Q1 2020 Earnings Call

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At this time all participants on in listen only mode.

We will be facilitating the question and answer session towards the end of today's conference.

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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 Nicolas Rose Managing director of Investor Relations for the total company. Please proceed mr. rose.

Thank you and good morning or earnings release issued this morning by business Wired and a copy can be found in the investor information section of our corporate website. The tour company Dot com.

On our call today are wrinkles, and chairman and Chief Executive Officer, everyday Peterson, Vice President Treasurer, and Chief Financial Officer.

We began with our customary forward looking statements policy. During this call we will make forward looking statements regarding our business and future financial and operating results.

Do you all are aware of the inherent difficulties risks and uncertainties and making predictive statements our earnings release as well as our SEC filings detail. Some of the important risk factors that may cause our actual results to differ materially from those in our predictions.

Please note that we do not have a duty to update our forward looking statements.

In addition, during this call we will reference certain adjusted non-GAAP financial measures and metrics reconciliations of historical adjusted non-GAAP financial measures and metrics to reported GAAP financial measures and metrics can be found in our earnings release or on our website.

The company believes these measures and metrics may be useful and performing meaningful comparisons of past and present operating results.

I understand the performance of its ongoing operations and how management views the business.

Such adjusted non-GAAP financial measures and metrics 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 and metrics presented in our earnings release in this call with that I will now turn the call.

Now over to Rick.

Thanks, and good morning.

Fiscal 2020 is off to a positive starts and we're encouraged about the season ahead.

The teams focused on our strategic priorities of profitable growth productivity and empowering people was key to our sales and margin momentum in Q1.

We also announced a strategic acquisition complements our organic growth.

Looking at our financial results, although the first quarter is typically a smaller quarter. Thanks to the efforts of Toreros dedicated employees, we achieved record net sales and earnings.

We generated net sales of $767 million up 27% over the prior year and we delivered adjusted diluted earnings per share of 64 cents up 21%.

Results were primarily driven in the professional segment by the addition of Charles Machine works continued demand for boss Snow and ice management equipment and net price realization.

And on the residential in the residential segment.

By the initial delivery of zero turn riding mowers to the tractor supply company.

During the first quarter, we announced the acquisition of venture products and I'm happy to report that we closed on Monday.

Venture products, which manufactures under the Ben track brand is a respected provider of turf landscape and snow and ice management equipment.

Ben track machines are valued for their versatility multi season attachments and hillside capabilities.

Our people share a similar value based culture with strong commitments to innovation quality and customer service.

I want to formally welcome then track team to the total company.

Turning to our operating performance for the quarter. Our professional segment net sales grew 31%, reflecting incremental contributions from the Charles machine works acquisition and positive contributions from the boss golf and grounds and irrigation businesses.

Charles Machine works through its family of businesses with iconic brands, such as ditch, which.

American Auger, Trencor subside hammerhead and radius generated strong incremental revenue for the quarter.

We drove solid retail demand with our new products, including the ditch, which Jay T 24, directional drill and SK 3000, many skids tier.

And the recently launched Blue light lead the cured in place lining system gain traction in the marketplace.

Nearly one year after the trials machine works team joined the total company. The integration is exceeding expectations and we are on track to deliver our synergy target.

Loss turned in another good quarter due to healthy demand for snow and ice management equipment. This resulted from early winter snowfall in key regions and sales of undercarriage mounts and plows for new truck models.

We also saw continued strong retail demand for the snow Raider, which turns a multi person job of plowing and treating sidewalks into a one person operation.

Our worldwide golf and grounds business benefited from solid golf equipment demand in Europe and Asia.

Interest in our new all electric Greensmaster eat try flex writing Greens more was high.

Customers appreciate its reduction and noise maintenance and fuel costs.

Additionally, we saw increased activity in previously deferred golf projects in the us and across our international markets.

Our AG irrigation business posted positive results for the quarter due to increased product demand in the eastern United States in Mexico.

This was partially driven by the introduction of the new Aqua Traxx Zugel precision irrigation tape that offers enhanced Claude resistance technology.

Irrigation business growth in the quarter was driven by favorable weather in key domestic regions that helped drive early demand for here 12 products used in residential and commercial applications.

Turning to our residential segment, we achieved over 14% net sales growth for the quarter largely driven by initial shipments of zero turn riding mowers, two tractor supply stores.

We also recorded positive results from our pulp branded DIY irrigation business in Australia.

In summary, we delivered strong performance for the quarter expanded our mass retail channel with the addition of the tractor supply company and completed another strategic acquisition complements our organic growth.

I'll now turn the call over to Renee for a more detailed discussion of our financial results.

Thank you Brett and good morning, everyone.

For our company is comprised of a balanced portfolio of products to enhance our customers productivity across the season.

Charles Machine works as incremental revenue and is less seasonal due to the use of these products in multi year infrastructure and telecom projects such as Fiveg.

And the focus on underground installation and maintenance.

Our ongoing focus on operational excellence and synergy capture should yield improved margins across the portfolio over time.

This enables the company to allocate capital across a variety of alternatives, including acquisitions.

Dividends.

Paydown and share repurchases.

Last certain factors July out of our control the portfolio of businesses allows that suggests shifting weather situation.

Changes in customer demand to provide consistent long term girl and generate healthy free cash flow.

Q1 was no exception.

Even though Q1 is a smaller quarter, we were able to exceed the expectations, we set for ourselves.

Based on our ability to adjust to changes and channel demand and product mix.

While maintaining our focus on our strategic initiatives of growth productivity and people.

We reported net sales of $767 million in the quarter, a 27.3% increase from the first quarter fiscal 2019.

Diluted EPS was 65 cents for the quarter compared to 55 cents last year.

Adjusted diluted EPS increased 20.8% to 64 cents.

For the first quarter professional segment net sales increased 30.7%.

To $594.7 million.

Revenue growth was primarily driven by the chart machine works, the acquisition, which added incremental sales of $161 million.

Excluding Charles Machine works professional segment sales were lower as compared to a strong Q1 up 29 team.

During Q1, 2020, we realize lower shipments of landscape contractor products.

As we focused on managing field inventory.

This was partially offset by sales across most of our professional businesses, including boss Snow and ice management.

Golf and grounds.

And irrigation businesses.

Professional segment earnings for the first quarter increased 16.5% to $102.5 million.

Residential segment net sales for the first quarter were up 14.3%.

To $165.8 million.

Mainly driven by shipments of zero turn riding mowers to tractor supply.

Residential segment earnings were up 65% to $21.6 million.

Reflecting a 400 basis points year over year improvement and segment margin.

This margin improvement was largely driven by favorable sales mix.

Productivity and synergy initiatives.

Lower commodity inherent cost.

And reduction in freight costs.

In the quarter good operating fundamentals translated to strong segment margin due to a combination of factors.

We anticipate second quarter segment margin to be comparable with the first quarter and then to moderate in the second half of the year.

As a result, we anticipate full year residential segment margins to be in the low teens.

Moving to our operating results.

Reported gross margin for the first quarter was 37.5%.

An increase of 170 basis points over the prior year period.

Excluding acquisition related impacts and other nonrecurring items.

Adjusted gross margin increased 180 basis points to 37.6%.

These increases were primarily driven by productivity improvements in synergy initiatives.

Increased net price realization.

And lower freight commodity and tariff costs.

SGN expense as a percent of sales increased 140 basis points for the quarter, primarily due to higher the higher costs. With addition of child machine works and increased marketing support for the mass retail channel.

Operating earnings as a percent of net sales increased 30 basis points to 11.9%.

Adjusted operating earnings as a percent of net sales increased 20 basis points to 12.1%.

Interest expense increased by $3.4 million for the quarter.

This increase was due to additional debt to fund the Charles Machine works acquisition.

For the full year, we anticipate interest expense of about $33 million as a result of additional debt to fund the Charles machine works and venture products that acquisition.

The reported effective tax rate was 18.6% for the first quarter and the adjusted effective tax rate was 21%.

For the full year, we continue to anticipate an adjusted effective tax rate of about 20.5%.

Turning to the balance sheet and cash flow.

Accounts receivable totaled $321.2 million.

This was up 42.4% from a year ago as a result of Charles machine works and higher sales into the mass retail channel.

Net inventories were up 77.4% to $739 million.

Primarily due to incremental inventory from charts machine works and higher inventory balances in our landscape contractor business.

In the professional segment.

And higher inventories to support our expanded mass retail channel and new product introduction in the residential segment.

Accounts payable increased 23.6%.

To $348 million.

Largely driven by our acquisition of Charles Machine marks.

We expect depreciation and amortization for fiscal 2020 of about $95 million and capital expenditures of about $100 million.

As I mentioned, we built inventory in preparation for our key selling season.

Free cash flow conversion was negative for the quarter our projection remains the same.

We continue to anticipate free cash flow conversion to be at about 100% for fiscal 2020.

Delivering high demand product aligned with the variance seasons as well as solutions for multiyear infrastructure project drives more consistent levels of profitability and increases our ability to allocate capital to fund future growth.

Our disciplined capital allocation strategy allows for investment inorganic M&A growth opportunities.

And the return of cash to shareholders for dividends share repurchases and debt pay down.

We continue to invest in innovation, and new product development, which fuels our organic growth.

And we are maintaining a disciplined approach acquisition.

Venture products is a recent example of our focus on profitable growth as we broadened our offering to customers through this acquisition.

I'll now turn the call back to Rick.

Thanks Ray.

Our record performance in the first quarter customer response to our innovative new products and the outlook for our key markets give us reason for optimism in 2020.

For the full year, we continue to expect revenue of about $3.6 billion and adjusted diluted earnings per share of $3.33 to $3.40 inclusive of the venture products acquisition.

For the second quarter, we expect adjusted diluted earnings per share of $1.28 to $1.33 cents.

As always we have a watchful eye on factors that could pose challenges to our performance such as unfavorable weather.

Trade policy and reviewed regulatory actions and the impact of of Corona virus.

Given the focus on krona virus I'd like to spend a moment, providing our current thinking on its potential effect on Toro.

First and foremost.

We're focused on the health and safety of our employees and other stakeholders, we are monitoring the situation and taking appropriate precautions, including those recommended by government agencies.

In addition, we have a number of internal planning groups that are helping us to prepare for various scenarios.

In terms of our supply chain, we are closely observing the evolve the evolving situation in real time, and taking appropriate steps to minimize disruption.

Our team, including those on the ground in China is working diligently with our suppliers to maintain a steady flow of components.

We currently expect a modest financial effect from supply chain disruptions in fiscal 2020.

From a revenue standpoint at this time, we do not expect immaterial impact in 2020.

We have minimal sales from geographies that have been most affected by krona virus so far.

While the situation is evolving quickly our guidance reflects our best estimates of how these factors may affect our second quarter and full year performance.

Let's review prospects for our businesses going forward.

Starting with the professional segment in golf. Despite the second one last year on record in the US annual rounds played were up 1.5% in 2019.

At the recent golf industry show in Orlando, we unveiled a record number of turf and irrigation products for the upcoming season, such as the all new grounds Master I'll front rotary lower and the latest links central control system.

Additionally, we unveiled Intel a dash a smart connected technology concept for golf superintendents.

I can tell a dash is a golf course management platform that integrates data from Torill products and other sources to provide real time information such as agronomic conditions labor asset location and equipment health.

From energy of managers to better run their operations.

We also introduced a new suite of autonomous technologies called Geo Link solutions. These include a multipro sprayer with auto steer capabilities and fully autonomous Reelmaster and Greensmaster concept machines.

Our customers are seeking solutions to alleviate labor challenges and drive productivity and these products can help them achieve their goals in the future.

Turning to our underground business the outlook continues to be encouraging with strong market growth opportunities such as the Fiveg wireless buildout.

Our new product introductions, such as the G 24 directional drill are showing strong early retail demand.

We have the right products to support the full lifecycle of pipe and cable from installation to repair and rehab.

Well showcase our brands and products at the upcoming Con Expo trade show with representation from dish, which American augers Trencor and sub site.

That's only the recently observed in Orlando during the American rental Association trade show the outlook for our rental and specialty construction business is strong.

The American rental association expects us rental equipment revenues to grow approximately 4% in 2020 and projects continued growth in each of the following three years.

Industry fundamentals support ongoing construction spending which should create demand for our new products.

Battery powered Toro eating go compact utility loader garnered a lot of attention and good pre season orders at the areas show.

Additionally, the recently launched Toro Trx walk behind Trencher received three industry awards for the innovative Intel a trench smart trenching technology.

Ditch, which also exhibited at area and excitement remains high for the S.K. 3000, many skids Dear.

We're also excited by anticipated demand for recently introduced products for landscape contractors. These include Zeterberg, Spreaders, sprayers, and irrigators and Exmark laser and Toro Titan Zero turn riding mowers.

Additionally, the grandstand multi force is building momentum with contractors due to the addition of attachments for multi season use.

We had a strong start to Q1 last year, followed by an unusually wet selling season, resulting in higher than anticipated field inventory at year end.

Assuming we nor assuming more normalized weather.

We anticipate retail demand will reduce our landscape contractor field inventory this selling season.

For residential we're excited to expand product to expand product placement with the tractor supply company.

All of our channel partners will benefit from the refresh brand positioning and product marketing.

In addition, we expect innovative new products will contribute to our results. This year. These include the redesign Timecutter zero turn riding mower.

And the expansion of our line of 60 volt Flexfours lithium ion products, including a 21 inch steel deck walk power mower and a hedge tremor.

In summary.

We expect to drive strong results through a focus on our key strategic priorities. These include profitable growth.

Productivity and operational excellence and empowering people.

Once again.

Thank you to our employees and channel partners for your contributions to the success, we achieved in the first quarter.

We appreciate your dedication and focus as we work together to deliver another successful year.

We now like to take your questions.

Ladies and gentlemen, if you wish to ask the question. Please press star followed by one on your touched on telephone.

If you wish list while your question. Please press the pound Keith.

The press star one to begin.

Please standby for your first question.

Our first question comes from the line of Mike Shlisky with Dougherty and company. Your line is now open.

Good morning, everybody good morning, good morning.

The next start off with the inventories.

The that are on your balance sheet not the ones that are in the channel, but on your own balance sheet those were little bit elevated in the quarter versus previous quarters I know you have.

Some of the Charles teamwork stuff in there, but is there anyway, you can you give us a sense as to whether you've got a plan to bring that number down from a dollar perspective. The next couple of quarters there.

Yes, so the biggest factor Mike is the Charles machine works inventory year over year as far as that increase as well as we had indicated our intent to kind of build ahead a little bit ahead of this season, given the introduction of new mass retail channel partner and then some inventory from landscape contractor just given the weather sits.

Duration.

Im that we had in 2019 as we look throughout the year, we do intend to bring down that inventory level and thats included in our free cash flow conversion.

Estimate of about 100% for the year. So the biggest driver that we'll see is that inventory level coming down as we go through the year.

Okay great.

I was wondering as much or.

Sure.

Our gross margin in the quarter those are some of the best to see a couple of years you had mentioned a couple of Tailwinds, Mike the cost of freight maybe some.

Oreo cost et cetera, how sustainable are those items for the rest of the year do. Thank you. Please go to some of that.

I've been here or is it.

Is it an uncertain volumes, but the pricing then.

Yeah, we really did feel good about our gross margins in Q1 and.

I commend the team for their continued focus on productivity and synergies, we did see more favorable commodities.

And net price realization more heavily focused on the pro business segment than.

Residential as we look for the year, Mike We do expect to see some gross margin improvement for the year, but not at that same rate year over year.

So we just don't expect part of it was also.

Favorable product mix in Q1, especially in the in the residential segment.

Okay got it.

Wanted to touch on Vin track as well you closed it just this past.

I think was Monday, you said.

Right, but indicated changed the guidance or anything and I was curious if it's just too small to kind of move the needle, although a lot of onetime items the kind of watch for this year.

It's definitely be a long term creative deal for you.

Yes, I'll start just a little bit about ven traps. So it's about 100 million in revenue based on the prior year I'm revenue, we're only going to see a partial year. This year. So it's a little bit smaller from that perspective. It is immediately accretive from an EPS on standpoint, excluding onetime items. So we would adjust out any.

Position, our integration related costs.

Cost the profitability is within the range of the pro segments. So we feel really good about it it's just relatively.

Scale up Toro, it's relatively small and just early in the year for it to be additive to to our guidance.

Okay.

One more for me.

I don't want to ask you for guidance beyond enjoy good out there for Q2, but just on a very broad based this do you think that.

Q2 here could be you can be your first quarter was you have.

<unk> billion dollars and your topline or.

Or higher.

Yeah, I mean, we will see holidays fall, we don't give specific guidance on.

Revenue for the quarter.

But.

We'll see I mean part of it is depending on.

But the type of spring that we have but we still feel good about it and as we've talked about before child machine works is less impacted by the weather. So that is is a real plus for us as well.

Okay. Thanks, Buck resolute events and that hopefully appreciate thank you. Thank you.

Thank you. Our next question comes from the line of David Macgregor with Longbow Research. Your line is now open.

Yes, good morning, everyone. Thanks for taking the questions David.

I guess just to start on the virus disruption you noted that for 2020 is no revenue impact expected, but in the press release with regard to the guidance you characterize the disruption is nominal.

Israeli can talk about the impact to that 128 133 for the Twoq you from.

Yes, its supply chain disruptions or just whatever that might be if youre thinking or the discussion.

Right. There are several elements to the krona virus considerations as you can imagine of first and foremost as we talked about the safety of our employees. So it's making sure that we are keeping.

Okay.

Logical travel guidance in place and so forth, but then you look at first supply side and the demand side on the supply side.

From the first moment that krona virus was mentioned we've been working with our suppliers. There are a handful of key suppliers for example, in China that especially matter.

And we have good confidence that we go through the next 30 days with no disruptions and then they're working on plans to bridge any possible disruption after that that take this fall into mid summer we get into mid summer that's kind of a normal shutdown period for us. So we really see the key right now as bridging through the spring.

Period on the demand side.

Again, the exposure in the countries that have been especially affected is they are important to us, but they would not be.

Significant to the outcome from a revenue standpoint, and we could likely make up for those and other areas I think.

The commentary about 10, Tractions one thing on the positive side that helps both.

Balance out some of those risks as well.

Thanks for covering that.

Charles Machine works I mean, you're approaching the anniversary that transaction by all accounts just seems to have been very successful you talked in the press release about Youre running ahead of your original expectations. My recollection was that was originally about 30 million of cost synergies over three years can you just could you give us a sense of where you are on the synergy curve and just how much ahead of expectations you might.

The inch and as a consequence does that 30 million become a bigger number or is this just a timing issue, where you're pulling forward and you're still attracted to 30.

Yes.

The $30 million was 30 million over three years, and we have high confidence that we will get to that number we do see opportunities to do more I think we mentioned on our last call. The so we're optimistic that there were more opportunities and kind of opens the ones as we look at the rest of the company as well we have.

Taken a.

Very disciplined approach to.

To our scorekeeping in that area. So we're not we're not counting those synergies until we can be absolutely confident that they will be realized but we certainly see visibility to exceeding $30 million as we have previously talked about and that's the on the synergy side, but another elements is really the broader element.

Which is the integration process itself and that is going.

Well ahead of schedule in terms of.

The restructuring that took place that was immediately in place and all the actions that we took from a strategic standpoint.

With the various business businesses were.

Right on track or well ahead of being on track right just to be clear 30 million was cost synergies. None there were incremental revenue synergies anticipated above that right.

30 million was a cost synergies and we didnt get specific about revenue opportunities.

But.

There is also working capital benefit that we see as we work.

More closely with with the organization relative to.

The team here at Torill right and then certainly for me is just this.

Professional landscape contractor issue, where you've got I guess it wasn't there was an inventory issue last quarter as well as I recall is again, it's something we're talking about here. This quarter can you just unpack that floors, a little bit give us a little more granularity around what exactly is happening there and why this this surplus is continuing on that is.

Something that is going to resolve.

By the end of this quarter or do you have some maybe some obsolete inventory there that is going to require any some kind of a write off just a little more detail there would be really helpful.

First going backwards. There is no obsolete inventory that has to be written off it really is the story really starts last year at this time pure remember professional segments in general was up almost 13% last year's lingering off the has pretty difficult in the first quarter.

All of our professional businesses are actually growing the exception is landscape contractor business and last year. At this time, there was tremendous excitement with the combination of new products and the prospects of a strong spring. So we shipped product that ultimately.

Did not move as quickly at retail because it was a horrendous year from a weather.

As I mentioned that thinking in prepared remarks, the weather second let us at least season in U.S. history. So not just did not move as quickly at retail and we expect to have that corrected through the second quarter and you'll see growth across all the professional business. We expect in the second.

Through the year end.

All this is reflected in our guidance and really for the first quarter two.

The quarter went precisely as we have plans on this was a planned.

Adjustment to our inventory that we that we put into the year. Okay. Thanks very much.

Thank you. Our next question comes from the line of Tom Hayes with Northcoast Research. Your line is now open.

Hi, Good morning. Thank you for taking my question for me Tom.

Hey, Rick I was wondering if you spend a little bit more detail on the rollout of tractor supply maybe your thoughts on.

Does that apply it is does the initial loading apply to all locations or your thoughts on how that's playing out so far.

Yes, the our association and our projects with with tractor supply is going extremely well.

Relationship as growing stronger every day with them and we've we're right on track with where we expect to be actually shipped more product to tractor supply in the first quarter than we expected that's really a agreed upon shipment rate based on the on the initial steps up the stores and what the inning.

So response has been from a customer standpoint.

So of the bottom line is its going exactly as planned and.

The good thing really for the entire residential business is that provides additional critical mass for us to invest in products in the brand in.

Marketing, but really strengthens business for all of our partners. So.

Other mass very important mass retailers plus our dealer network.

It could be.

Yeah, the bulk of the shipments will still take place in the second quarter. So that's that's true. We just we did ship a few more units in the first quarter.

Great. Appreciate the color I guess, just secondly, circling back to excuse me Michaels earlier question on inventory levels.

As far as channel inventory levels, it's been kind of slow season last month or so.

Yes, your thoughts on channel inventory on this does the business.

Yes, we are were generally in good shape on snow inventory.

The the market in the northeast was a little slower because of less snow. So it's a little bit higher there, but on average our snow inventory is in solid shape, but a very very strong starts to the season and we have you know at the same time weve.

Our share in the Midwest is very strong and that's where a lot of the snow events took place earlier in the air So.

We're we're in good shape from a field inventory both on the residential side and exceptionally good position on the boss side.

Thank you appreciate the color.

Thank you.

Thank you. Our next question comes from the line Sam Darkatsh with Raymond James Your line is now open.

Good morning, Rick Good morning, Rene how are you for years now good.

Few questions most of mine a bit asked and answered.

Too if we could return back to the unfortunate Corona virus topic give us a sense generally speaking what percentage of your overall skus have Chinese based components.

And our they overweight in any particular.

Product vertical im trying to get a sense of margin wise if this.

Becomes an issue, our where would it where would we see it.

Mostly transpire.

Yeah, we wouldn't have an exact percentage of content, though we have the information that we don't have it right in front of us here.

It would be a bit higher exposure more on the residential side of things just in general.

Than it would be on the commercial side about the sale there wouldn't be key components that we'd be part of commercial products, but.

In terms of the volume of Cogs, It would be more on the residential.

Residential through probably.

Homeowner.

Type of product.

And then you mentioned that thank you have some critical vendors.

In the area.

At year end very close contact with and for 30 days you envision no disruption.

I don't remember the exact verbiage two years, we said you had plans with them contingency plans post for 30 days can you do a little bit more unpacking in terms of what specifically those plans.

Might look like and what assumptions are included there in terms of how quickly the.

Then there is might have to get up and running or what the utilization rates might look like as opposed to now.

Sure.

And were we are.

We have those plans in place across our global supply chain, So I'll, probably talk little bit about China that the same holds true whether its Italy, South Korea, Japan, or any secondary suppliers that might be supplying.

Top core supplier somewhere else.

So we have.

Our team specifically looks at every part number and when it needs to be in our plants, what's on the water.

If you think about if there are six weeks of shipping time, theres actually a continuous flow of products still coming.

By water, even if they extend the.

The lunar.

New year as they did.

And just in terms of the spot the status of our key suppliers in China. They are approaching a 100% at this point. So they are well above 75 expect to be at 100% within two weeks, we have a small plants in China that also is up and operating.

So the what we would build in.

All the way through the period that I talked about March and beyond we do not expect the.

The effect to be material for us we have a plan in place what we would expect to see is some premium in freight because some of those products, we would not put on boat we would.

We would.

Use air shipping.

And the the challenge that we're looking at right now is.

His availability of freight.

Carriers.

So that's a that's the.

One of the areas that were working right now to make sure that we've got carriers that can that can fill those gaps we might see some.

Random short term sorts of disruptions on our lines, where we don't expect that to be significant and keep in mind, we're kind of tapering into we will be tapering into the summer months, where we frequently have shutdowns in our plants just as a normal seasonal.

Exercise, so that will play into our benefit plus as we mentioned we're in good shape from an inventory standpoint finished goods.

And then my last question is more of a high level question.

If my math holds that doesn't hallways, but if my math holds looks like guidance for the year.

Kind of suggests organic sales growth in the low single digit range or thereabouts.

I'm trying to figure out why that might be though I would think just looking at the easy professional comparisons.

Next three quarters, the tractor supply effects underpinning.

Reggie I'm trying to understand why organic wouldn't be higher than that like mid to high single digit I know youre naturally conservative, but you mentioned the channel inventory is essentially in good shape and we're getting repaired near term.

Both in landscape in snow and then Corona virus, you're not anticipating any material sales impact so I'm trying to understand why the.

Why the extra conservatively as it relates to the season and the organic sales expectations.

Yeah, I would just say about as we look forward.

It's still early in the year.

And so projecting.

Greater growth until we see how the season unfolds and what the year has.

Just isn't normally how we would provide guidance. We just will be will be a much better positioned than second quarter, having the experience of.

Spring, we'll be well along by that point will be in a better position two or two.

You know offer more guidance on the year in the context of our Corona virus discussion and some of the other factors that we talked about we're staying with our guidance for the year.

If you if the season plays out well there maybe opportunities beyond that.

Thank you thank him for both very much appreciate it. Thank you again.

Thank you. Our next question comes from the line of Joe Mondello was the Dougherty and company. Your line is now open.

Hi, good morning, everyone.

Good morning is the sort of follow up on that prior question related to weather could you update us at this point in time in the season, how you're thinking about weather, especially concern you know relative to the context of what you saw last year.

Yes, so weather last year was it was among the worst spring so at least in my memory of when association with with with World. So.

It was in the Midwest, we had some of the most significant snowfalls of the season in April and that pushed out some of the.

Some of the.

Normal spring activities and excitement about the spring well into the mid summer. So what we've built into our plan. This year is what we would call a normal weather pattern, which means normal breaking of this spring.

At this point, we know that the warm up has started.

In the south, particularly and we're seeing a normal pattern at this point. So that's what we've and that is what we've built into our plan at this point.

And so if we do see a normal weather pattern I think I guess, maybe again to sort of follow up to the prior question.

When we see you know.

Pretty good growth on just even if it's normal and I'm here in the north and.

North East and it's supposed to be you know its 50 degrees lot yesterday closely in the Fiftyth today, you know it couldn't be better than normal, but even in a normal can scenario when you see considerable growth.

Compared to last year.

I think if we see a fantastic early start to spring and it flows directly into a decent summer.

Theres opportunity for us to do better we've built kind of a nominal level and at this point and we.

We were coming off a couple of years, where we're excited about this spring and then April turned out to be a surprise so.

We have built in what we think is is the rate forecast for though whether at this point, but it's back to a more normal situation.

Okay into regarding that the professional segment it looks like if I'm doing the math correctly. Your organic revenues were off a year over year, 5% in the quarter itself and you mentioned landscape the return.

And you stated that the to the inventories now are sort of Rightside. So number one going forward you think growth returns and number two in terms of the margins. It looked like even on those organic revenue declines your organic margin.

Expanded quite a bit.

Could you walk us through what the main driving factor to the margin the organic margin expansion wants.

Maybe could I take charge and piece and then we can come back to the revenue growth was if we looked at.

Mark.

Expansion was was good cross the business and we really did see the benefit from our focus on productivity in synergies we were in a better.

Commodity environment from a commodity and tear standpoint, and the net price realization.

Helped as well that more biased toward profile versus the residential so we do expect to see.

Benefits from a gross margin standpoint continue probably not at that same rate year over year of improvement.

But we do continue to expect to see improvement for the year.

As as a as you go through the remainder of the here.

And regarding the timing of growth, we would expect that too we will need to get through the first part of the spring that happens largely in the second quarter, but into the third quarter in the second half of the year, that's for LCD or landscape contractor business of.

Starts to show growth as well.

Okay, and I guess last question just a I know a one person already asked but in terms of the swaps snow equipment sales.

You know, we thought minimal smelting up here in the northeast, but I know boss.

It's more so in the mid West how would you characterize the snowfall in the Midwest. This year and just the sort of clarify looking at the back half of this fiscal year, you're sort of characterizing inventories at soda normal so.

You know based on what we saw in the northeast I guess.

You know minimal snowfall you're not anticipating.

A big effect I'm related to channel inventories in the back of the here.

No, we're not and the way.

From a Midwest perspective, we had a very strong start to the snow season. This year. So.

On average with a probably below.

Average performance in starting in January February.

So it averaged out probably to an average year Boes a tale of two extremes, who is a pretty extreme November December timeframe.

Created a lot of demand all the way through retail that's helped us.

To be in good shape from a field inventory the northeast, though is that exceptions. So.

That was not the case, there, but that's been kind of the second here in a row four for that situation. So did not drive a lot of incremental shipments last year.

Okay, Great and just lastly, renamed could you just repeat what you're sort of in expectations were for product or residential.

Margins margins, yes, what I had mentioned as we did expect residential margins would be.

Similar in Q2 to what we thought in Q1, because as Rick mentioned the bulk of attracted by shipments will occur in Q2, So we're going to see higher growth in may we normally see in residential and acquire we expect the second half to moderate the Q3 in Q4 I'm at a lower level and from a full year.

Standpoint, we would expect on residential margins in the low teens.

Okay, great. Thanks, a lot have a great day, everyone. Thank you.

Thank you. Our next question comes from the line of Tim Lodges with Robert W. Baird. Your line is now open.

Hey, Hey, everybody good morning, good morning.

Just two questions. The first just on track.

Could you just talk about.

With that overlap between between that business and your current.

Toro distribution businesses today, and then I guess, how how fast would or could you kind of sold that business into toward distribution I guess Im just talk about any any plans to kind of mitigate any those types of disruptions.

Right well first of all on the overlap the one of the reasons why we have been so interested in those product categories and specifically then track Inventure products incorporated is.

They are.

To a grief expense are complementary to our existing product lines.

So the strength and multi purpose articulated tractor feeds into our.

Feeds into our landscape contractor business for contractors that feeds into our.

Acreage owners and they really appreciate the the multi purpose capabilities, including switching from snow to summer products and just a.

A host of versatility that comes with that product.

We've also seen a lot of application for the products on in.

Manicured turf areas and also golf courses for rough areas for slowing and so forth. Those are all areas that are complementary.

Two hour.

To our existing product lines in terms of the plans for the channels. They have two primary channels through the dealer dealer network, which does have some overlap with our existing dealers and some that are in a competitive dealers and then the turf side of things which is through.

Distribution similar to our commercial.

Golf and grounds distributors today.

And in all of these cases, we will we have a plan going forward. We're in the process of executing that now and it's too early.

To to talk about those before we get into the specific execution of those but the expectation as we would be picking the.

The strong partners from a dealer standpoint.

Making tough decisions for the turf business going forward.

Okay. Okay. That's helpful. And then one is one of your customers is it is.

On the residential side is it resetting.

Their outdoor.

Power I'll take to really emphasize more as the.

With the am I on kind of battery technology, and I'm, just kind of curious how.

Core office there in terms of maybe new placements versus prior placement. If you can maybe talk about that.

That kind of reset for you guys. Yeah. We are extremely excited about the transition taking place.

To electric specifically lithium ion.

And have been very pleased with with what we're doing with our channel partners.

Yeah for me personally I, just opened up a magazine ethic of popular mechanics, or something and the Torill walk power steel deck more was listed at the top.

The top rated product.

I think what we are what we're seeing is something that we talked about which is it's not a novelty to be a I know a battery powered products at this point, that's really coming back to features and benefits and performance and.

And with no alternative energy power.

Options.

And we feel very positive about our ability to compete there and the response on the products that we've introduced so far has been very positive so.

From for Us from a product standpoint, and partnering with our key channel partners, we feel very good about.

Where that can go.

Great. Thanks for the time can look on the rest of year yeah. Thank you again.

[laughter].

Thank you. Our next question comes from the line of Air Showered with Cleveland Research. Your line is now open.

Two things first of all what's not totally clear on where you see channel inventory now.

Especially in the landscape contractor business I understand what happened over the last 12 months, but can you just summarize where you think channel inventories are now relative to where those customers would like them to be.

Yeah, we finished the year last year at it with a higher inventory level.

To some extent internally plus field inventory.

So it's not out an extraordinary level that's out of the range of things that we've seen.

But we would expect to work through the inventory through the first and second quarters.

Yes, I don't.

Typically I don't have for example, the number yeah no but by Q1 is in a strong retail quarter. So it's not as though there's a lot of retail that occurs within that quarter thats fairly similar to where we would have ended in Q4 and that's really the reason why it extends into the second quarter is the first quarter is a lot about shipments, but not so much.

Retail it's a personal.

Related to that underlying demand that and I understand it's harder quarter to read but obviously you've spent time with your customers at the shows over the last 90 days or so the underlying landscape contractor demand how does that.

How does that feel now and through the year.

I just spoke with some of the representatives from our businesses on the landscape contractor area and they filled very positive about it particularly in the Midwest. There has been good snow revenue and that has not always been the case than the past.

And they're optimistic about the spring of Oh past couple of years have been tough from.

Delayed projects standpoint, and if we did a more normal season. This year there whether you go.

And then lastly, I think we're now you may have.

Commented that there were areas of the business that were better than expected or the business and told it was better than expected in the quarter can you just more narrowly defined where you performed ahead of expectations in the quarter, specifically interested on the revenue line. Yes. In particular, we had mentioned that that shipments to tractor supply. Originally we would have anticipated those two.

In Q2 and based on his as record mentioned based on a mutual discussions and and how that stores were being set for the initial rollout and some of those shipments came into Q1.

So that drove some of the residential growth and also part of our beat.

For the quarter.

Wow.

Okay. Thank you.

Thank you.

Thank you we do have a follow up question from the line of David Macgregor with Longbow Research. Your line is now open.

Yeah. Thanks for taking the follow up I guess, a lot of progress here just year over year in terms of the presence in the visibility of the total Brandon in alternative energy.

In the earlier question was asked about the home depot reset and I guess I just like to maybe in the last couple of mentioned the call here just Rick if you could just help us understand kind of that market. How do you think about secular growth rates.

It's still kind of in the early innings of that category inch and how that might differ from pro versus residential and just kind of cheap bigger thoughts in terms of the growth opportunity and alternative energy.

Great.

If you if you look at the electric portion the batteries portion of walk power Mowers. For example, it's growing it's still relatively the smaller portion.

Of the power that's provided for those products engines are going to be around for a long time, so they're not going to be obsolete anytime soon but we are extremely excited and we had.

Prioritized alternative energy a number of years ago, along with smart connected products and autonomous and for US its self fulfilling says he now this cash being introduced and to see the the response in the marketplace. So we think there is good opportunity to grow in many cases its displacing of the.

Gas power products. So, it's it's not all incremental for us, but our experience. So far has been very positive and the response to the products has been very strong just left as mentioned in his we do have the ability to leverage across our businesses. So there may be you know that's moving faster in some areas like the.

Residential what problem or area, and we can leverage that experience into other areas and vice versa like the commercial side of things so.

We're excited about the growth and we expect that to continue.

You say how much of the current offering is manufactured by you versus sourced.

I agree with regards to typically to batteries.

The just the entire battery powered product offering which.

You talked about the dingo in that trial collection, the Flexfours and just as you think across the entire line structure of alternative energy how much of thats manufactured versus sort of with the exception of some cases in the residential area its manufactured by us.

Allergy is coming from us.

And you don't want to give us a growth rate you don't quantify how you're thinking about the growth opportunity.

I wouldn't I wouldn't.

I wouldn't have that right now.

To be able to quote that too okay terrific. Thanks very much.

Thank you.

Thank you. This concludes the question and answer session. Mr. Rob. Please proceed for closing remarks.

Thanks for your questions and interest in the total company look forward to talking with you again in June to discuss our second quarter results. Thank you.

Thank you for participating in today's conference. This concludes the presentation you may now disconnect good day.

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Good day, ladies and gentlemen, and welcome to the total company first quarter earnings Conference call. My name is there and I'll be your coordinator for today.

At this time, all participants on the listen only mode.

We'll be facilitating the question and answer session towards the end of today's conference.

If anytime during the call you require assistance. Please press Star then zero and the coordinator be happy to assist you.

As a reminder, this conference is being recorded for replay purposes.

I would now like the turn the presentation over to your host for todays conference Nicolas Rose managing director of Investor Relations for this oil company. Please proceed mr. rose.

Thank you and good morning, our earnings release was issued this morning by business wire and a copy can be found in the investor information section.

Corporate website, the tour company Dot com.

On our call today, our recalls and chairman and Chief Executive Officer, M&A, Peterson, Vice President Treasurer, and Chief Financial Officer.

We began 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.

You all are aware of the inherent difficulties risks and uncertainties and making predictive statements.

Our earnings release, as well as or FCC filings detail. Some of the important risk factors that may cause our actual results to differ materially from those in our predictions.

Please note that we do not have a duty to update our forward looking statements.

In addition, during this call we will reference certain adjusted non-GAAP financial measures and metrics.

Reconciliations of historical adjusted non-GAAP financial measures and metrics to reported GAAP financial measures and metrics can be found in our earnings release, we're on our website. The company believes these measures and metrics may be useful in performing meaningful comparisons of past and present operating result to under.

Stand the performance of its ongoing operations and how management views the business.

Such adjusted non-GAAP financial measures and metrics 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 and metrics presented in our earnings release in this call.

With that I will now turn the call over to Rick.

Thanks, and good morning.

Fiscal 2020 is off to a positive start and we're encouraged about the season ahead.

The teams focused on our strategic priorities of profitable growth productivity and empowering people was key to our sales and margin momentum in Q1.

We also announced a strategic acquisition complements our organic growth.

Looking at our financial results, although the first quarter is typically a smaller quarter. Thanks to the efforts of tour of dedicated employees, we achieved record net sales and earnings.

We generated net sales of $767 million up 27% over the prior year and we delivered adjusted diluted earnings per share of 64 cents up 21%.

Results were primarily driven in the professional segment by the addition of Charles Machine works continued demand for boss Snow and ice management equipment and net price realization.

And on the residential in the residential segment.

By the initial delivery of zero turn riding mowers to the tractor supply company.

During the first quarter, we announced the acquisition of venture products and I'm happy to report that we closed on Monday.

Venture products, which manufactures under the Ben track brand is a respected provider of turf landscape and snow and ice management equipment.

Ben track machines are valued for their versatility multi season attachments and hillside capabilities.

Our people share a similar value based culture with strong commitments to innovation quality and customer service.

I want to formally welcome event track team to the total company.

Turning to our operating performance for the quarter. Our professional segment net sales grew 31%, reflecting incremental contributions from the trials machine works acquisition and positive contributions from the boss golf and grounds and irrigation business.

Charles Machine works through its family of businesses with iconic brands, such as ditch, which.

American Auger, Trencor subside hammerhead and radius generated strong incremental revenue for the quarter.

We drove solid retail demand with our new products, including the ditch, which Jay T 24, directional drill and SK 3000 Minis gets dear.

And the recently launched Blue light, we de cured in place lining foot them getting traction in the marketplace.

Nearly one year after the trials machine works team joined the total company the integration of exceeding expectations and we are on track to deliver our synergy target.

Well I turned in another good quarter due to healthy demand for snow and ice management equipment.

This resulted from early winter snowfalls in key regions and sales of undercarriage mom and pop out for new truck models.

We also saw continued strong retail demand for the snow Raider, which turns a multi person job of plowing and treating sidewalk into a 1% operation.

Our worldwide golf and grounds business benefited from solid golf equipment demand in Europe and Asia.

Interest in our new all electric Greensmaster, you try flex writing Greens more with high.

Customers appreciate its reduction and noise maintenance and fuel costs.

Additionally, we saw increased activity in previously deferred golf projects in the U.S. and across our international markets.

Our AG irrigation business posted positive results for the quarter due to increased product demand in the eastern United States in Mexico.

This was partially driven by the introduction of the new Aqua Traxx Zohr precision irrigation tape that offers enhanced clog resistance technology.

Irrigation business growth in the quarter was driven by favorable weather in key domestic regions that helped drive early demand for here 12 products used in residential and commercial applications.

Turning to our residential segment, we achieved over 14% net sales growth for the quarter largely driven by initial shipments of zero turn riding mowers, two tractor supply stores.

We also recorded positive results from our pulp branded DIY irrigation business in Australia.

In summary, we delivered strong performance for the quarter expanded our mass retail channel with the addition of the tractor supply company and completed another strategic acquisition complements our organic growth.

I will now turn the call over to Renee for a more detailed discussion of our financial results.

Thank you Brett and good morning, everyone.

Our company is comprised of a balanced portfolio product to enhance our customers productivity across the season.

Charles Machine works as incremental revenue that is less seasonal due to the use of these product in multi year infrastructure and telecom projects such as Fiveg.

And the focus on underground installation and maintenance.

Our ongoing focus on operational excellence and synergy capture should yield improved margins across the portfolio over time.

This enables the company to allocate capital across a variety of alternatives, including acquisitions.

Dividends.

Paydown and share repurchases.

Where certain factors July out of our control the portfolio of businesses allows us to just shifting weather situation.

Changes in customer demand to provide consistent long term girl and generate healthy free cash flow.

Q1 was no exception.

Even though Q1 is a smaller corridor, we were able to exceed expectations, we so far south.

Based on our ability to adjust to changes in channel demand and product mix.

While maintaining our focus on our strategic initiatives have grown productivity and people.

We reported net sales of $767 million in the quarter, a 27.3% increase from the first quarter fiscal 2019.

Diluted EPS was 65 cents for the quarter compared to 55 cents last year.

Adjusted diluted EPS increased 20.8% to 64 cents.

For the first quarter professional segment net sales increased 30.7%.

To $594.7 million.

Revenue growth was primarily driven by the chart machine works acquisition, which added incremental sale of $161 million.

Excluding Charles Machine works.

Vessel segment sales were lower as compared to a strong Q1 2019.

During Q1, 2020, we realize lower shipments of landscape contractor product.

As we focused on managing field inventory.

This was partially offset by sales across most of our professional businesses, including boss snow and ice management golf and grounds and irrigation businesses.

Professional segment earnings for the first quarter increased 16.5%.

$102.5 million.

Residential segment net sales for the first quarter were up 14.3%.

To $165.8 million.

Mainly driven by shipments of zero turn riding mower to tractor supply.

Residential segment earnings were up 65% to $21.6 million.

Reflecting a 400 basis points year over year improvement and segment margin.

This margin improvement was largely driven by favorable sales mix.

Vivien synergy initiatives.

Lower commodity and tariff costs.

Reduction in freight costs.

In the quarter good operating fundamentals translated to strong segment margin due to a combination of factors.

We anticipate second quarter segment margin to be comparable with the first quarter and then to moderate in the second half of the year.

As a result, we anticipate full year residential segment margins to be on the low teens.

Moving to our operating results.

Reported gross margin for the first quarter was 37.5%.

An increase of 170 basis points.

Over the prior year period.

Excluding acquisition related impacts and other nonrecurring items.

Adjusted gross margin increased 180 basis points to 37.6%.

These increases were primarily driven by productivity improvements in synergy initiatives.

Increased net price realization.

Lower freight commodity and tariff costs.

Yes, you know expense as a percent of sales increased 140 basis points for the quarter, primarily due to higher the higher costs. With addition of child machine works and increased marketing support for the mass retail channel.

Operating earnings as a percent of net sales increased 30 basis points to 11.9%.

Adjusted operating earnings as a percent of net sales increased 20 basis points to 12.1%.

Interest expense increased by $3.4 million for the quarter.

This increase was due to additional debt to fund the child machine works acquisition.

For the full year, we anticipate interest expense of about $33 million as a result of additional debt to fund the Charles machine works and venture products actually acquisition.

The reported effective tax rate was 18.6% for the first quarter and adjusted effective tax rate was 21%.

For the full year, we continue to anticipate an adjusted effective tax rate of about 20.5%.

Turning to the balance sheet cash flow.

It's receivables totaled $321.2 million.

This was up 42.4% from a year ago as a result of Charles machine works and higher sales into the mass retail channel.

Net inventories were up 77.4% to $739 million.

Primarily due to incremental inventory from chart machine works and higher inventory balances in our landscape contractor business.

In the professional segment.

And higher inventories to support our expanded mass retail channel and new product introduction in the residential segment.

Accounts payable increased 23.6%.

To $348 million.

Largely driven by our acquisition of Charles Machine works.

We expect depreciation and amortization for fiscal 2020 of about $95 million.

Capital expenditures of about $100 million.

As I mentioned, we built inventory in preparation for our key selling season.

Free cash flow conversion with negative for the quarter, our projection remains the same.

We continue to anticipate free cash flow conversion to be at about 100% for fiscal 2020.

Delivering high demand product aligned with the variance seasons as well as solutions for multiyear infrastructure project drives more consistent levels of profitability and increases our ability to allocate capital to fund future growth.

Our disciplined capital allocation strategy allows for investment inorganic M&A growth opportunities.

And the return of cash to shareholders for dividends share repurchases and debt pay down.

We continue to invest in innovation, and new product development, which fuels our organic growth.

And we are maintaining a disciplined approach to acquisitions.

Venture products is a recent example of our focus on profitable growth as we broadened our offering to customers through this acquisition.

I will now turn the call back to Rick.

Thanks Ray.

Our record performance in the first quarter customer response to our innovative new products and the outlook for our key markets give us reason for optimism in 2020.

For the full year, we continue to expect revenue of about $3.6 billion and adjusted diluted earnings per share of three dollarsthirty three cents to $3.40 inclusive of the venture products acquisition.

For the second quarter, we expect adjusted diluted earnings per share of $1.28 to $1.33 cents.

As always we have a watchful eye on factors that could pose challenges to our performance such as unfavorable weather.

Trade policy in regular regulatory actions and the impact of Corona virus.

Given the focus on across the virus I'd like to spend a moment, providing our current thinking on its potential effect on Toro.

First and foremost.

We're focused on the health and safety of our employees and other stakeholders, we are monitoring the situation and taking appropriate precautions, including those recommended by government agencies.

In addition, we have a number of internal planning groups that are helping us to prepare for various scenarios.

In terms of our supply chain, we are closely observing the evolve the evolving situation in real time, and taking appropriate steps to minimize disruption.

Our team, including those on the ground in China is working diligently with our suppliers to maintain a steady flow components.

We currently expect a modest financial effect from supply chain disruptions in fiscal 2020.

From a revenue standpoint at this time, we do not expect immaterial impact in 2020.

We have minimal sales from geographies that have been most affected by krona virus so far.

While the situation as evolving quickly our guidance reflects our best estimates of how these factors may affect our second quarter and full year performance.

Let's review prospects for our businesses going forward.

Starting with the professional segment in golf. Despite the second one last year on record in the US annual rounds played were up 1.5% in 2019.

At the recent golf industry show in Orlando, we unveiled a record number of turf and irrigation products for the upcoming season, such as the all new grounds Master upfront rotary lower and the latest links central control system.

Additionally, we unveiled Intel a dash a smart connected technology concept for golf superintendents.

Impella Dash is a golf course management platform that integrates data from Torill products and other sources to provide real time information such as agronomic conditions labor asset location and equipment health.

From energy managers to better run their operations.

We also introduced a new suite of autonomous technologies call Geo Link solutions. These include a multipro sprayer with auto steer capabilities and fully autonomous Reelmaster and Greensmaster concept machines.

Our customers are seeking solutions to alleviate labor challenges and drive productivity and these products can help them achieve their goals in the future.

Turning to our underground give us the outlook continues to be encouraging with strong market growth opportunities such as the Fiveg wireless buildout.

Our new product introductions, such as the GBP 24 directional drills are showing strong early retail demand.

We have the right products to support the full lifecycle of pipe and cable from installation to repair and rehab.

Well showcase our brands and products at the upcoming Con Expo trade show with representation from ditch, which American augers Trencor and sub site.

That's only the recently observed in Orlando during the American rental Association trade show the outlook for our rental and specialty construction business is strong.

The American rental association expects us rental equipment revenues to grow approximately 4% in 2020 and projects continued growth in each of the following three years.

Industry fundamentals support ongoing construction spending which should create demand for our new products.

Battery powered Toro eating go compact utility loader garnered a lot of attention and good pre season orders at the areas show.

Additionally, the recently launched Toro Trx walk behind Trencher received three industry awards for the innovative Intel a tranche smart trashing technology.

Ditch, which also exhibited at area and excitement remains high for the S.K. 3000, many skids Dear.

We're also excited by anticipated demand for recently introduced products for landscape contractors. These include the turf Spreaders sprayers, and originators and Exmark laser and Toro Titan zero turn riding mowers.

Additionally, the grandstand multi force is building momentum with contractors due to the addition of attachments for multi season use.

Strong start to Q1 last year, followed by an unusually wet selling season, resulting in higher than anticipated field inventory at year end.

I mean, we nor assuming more normalized weather.

We anticipate retail demand will reduce our landscape contractor field inventory this selling season.

For residential we're excited to expand product to expand product placement with the tractor supply company.

All of our channel partners will benefit from the refresh brand positioning and product marketing.

In addition, we expect innovative new products will contribute to our results. This year. These include the redesign Timecutter zero turn riding mower.

And the expansion of our line of 60 volt Flexfours lithium ion products, including a 21 inch steel deck walk power mower and a hedge tremor.

In summary.

We expect to drive strong results through a focus on our key strategic priorities. These include profitable growth.

Productivity and operational excellence and empowering people.

Once again.

Thank you to our employees and channel partners for your contributions to the success, we achieved in the first quarter.

We appreciate your dedication and focus as we work together to deliver another successful year.

I'd now like to take your questions.

Ladies and gentlemen, if you wish to ask the question. Please press star followed by one on your touched on telephone.

If you wish to withdraw your question. Please press the pound Keith.

Chris I want to begin.

Please standby for your first question.

Our first question comes from the line of Mike Shlisky with Dougherty and company. Your line is now open.

Good morning, everybody good morning, good morning.

The next started off with the inventories.

The that are on your balance sheet not the ones that are in the channel, but on your own balance sheet those were little elevated in the quarter versus previous quarters I know you have.

Some of the Charles tumor stuff in there, but is there anyway, you can give us a sense as to whether you've got a plan to bring that number down from one dollar perspective. The next couple of quarters there.

Yes, so the biggest factor Mike is the Charles machine works inventory year over year as far as that increase as well as we had indicated our intent to kind of build a little bit ahead of this season, given the introduction of new mass retail channel partner and then some inventory from landscape contractors, just given the weather.

Operation.

That we had in 2019 as we look throughout the year, we do intend to bring down that inventory level and thats included in our free cash flow conversion.

The amount of about 100% for the year. So the biggest driver that we'll see is that inventory level coming down as we go through the year.

Okay great.

We also want to structure.

Sure.

Our gross margin in the quarter on those are some of the best we've seen a couple of years you had mentioned a couple of Tailwinds, Mike the cost of freight maybe some.

Material cost et cetera, how sustainable are those items for the rest of the year do you think you. Please.

Locked in here or.

Is it an uncertain environment, but the pricing them.

Yes, we really did feel good about our gross margins in Q1.

I commend the team for their continued focus on productivity and synergies we didn't see more favorable commodities.

And net price realization more heavily focused on the pro business segment than.

Residential as we look for the year, Mike We do expect to see some gross margin improvement for the year, but not at that same rate year over year.

So we just don't expect part of it was also.

Favorable product mix in Q1, especially in the residential segment.

Okay got it.

Wanted to touch on Vin track as well you closed it just discussed.

I think was Monday, you said.

Right, but as Jay changed at the guidance or anything and I was curious if this is just too small and kind of move the needle.

A lot of onetime items, the kind of watch for this year.

It is definitely a long term.

For you.

Yes, I'll start just a little bit about ventral so it's about 100 million in revenue based on the prior year.

Revenue, we're only going to see a partial year. This year. So it's a little bit smaller from that perspective. It is immediately accretive from an EPS.

Endpoint, excluding onetime items, so we would adjust out any acquisition our integration related.

Cost the profitability.

Within the range of the pro segments. So we feel really good about it it's just relatively.

Scale up Toro, it's relatively small and just early in the year part to be additive to to our guidance.

Okay, and maybe one more for me.

I want to ask you for guidance beyond enjoy good out there for Q2, but just on a broad based this do you think that.

Q2 here could be up to your first quarter when you have.

<unk> billion dollars on your topline or.

Or higher.

Yes.

We will see Howard and fall on we don't give specific guidance.

Revenue for the quarter.

But.

We'll see I mean part of it is depending on.

That's the type of spring that we have only so feel good about it and as we've talked about before 12 machine works is less impacted by the weather. So that is is a real plus for us as well.

Okay. Thanks, Buck Maisonet events and then hopefully appreciate thank you. Thank you.

Thank you. Our next question comes from the line of David Macgregor with Longbow Research. Your line is now open.

Yes, good morning, everyone. Thanks for taking the question.

I guess, just just started on the virus disruption you noted that.

2020 is no revenue impact expected, but in the press release with regard to the guidance you characterize the disruption is nominal.

Is there anyway, you can talk about the impact to that 120, Eighttwo hundred 33 for the Twoq from.

Yes, its supply channel disruptions or.

Just whatever that might be if you're thinking early discussions, but right. There are several elements to the cronto virus considerations of you could imagine.

First and foremost as we talked about the safety of our employees close making sure that we are keeping.

Yes.

Roger coal travel guidance in place and so forth, but then you look at foot supply side and the demand, but on the supply side.

From the first moment that krona virus was mentioned we've been working with our suppliers. There are a handful of key suppliers for example, in China that especially matter.

And we have good confidence that we go through the next 30 days with no disruptions and then they're working on plans to bridge any possible disruption after that but to take this fall and some that summer we get into mid summer that's kind of a normal shutdowns fruit for us. So we really feel the key right now as bridging through the spring.

Good.

On the demand side.

Again, the exposure in the countries the especially affected.

They are important to us, but they would not be.

Significant to the outcome total revenue standpoint, and we could likely make up for those and other areas I think.

The commentary about 10, Tractions one thing on the positive side that helps us.

Balance out some of those risks as well.

Thanks for coming that.

Charles Machine works I mean, you're approaching the anniversary that transaction by all accounts ships have been very successful you talked in the press release, but you're running ahead of your original expectations.

My recollection was it was originally about 30 million a cost synergies over three years can you just could you give us a sense of where you are on the synergy curve and just how much ahead of expectations, you might be and and as a consequence does that 30 million become a bigger number or is this just a timing issue, where you're pulling forward and you're still attracted to 30.

Yes.

The $30 million was 30 million over three years, and we have high confidence that we will get to that number we do see opportunities to do more I think we mentioned on our last call that so we're optimistic that there are more opportunities kind of opens the ones as we look up the rest of the company as well we have.

Taken a.

A very disciplined approach to.

To our scorekeeping in that area. So we're not we're not counting those synergies until we can be absolutely confident that they will be realized but we certainly see visibility to exceeding $30 million as we have previously talked about and that's the on the synergy side, but another elements is really the broader element.

Which is the integration process itself and that is going.

Well ahead of schedule in terms of.

The restructuring that took place that was immediately in place on all the actions that we took from a strategic standpoint.

With the various business businesses were.

Our right on track or well ahead of being on track right and just to be clear 30 million was cost synergies than there were incremental revenue synergies anticipated above that right.

30 million was.

Cost synergies and we Didnt get specific about revenue opportunities.

But.

There is also working capital benefit that we see as we work.

More closely with with the organization relative to.

The team here at Torill right and then certainly for me is just this.

Professional landscape contractor issue, where you've got I guess it wasn't there was inventory issue last quarter as well as I recall again, it's something we're talking about here. This quarter can you just unpacked that floor is a little bit give us little more granularity around what exactly is happening there and why this this surplus is continuing on that.

It's something that is going to resolve.

And by the end of this quarter or do you have some maybe some obsolete inventory there that is going to require any sometime a write off just a little more detail there would be really helpful.

First going backwards. There is no obsolete inventory that has to be written off it really is the story really starts last year at the time pure remember professional segments in general was up almost 13% last year, so that comp.

Pretty difficult in the first quarter.

All of our professional businesses are actually growing the exception as the landscape contractor business and last year. At this time, there was tremendous excitement with the combination of new products and the prospects are those strong spring so.

We shipped from products that ultimately.

Did not move as quickly at retail because it was a horrendous year from weather.

As I mentioned I think in their prepared remarks, the weather second wesco lease season in U.S. history. So not just did not move as quickly retail and we expect to have that corrected through the second quarter and you'll see growth across all the professional business. We expect in the second.

Through the year end.

All this is reflected in our guidance and really for the first quarter.

The quarter, what precisely as we have plans. So this was a plans.

Adjustment to our inventory that we that we put into the year. Okay. Thanks very much.

Thank you. Our next question comes from the liner Tom Hayes with Northcoast Research. Your line is now open.

Hi, Good morning. Thank you for taking my question for me Tom.

Hey, Rick I was wondering if you felt a little bit more detail on the rollout tractor supply maybe your thoughts on.

Does that apply.

Does the initial loading apply to all locations or your thoughts on how that's playing out so far.

Yes, the our association and our projects with with tractor supply is going extremely well.

Relationship is growing stronger everyday with them and we were right on track with where we expect to be actually shifts more products to tractor supply in the first quarter than we expected that's really a agreed upon shipment rate based on the on the initial subsets of stores on what the in it.

Actual response has been from a customer standpoint.

So the bottom line is its going exactly as planned and.

The good thing really for the entire residential business is that.

Provides additional critical mass for us to invest in products in the brand in.

Marketing, but really strengthens business for all of our partners. So.

Other mass very important mass retailers plus our dealer network.

Good.

Yes, the bulk of the shipments will still take place in the second quarter. So that's that's true. We just we did ship a few more units in first quarter.

Great. Appreciate the color then I guess, just secondly, circling back to excuse me Michaels earlier question on inventory levels.

As far as channel inventory levels, it's been kind of slow season last month or so.

Yes, your thoughts on channel inventory on the snow so the business.

Yes, we are were generally in good shape snow inventory.

The the market in the northeast was a little slower because of less snow. So it's a little bit higher there, but on average arsenal inventories and solid shape at a very very strong start to the season and we have the same time weve.

Our share in the Midwest is very strong and that's where a while the snow events took place earlier in the air So.

We're we're in good shape from a field inventory both on the residential side and exceptionally good position on the boss side.

Thank you appreciate the color.

Thank you.

Thank you. Our next question comes from the line Sam Darkatsh with Raymond James Your line is now open.

Good morning, Rick Good morning, Rene how are you Oriental good.

Few questions most of mine have been asked and answered.

If we could return back to the unfortunate corrado virus topic.

Give us a sense generally speaking what percentage of your overall skews have Chinese based components.

And our they overweight in any particular.

Product vertical im trying to get a sense of margin wise if this.

Becomes an issue, our where would it where would we see it.

Mostly transpire.

Yeah, we wouldnt have an exact percentage of content, we have the information that we don't have it right in front of us here.

It would be a bit higher exposure more on the residential side of things just in general.

But it would be on the commercial side, that's not to say there wouldn't be key components, though would be part of commercial products, but.

In terms of the volume of.

Cogs it would be more on the residential.

Residential through probably.

Homeowner.

Type of product.

And then you mentioned that thank you have some critical vendors in the area.

At year end very close contact with and for 30 days you envision no disruptions.

I don't remember the exact verbiage two years, we said you had plans with them contingency plans post for 30 days can you do a little bit more on packing in terms of what specifically those plans.

Might look like and what assumptions are included there in terms of how quickly the.

The vendors might have to get up and running or what the utilization rates might look like as opposed to now.

Sure.

And were we are.

We have those plans in place across our global supply chain, So I'll, probably talk little bit about China, but the same holds true other of Italy, South Korea, Japan, or any secondary suppliers that might be supplying.

Top core supplier somewhere else.

So.

We have.

Our team specifically looks at every part number and when it needs to be in our plants, what's on the water.

If you think about if there are six weeks of shipping time, theres actually a continuous flow of products still coming.

By water, even if they extend the.

The lunar.

New year as they did.

And.

Just in terms of the spot the status of our key suppliers in China. They are approaching 100% at this point. So they are well above 75 expect to be at 100% within two weeks, we have a small plants in China that also is up and operating.

So the what we would build in.

All the way through the period that I talked about March and beyond we do not expect.

The effect to be material for us we have a plan in place.

We would expect to see is some premium in freight because some of those products, we would not put on a vote we would.

We would.

Use air shipping.

And that the challenge, though or look at right now is.

His availability of freight.

Your ears build up Thats the.

While the areas that were working right now to make sure that we've got carriers that can that can fill those gaps we might see some.

Random short term sorts of disruptions on our lines, where we don't expect that to be significant and keep in mind, we're kind of tapering into we will be tapering into the summer months, where we frequently have shutdowns and our plans just as a normal seasonal.

Exercise, so that will play into our benefit plus as we mentioned we're in good shape from an inventory standpoint in finished goods.

And then my last question is more of a high level question.

If my math holds that does it always but if my math holds looks like guidance for the year.

Kind of suggests organic sales growth in the low single digit range or thereabouts.

I'm trying to figure out why that might be though I would think just looking at the easy professional comparisons.

Next three quarters, the tractor supply effects underpinning.

Ramsey Im trying to understand why organic wouldn't be higher than that like mid to high single digit I know you are naturally conservative, but you mentioned that channel inventory is essentially in good shape and we're getting repaired near term.

Both in landscape in snow and then Corona virus, you're not anticipating any material sales impact so I'm trying to understand why the.

Why the extra conservatively as it relates to the this season and the organic sales expectations.

Yes, I would just save on as we look.

Portware.

It's still early in the year and so projecting greater growth until we see how the season unfolds and what the your house.

Just isn't normally how we would provide guidance. We just will be will be a much better position in second quarter, having the experience of.

Spring, we'll be well along by that point will be a better position to too.

Offer more guidance on the year in the context of our.

We're on a virus discussion and some of the other factors that we talked about we're staying with our guidance for the year.

Yes, the Cdone plays out well, there maybe opportunities beyond that.

Got it. Thank you. Thank you both pretty much appreciate it thank you.

Thank you. Our next question comes from the line of Joe Mondillo with Sidoti and company. Your line is now open.

Hi, good morning, everyone.

Morning is to sort of follow up on that prior question.

Related to weather could you update us at this point in time in the season, how you're thinking about weather, especially.

Relative to the context of what you saw last year.

Yes, so weather last year was it was among the worst spring so at least in my memory of My Association with with.

Toro so.

Was in the Midwest, we had some of the most significant snowfalls of the season in April and that pushed out some of the.

Some of the.

Normal spring activities and excitement about the spring well into the mid summer. So what we've built into our plan. This year as what we would call a normal weather pattern, which means normal breaking of this spring.

At this point, we know the warm up has started.

In the south, particularly and we're seeing the normal pattern at this point, so thats, what weve and that is what we've built into our plan at this point.

And so if we do see a normal weather pattern I think I guess, maybe again sort of follow up to the prior.

Question.

When we see.

Pretty good growth.

Even if its norm on I'm here in the north.

Northeast and it's supposed to be 50 degrees lot yesterday puts me in the Fiftyth today.

It could be better than normal, but even in a normal comes.

Scenario.

When you see considerable growth.

Compared to last year.

I think if we see a fantastic early start to spring and if flows directly into.

Decent summer.

There's opportunity for us to do better we've built kind of a nominal level and at this point and we.

We were coming off a couple of years, where we are excited about this spring and then April turned out to be a surprise so.

We've built in what we think is is the right forecast for though whether at this point, but it's back to a more normal situation.

Okay.

Regarding the professional segment it looks like if I'm doing the math correctly your organic revenues were off.

Year over year, 5% in the quarter itself and you mentioned landscape the return.

You stated that the to the inventory now are so to right size so number one.

Going forward you think growth.

Returns and number two.

In terms of the margin.

Looked like even on those organic revenue declines your organic margin.

Expanding quite a bit.

Could you walk us through what the mean driving factor to the margin the organic margin expansion wants.

Maybe could I take charge and piece and then come back to the revenue growth was if we look at.

Mark.

Expansion with was good cross the business and we really did see the benefit from our focus on productivity and synergies we were in a better.

Commodity environment from the commodity and hair standpoint, and a net price realization.

Helped as well but.

I asked why that pro nurses the residential so we do expect to see.

Benefits from a gross margin standpoint continue probably not at that same rates year over year of improvement Joe, but we do continue to expect to see improvement for the year.

As as as we go through the remainder of the year.

And regarding the timing of growth, we would expect that too.

We will need to get through the first part of the spring that happens largely in the second quarter, but into the third quarter in the second half of the year, that's for LCR landscape contractor business.

Starts to show growth as well.

Okay, and I guess, what questions if I know a 1% already asked but in terms of the Swat snow equipment sales.

We saw a minimal snowy up here in the northeast, but I know boss.

It's more so in the mid west.

How would you characterize the snow fall in the Midwest This year and just sort of clarify looking at the back half of this fiscal year.

You are sort of characterizing inventories that sort of normal so.

Based on what we saw in the northeast thank guys.

Minimal snowfall you're not anticipating.

A big effect related to channel inventories in the back half of the here.

No, we're not and the way from our Midwest perspective, we had a very strong start to the snow season. This year. So.

On average with probably below.

Average performance in starting in January February.

So it averaged out probably to an average year Boes a tale of two extremes, who pretty extreme November December timeframe.

Created a lot of demand all the way through retail that helps us.

To be in good shape from a field inventory the northeast, though is that exceptions. So.

That was not the case, there, but that's been kind of the second here in a row four for that situation. So did not drive a lot of.

Incremental shipments last year.

Okay, Great and just lastly, Rene could you just repeat what you're sort of expectations were for products.

Our residential.

Margins margins, yes, what I had mentioned as we did expect residential margins would be.

Similar in Q2 to what we thought in Q1, because as Rick mentioned, the bulk of the tractor supply shipments will occur.

You too so we're going to see higher growth in may we normally see in residential and acquire we expect the second half to moderate the Q3 in Q4.

Lower level and from a full year standpoint, we would expect on residential margins in the low teens.

Okay, great. Thanks, a lot have a great day, everyone. Thank you.

Thank you. Our next question comes from the line of Tim Lodges with Robert W. Baird. Your line is now open.

Hey, Hey, everybody good morning.

Morning.

Just two questions. The first just on other then track.

Could you just talk about.

With the overlap between between that business and your current.

Toro distribution businesses today, and then I guess, how fast would or could you kind of fold that business into towards distribution. I guess, just talk about any any plans to kind of mitigate any those types of disruptions.

Right well first of all on the overlap the one of the reasons why we have been so interested in those product categories and specifically then track and venture products incorporated is.

They are.

To a great expense complementary to our existing product lines.

So the strength in multi purpose articulated tractor.

Feeds into our.

Feeds into our landscape contractor business for contractors have feeds into our.

Acreage owners and they really appreciate the the multipurpose capabilities, including switching from snow and so some are products and just.

A host of versatility that comes with that product.

We've also seen a lot of application for the products on in.

Manicured turf areas and also golf courses for rough areas for slope mowing and so forth. Those are all areas that are complementary.

Two hour.

To our existing product lines in terms of the plans for the channels. They have two primary channels through the dealer dealer network, which does have some overlap with our existing dealers and some that are in a competitive dealers and then the turf side of things which is through.

Distribution similar to our commercial.

Golf and grounds distributors today.

And in all of these cases, we will.

We have a plan going forward, we're in the process of executing that now and it's too early.

Good to talk about those before we get into the specific execution lows, but the expectation as we would be picking the.

So strong partners from a dealer standpoint, and making invest decisions for the turf business going forward.

Okay. Okay. That's helpful. And then one of one of your customer. This is on the residential side is resetting.

Their outdoor.

Power I'll turn it to really emphasize more of the.

Lithium ion battery technology, and I'm, just kind of curious how.

Core office there in terms of maybe new placements versus prior placement. If you can maybe talk about that.

Yeah that kind of reset for you guys. We are extremely excited about the transition taking place to electric specifically lithium ion and have been very pleased with.

With what we're doing with our channel partners.

Yes for me personally I, just opened up magazine ethic of popular mechanics, or something and the Toro walk power steel deck more was listed at the top.

The top rated product.

I think what we are what we're seeing is something that we talked about which is it's not a novelty to be.

Hey.

A battery powered products at this point, that's really coming back to features and benefits and performance and.

As with alternative energy power.

Options.

And we feel very positive about our ability to compete there and the response on the products that we've introduced so far has been very positive so.

From for Us from a product standpoint, and partnering with our key channel partners, we feel very good about.

For that can go.

Great. Thanks for the time could look on the rest of year.

Thank you again.

Thank you. Our next question comes from the line of Eric Showered with Cleveland Research. Your line is now open.

She thinks.

First of all.

Lets not totally clear on where you see channel inventory now.

Especially in the landscape contractor business I understand what happened over the last 12 months, but can you just summarize where you think channel inventories are now relative to where those customers would like them to be.

Yeah, we finished the year last year with a higher inventory level.

To some extent internally plus field inventory.

So it's not out of extraordinary level, that's out of the range of things that we've seen.

But.

We would expect to work through the inventory through the first and second quarters.

Yes.

Specifically I don't have for example in lumber unknown, but by Q1 isn't as strong retail quarter, Sally not as though there's a lot of retail that occurs within that quarter Thats fairly similar to where we live ended in Q4 and that's really the reason why it extends into the second quarter is the first quarter is a lot about shipments but not.

So much about retail it's a personnel.

Related to that underlying demand that and I understand it's harder quarter to read but obviously you've spent time with your customers at the shows over the last 90 days or so the underlying landscape contractor demand.

How does that.

How does that feel now and through the year.

No just spoke with some of the representatives from our businesses and the landscape contractor area and they filled very positive about it.

Particularly in the Midwest there has been good snow revenue.

And that has not always been the case in the past.

And they're optimistic about the spring.

Well past couple of years have been tough from.

Delayed projects standpoint, and we did a more normal season. This year there whether you go.

And then lastly, I think you may have.

Commented that there were areas of the business that were better than expected or the business in total was better than expected in the quarter can you just more narrowly defined where you performed ahead of expectations in the quarter, specifically interested on the revenue line. Yes. In particular, we had mentioned that that shipments to tractor supply originally we would have anticipated.

In Q2 and based on his as record mentioned based on our mutual discussions and how that stores were being sat for the initial rollout and some of those shipments came into Q1.

So that drops in that residential growth and also part of our fee.

For the quarter as well.

Okay. Thank you.

Thank you.

Thank you we do have a follow up question from the line of David Macgregor with Longbow Research. Your line is now open.

Yes, thanks for taking the follow up.

Yes, a lot of progress here just year over year in terms of the presence in the visibility of the Toro brands in alternative energy.

In the earlier question was asked about the home depot reset and I guess I'd just like to maybe in the last couple of mentioned the call here just Rick if you could just help us understand kind of that market. How do you think about secular growth rates.

It's still kind of in the early innings for that category inch and how that might differ from pro versus residential and just.

Your thoughts in terms of the growth opportunity and alternative energy.

Right.

Few if you look at the electric portion the battery portion of walk power mower certain Apple is growing it's still relatively the smaller portion.

The power that's provided for those products engines are going to be around for a long time, so they're not going to be obsolete anytime soon.

But we are extremely excited and we had.

Prioritized alternative energy a number of years ago, along with Mark connected products and autonomous and for US It self fulfilling the now this product being introduced and.

To see the the response in the marketplace. So we think there is good opportunity to grow in many cases, its displacing of a gas powered products. So it's it's not all incremental for us but.

Our experience so far has been very positive and the response to the products has been very strong.

Lastly, I would mention is we do have the ability to leverage across our businesses. So there may be.

Thats moving faster in some areas like the residential walk power mower area, and we can leverage that experience into other areas and vice versa like the commercial side of things so.

We're excited about the growth and we expect that to continue.

Can you say how much of the current offering is manufactured by you versus sourced.

I agree with regards to specifically to batteries.

Yes, the just the entire battery powered product offering which.

Can you talk about the end goal in the try flexion than Flexfours and just as you think across the entire line structure of alternative energy how much of that is manufactured so.

With the exception of some cases in the residential area its manufactured by us.

Technology is coming from us.

Okay, and you don't want to give us a growth rate equal to quantify how you're thinking about the growth opportunity.

I wouldn't I wouldnt.

I wouldn't have that right now.

To be able to quote that too okay terrific. Thanks very much.

Thank you.

Thank you. This includes the question and answer session. Mr. Rob. Please proceed with closing remarks, great. Thanks for your questions and interest in the total company look forward to talking with you again in June to discuss our second quarter results. Thank you.

Thank you for participating in today's conference. This concludes the presentation you may now disconnect good day.