there with the retail sales outlook.
Can you comment on how you feel about your inventories at Charles Machine works on your other construction products and.
Sure Matt to pull back on on the production just to kind of start the year or do you feel pretty good about where inventories stand today, we actually feel good about construction and in our excuse me about inventory in our construction categories.
As you know last year, we had some strong new product introductions so that.
There is a lot of excitement about those new products from us sales and retail standpoint, so we have good flow there.
So we are inventories are in good shape from a construction standpoint from a specialty construction standpoint.
And just keep in mind, we are in.
Small segments specialty segments of constructions those is not we're not talking about bulldozers and excavators and so forth. This is for either very specialized.
Applications or for more landscape contractor smaller scale type of operations that are driven by different construction factors.
Sure of course right.
Maybe one one last one for me and that's just a little more color from you on on the organic growth outlook for 2020.
I guess first do you feel like you're going to get some good organic growth from Charles Machine works and then secondly from a from a broader perspective.
Can you give us any kind of number or range as to where.
That's what you think we should be modeling for organic growth overall next year.
Yes, I would just.
We're making comments on on.
What we can talk about specifically with regard to organic growth but.
We feel quite optimistic pretty much across the board on our markets and.
There are obviously factors like weather that we can't control, but the factors that we can control we feel very good about we have a lot of new products that are entering the market, there's optimism and some degree in every market.
So we've got golf rounds. For example started this last year in the through the spring I think in June It may not its June or may down, 4% year to date and as of the last data that we saw through I believe October .
There were in positive territory. So they made a tremendous ground during the season. That's obviously, a nice revenue trend for the golf courses and helps to provide funding for for new projects and new equipment. So.
Pretty much across across the board we see.
And positive the that so we feel good about and Charles machine works.
Grew their business and we expect to continue to grow their business.
In.
Roughly the same races for company has been growing mid single digits type of growth.
Oh, yes, okay and on to that if I may from an overall standpoint, if we look at it maybe from a segment point of view.
We would look at probing mid single digit type of growth rate.
Pretty solid as we look forward from a residential standpoint, we normally would guide to GDP type of growth, we do expect that to be greater as we talked about with that.
Tractor supply I'm partnership being in its initial year and then overall Charles machine works as Rick was just talking about we would expect to be basically that mid single digit type of growth rate again, we're including them now for a full year, where we only had a parcel year in 2019.
Got it perfect. Thanks, so much guys I'll pass along I appreciate it. Thank you thanks, Mike.
Thank you and our next question comes from David Macgregor with Longbow Research. Your line is open.
Yes. Good morning, everyone. Good morning, David just to build on the last question on inventories, which was very specific with regard to construction wonder if you could just talk about the bigger inventory number on the balance sheet, because it seems to be up fairly substantially obviously some of that as see MW. Some of it is probably new products that you talked a lot about some of its going to be raw material inflation.
But is there any way to parse that out a little bit for us and give us a little bit of a better feel for sort of the composition of that increase yes, David the biggest piece by far is Charles machine works.
And just given the size and as we've talked about in the past, we do see opportunities to improve transmission or its working capital, but thats by far the biggest piece of that I would also those say you know.
Going into 2019, we do have a great lineup that new products and so we are anticipating real strong introductions typical with the path. We would have some inventory build as we go into new product introduction, and then we talked about tractor supply as well and in all honesty as we end.
2019 from a legacy perspective, we started extremely strong with a very strong Q1, you might remember we had 10% sales growth overall for the company and then the remainder of the year weather wasn't as favorable.
One is very optimistic going into the year. So there's probably some impact just from the wet weather that we signed 2017 as well.
Thanks for that.
Just with regard to tariffs can you just update us on kind of the carryover impact into 2020.
Yeah, as we look at tariffs so some of the latest changes that had occurred.
We're primarily focused on the list for which for US was not very impactful for still kind of a minimal impact.
For that we're just looking at us with terrorists being about flat year over year, we talked about in the past for us it's somewhat hard to segment tariffs from in tariff related inflation, because more and more of an assembler of products versus a pure manufacturer for many of the times, we get the tariff kind of indirectly sling or purchasing the pro.
Product or the parts from one of our suppliers. So it's hard pressed to break out the exact impact the tariffs that were thinking it's going to be about flat year over year, no maybe something we'll get resolved that would be beneficial we can certainly hope for that yes hopefully.
On the walk power mowers down in the fourth quarter.
I guess, we talked about the sort of battery powered more secular growth pattern in the past, but just trying to get a sense of weather. We finally got to the point, where maybe sort of gas powered walk mowers are starting to lose more share to the battery powered products and your that particular product categories, just succumbing to the seeking to the secular try.
And in battery power.
Yes. The battery powered portion has been a small but one of the faster growing segments of the lawn and garden in the Waqar more segment. We have now I was very very solid 60 volt lithium ion battery package and we're seeing nice risk.
Bonds from customers on that very positive feedback.
So we think that.
As it settles then it will be another power source and a lot of the focus will go towards the overall features and benefits of the products and that's where we feel very positive about about our.
About our off about our offerings and our options. So it's it has been a growing segment gas powered products are not going to go away in the near future, but we will have an offering of.
What customers want whether its battery or whether it is gas and we will maintain and have maintained our market share and the battery offering will be and has been part of that beginning this year.
In that case do you think Rick you may have just lost share in walk power mowers.
So we didnt, we we actually maintain their share in a in a really tough environment. So was tougher all competitors, meaning.
Good.
Very competitive in the environments, and we maintain or share in one or more so.
Industry was probably down in part related to weather, yes. That's that's why I was trying to get it last question for me is just you talked about the Flexfours lithium ion products that you're rolling out because how do you build retail distribution support for that product now.
All where we've had strong support I can tell you from a mass standpoint, they will continue to get placements and with our mass partners.
For me personally one of the areas of surprises in our dealer network. It's had a very strong response, especially.
After the initial introduction.
And the reputation started to generate the the feedback from our dealers has been very positive I think they were surprised that the number of customers that came in looking for battery powered option.
They have not historically business is strong in the battery area. So I think thats kind of a new.
Interesting development for US good thanks very much good luck. Thank thank you.
Okay.
Thank you and our next question comes from Joe Mondillo with Sidoti and company. Your line is open.
Hi, good morning, everyone.
Yeah.
So question, so just to clarify Renee regarding one of the initial questions on the Tonight.
Regarding the adjusted professionally you.
Made a statement regarding the full year fiscal 19 I was curious.
Is that sort of 70 525 breakout similar in the fourth quarter or is that at all any different.
Yes, I would like it really relates to some of the management actions are split more between the other enpro, where most of the acquisition related.
Items fall.
In a more directly so if I mean, it's a reasonable split it is with the split for the year, but it would be reasonable for the quarter THL.
Okay.
And then.
I'm just trying to think in terms of the professional business the legacy professional business.
The last couple few quarters have been pretty tough, obviously, a couple of quarters ago.
The weather was not favorable at all just curious if if we have a scenario where weather sort of Robert said, all closer back to sort of the norm.
How does that.
How should the business paragraphs in that situation, you're going to have an easier comp, but then how are you thinking about inventories in the channel you know our inventories higher than normal because of.
The weather last year.
And any color behind how you're thinking about that we help right. Yes. So I think you know to summarize the slasher anything that had to do with growing grass or mauling or outdoor activities was really challenged from the early spring all the way through mid summer.
And so that cuts across.
Many different categories for us so as one of the more challenging years I think it was the what us.
Your on record in Minnesota leased and for much of the Midwest.
So that was kind of the threat of challenge that ran through our businesses. This year. If we return to a more normal weather pattern. We've we have modeled the required inventory and the effect than inventory in our plan now. So that's really what is built into our plan. We also build in some.
Its ability to respond to the greater or less then and the key is really to do exactly that to stay responsive to what's happening in real time and be able to adjust just our requirement for our production and supply chains as quickly as possible. So thats up we stay nimble and that's been the key to Torill for one.
On time.
So so do you do you think the inventories in the channel a little high and if so would it would that sort of be a maybe a little weaker performance earlier in the year not those inventories get absorbed maybe stronger performance, especially given the comps that you have maybe towards the backdrop the Arizona.
Airway booking pattern or not.
We have a few categories were inventory is a little bit higher but not outside of the range of what we've seen before so that that's all built into our plan. So that's the flow that we've built into our plan for 2020 is really acknowledges where there are those isolated.
Cases, yeah, and as you said, Rick I mean, if that is an area were very used to dealing with that and kind of ebb and flow that that comes with that and we always make sure that we're focused on retailing and keeping the field in good shape does not at all how did the ordinary and as we've talked about in the past sometimes things can move between quarters for us that we always incur.
People to look over the total year.
When you get the best perspective from our performance.
Okay and then at the residential segment you saw another pretty good quarter in terms of margin.
Just curious what drove that did you see any I know I think you called out in the third quarter that you saw some terrorists recovery income.
You see any of that type of income in the fourth quarter.
Yes, nothing nothing out of the ordinary Joe we did see on the impact of we had commented on pricing and productivity initiatives. So.
Sorry, I saw that impact a little bit more concentrated and as you think about it. We had said we were going to expect margins to improve more in the second half of the year and and we saw that sequentially, but there weren't any unusual one time items, we did see though commodities.
Moderate and deflate, a little bit in the quarter, but more than anything with pricing and productivity.
Okay, and then two last questions one on free cash flow I'm, just in terms of working capital expectations.
As stated that you're anticipating a earnings to free cash flow conversion of about 100% this year.
Just wondering what or how that translates into working capital and then last question just on the tax rate wondering what you're anticipating for that okay. So first of all on working capital. We would expect that as we go into year end, we would see year end 2020 that working capital coming down we do believe.
Structurally Charles Machine works is that a higher working capital rate, we think over time, we'll see some improvement there.
And again, we had a.
Number of items that were driving our working capital and in particular inventory to be a little bit higher at year end that we don't necessarily anticipate part of it being just the weather part of it being the new products for the whole host of new product introductions that we have and then again tractor supply being new to us. So we would expect working capital at year end.
To be coming down and trending lower from a tax rate standpoint, we would expect adjusted effective tax rate to be 20.5% or thereabout.
Our next year.
Okay. Thanks for taking my questions. Thank you. Thank you.
Thank you. Our next question comes from Sam Darkatsh with Raymond James Your line is open.
Good morning, Rick Rene Nick how are you getting nice and well go ahead have happy holidays to each of you.
Just.
Most of my questions have been asked and answered I just have a couple of.
Housekeeping items.
The guidance for 20.
EPS guidance to $3.33 to $3.40, what does that imply for GAAP EPS.
We do not guide to gap and part of it as we just don't feel especially with the areas around the stock excess tax benefit from stock comp is very difficult to try to estimate.
When options will be exercised.
So that part of the reason why we consider that to be a non-GAAP items that we havent provided gap from guidance.
Yes.
The obvious follow up that is how do we figure the 100% free cash flow conversion since I'm guessing that's based on reported net income.
We tried to give you that elements associated with it.
Just talked about working capital a moment ago.
As well as capital expenditures that we expect to be about 100 million.
We live in trying to think we DNA, we had putting in guidance as well so we've got.
DNA, we expect to be about 95 million.
We tried to give you the elements.
But.
Can you can you quantify working capital or put a little bit more meat on the boat in terms of that.
Yeah, we haven't quantified it specifically, we just said that we would expect it to decrease from where it's at.
Today at year end.
Okay. So.
Then should we.
I assume that free cash flow would be up on a year on year basis at least yep. Okay.
Okay.
As well we're at 90% this year with said, 100% and our yes, I mean, we're growing with the entire year a child machine. So yes, sorry in terms of Dollarsto free cash flow will be up year on year. Okay. Congrats.
Then my final question.
The professional organic in the fourth quarter was down.
Now I know it was a more difficult comparison. This has been talked about already I think on this call.
Are you expecting or assuming that organically professional will be down again in the first quarter.
Looking at the comparison and it looks similar and then if you could be more specific Rick in terms of what specific categories, you're seeing the headwinds in pro right now.
Special organically, especially knowing that snow is is so strong I know you mentioned anything that's due with cutting but if you could be more specific in terms of where you're seeing it. So we can track it as it progresses I think we we touched on a couple of times, but the the inventory areas would be in the LC area. So we would be.
The.
Making sure we get those at the point, where we want them to be.
A little bit in international and a bit in irrigation and theres not a lot.
For irrigation the first quarter is not.
Theres not a lot of.
Retail drive during the quarter. So it's always a little tough anyway, but those are some of the elements, where it's coming from so international.
Ill healthy inventory.
And that of irrigation.
And the organic growth expectations for organic sales expectations for pro in the first quarter would be similarly pressured as it was in the fourth.
I think thats fair to say, yes, okay.
Thank you each of you and again very very happy holidays to you in your families. Thank you.
Okay.
Thank you. Our next question comes from Tom Mahoney with Cleveland Research. Your line is open.
Hi, good morning.
Mining.
Traditionally you guys been able to to achieve a realized price in the pro segment and certainly with tariffs I think thats been a part of the story over the last 12 or 18 months can you talk about.
Whether there was price in the pro segment in 19 in a few expect.
That number to be similar or more or less as you look into fiscal 2000.
Yeah, we we typically.
Overtime, good between one and 2% price in the last year and a half for so you've talked about.
The need to two of beyond the high end of that due to some of the high.
Input costs increase that we had so the some of those are not as strong in 2020.
So we would we would not expect quite as much price.
During 2020, but we would still be staying in that range of one to two price realization.
Okay, and then you mentioned a change in Red Iron is that a is that purely an accounting change or is there any any change in in terms of how.
Any impact on the dealer network any incremental benefits for them issue as you make a change there yes, no. There is there's no impact externally at all and it's really Tom just geography on the PML, but we wanted to pointed out to assist with modeling that's really moving from.
And our equity investment being other income and to really being a increase in net sales because of a lower sales deducted from the driver to that so just move between geography on the piano, but no fundamental change other than that and no impact externally.
Understood. Thank you.
Great. Thank you.
Thank you. This concludes the question and answer session Mr. Rose. Please proceed to closing remarks. Thank.
Thank you for your question and interest to the total company, we look forward to talking again in the new year to discuss first quarter results. Thanks, everybody.
Thank you for participation in today's conference. This concludes the presentation. You may now disconnect everyone have a good day.
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