Q2 2021 Toro Co Earnings Call
[music].
Good day, ladies and gentlemen, and welcome to the total company second quarter Earnings Conference call. My name is Jonathan and I will be your coordinator facilitator for today at this time all participants are in a listen only mode. We will be facilitating a question and answer session towards the end of today.
The conference if at any time during the call you require assistance. Please press star followed by zero and a coordinator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes I would now like to turn the presentation over to your host for today's conference Julie characters Treasurer and senior you're managing.
The director of Investor Relations for the Toro Company. Please go ahead Ms <unk>.
Thank you and good morning, our earnings release was issued this morning, and a copy can be found in the Investor information section of our corporate website, the Toro company Dot com on.
Of our call today are Rick Olson, Chairman, and Chief Executive Officer, and Renee Peterson, Vice President 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 and future financial and operating results.
You all are aware of the inherent difficulties risks and uncertainties in making predictive statements.
The earnings release, as well as our SEC filings detail some of the important risk factors that may cause our actual results to differ materially from those in our predictions.
Please note that we do not have a duty to update our forward looking statements.
In addition, during this call we will reference certain non-GAAP financial measures.
Reconciliations of historical non-GAAP financial measures to reported GAAP financial measures can be found in our earnings release or on our website.
We believe these measures may be useful in performing meaningful comparisons of past and present the operating results to understand the performance of our ongoing operations and how management views of the business.
Non-GAAP financial measures should not be considered superior to or a substitute for the GAAP financial measures presented in our earnings release and of this call with that I will now turn the call over to Rick.
Thanks, Julie and good morning patrol the company delivered very strong results for the second quarter of fiscal 2021, driven by robust broad based demand across our professional and residential segments.
Our team continued to execute well in this dynamic environment, managing the supply chain challenges affecting our industry and the global economy, and working together with our channel partners to serve customers and fulfill retail demand.
As of results net sales for the second quarter were up 24% year over year professional segment net sales increased 25% continuing the growth trend for this segment and setting a new record.
The increase was primarily driven by a strong demand for golf landscape contractor irrigation and rental and specialty construction products.
Our lineup of innovative products combined with increasing business confidence in the economic recovery helped fuel exceptional demand.
Residential segment net sales for the second quarter were up 20% year over year setting another record.
This growth was led by a strong demand for zero turn riding mowers and our all season Flex Force 60 volt home solutions products.
In addition, enhanced retail placement of boosted sales of our snow equipment and late season snow storms helped clear of the channel.
The introduction of innovative new residential products, coupled with the refreshed marketing expanded mass retail distribution continue to strengthen our brand and drive growth for this segment.
We also set records for earnings in both segments. This quarter as we drove productivity and operational synergies enterprise wide.
Professional earnings were up 57% and residential earnings grew 24%.
Reflecting on the outstanding results this quarter, we note 3 prevailing themes.
First demand has been exceptionally strong.
We see this continuing for the foreseeable future, albeit with year over year growth rate comparisons the will ultimately stabilize off the higher base.
This demand is driven by improving consumer and business confidence, coupled with public and private investment priorities and current lifestyle trends we.
We expect the capitalized on these drivers with our commitment to new product development best in class distribution channels and our strong balance sheet that provides the financial flexibility to invest in the future.
The second along with the exceptionally strong demand, we've seen escalating supply chain and inflation challenges.
These challenges are not unique to this for our company and are having a global impact.
Our teams have worked effectively to keep up with increased demand while navigating the current supply chain environment.
We are also focused on mitigating material freight and wage and inflationary pressures through productivity and synergy initiatives disciplined expense control and market align pricing actions, we will continue to prioritize important investments to support growth.
Third we're leveraging our strong balance sheet to position the company for future growth.
As we continue to generate strong free cash flow, we are allocating capital to the best drive value for all stakeholders. This year, we've made strategic investments in technology accelerators through the acquisitions of turf links and left hand robotics.
These teams have the immediately helped us advance our innovation roadmap.
At the same time, we've continued to invest organically in key technologies, including alternative power smart connected and autonomous.
As an example, our expanding line of Flex Force 60 volt products will soon include of battery powered 2 stage snow thrower, which is ready to launch and is generating a lot of excitement in the field.
Our healthy cash flow also allows us to return capital to shareholders, while maintaining ample liquidity.
Year to date, we've paid down $100 million of debt invested $107 million kind of share repurchases and paid out $57 million in dividends.
While we work to capitalize on this period of great growth, we remain committed to our employees and channel partners and continue to diligently manage and mitigate COVID-19 related risks.
We're keeping the health and safety of our team in the forefront while executing operationally to get the right products to the right places at the right time.
Through the so we can campaign, where incentives are employees to get vaccinated.
We extend sincere thanks to both our team and our channel partners for their continued commitment to keeping each other safe, while also going above and beyond to meet the needs of our customers.
Looking ahead, we remain focused on our enterprise strategic priorities of accelerating profitable growth driving productivity and operational excellence and empowering people.
We will continue to execute against these priorities to position the company for long term sustainable growth.
I'll discuss our outlook further following Renee his more detailed review of our financial results with that I will turn the call over to Renee.
Thank you Rick and good morning, everyone.
Our record second quarter was driven by robust demand across our professional and residential segments, coupled with strong operating performance.
We grew net sales by 23, 6% to $1.15 billion.
The reported EPS was $1.31 per diluted share up from 91 cents last year.
Adjusted EPS was $1.29 per diluted share up from 92 cents in the prior year.
Moving to our segment results for the quarter.
Professional segment net sales were up 25, 3% to $828.4 million.
This increase was primarily due to.
Channel demand for golf landscape contractor irrigation and rental and specialty construction products.
The offset by lower sales of underground construction equipment, driven by supply chain disruption that impacted product availability and continued softness in oil and gas market.
Professional segment earnings were up 57, 3% to $167.1 million.
And when expressed as a percentage of net sales increased 410 basis points to 22%.
This increase was primarily due to <unk>.
Productivity improvements, including Covid related manufacturing inefficiencies in the second quarter of last year that did not repeat.
The net price realization and volume leverage.
Actually offset by higher commodity costs.
Residential segment net sales were up 22% to $315 million.
This increase was primarily driven by.
The strong retail demand for zero turn riding mowers, due to new and enhanced products.
Higher sales of Flex force battery electric products, mainly driven by successful new product introduction.
The higher shipments of snow equipment as a result of late season storms and expanded retail placement.
Residential segment earnings were up 23, 9% to $46 million.
And when expressed as a percentage of net sales up 40 basis points to 14, 6%.
The increase was primarily driven by productivity improvements, including Covid related manufacturing inefficiencies in the second quarter of last year that did not repeat.
Net price realization and product mix.
The offset by higher commodity costs.
Turning to our operating results for the second quarter.
We reported gross margin of 35, 1%.
An increase of 210 basis points from the prior year.
Adjusted gross margin was 35, 1% up 170 basis points.
These increases were primarily due to productivity improvements net price realization and favorable mix, partially offset by higher commodity costs.
SG&A expense as a percentage of net sales decreased 10 basis points to 19, 4%.
This favorable performance was primarily driven by the.
Volume leverage and lower indirect marketing expenses.
Actually offset by higher incentives due to improved performance.
The reinstatement of certain costs that had been part of the company's fiscal 2020 pandemic driven expense reductions.
Operating earnings as a percentage of net sales increased 220 basis points to 15, 7% in.
And adjusted operating earnings as a percentage of net sales increased 170 basis points also to 15, 7%.
Interest expense was down $1.5 million to $7.1 million, driven by reduced debt and lower interest rates.
The reported effective tax rate was 19, 8%.
The adjusted effective tax rate was 29%.
Now turning to the balance sheet and cash flow.
At the end of the second quarter, our liquidity remained consistent at $1.1 billion.
This included cash and cash equivalents of $500 million and full availability under our 600 million dollar revolving credit facility.
We have no significant debt maturities until April of 2022.
Accounts receivable totaled $391.2 million down 2.3% from a year ago, primarily driven by channel mix.
Inventory was down 12% for 1 year ago to $628.8 million per.
Primarily as a result of increased demand.
Accounts payable increased 28, 8% from last year to $421.7 million. This was primarily due to increased purchases of components as well as more normalized expenses.
Year to date of free cash flow was $292.4 million.
With the conversion ratio of 115 per ton.
This positive performance was largely the result of higher earnings and lower working capital driven by higher payables and reduce inventory levels.
Our disciplined capital allocation strategy fueled by our strong balance sheet includes investing in organic and M&A growth opportunities.
Maintaining an effective capital structure and returning cash to shareholders.
Our capital priorities remain the same and include reinvesting in our businesses to support sustainable long term growth both organically and through acquisition.
Returning cash to shareholders through dividends and share repurchases.
And maintaining our leverage goals to support financial flexibility.
At the midpoint of the fiscal year demand momentum is strong and our leadership position in the markets we serve as solid.
Like many other companies we are continually adjusting through these dynamic times.
The economy is experiencing a surge in demand while supply is struggling to keep pace.
In the long run we expect the positive from the heightened demand trends across the Americas to endure and of wave the near term pressures, while we continue to drive productivity and synergies and take appropriate market based pricing actions.
Our operating margins in the second half of our fiscal year will be pressured.
This is driven by the escalation and supply chain challenges as well as material.
Freight and wage inflation, which we expect will result in manufacturing inefficiencies and higher input costs relative to our prior guidance.
With that backdrop, we are updating our full year fiscal 2021 guidance.
We now expect net sales growth in the range of 12% to 15%.
Up from 6% to 8% previously.
We expect professional and residential segment net sales growth rates to be similar to the overall company.
With residential trending slightly ahead of professional.
This is due to the strong demand we continue to see across our businesses.
Looking at overall profitability, we continue to expect adjusted operating earnings as a percentage of net sales for the full year to be slightly higher than fiscal 2020.
This reflects the strong performance in the first half coupled with the more challenging supply chain and deflationary environment in the second half.
Given our strong balance sheet and future growth expectation.
We are increasing our estimated capital expenditures for the year to $130 million up from $115 million.
This aligns with our priorities of investing in key technology areas and ensuring we have the capacity to meet future growth.
Based on current visibility, we now expect full year adjusted EPS in the range of $3.45 to $3.55 per diluted share the.
This increase reflects the robust demand environment, while also taking into account the near term supply chain and inflationary pressures.
We anticipate the impacts of these pressures to be the most pronounced in the third quarter. So for our mitigating actions are more fully realized.
We expect adjusted EPS per diluted share in the fourth quarter to be similar to fiscal 2020 against a very strong Q4 of last year.
Looking for the rest of the fiscal year, we remain excited about the broad based demand for our product we.
We are well positioned as we continue to execute on our long term strategic priorities and invest in innovation to capitalize on future growth opportunities.
I'll now turn the call back to Rick.
Thanks Renee.
As we look ahead for the remainder of the year, we're watching a number of key drivers in our end markets.
For residential and certain professional businesses, continuing consumer interest in home of investments.
For the landscape contractors capital investments, including catch up purchases of prior deferrals, driven by improved business confidence for golf.
<unk> strong momentum in general the reopening of international courses and the return of resort calls for.
For ground equipment, the prioritization of outdoor space maintenance that improvement by municipal and other tax supported entities.
For underground increased government support and funding for infrastructure spending. This includes broadband buildout alternative energy investments in critical need the infrastructure of rehab and replacement.
For rental and specialty construction strong demand by both professional contractors and homeowners.
For snow and ice management channel demand given the lower end of season inventory levels.
In short these end market drivers should continue to support robust demand our biggest challenge for the remainder of the year will be our ability to produce at the desired rates given the supply chain constraints, we are facing.
We believe the constraints will improve as key commodity availability normalizes global vaccination rates improve COVID-19 restrictions ease and logistical capacity finds the balance.
We anticipate demand will remain strong even after supply chain constraints ease at that point, we expect to be in a position to rebuild field inventory levels across our channels.
Our operations team remains committed to doing everything possible to meet the increased production demands.
With our team's dedication our innovative suite of products and our market leadership as well as our consistently strong cash flow to support growth investments, we are well positioned to capitalize on this demand opportunity.
We're also well positioned to capitalize on electrification trends given our expertise and leadership across our markets. We are committed to developing the electric products offer both power and durability with no compromise on performance for.
For example in March our 60 volt personal pace Recycler Moore was named Editor's choice by popular mechanics, and this evaluation of electric lawn mowers.
Build quality and cut quality were cited as the 2 reasons Toro mowers have received more editors choice awards than any other brand the.
Addition to the residential Flex force line, we have an increasing number of professional battery powered products, including our all electric Greensburg and lithium ion Workman utility vehicle.
Sustainability is fundamental to our enterprise strategic priorities and our focus on alternative power smart connected and autonomous technologies is embedded as part of our sustainability endures strategy.
It's the right thing to do and provides the opportunity for our company to create value for all stakeholders, while helping our customers achieve their sustainability goals.
A recent win highlights of this focus 1 of our European Channel Partners, Joan Hey Brook of recent group.
Was awarded a 4 year preferred supplier agreement and fleet management partnership with the city of Amsterdam The <unk>.
Citi has an objective of zero emissions by 2030, and we're excited to partner with them in achieving this goal.
Another example is our new 20 year partnership with the National links Trust in Washington D. C. Their mission is to protect and promote accessible and affordable of municipal golf courses to positively impact the communities.
We are honored to support this mission together with our distributor turf equipment and supply company as well as our longtime partner true the world's largest golf management company.
Involvement in this project exemplifies who the Toro company of <unk>.
<unk> focus on long term carrier relationships, our communities and the environment.
In closing we are optimistic as we begin the second half of our fiscal year. We believe our updated guidance appropriately reflects the risks we face and the current operating environment. While also accounting for the robust demand we expect.
We have strong momentum across our businesses and are positioned to capitalize on future growth drivers.
As always our extended the team is the key to the Toro company's long term success.
Thank you to our employees for your dedication and resilience into our channel partners customers and shareholders for your continued support.
With that for an in I will take your questions.
Thank you ladies and gentlemen, if you do have the questions. At this time. Please press Star then 1 on your Touchtone telephone if for your question has been answered and you'd like to remove yourself from the queue. Please press the pound key our first question comes from the line of Sam <unk> from Raymond James for your question. Please.
Good morning, Rick Good morning, Renee how are you.
Good morning sales, okay, well thank you.
3 questions if I might.
The first.
You mentioned that your production constraints should ease.
In the coming months.
More interested in potential inflation.
And raws spend components next year I think you normally do your negotiations with your vendors and that kind of August September area.
Which suggests that there might be further pressure for next year can you can you talk around that in terms of whether you see maybe even more inflation next year or has that already been.
The worst of it is behind you.
Sure.
Yes, as we look at inflation.
You know it is the global issues that we're dealing with and in particular sand, we're seeing inflation that was higher than our initial expectations and we have tried to factor that into our guidance for this year, but in particular ceiling and resin are.
Particular components that are raw materials that are we're seeing more of that inflation as well as some freight and wage inflation as well.
And as we look forward, we do expect for the second half for inflation to continue going.
Going into next year, I mean part of it we'll have to see how the economy unfolds I mean, there's different points of view on inflation and some see it as more of a temporary.
The blip other see it as a longer term the thing that we will do is we'll continue to focus on and the things we can do to mitigate to the best of our ability and we still.
Lucky that we had a strong pipeline of synergy and productivity efforts across the enterprise.
We will always manage costs prudently and we also will take market based pricing actions and we'll kind of have promotions and the and other marketing programs as well so well have to see how next year unfolds, but we also see is demand is remaining very strong and the business fundamentals look.
Encouraging going forward as well.
To that last point.
Could you help us with respect to what volume growth was versus price in the second quarter and then prospectively.
Prospectively within 12% to 15% sales growth guidance for the year Renee.
Yes, as we look at we did take take a market based pricing actions with within the year and we will look at also if there are additional market based pricing actions, we have to take the majority of the growth would have been would have been volume base.
Certainly within the quarter, but we're continuing to look at as of the inflation becomes clearer to us what type of actions, we need to continue to take for the rest of the year, but again, we don't we don't start with price will start with.
We can do internally to try to control to the best of our abilities.
And again demand looks to be remaining strong for the remainder of the year and can be on as well.
So the incremental price I'm, sorry, the incremental sales growth.
Guidance is mostly price for its mostly volume or I'm, just trying to get a sense of.
When you decided to raise your expectations for sales for.
This year of presumably for the back half how much of that was volume versus price.
Yeah, we don't break it out specifically, but I mean, when we're looking at growth at the double digit I mean, it's more volume based on price based.
Got you and then my last question and I'll defer to others. Thanks.
The.
Residential business up 20%.
The quarter.
Which is terrific obviously.
Just trying to reconcile that though with the growth that was.
<unk> by both home depot, and tractor, which of your obvious large channel partners that were well in excess of 20% I think they were both talking about 30 plus.
First off.
What was going on there.
To reconcile the difference there.
Especially knowing that you talked about additional placements too.
Yes, I can't speak specifically to the for the home depot on track for supply numbers that you're quoting we had we had an exceptionally strong.
Quarter from a residential perspective in fact the.
The stay at home probably kicker that's on top of the work that we've done.
And the even further than we expected at this point, we expect that effect.
To wane at some point.
But the fundamental of the fundamental things that we've done continue so we're.
We're pleased with our growth at scale.
All of the.
The places that you are mentioning so I can't speak specifically to the to the the comparison that you are talking about the.
The fundamental things that we've done with the refreshing the product line.
Banding placements and.
The building the brand and the messaging has been very effective from our perspective.
Thank you both the well thank you.
Thank you.
Thank you. Our next question comes from the line of Tom Mahoney from Cleveland Research. Your question. Please.
Hi, good morning.
2 questions first is there a way to characterize.
The production speeds.
We're able to achieve now relative to pre COVID-19 levels.
I would say no without a specific percentage we are we're still largely in the COVID-19 operation mode. So our manufacturing operations of actually improved efficiency and productivity relative to where we were let's say 9 months ago.
But we're still kind of <unk>.
<unk> got the social distancing on our assembly lines, we've stretch those out other.
Are there certain practices that we have to continue to follow from a safety standpoint the.
The results and ultimately some inefficiencies, but we are seeing improvement both in optimizing that.
That process plus as we get additional.
Associates vaccinated that helps us with the additional flexibility. So we saw a nice improvement of our own productivity and efficiency internally and we expect that to continue as the pandemic situation improves.
We get more people vaccinated.
I would just add that I think we have seen.
Some impact from the supply chain disruption.
Net.
It has been escalating as we went through the year and we're also managing that very well I mean, the team is really doing an excellent job.
Doing all of that as possible, but that causes some additional disruption in maybe the COVID-19 related it's flat since the stopping and the starting of assembly lines and so forth, but just builds.
Additionally, the efficiencies and as that improves we should also.
We expect to see improved.
The manufacturing because of that as well.
Okay.
Okay, and then just to follow up on the residential lower point. The you guys were just making.
Is there any signs in.
The demand that Youre seeing.
As the spring has progressed.
Of interest in.
Home spending weighing whether its mix or if you look at <unk>.
Volume on the sequential basis, and then along with that any change in appetite from.
Retailers are dealers to take inventory.
In that part of your business on the residential side.
We really have not seen that trend diminish at this point. So we continue to have very strong demand in our residential segment for <unk>.
The us almost certainly part of it but the things that we've done over the last several years to reboot the business our fundamental.
Drivers that will continue on beyond the pandemic situation.
Remember the comparisons of our looking at are off of a high base from last year at this time and really through the entire the entirety of fiscal 'twenty.
We continue to build on top of what seemed like a very high base.
The the effects of the stay at home continues also of field inventory is in it's actually lower than we would like to see.
Terms of your question the the willingness to take inventory is very high.
That is hungry for inventory impact at this point.
Great. Thank you very much.
Thank you.
Thank you. Our next question comes from the line of Tim which is from Baird. Your question. Please.
Hey, good morning, everybody.
Maybe just kind of dovetailing on the last question Rick.
I'm not sure if you can quantify it or not to provide any numbers, but I guess, how would you kind of characterize broader inventory of broader field inventory levels versus kind of the normalized level just trying to understand it.
Maybe what a rebuild of opportunity is for you over the next 12 months.
As you would expect with very strong demand over the last several periods and with some of the supply constraints are inventory field inventory is lower than we would like to see it at this point, so that and that's pretty much true across all of our businesses in both segments. So.
There is opportunity and very much willingness to refill the field inventory and that's another bit of capacity or opportunity that's out there for us.
Okay, and just given the demand environment and some of the supply constraints. I mean is that something that you think really falls more into fiscal 'twenty 2 than this year.
Realistically as we forecast for that's something that the.
Perhaps starts to happen at the end of fiscal 'twenty, 1, but certainly into the first portion of of 22.
Okay, Okay great.
And then.
I guess on the supply chain.
Where are you seeing from a component perspective, where are you seeing kind of the the tightest constraint and just kind of any color internally and how youre positioning yourself just to make sure that you are getting at least your fair share of the components from your suppliers.
Yes, I mean, our ops team is doing just a miraculous job working really off of a base of the way that we do business with our suppliers to look at long term relationships. So happened that we had been through as part of our synergy efforts with the Charles Machine works and integration efforts, we had Jim.
<unk> gone through.
Some contracts re upping contracts and focusing on some key suppliers of key partners. So thats a great base to go from.
And.
What you can look at is really from a first of all of the basic commodities for steel is our number 1 commodity and I think relative to last year at this time.
The market index was up about 300%.
We don't see that much because because of the.
The contracts that Ive mentioned earlier, but those are the major drivers of some of the cost per inflationary factors resin is another 1 that's probably 100% from last year. The base last year at this time, that's been affected by some externalities like the weather situation in Texas that knocked out.
A good portion of.
Of the supply supply chain resources there of the.
Facilities that makes erosion for.
Thats something that has been fixed but it's just taken a while to get everything back on line and then catch up with what the shortage.
Those 2 of.
Of those raw materials always find their supply demand balance, but that's taking longer than that it would normally based on the number of factors and then the other the other factories with suppliers are just the same challenges that were that were working through.
Getting your workforce back operating in a COVID-19 safe environments, and responding to demand thats come back very quickly.
Okay great.
Great.
Good luck on the rest of the year guys. Thanks for the questions. Thank.
Thank you. Thank you.
Thank you. Our next question comes from the line of David Macgregor from Longbow Research. Your question. Please.
Yes, good morning, everyone.
First question is already by channel and yes, good morning, Rick.
First question for the supply channel and just what's your best estimate of the total quarterly expenses being incurred right. Now is the result of the supply channel and labor disruptions.
To get a sense of.
Once the world Normalizes, and you get back to a steady state how much of that goes away.
Yes.
I think we can give you that number exactly what we do see is the probably the strongest effects in the second half we're going to see the full effects in the third quarter.
Particularly of the net effects of.
Some of the mitigation actions that we're taking and we will not be seen completely until the fourth quarter.
We will probably see the peak effects of the inflationary factors in the third quarter by themselves.
But the good news of the fundamental demand continues to be there and we believe if thats kind of be that's going to be there long. After we work through the supply chain issues and I would just add when you look at the total year, we do expect.
Our operating margins to be up slightly for the year and we also expect pro margins to be up in residential to be similar are down. So we're encouraged when you look at the total year and we are.
The expected.
<unk> reflects that EPS will be up on the year over year.
Wow Okay.
And I guess.
Sort of for drilling you with the model questions here, but I guess similarly on SG&A of noted the reinstatement of certain costs for that.
The reduced in 2020 of how much more of those 2020 reductions will be returning in the second half of the sheer can you quantify that for us.
We don't have an exact number I mean part of what we're seeing as well is there are there are certainly of return we had.
The salary reductions that took place and some other of cost certainly <unk> was 1 of them that will still be at a lower level.
And as well as we look at the second half of the year.
Incentives are also David at the Big change year over year in part because for fiscal 'twenty, we were adjusting down our incentives based on performance and expectations and for 'twenty..1 would we be adjusting those up so you see some of that impact in Q2, and you'll see some of that for the rest of the year and volume also.
I mean part of the SG&A is more variable based on volume so with volume being up.
And it's all included in our in our guidance, but I know that it's difficult to break that out.
Alright, great.
Yes.
I wanted to ask the question you called out the increase in Capex and I guess I just wanted to tie that back to market share question here I.
Just thinking about your operating scale benefits that you have just competitively speaking I think you would have of fulfillment advantage of this environment over smaller players whose.
The problems are probably even greater than yours, frankly, do you have the capacity to take share right now or are you taking share and if so can you talk about where in the business.
We do excuse me, we do have capacity to take share and we are taking share in a number of places I think some of it goes all the way back to.
Some of the things, we've talked about with our supply chain and the.
Of the advance work that was done with our supply chain to be.
We're able to support the demand that we did see coming back.
Back in the winter.
Prior to the spring season.
And we continue to be excited about the future.
It's not only the ability to supply of product, but it's really driven by the innovation. The changes that we've made with our products that really have people excited we've mentioned the 60 volt Flex force, but thats, becoming.
Net lithium ion power of portion of our business is becoming appreciable if you look at the.
Opportunities with our underground business before we started the pandemic there was a huge opportunity with 5 G. The.
Mission and the pandemic that Theres a broadband.
GAAP that needs to be closed and then all of the infrastructure investment that's coming for underground utilities.
For.
For telecommunications.
Repair of rejuvenation are strong and then we didn't really talk a whole lot about golf.
But the golf has seen a tremendous surge through the pandemic and there is good evidence that thats going to be sustained sustained at a higher level I think the year to date numbers for golf for something like 44% I know it's against the <unk>.
Pandemic base, but even if you look back to like the 2017 through 19 period, it's up about 20% year to day. So those drivers of the game itself.
Of our golf courses in very good financial shape and the cost of investment that they wanted to make is to make sure of the golf course is in good shape that means equipment and irrigation systems.
So I just want to make sure im clear on the so you're saying that you are gaining share in the golf business.
The golf business in general has been of low single digit type of growth business over time. So we are steadily.
Taken share and that trend continues but of the dramatic kind of moves that it would be of fast faster growing market.
Great. Okay, and then last for me is just on the underground construction you reported sales declines in the second quarter I guess that was a little bit of of surprise, but can you talk about what youre seeing in that business.
And how that's reflected in your guidance is this just the timing issue of around <unk> and you expect to see stronger underground in the in the second half.
And of your consequent supporting that the growth in revenue.
Sure.
Being just the summary is absolutely incredible demand for the underground business.
We've talked the last several quarters of little bit about the downside of oil and gas, but it's really all of the supply side. So it's really about producing the products to meet the demand.
Had we been able to do that in totality over the last quarter you would not have seen the effect that you just talked about.
So very very strong long term.
And long term.
Significantly.
The stronger demand.
Most of the drivers for that business.
And that really does that improve the 2.
To the point that you raised about Capex, we're making an increase in our Capex is really focused on capacity and technology in some cases, we can enhance our production capacity to be more productive.
With some cash to put into place and we havent really strong balance sheet net offers.
Of that opportunity to continue to invest our top priority is always going to be profitable growth, both organic and M&A and we feel it's a good investment for us to make for the future because we think of the demand is kind of remained strong for some period of time.
Alright, okay, well, thanks, very much Rick Thanks, Renee and good luck for this quarter. Thank you.
Thank you. Our next question comes from the line of Ross Gilardi from Bank of America of your question. Please.
Good morning, guys.
Good morning Ross.
Hey, Rick can you talk a little bit about.
Within that 20% growth in residential the how the growth in gas powered equipment compares to electrified product and just what is your general split of gas powered versus electric on Enel.
And the LTM basis, or however, you would choose to break it out.
The if we called out the 3 categories.
<unk> was the first 1.
The 60 volt lithium ion portion was a big portion.
It was a significant portion of the growth of and Thats really picking up significant momentum. If we think we don't break it down specifically, but we can tell you that it's becoming a more significant driver of.
Of growth.
And it's really our focus what's appealing to the customers is our commitment that of no compromise choice of gas 2 battery and so that message has been very well received so of battery electric still of relatively small portion of the overall business and even in this quarter, but 1 of the.
The fastest growing areas, but.
Kelly the Z category was very strong.
Well, just what I'm getting out of them and you also said snow contributed positively towards the.
At the end of the quarter, which is more of a weather impact in.
1 of the questions earlier.
Hi, just on the retailers seem to grow faster.
Some of your competitors seem to have gone a lot faster or at least in the first quarter. The comp is a little bit different of the product mix of different the specifically within outdoor and I'm just wondering if some of the lagging relative to.
Some of those things I just cited is tied to just gas powered equipment.
The losing share of the overall pie.
Yes, I would I would say absolutely not.
I left out of the snow is 1 of the drivers actually that was minus stake, but those sales with very important part of our business in the quarter and actually through the entire snow season, we've taken market share in most categories within snow and have seen particular.
Great demand on our battery powered products for snow.
We're just going to be introducing a 2 stage battery powered stone products slated to have 1 at my house and I cant wait because of I had a chance to demo of adhere fantastic piece of equipment.
It's got all of the Toro characteristics as well, which is the support and the brand thats going to be behind it as well. So we feel very positive about snow we've added placements with our key partners over the last season, and we feel very excited about it going forward and we know that we were taking share.
Within within snow, but just overall.
I'm talking more broadly within the overall category, it's just outdoor power equipment.
It's hard to see how gas powered.
Equipment is taking share from electric equipment right now would you agree with that or no.
Well you have to keep in mind the gas is still by far of the dominant power source for power equipment beyond trimmers and handheld products.
By far of gas is still the largest component so as we expand our channel as we expand our product offerings. We can continue to take share within gas at the same time, we build out our electric offerings.
Okay.
And then maybe this 1 is more for Renee Renee.
The ability to control costs I mean, certainly Toro has.
Got a great great record on managing the cost structure, and so forth, but just the spirit of what some of the other questions. We're asking too you've got this raw material inflation, you are saying that that you can continue to manage our costs very carefully the you've kind of already been doing that for the last year. I mean don't you have to how the natural level of of SG&A.
<unk> over the next 6 to 12 months, while you're getting hit with this raw material inflation just as the economy continues to reopen the AD capacity presumably.
If you can add some personnel and so for start traveling again going to going to the 2.
Tradeshows just all the things that you would normally be doing just can you really hold back SG&A like and the type of economic acceleration right now that the offset.
Some of the compensation.
Yes, I don't know that we will necessarily offset all of the cost inflation with SG&A. So just to clarify that at that point I think we will make sure first and foremost within SG&A that we invest in technology and innovation I mean that that doesn't change regardless of the economic environment.
We make good choices about other SG&A, but we are seeing it.
If you look at the the SG&A rate we're seeing.
<unk> benefit from SG&A.
All of the things that you are saying are happening the EQ. We do have the volume related SG&A that well will happen as volume increases we will leverage our fixed cost structure.
More of the the larger offsets for the inflation will be the continued focus on productivity.
We do have some benefit from product mix as well and then we'll make market based pricing decisions as well, but all of those would help us to offset not just the SG&A piece.
Okay, and then just lastly on this underground construction business.
It's clearly it's the supply side issue of the demand is there but is this just you didn't have enough capacity like I'm just trying to understand how much of this is under your control in terms of.
Ramping back up are you are you dependent on some component suppliers or you just need to get additional capacity up and then you mentioned oil and gas is the source of weakness can.
Can you remind us what portion of the businesses.
Of the oil and gas does that pipeline construction that is just remaining very weak that is kind of dragging the business down am I understanding that correctly.
Yes, so for the first part of your question, it's really of the forces that are affecting the entire industry. So its the key components.
That.
The suppliers are not fully up to speed yet so in some cases, we're on allocation, but that would be true across the industry as well lots of common components from engine hydraulics, even fasteners those types of things.
The.
The roots of the constraint for at this point.
In terms of the significance of oil and gas.
Small portion of our underground business low single digits in total for the Toro company.
Okay. Thanks very much.
And you asked about pipeline, that's obviously part of it but as the oil price continues to stay higher that's bringing on some.
Some of oil capacity that uses our equipment beyond pipelines as well.
Got you. Thank you very much.
Thank you. Our next question comes from the line of Mike Shaw from couple of years could just curious for your question. Please.
Hey, good morning, guys and congrats on what I think is your first $1 billion sales quarter.
Thank you Mike.
I guess I wanted to follow up on the questions that were asked earlier.
Maybe a different way could you maybe share.
Other business were there any pull forward of orders and deliveries.
Some of your customers anticipating.
Higher prices or some shortages of Iran and the.
In the year.
No no Mike in fact of it probably just the opposite so in the cases were not able to completely fulfill orders. Those are those are still there for us to get the facts what happens in the circumstances, there can be a little bit of of piling on of orders. So even if you sort that out which we do we have.
The strong demand into the future and theirs.
No pull forward of element.
Okay got it.
I also wanted to ask about your inventory levels. Some of the commentary I just wanted to clarify Renee from.
Your prepared comments.
You had an all time record quarter over $1 billion in sales and he's got a great outlook for the inventories of kind of flat year over year pretty much in.
Sorry.
Actually it was actually flat from 2 years ago from the pre pandemic second quarter, So I'm kind of.
Could you give me tell us did you.
Could would you have had higher inventories at the.
End of the quarter.
And how much more of the capital would you have wanted to invest.
Could have COVID-19.
We didn't have any shortages.
Yeah, No we would have built inventory out of any given the volume demand that we're seeing if we could have.
And I guess within the inventory.
Additional clarifying comment what we're seeing if maybe it's the same level of 2 years ago that our finished goods is down quite significantly and with this up and it really goes to the supply chain challenges that Rick commented on is we are trying to do our best and we've literally willing question and what's the help to mitigate some of that to the extent that we can.
Right now our supply chain is just struggling to meet the higher demand and so we will as we look over time, we would reach all of that inventory.
2 in a more normal level and then the more normal mix within that I think that's also going to take some time to be able to do that given the demand strength that we're seeing not just for this year, but even going into next year.
Okay got it.
And then you just won the golf question for you.
Rick I'm not sure. If you can if you can parse this out but.
I am starting to see some really different trends between munis and private courses I mean, we've seen the medians have just massive budgets by whatever they can and the private courses are seemingly having a little more trouble with the cash flow because they still can't do these types of recently weddings or larger events or the major food and beverage given some of the COVID-19.
<unk> can you tell us.
If your golf business has seen any.
Classification in the trends from either of 2.2 of private recently.
We have not and I just reviewed the.
The feedback from our sales team recently and I would say there's no differentiation in fact that was probably more emphasis the private of course.
Interest in investing in the golf course itself and.
Keep in mind, we've talked about we've talked about this a lot but.
If the golf courses open that means that the golf course has to be maintained some of our equipment gets used whether there's a recession or a pandemic in the same way. So if you don't make those purchases on the routine that youre in.
And then you need to make up for those investments at the point at some point because the equipments is ultimately consumed over time.
And that's what we saw coming out of the great recession.
2010, and 11 was for a lot of makeup purchases that happened to get people back on their capital replacement of track that.
Really it's so great to see the munis the.
<unk> come back strong like you said they are healthier than ever because they are more of.
Dependent on fees and the biggest thing is just the great interest in using the Gulf versus that's continuing and we see that in parks as well the even were munis.
Municipal budgets are constrained the G.
General public is prioritizing green spaces and parks because of what it is what it has meant for them over the last year.
Okay.
That's great color. Thanks, so much I'll pass it along.
Thank you. Thank you.
The Q and our final question today, a follow up from the line of David Macgregor of Longbow Research. Your question. Please.
Yeah.
Yes, thanks for taking the follow up question I guess, just a quick question on capital allocation and share repurchases specifically in the big spend in the second quarter.
Are you thinking about the cadence of that program over the balance of the year. Ultimately do you think for going back to kind of those 2017.2018 levels of.
The total spending or could your.
Could you repurchases actually exceed those levels this year.
Yes.
Our capital allocation priorities really remain the same.
As I mentioned earlier in the discussion around Capex, our top priority will continue to be to focus.
Long term profitable growth and we'll look at that both organically, that's probably our highest return as well as any M&A.
<unk> sort of continuing to focus on our pipeline will grow our dividend as our earnings growth and then we kind of look at them.
The latter of priority being share repurchases, but we wanted to make sure we're offsetting.
Dilution that we remain disciplined around that.
You know as the pandemic continues to recover we will sell more comfortable having a little less cash balance as well so I would say.
I expect us to act in that manner and part of it depends on if we see great growth opportunities that yield a higher return that we would invest there first but if not then.
We will invest in share repurchases as well.
I'm just wondering how you're thinking about M&A in that context, then because of the 1 hand youre acquiring the business. It's probably also experiencing fulfillment youre just buying somebody elses problems when the other hand, taking a longer term view of your.
The platform for growth. So how are you thinking about M&A right now is the priority within.
The capital allocation just based on what Youre seeing in the funnel of what people showing up at your door with.
Just yes, just in general we would always look at it long term so capacity you might be.
<unk> given the short term constraints the room, but ultimately we're looking at the long term value of that could be added to the company with the acquisition of always.
Alright, Thank you very much.
Thank you.
Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to Julie characters for any further remarks.
Thank you for your questions and interest in the Toro company, we look forward to talking with you again in September to discuss our results for the third quarter of fiscal 2021.
Thank you for your participation in today's conference. This concludes the presentation you may now disconnect good day.
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