Q2 2020 Toro Co Earnings Call
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Good day, ladies and gentlemen.
Turning to the Toro company second quarter earnings Conference call.
My name is Daniel and I will be your coordinator for today.
At this time all participants are in a listen only mode.
We will be facilitating the question and answer session towards the end of today's conference.
If it anytime during the call you require assistance. Please press star followed by zero and a coordinator we'll be happy to assist you.
As a reminder, this conference is being recorded for replay purposes.
I would now like to turn the presentation over to your host for today's conference Nicholas roads, managing director of Investor Relations for the <unk> Company. Please proceed mr. roads.
Thank you anymore.
Our earnings release was issued this morning, but this is wire and a copy can be found any investor information section of our corporate website The tour company Duck.
On our call today, or verticals, and chairman and Chief Executive Officer, and Rene Peterson, Vice President Treasurer, and Chief Financial Officer.
Beginning with our customary forward looking statement policy.
During this call we will make forward looking statements regarding our business the future financial and operating results.
We're all aware of inherent difficulties risks and uncertainties and making predictive steam.
Our earnings release as well as far as you see filings.
Well some of the important risk factors, including those related to cope with 19 that may cause our actual results to differ materially from those in our prediction.
Please note that we do not heavy duty to update our forward looking statements.
In addition, during this call we will reference certain non-GAAP financial measures reconciliations of historical non-GAAP financial measures to reported GAAP financial measures can be found in our earnings release, we're on our website. The company believes these measures may be useful in performing meaningful comparisons of past and present operating results.
To understand the performance of its ongoing operations and how management views the bid.
Such non-GAAP financial measures should not be considered superior to.
As a substitute for or as an alternative to and should be considered in conjunction with the GAAP financial measures presented in our earnings release in this call.
With that I will now turn the call over to Rick.
Thanks, and good morning.
I'll start by acknowledging those ads and history and recent events Minneapolis, Saint Paul Metro area and across the nation began with a terrific job of one of our community members George Floyd.
Our Hearts go out of a family and friends of Mr Floyd and the communities directly affected.
Regrettably. These events are representative of larger social and systemic issues.
As our communities work together through these tragic circumstances, we must stand for what is right.
The total company has a long standing focus on the importance of respect for all.
And our workplaces in how we conduct business and in the communities we serve.
In addition, some events over the past week, we all continue to deal with the effects of Covance 19.
We hold all of you and your families are safe during this difficult time.
And with humbling to see how so many people and organizations moved forward without hesitation to do what was needed to help others have the coven 19 pandemic spread around the world.
In response to the grown the virus, we prioritize the safety wellbeing and support of our employees customers and communities.
In addition to our value of respect for all as previously mentioned some of our other core people values include carrying relationships trust and integrity.
Even through significant personal and family challenges our team has transformed the way we work to protect the safety of one another supporter customers and help our communities.
I have deeply grateful for all of our employees around the world.
Many who are coming into our facilities each day to develop test bill and ship our products.
The teams flexibility resourcefulness and resolve is being demonstrated as we've acted to make our facilities safe and implement work from home policies.
At the same time, we are maintaining the critical functions of our manufacturing operations.
All of this is vital given the total company standing as an essential business.
In support of our communities, we launched a special Kobin 19, giving initiative called together, we can do more.
Through this initiative, we directly donation match all employee contributions made to covert 19 at least efforts.
In addition, the Toro Foundation contributed $500000 organization supporting families and communities costs directly affected by the endemic.
Recognizing the financial strain among our employees and their families. We expanded the availability of the Melrose Hoffman employee critical need fund.
Additional voluntary contributions were made to that funds by our leadership team and the board of directors.
To quote our legendary former chairman and CEO, Ken, though rose through sadly passed away last month.
Everyone has the potential to contributes to achieving the goals of the company.
You unleash that potential success will be a natural byproduct.
These words mean alive coming from Ken We successfully led the total company through some of the most challenging times in our history.
Thanks, again to our amazing team well certainly lived up to Ken's model of excellence during the past few months.
I will turn out to our business and financial review.
From a business perspective, our focus has been on maintaining ample liquidity growing our position in the market and balancing short and long term objectives.
Our results this quarter or net sales of $929 million down 3.4% from the prior year, primarily due to reduced professional segment retail demand as a result of Cobank team.
We reported adjusted diluted earnings per share of 92 cents down 21.4% from the prior year.
To provide specific information by business segment and the professional segment total net sales were $661 million down 8.6%.
Sales benefited from incremental contributions from the Charles machine works and venture products acquisitions.
This quarter, we passed the one year anniversary of the Charles Machine works acquisition. We are fortunate to have this business and its employees as part of our company.
Carlos Machine works added scale and diversification to our portfolio open access to new markets and provided additional opportunities for synergy and value creation across the company.
We are on track to achieve or exceed our stated synergy targets.
Offsetting the gains from acquisitions were declines can most of our professional businesses as a result of soft retail demand due to covert 19.
The declines were most pronounced in commercial golf and grounds for soft fewer shipments of turf equipment navigation products. This was driven by budget deferrals and tech golf clubs and municipalities.
Landscape contractor businesses, which had fewer shipments as our channel partners aligned field inventory levels with reduced retail demand and rental specialty and underground construction businesses, which experienced reduced sales volumes as a result of global economic slowdown and impact.
On the construction in oil and gas markets.
It's important to note. The professional segment performance was tracking consistent with our expectations of modest growth until mid March.
In April we experienced additional and significant declines in most of our professional markets.
We typically do not discuss the current quarter in our earnings calls. However, we appreciate that this quarter is very different so we will share some color on what happened in may.
For the threshold segment. It was largely a story of new equipment purchase deferrals and focus on service and repair.
We're seeing continued challenges across golf and grounds landscape contractor and rental specialty and underground construction businesses.
These challenges stem more from lower budgets and deferred purchases from temporary facility closures.
For golf, most play has resumed and demand for rounds has been robust.
However, lower food and beverage and events revenue has negatively affected club budgets, putting pressure on new equipment purchases.
For our municipal grounds customers budgets have been lower deferred diverted to non ground support.
It has resulted in reduced equipments demand.
The repair and to first story is the same with landscape contractors. However, with the lessening of stay at home restrictions. There was some improvements in these categories starting in late May.
In rental specialty and underground construction fiveg infrastructure and broadband spending increased modestly in Maine, but high demand for system capacity as a result will stay at home orders.
Underground infrastructure rehab and repair projects remains steady.
However, this is being offset by continued construction and oil and gas projects office reduced capital spending from national rental accounts, resulting in new equipment purchase deferrals and lower dealer retail.
In the residential segment sales were up 12.9% in the second quarter. This was mainly driven by incremental shipments to our expanded mass retail channel and strong retail demand.
Some of the demand drivers were favorable spring weather, new products and consumers focusing on home and garden improvements during stay at home orders.
Our product sales through captives and partner E Commerce sites were up significantly in the second quarter.
For me residential segment momentum continued driven by the same trends.
Regarding operations all of our facilities are currently open with some operating at reduced capacity.
During the second quarter, some sites closed temporarily due to government orders or to manage inventory levels. We will continue to align production to customer demand comply with government orders and ensure the safety of our teams we had no supplier related shutdowns in the quarter.
Regarding cash and financial flexibility, we continue to have a strong balance sheets and ample liquidity.
We took measures in the quarter to ensure that we have sufficient cash given the economic climate.
For the remainder of fiscal 2020, we are taking across the board pay cuts inclusive of leadership and eliminating merit increases and discretionary retirement plan contributions.
We also reduced expenses in pause new hires except for critical positions.
At the same time, we have preserve jobs and retain key talent.
We continue to benefit from productivity initiatives and enterprise synergy opportunities as a result of recent acquisitions.
As with past periods of economic challenge, we know what works and how to play to our strengths.
Our culture and business management approach are well adapted to respond to uncontrolled external variables.
While certain factors do why out of our control our diverse portfolio and flexibility help us adjust to shifting situations, while continuing to provide long term growth and sustain free cash flow.
We will continue to invest in the future of benefit of all of our stakeholders with that I will now turn the call over to Renee for a more detailed discussion of our financial results.
Thank you Rick and good morning, everyone.
The total company is comprised of a balanced portfolio of products that enhance our customers productivity across procedure.
The company has a strong balance sheet that enables us to allocate capital effectively among a variety of alternative.
Including new product development acquisition.
Dividends debt Paydown and share repurchases.
Q2 was no exception.
Why the coping 19 pandemic affected our results, we were able to adjust our operation and move the business forward.
We reported net sales of $929 million in the quarter.
3.4% decrease from the second quarter fiscal 2019.
Diluted EPS was 91 cents for the quarter compared to one dollar and seven cents last year.
Adjusted diluted EPS was 92 cents.
Down 21.4% compared to the second quarter fiscal 2019.
For the first six months to fiscal 2020 net sales increased 8.4%.
Diluted EPS was $1.55 Karen.
Compared to $1.62 cents in the first six months fiscal 2019.
You are today adjusted diluted EPS was $1.56 cents.
Compared to $1.69 cents a year ago.
Before I review segment results I'll cover liquidity.
Back in March we entered into a three year term loan agreement for $190 million.
This was to refinance our revolving credit facility borrowings incurred in connection with venture products acquisition, which closed on March 2nd.
With the funding of this new term, allowing the company now have liquidity of approximately $800 million.
Including cash and cash equivalents of $200 million.
And availability under our revolving credit facility of approximately $600 million.
We have no significant that maturity until April 2020 shale.
We continue to work closely with their banking partners and monitor credit markets.
Receivable collections continue to track similar to last year.
All of this gives us confidence in our ability to whether the current and potentially extended period of macroeconomic uncertainty.
I'd like to provide more color and some of the actions we've taken hellfire to maintain a strength as the company given the unprecedented speed and on the pandemic.
From a demand perspective, we've executed business continuity plans and work to ensure product availability in areas, where demand remains strong such as in a residential segment.
Additionally, we scaled back production in areas, where demand was weaker.
As we've discussed we've taken actions to align costs with near term demand and we'll continue to look for ways to make our cost structure more flexible and competitive.
Meanwhile, we focused on maintaining productivity in synergy initiatives.
Yes were driven by recent acquisitions and then extend it across the enterprise.
Now to the segment results.
For the second quarter professional segment net sales decreased 8.6% to $661 million.
The top line benefited from the child machine works and venture product acquisition.
Which together added incremental net sale I'm $142 million.
Professional segment sales declined compared to the second quarter at 2019 due to lower shipments driven by college related demand pull back.
Until mid March and the impact is probably 19 sales were tracking to modest growth in line with our expectation.
We saw modest sales decline in the second half of March and a more significant reduction in April as compared to prior year performance.
For the year to date period of fiscal 2020, net sales increased 6.6% compared to the same period of fiscal 2019.
Professional segment operating earnings for the second quarter decreased 29.2% to $106 million, reflecting a 460 basis point decline in segment operating earnings as a percent of sale.
Primarily due to.
Manufacturing variance as a result of cobot 19 related facility closures and social distancing initiatives.
Incremental marketing engineering and administrative costs as a result on the Charles machine works and venture products acquisition.
Higher warranty expense and unfavorable product mix.
This was partially offset by favorable net price realization.
Productivity in synergy gains.
Lower commodity and tariff costs and decreased incentive compensation expense.
You are today professional segment operating earnings declined 12.3% compared to the same period in the prior fiscal year.
Professional segment operating earnings decreased 360 basis point.
To 16.6%.
Residential segment net sales for the second quarter were up 12.9% to $262 million.
Mainly driven by incremental shipments of zero turn riding and walk power mowers should expand in mass retail channel.
As well as strong retail demand.
Year to date fiscal 2020, net sales increased 13.4% compared to the same period of fiscal 2019.
Residential segment operating earnings were up 68.5% to $37 million.
This reflects a 470 basis point year over year increase in segment operating earnings to 14.2%.
This improvement was largely driven by productivity in synergy gains.
Lower commodity and tariff costs.
Lower freight cost and SGN a leverage.
This was partially offset by unfavorable manufacturing variances and higher warranty expense.
You are today residential segment operating earnings increased 67.2% to $58.7 million.
On a percent of sales basis segment earnings increased 440 basis points to 13.7%.
Moving to our operating results.
We reported gross margin for the second quarter of 33% a decrease of 40 basis points over the prior year period.
Excluding acquisition related charges and onetime costs associated with inventory write down on the tour our branded underground business.
Adjusted gross margin decreased 100 basis points to 33.4%.
The decrease in adjusted gross margin was primarily driven by manufacturing variances due to production downtime and inefficiencies as a result to cover 19 related closures.
And product mix with higher residential segment net sales compared to Q2 of 29 team.
This was partially offset by productivity in synergy gains.
Favorable net price realization within our professional segment.
And lower commodity and terra costs.
For the first six months of fiscal 2020.
Gross margin was 35.1% compared with 34.3% in the prior year period.
Adjusted gross margin was 35.3% compared with 34.9% in the first six months of fiscal 2019.
SGN expense as a percent of sale increased 40 basis points to 19.5% for the quarter due to incremental marketing and engineering cost as a result, other professional segment acquisitions.
As well as higher warranty expense.
These cost increases were partially offset by decreased incentive compensation costs and lower transaction and integration costs.
SGN expense as a percent of sale for the first six months of fiscal 2020 was 22.3%.
Up 130 basis points from the prior year period.
Operating earnings as a percent of net sales decreased 80 basis points to 13.5% for the second quarter.
Adjusted operating earnings as a percent of net sales decreased 240 basis points to 14%.
For the first six months of fiscal 2020 operating earnings as a percent of net sales were 12.8% compared to 13.3% a year ago.
Adjusted operating earnings as a percent of net sales for the first six months fiscal 2020 were 13.1% compared with 14.7% a year ago.
Interest expense increased $2 million and $5.4 million for the second quarter and year to date, respectively.
Compared to a year ago.
These increases were due to higher debt outstanding related to the professional segment acquisition.
For the full year, we anticipate interest expense of about $34 million.
The effective tax rate was 18.9% for the second quarter and the adjusted effective tax rate was 20%.
For the first six months of fiscal 2020.
The effective tax rate was 18.8% and adjusted effective tax rate was 20.4%.
For the full year, we anticipate an adjusted effective tax rate of about 20.5%.
Turning to the balance sheet and cash flow.
Accounts receivable totaled $400 million. This was down 6.6% from a year ago as a result of lower professional segment sales at the end of the second quarter driven by reduced demand due to cover 19.
This is partially offset by incremental residential segment sales to the expanded mass retail channel.
An additional receivable as a result adventure product acquisition.
Inventory was up 16.8% to $714 million from a year ago.
Primarily due to higher finished goods in our professional segment due to covert 19 related sales reduction.
Increased raw materials and work in process as a result of production downtime due to facility closures and production inefficiencies.
An incremental inventory from venture products.
Accounts payable decreased 16.4% to $327 million from a year ago.
This was mainly due to decrease material purchases as we align production level with reduced sales volume.
Incremental payables for venture products, partially offset the decline in purchases.
We expect depreciation and amortization for fiscal 2020 of about $100 million.
Which includes approximately $3 million, a fair value step up related to the acquired inventory from venture products.
We are now estimating lower capital expenditures of $80 million versus our prior expectation of $100 million.
Free cash flow for the quarter was below prior year amount, primarily due to decreased net earnings.
Lower accounts payable and higher inventory.
Our disciplined capital allocation strategy includes investing inorganic M&A growth opportunities, maintaining an effective capital structure and returning cash to shareholders.
Our team focused on near term liquidity has reaffirmed our capital allocation priorities for the year.
Consistent with our objective following the venture products acquisition.
We will continue to prioritize debt repayment in order to manage our leverage targets.
Curtail share repurchases for the year and consider strategically compelling acquisition.
In May we declared our regular quarterly dividend.
Based on our current outlook and strong financial position, we expect to maintain our dividend.
As a result of the many and evolving cobot 19 related factors, we discuss today and more of that could emerge should the current economic climate extend for a prolonged period, we do not have the ability to predict its impact on her businesses and financial results.
As such we would do your second quarter and full year guidance late in March and will not be providing new detailed financial third quarter or full year guidance on this call.
That said, we do want to share with you some of our thinking about the remainder of the year.
At this point based on current information regarding the global economic outlook. The company expects the most pronounced year over year sales and EPS percentage declines in the third quarter of fiscal 2020.
We also expect negative year over year fourth quarter sales and EPS growth.
This assumes continued customer behavior changes that include lower capital outlays and cash preservation.
Mostly in the professional segment.
On the positive side.
Our products have a natural replacement life.
So we anticipate net sales will rebound in future periods.
Coping 19 related factors that could impact these expectations.
Include.
First the company's ability to continue operations and or adjust our production schedules due to governmental actions that have been and continue to be taken in response to the cover 19 pandemic.
Second supplier risk and the company's ability to obtain commodity component parts and accessories in a timely manner and an anticipated costs.
And finally prolonged periods of economic stress that may affect customer liquidity, including peak customer buying patterns.
Well, we do not know how long this cobot 19 uncertainty will continue.
We anticipate an easing of these pressures as we head into fiscal 2021.
In summary, with our flexible business model and strong culture as our foundation, we have taken the necessary steps to be in a position to grow as we enter fiscal 2021.
We have freezer jobs lower cost strengthen our financial position served our partners as well and continued to invest in technology and innovation and we are prepared to take further actions to serve our customers in multiple potential economic scenario.
I will now turn the call back to Rick.
Hello.
Thanks Renee.
As we've seen so far in 2020, we have been agile in our response to the pandemic remain committed to our core values innovation and carrying relationships built on trust and integrity.
While our near term visibility is limited we've taken measures to ensure a solid financial position as we move forward.
We are confident in our ability to continue serving our global customers throughout and Barbie on the pandemic.
As we look ahead, we are optimistic about our many exciting opportunities.
Our investments in alternative power smart connected products and robotic and autonomous technologies will drive an entirely new cycle innovative products across our markets.
We continue to expand our full featured portfolio of battery power products as customers see convenience and an opportunity to reduce emissions.
We expect the customers who differs new equipment purchases will return to historic buying patterns as the economy improves.
In past Recessionary times, when we saw new equipment purchase deferrals, we experienced strong growth in the recovery.
In construction the build out of Fiveg and rural broadband should benefit sales of our underground equipment like the new JT 24 horizontal directional drills.
In golf and grounds, we will continue to innovate to increase productivity and solve customer challenges. For example, our untold Dash course management platform holds true professionals integrate data and use information to simplify operations and use water and other resources more efficiently.
We continue to support contractors with an expanded line of high productivity equipment solutions.
For the snow and ice season. This includes the boss snow reader and Ben track SSV and for the growing season, the Exmark stars and Toro brand span multiple horse.
These are just a few examples of how we're creating long term growth through new product development and strategic acquisitions.
We also expect continued homeowner interest in home and garden improvements, we have an exciting array of new products, including an expanded portfolio of 60 volt solutions refresh brand content and marketing and the new channel partner that is broadening our reach.
In closing our strategic priorities are enduring now and long after we emerge from this challenging time, we remain focused on accelerating profitable growth.
Driving productivity and operational excellence and empowering people.
I'd like to again recognize the dedication and resilience of our employees and channel partners and offer my sincere thanks to our customers and shareholders for your continued support.
With that run and I wouldn't be happy to take your questions.
Ladies and gentlemen, if you wish to ask a question. Please press star followed by one on your touched on telephone.
If your question hasn't answered or you wish to withdraw your question press the pound key press star one to begin please standby for your first question.
Your first question comes from David Macgregor with Longbow Research. Your line is now.
Yes, good morning, everyone. Thanks for taking the questions.
Good morning.
Well I'd like to start as and thank you for the additional color.
That's helpful, but you talked with third quarter.
As being potentially the worst from both revenue and earnings standpoint, what did you could just open that up a little bit just talk about some of the individual business units in the dynamics do you expect which contribute to that result.
Sure I could talk just maybe hit a few of the businesses.
I think most important thing to watch it would be the general macroeconomic.
Trends and general consumer confidence business confidence throughout the next period here as being a significant factor along with.
No what could go whether those growth.
And.
The trajectory of the coldest virus so.
So those those macro pieces, if you look at some of the individual areas.
To what I'd call for example.
We've all seen in the news that rounds played has been very positive.
Yes.
Since the co goods government restrictions were released so it is a strong demand for golf rounds.
However, that's one piece of golf clubs revenue.
We believe the food and beverage the event sort of revenues to continue coming back as the restrictions are released on the radio wish that happens we'll provide.
No more revenue flexibility to continue investing in equipment.
If you look at LCV.
That's a business confidence factor for those small businesses, the Medicaid move and.
A solid mowing season. This year, we'll put revenue in their pockets of they've got confidence with the economy hands a recovery the return to making their capital purchases because that equipment does it consumes.
Part of usage process for them.
Grounds too.
What happens to municipal budgets or some of them.
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The.
Goal.
Terrorist acts and other accurate or.
Moving to offset some of these expenses will depend on elsewhere.
Residential and Theres strong growing conditions as you see the trends continuing with interest.
And investing in your home.
Placed into service you want to spend time.
Underground.
Resumption of.
Five he and broadband projects and we're seeing signs that.
Spending in those areas with contractors and the groups that are installing system is coming back so that would be something to watch there and then construction in rental we know some elements of construction will be a more extended recovery of good.
Buying there the other rental side.
We've seen strong rental.
Usage from Billboard total smaller rental shops in municipality.
Particularly rental homeowners have done extremely well.
It's really more of the construction holds the large national accounts.
While the business is tied to construction that's a factor so.
As you just a little bit of flavor of the kinds of factors that we're looking at going forward.
The thing to watch would just be coal good.
As it relates to our operations at our supply chain. If there are widespread disruptions caused by that are specific regions over effected by those will be factors as well, let's just gives you a little bit.
Flavor of the factors that we're looking at as we go forward and I would just offer David but this is similar to what we saw this many parallel to the await a nine recession, where we saw the residential.
Segment really hold up well again as Rick said more influenced by weather.
And we saw more deferrals within the professional segment with a pretty strong recovery. When we came out and I wouldn't that recession and and also I would just offer keep in mind in Q3, we don't have that incremental benefit from Charles machine works as an acquisition as Rick mentioned we've.
Half of that one year anniversary and so that's integrated into our business going forward right.
Is there any weve.
Assessing just how much revenue was dislocated from Twoq into Threeq, you due to plant closures and product availability of backlog.
And.
Those types of the issues.
Sure.
We had.
As you can imagine with above the multiple directives by states and by region. It was an incredible challenge to keep our operations running but.
Our team did a great job.
Making sure that our AR facility has continued to operate.
And.
We had no disruptions from a professional side and from a residential side a few product categories. We have some delays some of that could fall into this next quarter, but for the most part so actually the the opposite historically been able to take.
Some sales opportunities because we had availability versus our competitors right and last question for me. It's just the decremental margins for rather large from the quarter, obviously things hit its hard to be nimble with your costs, but how should we think about decrementals moving into third quarter in fourth quarter do you have an opportunity to start.
Maybe normalizing costs down to reflect the what's going out the top line or how should we think about that.
Well, if you look at history I mean, what we've seen first from the incremental standpoint, if we tend to be between 20 and 25% incremental margins.
Really depending on product mix and segment mix as well if you again using maybe the only on nine downturn is as an example, what we saw there in the short term, we saw a higher than that rates in from a decremental standpoint.
Just as we adjust our cost structure and we can tend to continue to invest in innovation and new products that served us very well on that particular case coming out really strong any hosting and capture market share.
Coming out of the recession.
If we view this as a longer term.
Economic downturn, we certainly would take some other rework aggressive fixed cost actions as well, but at this point in time, we haven't tried to take out capacity or anything like that because we do expect that I'm. Although this is what will spill into next year that we're going to see that recovery, we want to make sure that we are able to respond to that.
Recovery when that occurs.
Thanks, very much and good luck.
Thank you.
Thank you. Our next question comes from Mike Shlisky with Dougherty, calling your line is now open.
Sorry, guys good morning.
Accordingly.
So you've been talking about some of the pro customers, reducing their capex. That's certainly not surprising just came in a tough times a year during the during the first part of this spring.
I was curious do you think you've actually this last announcement to you. If you didn't get it in March or April it's not going to happen because of the because the way that this this is Ron.
And perhaps as a with a question.
And there are certain based business is there can you give us there's been I understand that that segment that runs on a three or four year lease cycle, because you feel like you've got a good.
So as to everyone who is off lease is trading and finally news.
Even though it's a.
Tougher environment, which can have no Michigan.
Theres just a kind of what is the based business in the professional segment.
Great to to answer the first part of the question.
We think it's probably a combination of all of those possibilities. So.
What definitely happened is one of our professional customers realize that we were in an economic downturn or.
Situation. They responded like we did they have they pulled back on expenses they.
Held their capital purchases in their preserve their cash.
As we.
As we.
Start to feed the economy begins to grow again.
Those projects that have been a pause or what they're now evaluating.
Obviously most of our products are consumed as they are used in the public's to some extent. So the products has been used golf courses have to be maintained regardless of the economy.
Graph has to be mode. There are other projects the continue on with or without the economy for that.
So in that respect.
For the.
Capital projects that are delays it means that moves out but is not in most cases go away.
To answer your question about the lease renewal that are three or four.
Leases, that's pretty typical in our golf environment, right and I don't have an exact information on the renewable or trend for those yeah, I wouldn't say for the golf and grounds for the golf in particular is probably close about half of the business goes through lease.
But that's not a typical thing within like landscape contractor, so that would be specific to the Gulf portion of the business.
And again folks tranches.
And the lease bring back Michigan and not have anything so in general you have seen renewal or a new new machine out the door or just to kind of holding off temporarily.
With from a goal leasing standpoint, I think they would be more likely to renew their lease it's more in.
The individual who isn't leasing today, and they're making that decision to buy or not we tend to see that that particular customer migrate more towards repair. So it really be those leases that are coming do they happen to come do right now in the middle of situation, they've gotta mechanism and if they go ahead and redo normally which.
As is probably most likely they could also extend leases or they've got other options as well.
Okay.
And then turning to residential.
You had a large channel partner rolling out in the quarter. Some isn't the name them I won't into either but I know they are.
Kind of curious.
As the sell through their even with the crisis has has been as good as expected, let's say six six months ago is it kind of going to your patients.
Also kind of curious are you able to ship everything into the stores, whether when signage and the actual products themselves in times of course, the coated prices hit.
And also kind of curious are you able to stick any kind of your stock now are you running on that level.
We are extremely pleased with new partnership with the tractor supply company and.
That is going on as planned that in spite of overall economic situation and Cobas.
Situation that's.
The sell the sales there have been well within the band that we would expect.
So we've been very happy with that and it's complimentary to.
You are other channel partners.
The home Depot for example has done extremely well or other mass.
Of partners.
In total have done while the dealer business has seen incremental growth. So it's a it's a it's a customer driven demand.
And we are we're pleased with all of our mass partners as well the progress that's been made of dealers.
Tractor supply extends that as complementary and breaches further into the rural and foreign markets and margin acreage owners.
That's great to hear guys, how low pass along thank you.
Thank you.
Thank you. Our next question comes from Joe Munda deal with Sidoti. Your line is now open.
Hi, good morning, everyone.
Good morning.
Just wanted to say I appreciate your opening remarks Rick.
My first question just related to a golf I was wondering if you could sort of talk about equipment versus irrigation have you where are you seeing any.
Maybe positive performance or better than equipment on the irrigation side, given that that's more sort of capital projects that you have any projects under going and so as those cop capital projects run off does irrigation get worse or just talk about irrigation versus equipment.
Yes, I think.
Equipment would be very much in keeping with the discussion that we've had about capital purchases and consumption of.
Of the product if you will through its lifecycle and leases.
Those kinds of considerations for irrigation there are other factors so.
The fact that some courses were shut down for the Covance restrictions created some opportunities to get on to the courses and do.
Some work from irrigation standpoint, or your addition business for golf this whole bode very well.
Partially also because of we've had good availability. So we've had the components that they need and thats been issued.
In the marketplace.
And then for major projects.
Has been that were planned a few of those dropped out.
But they were quickly replaced by other projects that were in the queue. Because there is the constraints is there a handful of.
Contractors that are sort of the trusted people that do installations, and so where there is availability for them that freed up it was immediately filled with a project that within the Q now what happens at the end of the line do some of the projects that were delayed and come back and again, there is a little bit more question, a little bit further out but in the.
In the near term perspective golf irrigation has done well in.
Projects.
The mix of a little bit different on projects, but the total has been very solid.
Right and when you look.
When you look at the channel inventory levels at the professional business.
Maybe maybe if you compare at the 2009.
You know it looked like this quarter the organic growth. It was off similar to maybe one of your worst quarters. In 2009. So when you think about channel inventories and the way. This you know even more specifically the timing of that.
Sort of economic shut down right you know your prime time see little time.
How do you think about channel inventories as we go through the year and into next season I know, it's sorta early but just wondering if your thoughts on that.
Yes from a I mean for all positives standpoints, our field inventories for the professional side are actually in great shape, and we've been able to continue over the last couple of quarters, we've talked about higher field inventory in some categories like landscape contractor.
And maybe commercial both of those of.
We've been able to.
That is those down in spite of.
The current situation. So we're making good progress there that leaves capacity as well in those channels as we begin.
A recovery process as well so we're we're in good shape from a professional side.
Are you referring to your were the Toro inventories in the channel or industry, because I'm sort of curious on industry.
Just how that's potentially going to affect later this year into next year.
Yes, really referring to our channel inventory I don't have as much visibility.
The other professional competitor.
Inventories in the field, especially right now.
Given the change okay. Okay.
Okay and then last question for me just on your specialty construction and.
See MW business, specifically, you know I think in your prepared remarks, you've stated that.
Things were.
Trending actually relatively pretty positive I think maybe with you stated a little offset by construction in oil and gas, but just curious.
How does that have you seen the worse than that business sort of been this trend you know given April a lot of cap equipment. You know is expected to soar to see the worse than April time period, maybe may.
Do you anticipate improvement in that business sequentially going through the rest of the calendar year or how do you view.
View that business and where we're at today.
So first of all we've talked about a one of our tests for acquisitions, which is how do we feel about a year later and ill say, we feel even better about a year later, we could not be more pleased with the acquisition of Charles machine works and now.
Venture products.
From a underground.
Businesses that are covered by Charles machine works they had a similar response.
Two coro legacy products in this end markets in this economic situation and roughly the same response back in 2008 2009 2010 in terms of coming back.
The the separate factor would be oil and gas so roughly.
And a little bit more than 10% of the business is tied to oil and gas and that's going to be on a different cycle that will probably be a slower recovery.
Bringing those markets back, but the big drivers that are different than 2008 through 2010 are the fiveg and the broadband and we've already seen signs that even if they have pause some of those projects are they had to because of aboard restriction.
Those of Theres, a lot of momentum about completing those build of buildout of Fiveg and the recognition of broadband gap for many parts of the country nuance here actually around the world.
I mean, a positive thing is that we have.
We are on track with our synergies and we have been very pleased to see how those synergies extend beyond.
The intersection of Charles Machine works and the total company to other parts of our business, including just as an example of the positive.
Margins that you see in residential.
In a part are due to the benefits that we've seen from additional scale and some other categories.
Okay, and just to follow up a in the context of the economic shut down and whatnot.
Would you expect.
Charles machine works to sequentially improve through the calendar year.
With that.
Visible or.
I think when you look at the overall, maybe answering it from an overall of the standpoint, if you adjust for the impact that we saw the benefit that we saw from Charles machine works in Q2, we would expect at the overall company level that we will see improvement I'm as we go through the remainder of this.
This year again Q3 is a larger decline, but driven by the fact that in Q2, we saw the benefit from the acquisition. So overall, we're just we're seeing that and I think the same is true for Charles machine marks.
I think could follow the rest of the company with regard to essentially it's a it's a sequence of less negative.
Time goes on that's going to.
Nominally match the economic cycle.
Okay, alright, thanks for taking my questions appreciate it.
Thank you. Thank you.
Thank you. Our next question comes from Tim Wolves with Baird. Your line is now open.
Hi, good morning, everybody, thanks for coming to the detailed good morning.
Maybe just.
On the guidance or the qualitative guidance for the third quarter I just had a clarification.
Is that the the guide of Q Q3, being kind of in most pronounced on UNEV sales basis on a year over year basis.
Is that a total.
Gross number organic number just because.
Charles Machine works was kind of been included in the second quarter still and I'm, just trying to to kind of clarify that comment.
Yes, no Tim that would be a total number nine organic number at the organic number would show as as Rick just said improvement as we go less less negative as we go through the remainder of the here that's a total.
Okay, Okay perfect.
And then maybe just on on on the Gulf side, if we do start to see if we see a continuation of a good rounds played and then also just a pickup in food and beverage do you think golf could see a rebound in terms of new equipment sales over the summer or do you think that that really just kind of gets deferred.
The next year, if you could you give us your best guess.
Yes the.
Thus responses there will be a combination of those so.
Some of those.
Especially in areas, where the restrictions have been released more quickly we'll come back quickly in some cases, they just committed to buy the equipment that's needed because its recognize that that's what the what the organization is about there are other parts of goal that we will definitely be slower to come back and those would be resort calls.
For example on their national basis, especially places that you fly to to play golf.
And that is TBD in terms of how quickly travel comes back where people start to feel more comfortable.
Going through airports and.
So that'll be out a little different cycle.
Individual business decisions right now there are few yes, there are we have customers that.
We don't see there's there's a long term issue, we're going to go ahead and maintain or equipment replacement cycle, others have said.
We lost all of our food and beverage revenue.
In weddings and banquet, so we're going to hold off so it's really a spectrum I'd like to give you.
A clean answer but.
Okay.
No no thats helpful. I appreciate that and then maybe just last question on residential.
I know I know the sell out in kind of.
So it's been pretty strong here to kind of began the year, but just given the expansion into tractor supply.
Do you think the structural margins in residential.
There's a new level that you're kind of getting too and that we can continue to see that.
Crews over the intermediate term, maybe back to kind of that low double digit tight frame you were in.
Five years ago.
What I would I wouldn't say Tim as you.
We're not providing specific guidance in this quarter about we did talk about residential margins in Q1, and what we had shared as we expected Q2 to remain pretty strong I mean, it is the benefit of that incremental volume and also some of the productivity in synergy actions that written just mentioned, we did say that based on.
The outlook at that point in time, we expected them to moderate in the second half of the year and that's very consistent with what we normally see.
And at that time, we thought it would be more moderating into the low teens, and maybe a little lower than that because of that impacts the common 19.
But we do.
Definitely see a benefit from some of the synergy and productivity actions across the portfolio as well as as volume benefit by having an expanded channel that should carry forward as well.
Okay. Okay.
That's it that's only have thanks, thanks, guys. Good luck on our CFO. Thank.
Thank you. Thank you.
Thank you. Our next question comes from Sam Darkatsh with Raymond James Your line is now open.
Good morning, Greg Good morning, Wednesday, and I Hope you and your families are well and safe.
Great. Thank you.
So just a couple of clarification question, even if this was covered I missed that I apologize.
Could you help specifically quantify what may sales were down.
Just just so we can get a sense of.
Things improve the lease what's the what's the base.
From where it would improve.
Yeah, we didn't specifically I'm talking to me sales.
And from a quantified standpoint, what Rick said I guess I believe was that we did see improvement in may and versus what we have seen in April so kind of recounting some impact the second half of buyers a more significant decline in April and we saw a may improving as far as that that too.
Directory attached.
Could you quantify one of those there may be April or May.
Just first for scope for us if you could.
Yeah, it's a C and seasonal business I don't I, we don't have all the monthly detail with us because every one of our months are little bit different within the quarter, but I think we felt good about trying we were seeing in may and I'm seeing that improve across all of the businesses.
Gotcha, Okay and then.
Hi, good uptake by missed this I apologize snow the snow season was challenging this year again.
Particularly in the northeast, which I think you are underway, but.
How would you.
Well look at the snow inventories and put perspective.
Preseason tour.
If you could Rick.
Sure.
Yeah, if you look at particularly at snow in the second quarter that was year over year below the prior year, both on the residential side that professional but that would be probably a little bit more typical the last couple of seasons of the.
The winter season at least in the Midwest has extended well into April.
Some would argue the first part of me. So there were stronger late season sales.
Last year.
This year overall, the snow season for us both on the residential and the pro side there's been.
It's been a decent snow year for us I think it.
Reflects two things we have done a lot of work.
With the residential team on or product lineup, we have great products with a lot of innovation that people are responding to it and then we are as you said over weighted to the Midwest and we had a decent winter in the Midwest Upper Midwest, especially.
This last season so.
Pre preorders as you could imagine in the middle of.
Of the cobot situation or.
Our we're a little bit less than we had hoped for the coming season, but the channel is telling us that.
Not reflecting their lack of confidence in the business, but they're more likely to make those purchases within the season versus pre pre ordering them and.
From a professional side the snow Raider, we've talked about in the past, but that continues to improve.
Be very solid and now the then track as best we sidewalk vehicle.
Those are those are open spaces for us that.
Have a huge productivity story associated with them that our customers really see.
My last question. It. Thank you for that that was helpful. My last question would be.
A fair amount of noise with the acquisitions.
Some of the balance sheet items could you help us today in terms of where your goal is for fiscal year ending inventories.
Certainly.
So when we look at inventories they are higher at this current point in time.
Due to the sudden change in demand and the efforts to realign and Rick talked about field inventory also being lower when we look at year end, we do expect Sam that will probably carry a little more inventory than we traditionally have.
Just because of the desire to try to.
Suffer some of the potential supplier issues that could occur that's sort of just well as we look at how we manage through this year.
And we plan to continue the same.
Supplier environment really improved substantially and then social distancing and the impact that hasn't capacity will also impact us we're assuming social distancing is going to be something that's in place for the foreseeable future. So we're kind of planning around that.
That has some impact on that the inventory that we would carry based on the on certain plants locations. It's not every plant locations and then the last thing is just being ready for the recovery, we do view this as.
Something that we'll see that recovery.
As we go into F 20 line and what we have seen from past recessions that recovery for us happens pretty quickly and we want to be prepared based on the financial strength of the company they feel that would be good investment.
So inventories in dollars would be up on a year on year basis.
By the end of this fiscal year by the end of October is that how to think of it.
I just by sales declines, yes that would be out here okay.
Thank you very much I appreciate it against the well. Thank you you too.
Thank you. Our next question comes from Tom teams with Northcoast Research. Your line is now open.
Thank you good morning recruiting appreciate you taking no question.
I guess just quickly most my questions have been asked and answered, but maybe Rick on a year to date basis. It looks like your international revenue was up slightly just wondering if there's any markets are products are kind of JV that the stood out to you.
Yes.
He is let's see I think overall im not sure we are.
Overall for international on the pro sides, we are up a little bit and that would be driven really regionally. So in Europe for example.
Driven by golf projects that continues and sold right up until the co. Good things happen would be the biggest driver.
Parts of Asia that had a very good year, they're counter seasonal both.
So those would be the big drivers, but no no major stand out sort of factors, there and together residential and professional.
Aggressively we may actually be down a little bit.
Alright. Thank you appreciate the color.
Okay. Thank you.
Thank you. This concludes your question answer session. Mr. Roads. Please proceed to closing remarks.
Great. Thank you all for your questions and interest in the total company. We look forward to speaking with you again in September to discuss our results for the third quarter.
Thank you.
Thank you for your participation in today's conference. This concludes the presentation you may now disconnect good day.
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