Q3 2020 Toro Co Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to the two oil company third quarter 2020 earnings conference call at this.
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I'd now like to hand, the conference over to Nicolas ROE Managing director of Investor Relations. Please go ahead.
Thank you and good morning, our earnings release was issued this morning by business wire in a coffee can be found in the investor information section of our corporate website. The total company dotcom.
On our call today, our replacement Chairman and Chief Executive Officer, and running Peterson, Vice President Treasurer, and Chief Financial Officer, we begin with our customary forward looking statement policy.
During this call we will make forward looking statements regarding our business.
Future financial and operating results.
We're all aware of the inherent difficulties risks and uncertainties in making predictive Steve.
Our earnings release, as well as RCC filings detail some of the important risk factors, including those related to coven 19 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 will reference certain non-GAAP financial measures.
Situations 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 business.
Such non-GAAP financial measures should not be considered superior to as a substitute for or as an alternative to and should be considered in conjunction with the GAAP financial measures presented in our earnings release and this call.
With that I will now turn the call over to Rick.
Thanks, Eric and good morning.
Our third quarter was a strong and dynamic one given the circumstances since coded 19 began to spread across the globe. The macroeconomic environment went from robust growth to recession almost overnight.
Now, we're seeing more positive economic and market trends, but the rate of the recovery and the status of the virus remain highly variable.
In short the environment in which we conduct business remains uncertain.
For the third quarter, we were pleased to achieve topline growth on the strength of our residential segment as favorable weather, our new product lineup and stay at home trends drove robust demand in the mass and viewer channels.
Incremental sales from our successful venture products acquisition also contributed to third quarter growth.
Hi, I'm deeply grateful for the extraordinary efforts and the commitments of our team during these challenging times.
The health and safety of our people remains our top priority as we support and deliver value to our customers.
Our talented global team of more than 9000 remain resilient and solution oriented.
Among other things, we modified production lines and workflow to accommodate social this unseen in manufacturing continue to work effectively while adhering to local safety guidelines.
Developed methods to move production and inventories meet customer requirements.
And manage the demands of home childcare and personal wellness.
Our teams did all this while delivering a solid quarter of financial results.
Turning to the demand environment during the quarter in May as the residential segment remains strong we saw an improvement in our professional segment and those trends continued throughout the quarter and into the month of August.
As customers gain more confidence demand started to return.
The market continues to be dynamic, giving the variability of the economic recovery and the status of the virus around the world.
We are fully prepared to respond to potential market changes.
Our longstanding ability to adapt to different business environments was evident in the quarter and our team is well positioned to continue to succeed even in challenging market conditions.
Looking at the results for the quarter, our residential segment continue to excel with 38% year over year net sales growth and strong margins.
The movement outdoors, we've seen during the past several months contributed to record sales of zero turn mowers, which doubled in the quarter.
We also saw strong contributions from walk power mower sales.
Professional segment net sales for the quarter declined 8% year over year, which was better than expected.
Sales included incremental revenue from the venture products acquisition.
We're encouraged by improved demand for our professional segment products, particularly in the landscape contractor rental specialty construction and irrigation markets.
We're seeing demand driven by greater business confidence and increased home investments.
Improved retail demand within the quarter reduced field inventory, which is in good shape and lower than prior year, setting us up well for pre season shipments.
With robust performance in our residential segment and improved demand in our professional segment, we demonstrated the strength of our diverse portfolio of businesses and our ability to be agile, while focusing on customer needs.
This positions us to drive growth forward as our end markets normalize.
There are two additional highlights in the quarter and that I would like to recognize first we launched our sustainability endures platform, which furthers and enhances our long standing dedication to make a positive global impact.
Socially and environmentally and financially.
And second we were named innovative partner of year by the tractor supply company.
This reflects our commitment to innovation as well as the effectiveness of our partnership to deliver great products. During these difficult times.
The successes, we experienced this quarter were due to the dedication of our team our innovative product lineup strong demand through math and dealer channels and the contribution from our first full quarter of the venture products acquisition.
According to the caustic about our future given our balanced and flexible business model that allows us to adapt quickly to change enduring values that focus on the success of customers innovative new products aligned to customer trends, a strong financial position and the proven ability of our people to adapt.
Apps and perform successfully in these dynamic times.
With that I will turn the call over to Rene for a more detailed discussion of our financial results.
Thank you reckon good morning, everyone.
During the third quarter, we once again demonstrated the ability of our adaptable business model and resilient culture to manage near term headwinds and position us for long term growth.
We continued to capitalize on our strong balance sheet to invest in growth, while executing well operationally.
We remain flexible in order to drive financial results, while keeping our people space and delivering on our brand permits to our customers.
In this environment, we grew third quarter net sales by 0.3%.
To $841 million.
Reported and adjusted EPS was 82 cents for the quarter compared to reported EPS of 56 cents and adjusted EPS of 83 cents last year.
For the first nine months net sales increased 5.6% to $2.54 billion.
Diluted EPS was $2.37 compared to $2 in 18 cents in the first nine months of fiscal 2019.
Year to date, adjusted diluted EPS was $2.38 compared to $2.52 a year ago.
Before I review segment results I'll cover our liquidity.
At the ended the third quarter, our liquidity was $992 million.
This included cash and cash equivalents of $394 million and availability under our revolving credit facility a $598 million.
We have no significant debt maturities until April of 2022.
We are in a strong position today and in the event of an extended period of macroeconomic uncertainty.
Now to the segment results.
Residential segment net sales for the third quarter were up 38.3%.
$205 million.
Mainly driven by strong retail demand for zero turn riding and walk power mowers, and our expanded mass channel.
Year to date fiscal 2020, net sales increased 20.4% compared to the same period of fiscal 2019.
Residential segment operating earnings for the quarter were up 76.7% to $28.5 million. This reflects a 300 basis points year over year increased to 13.9%.
When expressed as a percent of lot sales.
This improvement was largely driven by productivity in synergy initiatives.
And SJ expense reduction and leverage on higher sales volumes.
This was partially offset by corporate related manufacturing inefficiencies and unfavorable product mix.
You are today residential segment operating earnings increased 70.2% to $87.2 million.
On a percentage of sales basin segment operating earnings increased 400 basis points to 13.8%.
For the third quarter professional segment net sales decreased 7.9% to $623.6 million.
This was due to reduce channel demand as the result of Kogan 19 related impacts this included fewer shipments of golf and grounds equipment.
Reduced sales of rental specialty underground construction equipment and fewer shipments of landscape contractor zero turn riding mowers.
This was partially offset by incremental venture product sales.
For the year today period professional segment net sales increased 1.3% compared to the same period of fiscal 2019.
Professional segment operating earnings for the third quarter were up 39.3% to $113.7 million.
And when expressed as a percentage of net sales increased 610 basis points to 18.2%.
This increase was primarily due to lower nonrecurring acquisition related expenses versus the prior year period.
Favorable net price realization and decrease commodity costs.
This increase was partially offset by unfavorable product mix and corporate related manufacturing inefficiencies.
Your today professional segment operating earnings increased 0.8% compared to the same period in the prior fiscal year.
When expressed as a percentage of net sales operating earnings remain constant 17.2%.
Year over year for both fiscal periods.
Moving to our operating results.
We reported gross margin for the third quarter of 35%.
An increase of 330 basis points over the prior year period.
Excluding acquisition related costs, adjusted gross margin decreased 70 basis points to 35.2%.
The decrease in adjusted gross margin was primarily driven by Copel 19 related manufacturing inefficiencies.
Unfavorable mix due to the higher sales of residential products.
And it increased inventory reserve in one of our professional businesses.
This was partially offset by favorable net price realization in the professional segment and productivity and synergy initiatives.
For the first nine months reported gross margin was 35%.
160 basis points compared with 33.4% in the prior year period.
Adjusted gross margin was 35.2% compared with 35.3% in the first nine months of fiscal 2019.
Question, a expense as a percentage of sales decreased 170 basis points to 21.2% for the quarter, primarily due to lower traveling meeting expenses.
Acquisition related charges and employee salaries.
For the first nine months of fiscal 2000, 20-F, Sinead spend as a percent of sales was 21.9%.
20 basis points from the prior year period.
Operating earnings as a percent of net sales increased 500 basis points to 13.8% for the third quarter.
Adjusted operating earnings as a percent of net sales increased 50 basis points to 13.9%.
For the first nine months of fiscal 2020.
Operating earnings as a percent of net sales were 13.1%.
Compared with 11.7% a year ago.
Adjusted operating earnings as a percent of net sales for the first nine months were 13.4% compared with 14.2% a year ago.
Interest expense decreased $700000 for the third quarter compared to a year ago due to lower interest rates.
Interest expense increased $4.7 million for the year to date period.
Compared to a year ago.
This was due to increased borrowings as a result of our professional segment acquisitions.
For the full year, we continue to expect interest expense of about $33 million.
The effective tax rate was 19.8% for the third quarter and the adjusted effective tax rate was 20.9%.
For the first nine months of fiscal 2020, the effective tax rate was 19.2%.
And the adjusted effective tax rate was 20.6%.
For the full year, we continue to expect an adjusted effective tax rate of about 20.5%.
Turning to the balance sheet and cash flow.
Accounts receivable totaled $294.7 million down 5.6% from a year ago.
Inventory was up 5.7% to $656.2 million.
And accounts payable decreased 11.8% to $268.7 million.
Year to date free cash flow with $259.3 million with a net income conversion of 100.7%.
This positive performance was due to the increase in net earnings.
Favorable net working capital change and reduce capital expenditures.
Our disciplined capital allocation strategy includes investing inorganic and M&A growth opportunities.
Maintaining an effective capital structure.
Returning cash to shareholders.
Our sharp focus on near term liquidity has reaffirmed our capital allocation priorities for the year.
These include.
Prioritizing debt repayment to maintain our leverage target.
Curtailing share repurchases and considering strategically compelling acquisitions.
We increased our cash dividends for the third quarter fiscal 2020 by 11.1% to 25 cents per share as compared to the prior year period.
Based on our current outlook and strong financial position, we expect to maintain our dividends.
As Rick discussed there remains uncertainty as a result of Kobin 19 related factors.
We went through our guidance in March and we will not be providing specific full year.
Guidance on this.
Similar to past practice, we will provide full year fiscal 2021 guidance on our fourth quarter call. If we have sufficient visibility empty and confidence to do so.
However, based on current visibility and with an understanding of the uncertain nature of economic environment, We would like to provide you with our current thinking about the fourth quarter.
We anticipate continued year over year growth in the residential market.
Professional market should benefit from the gradual return to more normal buying patterns as customers confidence in the economy increases.
These positive trends will likely be somewhat offset by remaining cover 19 headwinds such as budget constraints the effect of social distancing restrictions and regional variations in economic recovery.
As you know precision is difficult in this environment.
But if these assumptions hold true we anticipate the fiscal 2024th quarter net sales will be higher than that of the prior year quarter.
And adjusted EPS will be similar to that of the fiscal 2019 fourth quarter.
We expect net other income to be lower in the fourth quarter of fiscal 2020, then in the prior year period as a result of a favorable pension and postretirement planned benefit in fiscal 2019 that will not be repeated.
We continue to expect total net other income for fiscal 2020 to be about $13 million.
We continue to expect depreciation and amortization for fiscal 2020 of about $95 million net capital expenditures of about $80 million.
We anticipate that fiscal 2020 free cash flow conversion rate to be similar to fiscal 2019, we plan to build inventory in the fourth quarter to mitigate any potential supply chain and manufacturing constrained due to social distancing restrictions.
In summary, we executed well in the third fiscal quarter in a challenging environment as our team demonstrated their resiliency commitment and determination. We are in a strong financial position and continue to invest in technology and innovation to drive long term growth.
As a result, we're confident in our ability to navigate through any near term challenges and capitalize on growth opportunities.
I will now I'll turn the call back to Rick.
Thanks Ray.
We're optimistic about our future.
Our diverse portfolio of businesses and strong customer relationships position us to drive growth as our end markets normalize.
Our productivity initiatives continue to enable operational improvements and our focus on innovative products and our recent acquisitions are aligned with changing global market dynamics.
We had several new products introduced during the year, the demonstrate our ability to innovate and satisfy our customers evolving needs.
For example, the new chains and partial hold that are part of the Toro 60 volt lithium ion once force platform.
The bingo compact utility loader electric and hybrid Greens mowers, the dish, which JC 24 horizontal directional drills and SK 3000 stand on skids here and awkward tracks Zuhlke drift team.
Our recent acquisition also continued to deliver with both Charles machine orders and venture products aligned with key market trends, such as Fiveg and broadband build out infrastructure improvements and product versatility for our professional and homeowners with acreage customers.
We are encouraged by the continued strong residential demand and the improvement in our professional markets. As we look forward, we'll be watching a number of macro trends such as the trajectory and duration of coal that related impacts, including social distancing restrictions and global supply chain disruptions.
Global economic recovery factors, driving general consumer and business confidence and commodity trends.
And weather patterns for the fall and winter seasons.
More specifically, we're attracting certain key factors for individual markets as we end the year and look ahead to fiscal 2021.
For the residential segment certain professional segment businesses continued customer interest in home investments driven by stay at home trends.
For golf continued strength in rounds played coupled with improved food and beverage revenue.
For grounds equipment, the health of municipal and other tasks supported budgets constrained by Corbett related factors.
For landscape contractors business confidence and favorable logging conditions.
For underground Fiveg and broadband build out critical need infrastructure rehab and replacement and increased oil and gas projects.
For rental and specialty construction homeowner related projects and the resumption of construction activity.
And for snow and ice management, the timing a little winter season, and continued demand within our new product categories.
In closing we are enthusiastic about our future given our new product pipeline and the proven ability of our people to drive growth and productivity and these dynamic times.
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 remain I will take your questions.
Thank you as a reminder to ask a question you would need to press Star then one on your telephone to withdraw your question. Please press the pound team.
Our first question comes on the line of Mike Shlisky with call. Your Securities. Your line is now open.
Good morning, everybody.
Good morning.
So I want to sort of maybe ask your question too about tractor supply can you give us.
An update on your level of satisfaction.
On that.
Understood. This year it sounds like there should be satisfied with review it given the award you have one im curious how fees one quarter of cases that are passed the spring and summer and what do you have any major additions or improvements for next year plan at this point.
It was great per share with tractor supply there was a little scary as we started the spring season, given the locked down and so forth, but it turned out to be fantastic year with tractor supply.
And to your points, we're we're always with all of our partners exploring opportunities to further those partnerships and look for opportunities for both parties going forward.
I think the good news is residential it was it's been a broad based.
Growth.
Factor this year. So it's not it's not only maps, it's not only a new channel partner, but we've seen growth in our dealer channel. We've been we've seen significant growth in our longstanding mass partners as well. So it's been good across the board tractor supply has been fantastic. It's a great fit in so many.
Yes.
In complementary to our other channels and.
Been very positive.
So we feel great about it.
Great.
I also wanted to ask about.
Dealerships in the professional World you guys said. Thank you then were under any kind of central strain during the during the quarter.
And do you think that Molson are going to kind of make it through this cobra, okay, if they've gone through it.
Okay. So far.
I didn't hear the first part of the question, which.
The dealers in winter.
I was curious.
Kind of broadly speaking across professional whether you're seeing a dealers who had some volume challenges they face any financial strain recently and do you think most then we'll get through it.
Given that some of the demand is.
Is improving so far.
Yes.
Obviously with would be professional businesses being down they certainly felt that the after that.
As businesses have throughout our.
Any place any part of our businesses so they.
Took actions early many of them, we're able to take advantage of the cures Act to help bridge the gap.
And I think they are grateful to see those businesses the business customers coming back and coming back into buying cycles. So we did not see any kind of wide spreads overall.
Business revenue kind of financial situations with that channel.
Okay and BRAF lastly from me.
It's like one of the major engine suppliers out there is facing difficulties in.
Filed for chapter 11.
Can you tell through there isn't any issues and your supply chain on engine.
And weather.
Your you might see is and the engines get change of stopped going forward. If this company.
Changes its own that product offerings.
Yes, Thats right.
Assuming that you're referring to is Jeff. This is and has been a good supplier to US there also competitor, which.
Historically makes that.
Interesting dynamic.
The sale process is continuing I think there are some procedural.
Pieces in place, but it's likely that it will go to the stalking horse at this point.
From our perspective, we are always.
Adjusting our engine strategies and we have multiple engines suppliers and certainly a factor that we have seen coming for some time, so because of the long lead times engines, we have to have those strategies in place well in advance season, and we have our plan.
We're already executed against for 21, so that's that's already side.
Okay. Thanks, so much I'll leave it there appreciate it.
Thank you.
Thank you. Our next question comes from the line of David Macgregor with Longbow Research. Your line is now open.
Good morning, everyone.
Good morning, very solid quarter.
Under the circumstances, so congratulations on that.
I guess it to start off for tractor supply just because it's been discussed so far is there any way to kind of par so.
As the growth in residential from.
ACA supply versus that core growth the core underlying growth and give us some sense of proportion.
Yes, we wouldn't break it down real precisely, but we can talk about kind of the internal factors that we were driving along with our partners and those the external factors. So I think we've talked about in previous quarters. We've we've really done a re boots are residential business.
So new new fresh product line with lots of innovation that people are interested in.
Increased marketing change in marketing and brand messaging, that's that's been very well received.
That cuts across all of our channels.
They will benefit from that.
Lastly, adding significant new mass partner has been a positive as well.
But those are the drivers that we're driving and we would expect goes to continue on.
Even when you talk about channel fill.
There will there certainly was elements of that but wouldnt repeat but we're also looking at ways that we can expand the partnership and.
The would.
Most channel most mass.
Partners would not want to carry inventory anyway, so there should be.
Continued continued opportunities and all four channels grew on the residential side.
On the external side, it's really the biggest factor a couple of these factors would be it's very very favorable growing season throughout and interestingly that was the case back in the great recession as well so that helped to drive residential business. When other parts of the business were challenged at that time that continues to be the case here.
The one that has had a lot of press the stay at home initiatives, which we know has driven interest in investing in regards to your whole upgrading equipment, because you're spending more time, there that portion will will obviously taper off as a restrictions are lifted people can do.
Two other things, but we believe we have strong underlying growth drivers that will help to continue to drive growth results with residential that's not going to be at the level that we're reporting this quarter will be back towards a more.
Modest level, but certainly growth.
Many opportunities to continue to grow.
All right.
Rick if we could just build off that that last point you were making I guess one thing that most investors are struggling with not just the quote was pretty much all the companies that we're dealing with the space. It's just the degree of pull forward that maybe occurring here clearly there's some pull for questions just how much.
I'm guessing you guys between models to help you better understand that.
Thank you can say that.
It's better understand or the extend the pull forward demand that is just dog many growth here versus.
Would be perceived as maybe more sustainable level of growth.
Yes, I think you're going to I mean, you've seen the catch up happen in this quarter and there will continue to be maybe a little bit of that.
We see the patterns returning back towards more normal buying cycle patterns, even as we look forward into our fourth quarter here as we've gotten started with it so.
It was clearly a factor in this and this quarter that you you can see but that's not a dominant factor as we go forward, but thats more professional customers are returning to normal buying patterns as we've said in the past, though with tourists.
Yes related products those products are used as the grass is growing so they continue to be consumed.
And they do have to get back on their buying cycle or normal life buying cycle. The good news is.
Field inventory is in great shape.
That said this morning across the board.
Lower than last year back in some cases, we'd like to see a little bit higher and we're going to work to make sure we can.
Did that in the right place here going forward, but it's a good set up as we go into certainly as we're in the fourth quarter as we go into 21.
Right, great great condition from an inventory standpoint should be able to take advantage of.
Continued growth.
That's good to hear but just one more question on that pull forward is.
Given.
Strength, you're seeing right now and you're talking about the expectation that we returned back to a more normalized pace of growth I guess the bigger question is the extent to which you perceive risk it was falling below that normalized growth and potentially to a negative growth period, just because of the volume thats been pulled forward how would you assess that risk your business.
Yes, I would say most of the factor I was actually talking about was the catch up.
These were.
Purchases there were delays when all especially on the business professional side all the businesses responded the same way the pause the watch their expenses they hold capital.
Purchases and then as they started to figure out what the trajectory look like for economy for the virus and have their customers came back and they came back and bought those products that they probably would have bought earlier in the year.
If you're talking about the residential side with potential pull forward, let's say very extreme.
But the very very large base and most of the most of the sales are replacement so.
That's driven by things like.
Homeownership new homeownership.
No. Other factors certainly the weather is very positive one so thats a good growing season, there as a percentage of people that are going to replace their equipment.
Every year and we do you think.
Go ahead.
So is it because I do think of the residential business. It was catch up as well as opposed to pull forward.
Yes, it was catch up I think in your definition, there would be a little bit of pull up in there but are you know as we look forward. We continue to see growth based on our on our modeling.
Okay, Thanks, I'll get back into queue.
It's a very large base. So there's a lot of opportunity for people to replace their equipment.
Great. Thank you.
Thank you. Our next question comes on the line of Joe Mondillo with Sidoti and company. Your line is now open.
Hi, good morning, everyone.
Good morning.
So in the press release in your prepared commentary you mentioned potential offset to some of the growth dynamics in for Q being budget constraints. Just wondering what part of your business would be most affected to that then are you actually starting to see effects of that or is that just something you're sort of.
So.
There are there probably several factors in there, but the ones. The one that we're probably specifically referring to was on the municipal side. So a portion of our business is tied to tap supported entities and I think it has yet to play out exactly what municipal.
Paul budgets look like in the next budget cycle.
And to what extent.
No.
Retaining parks and municipal golf courses becomes a priority I mean, you can make a case, but it will continue for priority. We just don't know how that's going to play out and then other budget constraints golf than tremendously positive news about calls in fact, it think rounds played in July were up.
A record almost 20% 19 something percent never been seen before but others portions of the golf revenue streams that have not come back yet, which our food and beverage is not fully back in the events.
Revenue as not back so to the degree to which.
Restrictions can be lifted and those activities can resume the budgets will come back into a more healthy position, but theres still a little constrained at this point.
And just the elements of call. It has to do with resorts. That's a relatively small portion of the overall market, but destination type of golf that's tied to travel.
We are you fly to a city that's oriented around resorts our goals.
That that continues to be constrained so that puts pressure on their budgets. So those are the budget references I think are referred to.
Okay, and just I guess broadly looking at the two segments.
Commented a little bit about channel inventories.
But.
Parsing, but with the boat part parsing through the two segments would you describe inventories is below normal at this point.
The our field inventories are below last year at this point and.
We we actually.
We call that a success given the pullback in a number of our businesses. Our operations team responded with making the right products at the right times and shifting production that necessary to where the opportunity.
And.
There are few areas, where we would like to see a little bit more inventory as we go into the next season.
That's especially true because.
Our rates of output has been affected in some cases because of coated.
Related restrictions that we put in place so we need to make sure that we've got inventory in place at the start of the season.
As we will have but we don't have.
The same level of outputs for plants. If you will so we've had to work some extra hours add some shifts and that just means it's a little bit.
There's a little bit more as we need to adjusted schedule going forward and.
My prepared remarks, I mentioned that we would be building some inventory in fourth quarter two to help to address we want to make sure that we can mitigate any supply chain challenges that may occur as well as be ready for the season and ready to deliver to meet our customers.
Okay, and just a follow up as far as field inventories.
Is that sort of below below average is that across the board or I mean.
Certain areas, maybe like in golf are you seeing.
Flat to maybe a little above the inventory or sort of broadly speaking are you seeing just field inventories pretty low.
It's broadly based across all of our businesses and just to provide some insight into that as we work with.
So our products through another party theyre all businesses that are looking to preserve liquidity and so forth they've been more conservative about inventory and we see that as we look at the overall numbers, but as they gain confidence and they see the opportunities going forward just as our residential dealers did in the spring.
They've got to help products when they will they will come back and so to the buying cycle there as well.
Alright, and then last question just as far as Capex just curious.
What you're investing in for Capex anything interesting that's going to maybe help.
Profitability going forward anything that you could highlight.
I would say our capex is really a combination.
Investing in productivity and cost reduction efforts were always looking for those opportunities new products are another key area for us and there's an element of of maintenance capital as well, we try to balance and across those three and I think in particular.
Some of the new products are really exciting.
We'll see those come out in the next number of years I.
I think especially if you go back to our technology priorities a lot of our investments in new products is going very much on target with those priorities.
Turn as energy smart connected products longer term robotics.
Okay, great. Thanks for taking my questions.
Thank you. Thank you.
Thank you. Our next question comes on the line of Tim Lotus with Robert W. Baird. Your line is now open.
Hey, good morning, everybody nice ornaments, gentlemen result.
Maybe just I guess, maybe on the supply chain.
How do you feel just about your internal capabilities to make sure that there aren't any constraints on on the component side and did you have any any supply chain challenges in the quarter or to the industry have any supply chain.
During the quarter that you're aware of.
We did not have significant disruptions during this entire period, our ops team did an incredible job so when I make that summary statement.
No way describes the process that we've been that we've gone through starting with the supply chain and that's really how that started I was looking at my notes from the first quarter and it was about our concerns about the supply chain.
The virus to bolt elsewhere in the world, we have not had the.
Significant stoppages from a shortage of supplies our plants have adapted incredibly wall.
Very short period of time to keep.
Continue operation continued to support our customers.
The effect is just.
For example, if you have throughput Assembly line and 50 people on the Assembly line, when we implement social distancing they need to spread out either means extend the wine. If you can or if you can then you need to reduce the number of people on the assembly line and that just means that you then probably need an additional shift.
An additional production time.
Got to be able to to accomplish the production.
So thats the kind of thing that our operations team has been working on.
And done extremely effectively and we think.
We think thats helped us.
Take share in a number of places.
Thats, especially on the residential side of availability became a problem in the marketplace.
Okay. Okay. That's good to hear and then it does sound just based on on the comments you made that unipro should kind of get back to maybe a more like a normalized growth kind of situation in the fourth quarter I, just I guess I wanted to verify that and it gets which product end markets.
The expected to contribute most to that.
We do expect.
We do expect pro to grow I think we've talked about a couple areas that are more constrained.
Portion of our business, particularly with Charles machine works that or is that it's tied to oil and gas.
The rate at which.
Some of those cost factors come back into place on municipal budgets being related to that as well.
But on the driver side.
The grounds business continues to be very positive for us our landscape contractor business, the construction and underground business.
No business continues to grow professional in and residential.
And rental has been very positive if you go back to.
Go back to the.
The underground business.
The telecommunications is very strong right now as we expected the fiveg major players have come back into their buying cycles and they paused as well that they can really afford to pause to long because they're in a race to build out for Fiveg network.
And then just one other comment to the telecommunications fiber for improved broadband, especially for home has been a factor that especially come into light and the whole concept of the digital divide some parts of our population and don't have adequate.
Broadband in order to do the things that are expected learn from home work from home.
Yes.
Thats a good driver for our business and.
Corporate.
So.
Okay. Okay. Thanks for the color there and then just on their Sim city terrorists coming into the market on on imported.
Engine front from China, and just wanted to ask what the potential if there is a way to frame the potential impact of that has to Toro and just your ability to offset that is if you're looking into next year.
Yes, you can imagine that is something that we're watching very closely along with 75, others in our marketplace because it really affects.
Our market.
As we talked about early earlier.
By the nature of engines they have a long lead time. So we have we're constantly working on our engine strategy and revising that based on the latest factors, but the plan for 21 was established sometime ago and were more in the execution phase of that so we feel very solid about our plan for two.
21 and.
We don't see material impact in 21.
Based on everything we know at this point.
The process itself, it's still early in the process there are lot of moving parts.
And as I said, we work on our long term strategies. So we take in our best best thinking of what's happening with various of our dozen or so engine supplier.
And a form of our best.
Best opportunity to provide the best value to our customers with those engines.
So.
Obviously very much watching what happens there historically.
There's a lot of ups and downs in these cases and they they may turn out completely different.
And oftentimes you know more favorable than some of the extremes look as we go through the process.
Okay. Okay I appreciate the appreciate the thoughts and good luck on with your guys.
Thank you. Thank you.
Thank you. Our next question comes from the line of Sam Darkatsh with Raymond James Your line is now open.
Good morning, Rick Rene How're you.
Okay, well are you doing well well thank you.
Just wondering if I could unpack that prior question a little bit more around the Chinese sore extensions Im guessing gross figure out how much you imagine is going to get passed through.
To the consumer on the residential side next year, either with poor product or industry wide.
Knowing that it there tends to be some Alaska city of demand.
How much do you think theres going to get pushed through and how much do you think gets absorbed with channel partners.
Yes, I think as you as you understand.
The.
The pressures on the residential side from a price standpoint are are significant because as a standard price points that are out there. The what's what's interesting in this case. It is is that is a industrywide issue. So.
If it turns out that.
There is a longer term effect or some sort of bridge period until the supply chain adjust.
Something unfortunately, that's going to affect our customers and we'll just fundamentally no change.
Market pricing at some point there'll be no choice, but to pass through.
But.
As we've said.
Sam for 21, we've got our plan in place. So we don't see a significant issue for 21 for us.
And remind us and fiscal 20, what your exposure was to those Chinese sourced engines that are now subjected to the tariffs.
No I don't have a specific number in front of media they would be.
No.
Certainly in our top top several engine suppliers.
Let me answer to the right.
Yes, that's a good plans with all limited to the residential segment.
Okay.
And then if I could I ask a few directional questions around.
2021, I, obviously, everyone here respects that giving.
Granular guidance is almost laughable based on how many variables are still an unknown but.
Just trying to get a sense it first incremental margins.
Normal incremental you've talked about in the Patrick around 25% or so I know that was implied with vision 2020.
Look also.
You got some good guys in bad guys, you would imagine the pro mix is going to be.
Better next year than it was this year, although I'm guessing some of the discretionary spending is going to return to any sense as to why we wouldn't think that a quote unquote normal ish.
Incremental margin might be in the cards for next year.
Yes, Tim this is really if I may answer that question I think we would say planning and normal ish type of incremental margin would be reasonable to your point, we do recognize there'll be some cost actions that we took this year that will come back into the equation is he going to up 21 Theres also some cost that were incurring.
This year that at some point in time.
We'll go away some of that so impact assessment that something in some of those inefficiencies that we talked about will also go away.
And keep in mind, we always focus on productivity and synergy.
Reduce our cost structure. So that remains the same so I would think kind of normal level.
Yes.
And then my last question same sort of topic around free cash flow conversion next year I think you're.
Talking about roughly 90% conversion rate this year like last year as you build inventory.
I'm guessing capex is going to be more normalized next year.
Sure sure.
How do we how do you imagine cash flow conversion looks like next year versus that 90% range, you've had last few years or so.
I would say.
We're building the inventory for specific reason at this point in time it to mitigate some of the concerns around supply chain, which again the team has done a great job doing today, and then making sure that were available to meet customer needs assuming that.
So distancing impacts go away, we would then intend to normalize or inventory levels throughout the year. So we expect to be in a normal level or.
That's a normal better than the 90% so maybe a quick closer to 100% than you originally were targeting for this year sort of thing.
Hopefully by normal more historical.
Okay terrific. Thank you very much and be well.
Thank you. Thank you.
Thank you. Our next question comes from the line of Tom Mahoney with Cleveland Research. Your line is now open.
Hello, Good morning.
I wanted to ask about.
The the normal cadence around price increases.
I guess, there specifically focused on the pro.
As you look into the next three to six months and then the fiscal 21, what are the things you evaluate as to whether you could move forward with those annual increases in the Chris and like you typically do.
Yes, we always talk about that Weve price to market. So the first thing. We do is look at what what's the value of the product offering that we have relative to the value that the customer Steve and we historically say that we get 1% to 2% of realized price.
And.
We're looking to provide the the value package of values that would continue to to command that.
And.
We we do that through innovation, which is.
Desirable features on the residential side for homeowners stuff on the business side.
Have products that have return on investments so that.
That that.
If there is a price increase of coming out of another portion of their budget, whether it's whether it is.
Bill fuel or labor or chemical those types of things that they can justify.
The increase in equipment.
Understood and then.
In terms of the inventory build in the fourth quarter any specifics around the.
Which segments those.
Incremental build is focused on.
Looking at more generally yes, certainly we don't expect to see the same type of growth as Rick mentioned in residential and that we know there's some probably variability in that marketplace and we do expect professional continued through the recovery. So I think it would be over overall not specific to one particular segments.
Sure.
Thank you very much.
Thank you.
Thank you we do have a follow up question from the line of day week Mcgregory with Longbow Research. Your line is now open.
Yes, thanks for taking the follow up I guess just to follow up on Sam's question.
Right you said eventually.
So this is in cost and the impact on the business will go away.
Talk for a couple of quarters, now, but cold nitin related manufacturing inefficiencies I just.
Interested in your thoughts on just how much longer do they last and.
I'm not necessarily asking how much longer code 19, as an issue, but we do seem to be on some kind of a recovery trajectory here and there assuming that for the purposes. This question that that trajectory continues.
Much longer is it's just something that dissipates and goes away by the.
Sort of the first calendar quarter second calendar quarter next year or how should we think about this.
Yes, with social distancing I mean, our plan is not to build more capacity that really reuse the cap capacity that we have in the best way possible and that's that's why we're talking about building some inventory.
To be able to better manage those costs.
So we look at that being as long as we have that social dispensing and place there's going to be some impact to start the way that are.
Factories will be able to execute keep in mind, we always focus on synergy and productivity and no. One is more focused on that in our operations team, they're always looking at ways. They can offset those costs, but we do expect or whatever period of time that social distancing restrictions are in place that will comply with those and they'll have some impact.
On the way we run our plan, we do think at some point in time I don't I don't know when I think we all wish we knew when that will change other than that cost would go away, we would reconfigure the plant.
Back to away that we can operate a little more efficiently.
In the meantime, these are just higher costs, there kind of structural and you just need volume to leverage limits that the idea.
Yes, it does.
Okay. That's a question. It's just you talked in the pro segment about favorable price cost you did well in the pricing you talked with better cost.
It's really to quantify that and then how well does that sustained through Fourq, you and just how much how how far forward should we think the should we be thinking about that net favorable price cost.
I think that relationship with certainly hold all things being equal through the remainder of the year as we look into next year I think because pricing.
Just talked about.
You know price to market not to costs. So.
We remain competitive.
I do think from a cost standpoint continue our focus on productivity.
Economy.
Curves that probably be some headwinds related to some material input cost philosophy is that Paul.
Okay, all bad or some of the dynamics change, but it will be driven more by the macroeconomics than anything weren't doing.
Okay. Thanks very much.
Thank you we do have a follow up question from the line Odell Mondello with Sidoti and company. Your line is now open.
Hi, everyone. Just one follow up question I had the residential segment.
Obviously very strong demand this year and you're probably benefiting I would assume from some temporary cost reductions just wondering how sustainable you think that 13% to 14% margins are if we sort of return to normalized environment.
Yeah, we really do Phil so.
Residential delivered in and the timing we feel good about performance as we look forward, we feel the factors that we can control.
We'll do everything we can do manage.
[music] products productivity that in the larger scale that we have now with that prior distribution. We think allows for cost leveraged following that and it certainly beneficial.
I just mentioned I think some of the challenges we may painful time will tell it just depends overall market improves that could be more pressure on on commodities and you never know with weather I mean, depending what kind of weather year. It does influence as we said no point in the residential segment more than the professional segment so that.
That would be certainly a factor that would impact margin.
Okay alright, thank you.
Thank you.
Thank you. This concludes today's question and answer session I would now like to turn the call back the Nicolas role for closing remarks.
Great. Thanks for your questions and interest in the total company. We look forward to talking again in December to discuss our fourth quarter and full year results. Thanks, everybody.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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Ladies and gentlemen, thank you for standby and welcome to the oil company third quarter 2020, <unk> earnings Conference call.
This time, all participant lines and only mode.
The speakers presentation, there will be a question and answer session.
The question during the session you want me the press Star then one on your telephone.
Please be advised that todays conference is being recorded.
Our any further assistance. Please press Star then zero I.
I would now like the helicopter fell within like let's roll managing director of Investor Relations. Please go ahead.
[music]. Thank you and good morning earnings release issued this morning by business wire and a copy can be found any investor information section of our corporate website. The total company.
We began with our customary forward looking statement policy.
During this call we will make forward looking statements regarding our business.
And your financial and operating results.
Youre, all aware of the inherent difficulties risks and uncertainties and making predictive statements.
Earnings release, as well as RCC fine.
Detail some of the important risk factors, including those related to covert 19 that may cause our actual results to differ materially from those predictions.
We do not have a duty to update our forward looking statements.
In addition.
During this call will reference certain non-GAAP financial measures.
So in terms of historical non-GAAP financial measures to reported GAAP financial measures can be found in our earnings release or on our website.
The company believes these measures may be useful in performing meaningful comparison in the past and present operating result to understand the performance of its ongoing operations and how management views the vision.
Such non-GAAP financial measures should not be considered superior to.
They substitute for or as an alternative to and should be considered in conjunction with the GAAP financial measures presented in our earnings release and this call.
With that I will now turn the call over correct.
Thanks, and good morning.
Our third quarter was a strong and dynamic one given the circumstances.
Let's call it nine team began to spread across the globe macroeconomic environment when from robust growth so recession almost overnight.
Now, we're seeing more positive economic and market trends, but the rate so the recovery.
So the virus remain highly variable.
In short the environment in which we conduct business remains uncertain.
[music] third quarter, we were pleased to have achieved top line growth on the strength of our residential segment, that's favorable weather, our new product lineup and stay up on trends drove robust demand and the mass and dealer channels.
Incremental sales from our successful natural products acquisition also contributed to a third quarter growth.
Hi, I'm deeply grateful for the extraordinary efforts have a commitment of our team during these challenging times.
The health and safety of our people remains our top priority as we support and deliver value to our customers.
Our talented global team of more than 9000 remained resilient and solution oriented.
Among other things, we modified production lines and work flow to accommodate social this insanely manufacturing continues to work effectively while adhering to local safety guidelines.
Methods to move production and inventory to meet customer requirements and manage the demands of home childcare and personal wellness.
Well it seems that all this while delivering a solid quarter of financial results.
Turning to the demand environment during the quarter in May as the residential segment remains strong we filed a progress in our professional segment and those trends continue throughout the quarter and into the month of August.
That's customers gain more confident demand started to return.
The market continues to be dynamic given the variability of the economic recovery and the status of the virus round the world.
We are fully prepared to respond to potential market changes.
Our longstanding ability to adapt to different business environments was evident in the quarter and our team as well position to continue to succeed even in challenging market conditions.
Looking at the results for the quarter, our residential segment continued to excel, what 38% year over year net sales growth and strong margins.
The movement outdoors, we've seen during the past several months contributed to record sales of zero turn mowers, which doubled in the quarter.
We also saw strong contributions from walk power mower sales.
Professional segment net sales for the quarter declined 8% year over year, which was better than expected.
Sales included incremental revenue from the natural products acquisition.
Were encouraged by improved demand for our professional segment products, particularly in the landscape contractor rental specialty construction and irrigation markets.
We're seeing demand driven by greater business confidence and increased home investments.
Approved the retail demand within the quarter reduced field inventory, which is in good shape and more than prior year, setting us up well for pre season shipments.
With robust performance at our residential segment and approved demand at our professional segment, we demonstrated the strength of our diverse portfolio of businesses and our ability to be agile focusing on customer needs.
This positions us to drive growth forward as our end markets normalize.
There are two additional highlights in the quarter, but I would like to recognize first we launched our sustainability indoors platform, which further enhances our long standing dedication to make a positive global impact.
Socially and environmentally and financially.
And second.
We were named innovative partner of year by the tractor supply company.
This reflects our commitment to innovation as well as the effectiveness of our partnership to deliver great products. During these difficult times.
The successes, we experienced this quarter were due to the dedication of our team our innovative product quite a strong demand through math and dealer channels and the contribution from our first full quarter of the venture products acquisition.
According to the aspect about our future given our balanced and flexible business model that allows us to adapt quickly to change enduring values that focus on the success of customers innovative new products aligned to customer trends, a strong financial position and the proven ability of our people to adapt.
Apps that perform successfully in these dynamic ties.
With that I will turn the call over to Rene for a more detailed discussion of our financial results.
Thank you reckon good morning, everyone.
During the third quarter, we once again demonstrated the ability of our adaptable business model.
You know yet culture to manage near term headwinds and position us for long term growth.
We continue to capitalize on our strong balance sheet.
Gross well executing well operationally.
We remain flexible in order to try financial results, while keeping our people safe and delivering on our brand promise to our customers.
In this environment, we grew third quarter net sales by 0.3%.
$841 million.
Reported and adjusted EPS was 82 cents for the quarter compared to reported EPS of 56.
And adjusted EPS at 83, seven last year.
For the first frame my net sales increased 5.6% to $2.54 billion.
Diluted EPS was $2.37 compared to $2 in 18, sorry in the first nine months of fiscal 2019.
Year to date adjusted diluted EPS was $2, a 38 cents compared to $2.52 a year ago.
Before I review segment results I'll cover our liquidity.
At the end of the third quarter, our liquidity with $992 million.
This included cash and cash put like a $394 million and availability under our revolving credit facility at $598 million.
We have no significant debt maturities until April 2022.
We are in a strong position today and is now that I'm, an extended period macroeconomic uncertainty.
Now to the segment results.
Residential segment net sales for the third quarter were up 38.3% to $205 million.
Mainly driven by strong retail demand for zero turn riding and walk power mowers, and our expanded mass channel.
Year to date fiscal 2020, net sales increased 20.4% compared to the same period of fiscal 2019.
Residential segment operating earnings for the quarter were up 76.7% to $28.5 million.
This reflects a 300 basis points year over year increased to 13.9%.
When expressed as a percent of our sales.
This improvement was largely driven by productivity in synergy initiatives.
And she had eight expense reduction and leverage on higher sales volume.
This was partially offset by calling related manufacturing inefficiencies and unfavorable product mix.
You are today residential segment operating earnings increased.
70.2% to $87.2 million.
On a percentage of sales basis segment operating earnings increased 400 basis points to 13.8%.
Well the third quarter professional segment net sales decreased 7.9% to $623.6 million.
This was due to reduced channel demand as a result of Cowen 19 related impacts.
This concludes then fewer shipments of golf and grounds equipment.
Where do you sales of rental specialty underground construction equipment and fewer shipments of landscape contractor zero turn riding mowers.
I was partially offset by incremental venture product sales.
For the year today period professional segment net sales increased 1.3% compared to the same period fiscal 2019.
Professional segment operating earnings for the third quarter were up 39.3% to $113.7 million.
Well when expressed as a percentage of not sales.
Increased 610 basis points to 18.2%.
This increase was primarily due to lower nonrecurring acquisition related expenses versus the prior year period.
Favourable net price realization and decrease commodity costs.
This increase was partially offset by unfavorable product mix and corporate related manufacturing inefficiencies.
Your today professional segment operating earnings increased 2.8% compared to the same period in the prior fiscal year.
When expressed as a percentage of net sales operating earnings remain constant 17.2%.
Robert here for bulk fiscal periods.
Moving to our operating results.
We reported gross margin for the third quarter of 35%.
An increase of 330 basis points over the prior year period.
Excluding acquisition related costs, adjusted gross margin decreased 70 basis points to 35.2%.
The decrease and adjusted gross margin was primarily driven by coven 19 related manufacturing inefficiencies.
Unfavorable mix due to the higher sales of residential product and it increased inventory reserve in one of our professional businesses.
This was partially offset by favorable net price realization in the professional segment.
And productivity and synergy initiatives.
For the first nine months reported gross margin was 35%.
Up 160 basis points compared with 33.4% in the prior year period.
Adjusted gross margin was 35.2% compared with 35.3% in the first nine months of fiscal 2019.
Actually in a expense as a percent of sales decreased 170 basis points to 21.2% for the quarter.
Primarily due to lower traveling meeting expenses.
Position related charges.
Other place salary.
For the first nine months of fiscal 2020 yesterday itself as a percent of sale was 21.9% up 20 basis points from the prior year period.
Operating earnings as a percent of net sales increased 500 basis points to 13.8% whether third quarter.
Adjusted operating earnings as a percent of net sales increased 50 basis points to 13.9%.
For the first nine months of fiscal 2020.
Operating earnings as a percent of net sales were 13.1%.
Compared with 11.7% a year ago.
Adjusted operating earnings as a percent of net sales for the first nine months were 13.4%.
Compared with 14.2% a year ago.
Interest expense decreased $700000 for the third quarter compared to a year ago due to lower interest rates.
Interest expense increased $4.7 million for the year to date period.
Compared to a year ago.
This was due to increased borrowings as a result of our professional segment acquisitions.
For the full year, we continue to expect interest expense of about $33 million.
The effective tax rate was 19.8% for the third quarter and the adjusted effective tax rate was 20.9%.
For the first nine months fiscal 2020, the effective tax rate was 19.2% and adjusted effective tax rate was 20.6%.
For the full year, we continue to expect an adjusted effective tax rate of about 20.5%.
Turning to the balance sheet cash flow.
Accounts receivable totaled $294.7 million down 5.6% from a year ago.
Inventory was up 5.7% to $656.2 million.
And accounts payable decreased 11.8% to $268.7 million.
Your today free cash flow was $259.3 million with a net income conversion on 100.7%.
This positive performance was due to the increase in net earnings.
Favorable net working capital change and reduce capital expenditure.
Our disciplined capital allocation strategy includes investing in organic and M&A growth opportunities.
Maintaining an effective capital structure.
Returning cash to shareholders.
Our sharp focus on near term liquidity has reaffirmed our capital allocation priorities for the year.
These include.
Prioritizing debt repayment to maintain our leverage targets.
Curtailing share repurchases and considering strategically compelling acquisition.
We increased our cash dividends for the third quarter fiscal 2020 by 11.1% to 25 cents per share as compared to the prior year period.
Based on our current outlook and strong financial position, we expect to maintain our dividend.
As Rick discussed there remains uncertainty as a result of carbon 19 related factors.
We went through our guidance in March and we will not be providing specific full year guidance on the similar to past practice, we will provide full year fiscal 2021 guidance on our fourth quarter call. If we have sufficient visibility ability and confidence to do so.
However, based on current visibility and with an understanding of the uncertain nature of the economic environment, We would like to provide you with our current thinking about the fourth quarter.
We anticipate continued year over year growth in the residential market.
Professional market should benefit from the gradual return to more normal buying patterns as customers confidence in the economy increases.
These positive trends that will likely be somewhat offset by remaining coping 19 headwinds such as budget constraints the effect of social distancing restrictions and regional variations in economic recovery.
As you know precision is difficult in this environment, but if these assumptions hold true we anticipate the fiscal 2024th quarter net sales will be higher than that of the prior year quarter.
Adjusted EPS will be similar to that of the fiscal 2019 fourth quarter.
We expect that other income to be lower in the fourth quarter fiscal 2020, then in the prior year period as a result of a favorable pension and postretirement plans that effect in fiscal 2019 that will not be repeat it.
We continue to expect total net other income for fiscal 2020 to be about $13 million.
We continue to expect depreciation and amortization for fiscal 2020 of about $95 million and capital expenditures of about $80 million.
We anticipate that fiscal 2020 free cash flow conversion rate to be similar to fiscal 2019, we plan to build inventory in the fourth quarter to mitigate any potential supply chain and manufacturing constrained due to social distancing restriction.
In summary, we executed well in the third fiscal quarter in a challenging environment.
Our team demonstrated their resiliency commitment and determination.
We are in a strong financial position and continue to invest in technology and innovation to drive long term growth.
As a result, we're confident in our ability to navigate through any near term challenges and capitalize on growth opportunities.
I will now I'll turn the call back to Rick.
Thanks Ray.
We're optimistic about our future.
Our diverse portfolio of businesses strong customer relationships position us to drive growth as our end markets normalize.
Our productivity initiatives continue to enable operational improvements and our focus on innovative products and our recent acquisitions are aligned with changing global market dynamics.
We had several new products introduced during the year that demonstrate our ability to innovate and satisfy our customers evolving needs.
For example, the new Chainsaw and power shovel that are part of the Toro 60 volt lithium ion plus force platform.
The bingo compact utility loader electric and hybrid Greens mowers.
This which JC 24 horizontal directional drill and SK 3000 stand on skin secure and awkward tracks Zohr drift Tate.
Our recent acquisition also continued to deliver with both trials machine works and venture products aligned with key market trends, such as Fiveg and broadband build out infrastructure improvements and product versatility for our professional and homeowners with acreage customers.
We are encouraged by the continued strong residential demand and the improvements in our professional markets. As we look forward, we'll be watching a number of macro trends such as the trajectory and duration of coal that related impacts, including social distant seen restrictions and global supply chain disruptions.
Global economic recovery factors, driving general consumer and business confidence and commodity trends.
And weather patterns for the fall and winter season.
More specifically, we're tracking certain key factors for individual markets as we end the year and looking ahead to fiscal 2021.
For the residential segment certain professional segment businesses continued customer interest at home investments driven by stay asphalt trends.
For golf continued strength in rounds played coupled with improved food and beverage revenue.
For grounds equipment halt of municipal and other tax supported budgets.
Strained by Covidien related factors.
For landscape contractors business confidence and favorable logging conditions.
For underground Fiveg and broadband build out critical need infrastructure rehab and replacement and increased oil and gas projects.
For rental and specialty construction homeowner related projects and the resumption of construction activity.
And for Snow ice management, the timing a little winter season, and continued demand within our new product categories.
In closing we are enthusiastic about our future given our new product pipeline and the proven ability of our people to drive growth and productivity and these dynamic time.
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 will take your questions.
Thank you as a reminder to ask the question you would need to press Star then one on your telephone to withdraw your question. Please press the pound team.
Our first question comes on the line of Mike Shlisky with call. Your Securities. Your line is now open.
Good morning, everybody.
So I want to sort of maybe ask your question or two about tractor supply.
Can you give us.
An update on your level of satisfaction on that New initiative. This year. It sounds like there is certainly satisfied with the here given the award you have one I'm curious how things went according to Jason is that we're past the spring and summer and what do you have any major additions are treatments for next year plan at this point.
It was a great per share with tractor supply there was little scary as we started the spring season, given the locked down and so forth, but it turned out to be a fantastic year with tractor supply.
And to your points, we're we're always with all of our partners exploring opportunities to further those partnerships and look for opportunities for both parties going forward.
Thank the good news is residential it was that it's been a broad based.
Growth.
Factor this year. So it's not it's not only maps, it's not always as new channel partner, but we've seen growth in our dealer channel. We've been we've seen significant growth in our longstanding mass partners as well. So it's been good across the board tractor supply has been fantastic. It's a great fit in so many ways.
And complimentary to our other channels and that's been very positive.
So we feel great about it.
Great.
I also wanted to ask about.
Dealerships in the professional World you guys said. Thank you then were under any kind of essential strained during the during the quarter.
And do you think that Molson are going to kind of make it through this co. Good okay, if they've gone through it.
Okay. So far.
Yes, I didn't hear the first part of the question, which.
The dealers in one area.
I was curious it kind of broadly speaking across professional whether you're seeing a dealers who had some volume challenges they face any financial strain recently do you think most then we'll get really.
Given that some of the demand is.
Is improving so far.
Yeah.
Obviously with.
Professional businesses being down they certainly adult that just a after that.
As businesses have throughout our.
Any place any part of our businesses so they.
Took actions early many of them are able to take advantage of the carriers App to help bridge the gap.
Things are grateful to see those businesses the business customers coming back and coming back into buying cycles. So we did not see any kind of wide spreads overall.
Business revenue kind of financial situations with that channel.
Okay and BRAF lastly from me.
It's like one of the major energy suppliers out there is facing difficulties.
As filed for chapter 11.
Can you tell to there's many issues and your supply chain on engine.
And weather.
Your you might see any engines get changed or stopped going forward. If this company.
Changes its own that product offerings.
Yes, Thats right.
Summing up so you're referring to is that this isn't has been a good supplier to US there are also a competitor which.
Historically.
But interesting dynamic.
The sale process is continuing I think there are some procedural.
Pieces in place, but it's likely that they will go to the stalking horse at this point.
From our perspective, we're always.
Adjusting our engine strategies, and we have multiple engines suppliers and certainly a factor that we have seen coming for sometime so because of the long lead time engines, we have to have those strategies in place well in advance of the season and we have our plan, yes, we're already executed against for 21.
That's already.
Okay. Thanks, so much I'll leave it there appreciate it.
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.
Good morning pretty solid quarter.
Circumstances, so congratulations on that.
I guess it just start off the tractor supply just because it's been discussed so far is there any way to kind of parse out sort of the growth in residential from.
Tractor supply versus that core growth at core underlying growth and give us some sense of proportion.
Yeah, we wouldn't break it down real precisely, but we can talk about kind of internal factors that we were driving along with our partners on those the external factors. So I think we've talked about in previous quarters. We've we've really done a re boots are residential business. So.
So no new fresh product line with lots of innovation that people are interested in.
Increased marketing change in marketing and brand messaging, that's that's been very well received.
That cuts across all of our channels.
All benefit from that.
Obviously, adding significant new mass partner has been a positive as well.
But those are the.
The drivers that we're driving and we would expect goes to continue on.
Even when you talk about channel fill their world. There certainly was elements of that but wouldnt repeat but we're also looking at ways that we can expand the partnership and.
The.
Most channel most maps partners would not want to carry inventory anyway. So there should be.
Continued continued opportunities and all of our channels through on the residential side.
On the external side, it's really the biggest factor a couple of biggest factors would be it's very very favorable growing season throughout and Pristinely that was the case back in the great recession as well so that helped to drive residential business. When other parts of the business were challenged at that time that continues to be the case here.
The one that has had a lot of press to stay at home initiatives, which we know has driven interest in investing in regards to your whole upgrading equipment, because you're spending more time, there that portion will will obviously taper off as a restrictions are lifted people can.
Do other things, but we believe we have strong underlying growth drivers that will help to continue to drive growth results with residential that's not going to be at the level that we're reporting this quarter will be back towards a more modest level, but certainly growth.
Many opportunities to continue to grow.
All right.
Rick if we could just build off that that last point you were making I guess one thing that most investors are struggling with not just recall, but we're pretty much all the companies that we're dealing with this space. It's just the degree of pull forward that may be occurring here clearly the sample for the question is just how much.
I'm guessing you guys may pay models to help you better understand that.
Thank you can say that.
Helps better understand kind of you extend to pull forward demand that is just augmenting growth here versus.
That would be perceived maybe more sustainable level of growth.
Yes, I think you're going to I mean, you've seen the catch up happen in this quarter and there will continue to be maybe a little below that.
But we see the pattern is returning back towards a more normal buying cycle patterns, even as we look forward into our fourth quarter here as we've gotten started with it so.
It was clearly a factor in this and this quarter. The cheap you can see but that's not a dominant factor as we go forward, but it's more professional customers are returning to normal buying patterns as we've said in the past, though with turf.
Sure for related products those products are used as the grass is growing so they continue to be consumed.
And how they do have to get back on their buying cycle their normal but buying cycle. The good news is.
Field inventory is in great shape.
As I review that this morning across the board.
Lower than last year back in some cases, we would like to see a little bit higher and we're going to work to make sure we can.
Did that in the right place here going forward, but it's a good set up as we go into certainly as we're in the fourth quarter as we go into so 21.
Right, great great condition from inventory standpoint, it should be able to take advantage of that continued growth.
That's good to hear but just one more question on that pull forward is.
Given.
Strength, you're seeing right now and you're talking about the expectation that we returned back to a more normalized pace of growth I guess the bigger question is the extent to which you perceive risk of was falling below that normalized growth and potentially into a negative growth period, just because of the volume that's been pulled forward how would you assess that risk your business.
Yes, I would say most of the fact rose actually talking about once a catch up.
These were.
Purchases there were delays when all especially on the business professional side.
All the businesses responded the same way the pause the watch their expenses they hold capital.
Purchases and that as they started to figure out what the trajectory look like for economy for the virus and have their customers came back and they came back and bought those products that they probably would have bought earlier in the year.
If you're talking about the residential side with potential pull forward, that's a very extreme.
It's a very very large base and most of the most of the sales are replacement so.
It is driven by things like.
Homeownership, new home ownership.
No. Other factors certainly the weather is very positive one so thats a good growing season, there as a percentage of people that are going to replace their equipment.
Every year and we do you think.
Go ahead.
So is it because I do think of the residential business. It was catch up as well as opposed to pull forward.
Yes, it was catch up I think in your definition, there would be a little bit of pull up in there but are you know as we look forward. We continue to see growth based on our on our modeling.
Okay, Thanks, I'll get back into queue.
It's a very large base. So there's a lot of opportunity for people to replace their equipment.
Great. Thank you.
Thank you. Our next question comes from the line, Joe Mondillo with Sidoti and company. Your line is now open.
Hi, good morning, everyone.
Good morning.
So in the press release in your prepared commentary you mentioned potential offset.
To some of the growth dynamics in Fourq, you being budget constraints.
Just wondering what part of your business would be most affected to that then are you actually starting to see effects of that or is that just something you're sort of cost itself.
There are there probably several factors in there, but the ones. The one that we're probably specifically referring to was on the municipal side. So a portion of our business is tied to tap supported.
Cities and I think it has yet to play out exactly what municipal budgets look like in the next budget cycle.
And to what extent.
So.
Maintaining parks and municipal golf courses becomes a priority I mean, you can make a case, but we'll continue to be a priority. We just don't know how that's going to play out and then other budget constraints golf than tremendously positive news about golf in fact, it think rounds played in July were up.
A record almost 20% late teens something percent has never been seen before but others portions of the golf revenue streams that have not come back.
Our food and beverage is not fully back.
Since.
Revenue as not back yet so to the degree to which.
Restrictions can be lifted and those activities can resume the budgets will come back into a more healthy position, but theres still a little constrained at this point.
And then just the elements of golf it has to do with resorts. That's a relatively small portion of the overall market, but destination type of golf that's tied to travel.
Were you fly to the city that's oriented around resorts our goals.
That that continues to be constrained so that puts pressure on their budgets rules are the budget references I think are referred to.
Okay, and just I guess broadly looking at the two segments you commented a little bit about channel inventories, but.
Parsing, but with the boat part parsing through the two segments would you describe inventories is below normal at this point.
The our field inventories are below last year at this point and we.
We know we actually.
I would call that a success given the pullback in a number of our businesses our operations team.
Responded with making the right products at the right times and shifting production, that's necessary to where the opportunity.
And.
There are few areas, where we would like to see a little bit more inventory as we go into the next season.
That's especially true because.
Our rates of output of the effective in some cases because of coated.
Related restrictions that we put in place so we need to make sure that we've got inventory in place at the start of the season, because we'll have but we don't have.
The same level of outputs for plants. If you will so we've had to work some extra hours add some shifts.
That just means that a little bit.
There's a little bit more as we need to adjusted schedule going forward.
In my prepared remarks, I mentioned that we wouldn't be building some inventory fourth quarter two to help to address so we want to make sure that weekend.
Mitigate any supply chain challenges that may occur as well as the rating for the season.
We are customers.
Okay, and just a follow up as far as field inventories.
That sort of blow up below average is that across the board or I mean.
Certain areas, maybe like in golf.
I mean.
Flat to maybe a little above the inventory or sort of broadly speaking are you seeing just field inventories pretty low.
It's broadly based across all of our businesses and yes, just to provide some insight into that as we work with.
We sell our products through another party theyre all businesses that are looking to preserve liquidity and so forth they've been more conservative about inventory.
And that we see that as we look at the overall numbers, but as they gain confidence and they see the opportunities going forward just as our residential dealers did in the spring they've got to help products. So they will they will come back and so to the buying cycle there as well.
Alright, and then last question just as far as Capex just curious.
What you're investing in for Capex anything interesting that's going to maybe help.
Profitability going forward and anything that you could highlight.
I would say our capex is really a combination.
Investing in productivity and cost reduction efforts were always looking for those opportunities new products are another.
Area for us and there's an element of of maintenance capital as well, we try to balance and across those three and I think in particular some of the new products are really exciting.
We'll see those come out and then that number of years I.
I think especially if you go back to our technology priorities a lot of our investments in new products is going very much on target with those priorities.
Turning to the energy smart connected products longer term robotics.
Okay, great. Thanks for taking my questions.
Yes. Thank you.
Thank you. Our next question comes on the line of Tim What we'll just with Robert W. Baird. Your line is now open.
Hey, good morning, everybody Nice Mr., Kevin the result.
Maybe just I guess, maybe on the supply chain.
How do you feel just about your internal capabilities to to make sure that there aren't any constraints on on the component side and did you have any any supply chain challenges in the quarter or to the industry have any supply chain.
During the quarter that you're aware of.
We did not have significant disruptions during this entire period, our ops team did an incredible job so I make that summary statement.
No way describes the process that we've been that we've gone through starting with the supply chain and that's really how that started I was looking at my notes from the first quarter.
About our concerns about the supply chain.
Virus to bolt elsewhere in the world, we have not had the.
Significant stoppages from a shortage of supplies our plants have adapted incredibly wall in a very short period of time to keep.
Continue operation continued to support our customers the effect is just.
For example, if you have 500 foot Assembly line and 50 people on the somebody line when we implement social distancing they need to spread out either means extend the wine. If you can or if you can then you need to reduce the number of people on the assembly line that just means that you then probably need additional shift.
Additional production time.
To be able to to accomplish the production.
So thats the kind of thing that our operations team has been working on.
Done extremely effectively and we think.
We think thats helped us.
Take share in a number of places.
That's especially on the residential side of availability became a problem in the marketplace.
Okay. Okay. That's good to hear and then it does sound just based on on the common teeth, you've made that unipro should kind of get back to maybe a more like a normalized growth kind of situation in the fourth quarter I, just I guess I wanted to verify that and it gets which product end markets.
The expected to contribute most to that.
We do expect.
We do expect pro to grow I think we've talked about a couple areas that are more constrained the portion of our business, particularly with Charles machine works that or is that it's tied to oil and gas.
The rate at which.
Some of those cost factors come back into place on municipal budgets being related to that as well, but on the other drivers but.
The the grounds business continues to be very positive for us our landscape contractor business, the construction and underground business. The snow business continues to grow professional in and residential and rental has been very positive. If you go back to.
Go back to the.
The underground business.
The telecommunications is very strong right now as we expected the fiveg the major players have come back into their buying cycles and.
They paused as well, but they really afford to pause to long because they're in a race to build out for Fiveg network and then just one other comment to the telecommunications fiber for improved broadband, especially for home has been a factor, that's especially come into bites and the whole concept.
The digital divide some parts of our population that don't have adequate.
Broadband in order to do the things are expected learn from home work from home.
So that's a good driver for our business and.
Brad.
So.
Okay. Okay. Thanks for the color there and then just on their Sim city terrorists kind of coming into the market on imported engine front from China and it just wanted to ask what the potential if there is a way to frame the potential impacted that fits to Toro and just your ability to offset that if you're looking at.
The next year.
Yes, you can imagine that is something that we're watching very closely along with 75, others in our marketplace because it really affects.
Our market.
As we talked about early earlier.
By the nature of engines they have a long lead time. So we have we're constantly working on our engine strategy and revising that based on the latest factors.
But the planned for 21 was established sometime ago and were more in the execution phase of that so we feel very solid about our plan for 21.
And.
We don't see material impact in 21.
Based on everything we know at this point.
The process itself, it's still early in the process there are lot of moving parts.
And as I said, we work on our long term strategies. So we take in our best best thinking of what's happening with various of our dozen or so engine supplier.
And form of our best.
Best opportunity to provide the best value to our customers with those engines.
So.
Obviously very much watching what happens there historically.
A lot of ups and downs in these cases, and they deem may turn out completely different and so.
And oftentimes you know more favorable than some of the extremes look as we go through the process.
Okay. Okay I appreciate the appreciate the thoughts soon to look on that you guys.
Thank you. Thank you.
Thank you. Our next question comes from the line of Sam Darkatsh with Raymond James Your line is now open.
Good morning, Rick Rene how are you.
Hello, how are you doing well well thank you.
Just wondered if I could unpack that prior question a little bit more around the Chinese sourced engines Im guessing press figure out how much you imagine it's going to get passed through.
To the consumer on the residential side next year, either with poor product or industry wide.
Knowing that it there tends to be some Alaska city of demand.
How much do you think theres going to get pushed through and how much do you think gets absorbed with channel partners.
Okay, I think it too as you understand the the.
The pressures on the residential side for a price standpoint are are significant because those standard price points that are out there.
What's what's interesting in this case it is is that is.
Industry wide issue so.
If it turns out that.
There is a longer term effects or some sort of bridge period until supply chain adjust that something unfortunately, that's going to affect our customers that will just fundamentally.
Change market pricing at some point there'll be no choice, but to pass through.
But.
As we've said.
Sam for 21, we've got our plan in place. So we don't see a significant issue for 21 for us.
And remind us and fiscal 20, what your exposure was to those Chinese sourced engines that are now subjected to the tariffs.
No I don't have a specific number in front of media they would be.
No.
Certainly in our top top several engine suppliers.
Let me touch.
Yes, that's a good point all limited to the residential segment.
Okay.
And then if I could I ask a few directional questions around.
2021, I, obviously, everyone here respects that giving.
Granular guidance is almost laughable based on how many variables are still an unknown but.
Just trying to get a sense. It first incremental margins you know normal incremental you've talked about in the Patrick around 25% or so I know that was implied with the vision 2020.
Look also.
You got some good guys and bad guys you would imagine the pro mix is going to be.
Better next year than it was this year, although I'm guessing some of the discretionary spending is going to return to any sense as to why we wouldn't think that a quote on quote normal ish.
Incremental margin might be in the cards for next year.
Tim This is Randy if I may answer that question I think we would say planning and normal ish type of incremental margin would be reasonable to your point, we do recognize there'll be some cost actions that we took this year that well come back into the equation is he going to up 21. There's also some cost that were incurring.
Sure that at some point in time.
Go away some of that so impact assessment that something in some of those inefficiencies that we talked about will also go away and keep in mind, we always focus on productivity and synergy.
Our cost structure. So that remains the same so I would think kind of normal level would be reasonable.
And then my last question same sort of topic around free cash flow conversion next year I think your thoughtful about roughly 90% conversion rate. This year like last year as you build inventory.
I'm guessing capex is going to be more normalized next year.
Sure sure.
How do we how do you imagine cash flow conversion looks like next year versus that 90% range. The pad last few years or so.
I would say you know we're building the inventory for specific reason at this point in time it to mitigate some of the concerns around supply chain, which again the team has done a great job doing today, and then making sure that were available to meet customer needs assuming that.
So just something impacts go away, we would then intend to normalize or inventory levels throughout the year. So we expect to be in a normal level or.
Yeah, so normal better than the 90% so maybe a quick closer to 100% than you originally were targeting for this year sort of thing.
By normal more historical.
Okay terrific. Thank you very much and be well.
Thank you. Thank you.
Thank you. Our next question comes from the line of Tom Mahoney with Cleveland Research. Your line is now open.
Hello, Good morning.
I wanted to ask about.
The normal cadence around price increases.
I guess, there specifically focused on the pro.
As you look into the next three to six months and then the fiscal 21, what are the things you evaluate as to whether you could move forward with those annual increases in the Chris cement like you typically do.
Yes, we always talk about that we price to market. So the first thing. We do is look at what what's the value of the product offering that we have relative to the value that the customer Steve and we historically say that we get 1% to 2% of realized price.
And.
We're looking to provide.
The value package of values that would continue to to command that.
And.
We do that through innovation, which is.
Desirable features on the residential side for homeowners.
For the business side.
Have products that have return on investments so that.
That that.
If there is a price increase of coming out of another portion of their budget, whether it's whether it is.
Fuel or labor or chemical those types of things that they can justify.
An increase in equipment.
Understood and then.
In terms of the inventory build in the fourth quarter any specifics around that.
Which segments those.
Incremental build is focused on.
We would look at it more generally you know certainly we don't expect to see the same type of growth as Rick mentioned in residential and that we know there's some probably variability in that marketplace and we do expect professional will continue through the recovery. So I think it would be over overall not specific to one particular segment.
Okay.
Thank you very much.
Thank you.
Thank you we do have a follow up question from the line of they make Mcgregory with Longbow Research. Your line is now open.
Yes, thanks for taking the follow up I guess just to follow up on Sam's question.
Right you said essentially.
Social distancing cost and the impact on the business will go away.
You talk for a couple of quarters, now, but probably 90 related manufacturing inefficiencies I just.
Interested in your thoughts on just how much longer to the last and.
I am not necessarily asking how much longer code 19, as an issue, but we do seem to be on some kind of a recovery trajectory here and then assuming that for the purposes. This question that you know that trajectory continues.
Much longer is it's just something that dissipates and goes away by the.
Sort of the first calendar quarter in the second calendar quarter next year or how should we think about this.
Yes.
Just one thing I mean, our plan is not to build that Mark how cities are really we use the cap capacity that we have in the best way possible and that's that's why we're talking about building some inventory.
Be able to better manage those costs.
So we look at that being as long as we have done social dispensing and place there's going to be some impact to start the way that are.
Factories will be able to execute.
Keep in mind, we always focus on synergy and productivity and no. One is more focused on that in our operations team, they're always looking at ways. They can offset those costs, but we do expect or whatever period of time that social distancing restrictions are in place that will comply with those and they'll they'll have some impact just on the way we run our plan we do.
Thank you at some point in time I don't know when I think we all wish we knew when that will change other than that cost would go away, we would reconfigure the plant.
Back to away that we can operate a little more efficiently.
It doesn't mean time. These are just higher costs, there kind of structural and you just need volume to leverage limits that the idea.
Yes, it does.
Okay. That's a question. It's just you talked in the post segment about favorable price cost you did while the pricing you talked with better cost.
It's anyway to quantify that and then how well does that sustained through for Q and just tell me how how far forward should we think the should we be thinking about that not favorable price cost.
I think that relationship with certainly hold all things being equal through the remainder of the year as we look into next year I think because pricing.
Just talked about.
Thanks Mark.
So.
We had.
Main competitive we do think from a cost standpoint, we continue our focus on productivity.
Economy.
Curves that probably be some headwinds related to some material input cost philosophy is that Paul.
All that where some of the dynamics change, but it will be driven more by the macroeconomics than anything weren't doing.
Okay. Thanks very much.
Thank you we do have a follow up question from the line Odell Mondello, what's the Dougherty and company. Your line is now open.
Hi, everyone. Just one follow up question I had the residential segment.
Obviously very strong demand this year and you're probably benefiting I would assume from some temporary cost reductions just wondering how sustainable you think that 13% to 14% margins are if we sort of returned to normalized environment.
Yeah, we really do Phil.
Residential delivered in a big timing, we feel good about their performance.
We look forward, we feel the factors that we can control.
We'll do everything we tend to manage.
New products productivity that the larger scale that we have now with that prior distribution. We think allows for cost leverage solve that is certainly beneficial.
I just mentioned I think some of the challenges we may painful time will tell adjusted EBITDA overall market improves that could be more pressure on on commodities.
And you never know with weather I mean, depending what kind of.
Whether you're it does influence as we said before the residential segment more than the professional segment. So that that would be certainly a factor that would impact margin.
Okay all right. Thank you.
Thank you.
Thank you. This concludes today's question and answer session I would now like to turn the call back the Nicholas role for closing remarks.
Great. Thanks for your questions in interest in the total company. We look forward to talking again in December to discuss our fourth quarter and full year results. Thanks, everybody.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.