Q3 2021 Toro Co Earnings Call
[music].
Good day and thank you for standing by welcome to the Toro Company third quarter earnings Conference call. At this time, all participants are in a listen only mode. After this.
Speaker's presentation, there will be a question and answer session to ask a question. During the session you will need to press star one on your telephone. Please be advised for today's conference is being recorded if you require any further assistance. Please press star then zero.
I would now like to hand, the conference over to your host Julie characters Senior managing director of Investor Relations. Please go ahead.
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 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.
Our earnings release as well as our SEC filings detail some of the important risk factors that may cause our actual results to differ materially from those in our predictions.
Please note that we do not have a duty to update our forward looking statements.
In addition, during this call we will reference certain 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 operating results and cash flows to understand the performance of our ongoing operations and how management views 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 this call with that I will now turn the call over to Rick.
Thanks, Julie and good morning.
Toro company delivered record third quarter results.
Continued to benefit from robust demand in both our professional and residential segments and our operations team went above and beyond to execute even as global supply chain challenges affecting availability.
Our employees together with our channel partners kept a sharp focus on serving the needs of our customers.
As a result total net sales for the third quarter were up 16% year over year.
Professional segment net sales increased 15%, marking the second quarter in a row of double digit growth for this segment.
We saw continued strength and landscape contractor and golf markets worldwide.
Pre season shipments of boss snow and ice management products and strong demand for our rental and specialty construction equipment and benchmark products.
Our lineup of innovative products combined with strong business confidence fueled robust demand.
Residential segment net sales were up 23% and that comparison is on top of a 38% growth rates in the third quarter of last year.
Growth in the quarter was driven by strong retail demand for our zero turn and walk power mowers.
Customers also continue to respond favorably to our all season, What's force 60 volt product lineup, which offers power and durability with no compromise on performance.
The recent actions, we've taken to introduce innovative new products refreshed marketing and expand mass retail distribution continues to strengthen the Toro brand and drive positive results.
As noted last quarter, we expected supply chain constraints and inflationary pressures escalate at a rate faster than it could be fully offset in the near term through pricing and other mitigating actions.
Yes.
Despite these challenges all segments delivered solid earnings growth in the third quarter with professional earnings up seven 6% and residential earnings of 10, 5%.
I'll now touch on some of the key themes for the quarter.
First is the robust and broad based demand, we continue to see across our markets worldwide.
This has been driven by consumer and business confidence as well as customer investment priorities focused on outdoor environments.
We continue to capitalize on these drivers with our commitment to investing in new product developments are best in class distribution and our talented teams.
Second the continued escalation of global supply chain and inflationary challenges.
This included component availability constraints as well as material freight and wage related cost headwinds.
Our operations team took extraordinary steps to enable us to source and produce as effectively as possible in this incredibly dynamic environment.
We also continued to execute on our productivity and synergy initiatives.
Emmons traded disciplined expense control and implemented market aligned pricing actions.
Regardless of how long these pressures persist we remain focused on managing the factors within our control.
Third in line with general economic trends, we saw in increasingly challenging labor market, including wage pressures and workforce availability limitations in some of our manufacturing locations.
Across the enterprise, we have talented and dedicated teams committed to serving our customers. We're focused on having the workforce and other resources in place to put ourselves in the best position to meet demand and deliver our products to the right places at the right time.
I want to extend my personal thanks to our team and channel partners for their unwavering commitment to serve our customers while navigating these extremely challenging operating environment.
Our innovative product portfolio outstanding team and deep relationships with our channel partners and end customers set us apart and position us well for long term growth.
We have the financial capacity to invest in the future and we continue to allocate capital to best drive value for all stakeholders. This.
This fiscal year, we've made strategic investments in key technologies, both organically and through acquisitions to advance our priority areas of.
Alternative power smart connected and autonomous.
Our healthy cash flow also has allowed us to return capital to shareholders, while maintaining ample liquidity.
Looking ahead, we will continue to execute against our enterprise strategic priorities of accelerating profitable growth driving productivity and operational excellence and empowering people.
I'll discuss our outlook further following Renee his more detailed review of our financial results.
I will now turn the call over to Rene.
Thank you Rick and good morning, everyone.
As Rick said, our record results for the third quarter were driven by robust demand in both our professional and residential segments.
Against the backdrop of increasing supply chain inflation and labor pressures.
We grew net sales for the quarter by 16, 2% to $984.0 million.
Reported EPS was <unk> 89 per diluted share up from 82 cents last year and.
And adjusted EPS was <unk> 92 cents per diluted share up 12, 2% from 82 cents in the prior year.
Both of our segments delivered record top and bottom line third quarter results.
Professional segment net sales were up 15, 2% to $723.0 million.
This increase was driven by broad based demand and landscape contractor golf snowing.
Snow and ice management rental and specialty construction and venture products.
This was slightly offset by lower sales of underground construction equipment due to supply chain disruption that impacted product availability.
Professional segment earnings for the third quarter were up seven 6% to $125.0 million.
And when expressed as a percent of net sales decreased 120 basis points to 17%.
This decrease was largely due to higher material and freight costs, partially offset by net price realization and productivity improvement.
Residential segment net sales for the third quarter were up 23% to $253.0 million.
This increase was primarily driven by strong retail demand for zero turn and walk power mowers.
Residential segment earnings for the quarter were up 10, 5% to $36.0 million.
And when expressed as a percent of net sales down 140 basis points to 12, 5%.
This decrease was primarily driven by the same factors as in the professional segment.
Turning to our operating results for the quarter, we reported gross margin of 33, 9%.
A decrease of 110 basis points compared to the same period in the prior year.
Adjusted gross margin was 33, 9% down 130 basis points on a comparative basis.
These decreases were largely due to the same factors that affected professional and residential earnings.
SG&A expense as a percent of net sales for the quarter increased 20 basis points to 21, 4%.
This increase was primarily driven by more normalized spending compared to the third quarter of last year and a legal settlement in the third quarter. This year.
Operating earnings as a percent of net sales for the third quarter decreased 130 basis points to 12, 5%.
Adjusted operating earnings as a percent of net sales decreased 80 basis points to 13, 1%.
Interest expense was down $4.0 million for the quarter to $7 million driven by lower debt levels and decreased interest rates.
The reported effective tax rate for the third quarter was 18% and adjusted effective tax rate was 19, 3%.
Turning to the balance sheet and cash flow accounts receivable totaled $303.0 million down two 2% from a year ago, primarily driven by channel mix.
Inventory was essentially flat to last year at $671.0 million.
However finished goods were significantly lower driven by strong retail demand while work in process was higher.
This was a reflection of the supply chain variability and our efforts to procure higher levels of key components when available.
Accounts payable increased 53% from last year to $415.0 million.
This was primarily due to the timing of purchases as well as more normalized spending compared to last year.
Year to date free cash flow was $429 million with a conversion ratio of 123%.
This positive performance was largely the result of higher earnings and lower working capital, primarily driven by higher payables.
At the end of the quarter, our liquidity remained at $2.0 billion.
This included cash and cash equivalents of $535 million and full availability under our $600 million revolving credit facility or.
Our cash balances are elevated from pre pandemic levels.
Largely driven by our desire to ensure adequate liquidity at the onset of the pandemic.
And our cash is further strengthened by the accelerated demand, we're experiencing along with the related working capital impacts.
Over the past nine months, we've deployed the majority of cash generated year to date, including.
The funding of our TERP Lynx and left hand robotics acquisition.
An increase in our regular dividend with 85 billion paid out so far this year.
The resumption of share repurchases with $177 million through the third quarter.
And $100 million in debt Paydown.
We also increased our capital expenditure budget, reflecting our commitment to invest in key technologies and ensure we have the capacity to meet future demand.
We remain disciplined in our capital allocation strategy fueled by our strong balance sheet.
Our priorities have not changed and include reinvesting in our businesses to support sustainable long term growth, both organically and through acquisitions.
Returning cash to shareholders through dividends and share repurchases and maintaining our leverage goals to support financial flexibility.
As we enter the final quarter of our fiscal year, we're benefiting from strong demand momentum and our leadership position in the markets we serve.
At the same time customer demand continues to outpace supply and production.
We're not immune to the challenges facing companies worldwide and we remain focused on serving their customers winning in our markets and managing the factors within our control.
We previously indicated that operational headwinds would be most pronounced in the third quarter.
As a result of the collective work of our teams to fulfill additional demand we were able to deliver a stronger third quarter than we had anticipated.
This resulted in lower finished goods heading into the fourth quarter.
We remain focused on procuring materials components and other resources to accelerate the pace of production in the face of supply chain inflation and labor pressures.
With this backdrop, we are updating our full year fiscal 2021 guidance.
We now expect net sales growth of about 17% up from 12% to 15% previously.
We anticipate the professional segment growth rate will be similar to the company average with the residential segment exceeding the company growth rates.
Looking at profitability, we now expect overall adjusted operating earnings as a percent of net sales for the full year to be similar to fiscal 2020.
We expect professional segment operating margins to be similar to last year.
We expect residential margins to be down compared to last year, but still well above historical levels.
This reflects our volume leverage and strong operational performance year to date.
Offset by increasing supply chain inflation and labor pressures.
We continue to take actions to counteract these market dynamics.
Based on current visibility, we now expect full year adjusted EPS in the range of $56 seven to $60.0 per diluted share.
Up from our previous range of $48.0 to $58.0
This higher EPS guidance reflects our strong year to date performance.
The robust demand environment and continued solid business execution.
While also taking into account the headwinds previously discussed.
All in we remain well positioned to capitalize on this period of profitable growth as we continue to execute on our strategic long term priorities.
I will now turn the call back to Rick.
Okay.
Thanks Renee.
Guidance Renee just discussed reflects continuing strong demand across our end markets as well as our current operational outlook.
Looking at global key demand drivers for the remainder of the fiscal year and into fiscal 2022, we are watching consumer and business confidence levels, along with developments related to COVID-19.
Customer prioritization of investments to maintain and improve outdoor environments, a continuation of strong momentum in golf and government support and funding of infrastructure investments.
These end market factors should continue to drive strong demand in the fourth quarter and into next year.
Our biggest challenge remains our ability to produce to meet retail demand across all of our markets given the current operating environment.
We believe constraints will begin to ease as we see improvements in key material and component availability logistics channels and other COVID-19 related factors.
Our operations team remains committed to doing everything reasonably possible to meet increased production requirements and grow market share in this challenging environment.
When operating constraints begin to ease we expect to be in a better position to build field inventory from our current historically low levels.
We remain focused on driving productivity and synergies prudently managing expenses and implement a market based pricing actions as appropriate.
We are well positioned to capitalize on long term growth opportunities with our strong cash flow market leadership.
<unk> and innovation and trusted relationships.
A few recent examples that highlight our commitment to innovation and our relationships include for the second year in a row a partner of the year award from tractor supply company.
At this time as Omnichannel partner.
From Green industry pros the selection of three of our products for their 2021 Editors' Choice Awards sighting innovation and utility as factors.
Three products include the.
The X Mark 96 inch lasers, the diesel the Toro is the master of 4000.
The Z spray Lcs spreader sprayer.
In August two of our rental and specialty construction offerings received Editor's Choice award from rental magazine, including the ditch Witch S. K 3000 full size stand on skid steer which offers the most power in its class and the Toro swivel mud buggy, but superior traction Emma.
Mobility.
And finally, the international sustainable irrigation Expo recently recognized our Aqua tracks actual micro irrigation solution as new product of the year.
In addition to awards are innovative products have been showcased that recent marquee events.
Earlier this summer our parent irrigation systems helps keep the playing fields in top condition at many of the Euro Cup Championship sites.
In July our irrigation and turf equipment supported Paul Larson and his team at Royal St. George's Golf club as their expert work was on full display at the open championship.
And more recently, our turf and irrigation solutions help Tokyo, Japan National Stadium and consuming secchi.
Country club maintain pristine conditions for this summer's high profile events.
Our mission to deliver superior innovation and customer care deeply rooted in our purpose of helping our customers enrich the beauty productivity and sustainability of the land.
This long standing focus on sustainability extends to our communities, where we have a strong legacy of giving back.
A few recent examples highlight was legacy <unk>.
First close to our worldwide headquarters, we've partnered with better futures and organization that works to transform the lives of men post incarceration and supports Minnesota environment.
Our donations of equipment and training resources help further the organization's mission.
Second on a national level, we partnered with the American Rental Association Foundation on our new community impact project.
This initiative is improving communities across the U S by rebuilding green spaces.
These are just a couple of examples of the many ways our company employees are giving back and promoting sustainability supporting our customers and communities is an important part of our culture and core to who we are as a company.
In closing we are optimistic as we finished fiscal 2021 and head into 2022, while also acknowledging that continuing dynamic environment.
We believe our updated guidance appropriately reflects both the risks and the opportunities we face.
Strong fundamentals and momentum across our businesses and are well positioned to capitalize on future growth.
As always.
Our extended team is the key to the Toro company's long term success.
You to our employees for your dedication and resilience into our channel partners customers and shareholders for your continued support.
With that Ron and I will take your questions.
Okay.
Thank you.
To ask a question you will need to press star one on your telephone to withdraw your question. Please press the pound key.
Our first question comes from the line of David Macgregor with Longbow Research. Your line is open. Please go ahead.
Yes, good morning, everyone.
Congratulations.
Environment within which to operate.
What was it.
Good quarter.
So there.
I guess.
Maybe talking a little bit about sales guidance.
17%, how much of that at this point, we'd look like price versus volumes.
Yes, as we look at it David we would say the majority relates to volume. We just continue to see very strong business fundamentals and very strong demand. So the majority would be volume.
Okay.
And I guess you made a pretty good case last quarter for why you need to protect your golf dealers on their large project bids, but you feel you've made adequate progress in passing through cost inflation. All your other product groups and how will that pasture with different in the fourth quarter and then maybe into <unk> versus what we saw this quarter.
Yeah.
So im just talking about pricing in the current it normally.
Don't really have a big backlog situation that we're looking at we usually talk about lead times, we stay very current with our orders we are in a remarkable situation right now where we do have extended lead times combined with.
Pretty significant cost increases. So this is a different situation.
We are not in a position to protect those prices that are further out at this point of that is part of the discussion with our customers. Obviously there are special.
Orkem stances and so forth, but this is this is a different environment, yeah, and I would just add that we have taken multiple on market based pricing actions to date will continue to evaluate that in this environment. David we are seeing our quarter to quarter price realization improved.
We haven't fully realized all of the pricing actions belief, we certainly expect to do that in the future.
Alright, because I think the thesis last quarter was that you were pushing through these price increases did have a partial impact on <unk> before having a more meaningful a pronounced impact on <unk>.
Guessing that still the expectation but.
Were there additional price increases announced.
Since our last earnings call.
There were.
It varies business by business, but there were additional price increases.
Effective during that time period, what we're also seeing though is more pronounced impact from supply chain and from inflation as well as we close up the year well, we'll continue to.
The situation and take action.
Where we need to to be able to.
Keep our focus on <unk>.
Serving our customer well, but also.
Profitable growth as well and David just adding to the earlier comments. What you said. It's also true we do have there is variability in how quickly you can implement price increases even even if we're not protecting the far out system orders.
Just by the nature of the business. Some things are transactional you can change them overnight others are part of the negotiations or.
Bid packages and they're just a little bit more complicated so there's still a delayed ramp up and realizing the full price impact.
In our financials and we're still on that curve.
The actions that we've taken so far and we will take actions as needed.
Okay.
My second question is with regards to the residential growth how much of the 23% was tractor supply and I know you've lapped the introduction there now, but they are adding stores and I think youre still adding listings.
But you've got tractor supply you've got the product refresh theres the flex force.
So you've got a number of initiatives in there that would be contributing to that growth I guess I'm trying to isolate against those initiatives what the growth was in the legacy.
Residential business.
And I think you touched on it David it's really a broad based growth. So certainly not unique to tractor supply and over the last year, we talked about trying.
Trying to parse out the drivers between the stay at home initiative and the other things that we're doing we kept reminding everyone of the work that was done with the products with.
Marketing with the branding messaging with the merchandising along with new channel partners and some of those strong drivers of the stay at home initiatives start to wane. We're seeing continued strength with those other drivers and that's that's the bulk of where that growth is coming from.
Okay, Alright, thank you very much.
Thank you. Thank you.
Thank you and our next question comes from the line of Tim <unk> with Baird. Your line is open. Please go ahead.
Hey, everybody good morning, good morning evening.
I guess just my first question kind of circling back on the inflation side is there any way to frame, what the annualized kind of inflation and supply chain impacts might be on a dollar basis, just trying to think.
Maybe it's a percentage of revenue or call. It I'm just trying to understand maybe where that is today. If you kind of snap the line versus where it was maybe three months ago in terms of just kind of absolute magnitude.
Yes from an inflation standpoint, I would say the most significant inflation that we're seeing is material and commodity inflation in particular steel and resins have been significant to us, but there's also inflation that we're seeing related to logistics and transportation again nothing unique to tomorrow.
And all the things that you're seeing in share across many of the companies that you cover and wage inflation has become more significant labor in the year.
Break it out specifically as far as on a dollar impact, but you are seeing the impact on our margin.
As we talked about earlier, we are taking market based pricing actions and focusing on productivity as well to try to mitigate that we do expect we will see continued price realization as we go forward. We do expect that Q4, we're going to continue to see a lot of the same situation as far as inflation.
Great and on the logistics challenges and those will probably in the short term accelerated a little bit and we tried to include that.
Our best estimate in our guidance.
But for the business are really really strong.
Right right. Okay that makes sense, then and I guess when you think about the pricing realization relative to inflation I mean, do you think you kind of.
At this point.
You can kind of offset it by the first quarter or early next calendar year, how would you kind of think about it today just relative to what youre seeing.
Yeah, I mean part of it depends on how long the inflation persists theres differing opinions on that we'll certainly continue to be very engaged and understanding that and taking appropriate actions. We do expect we will see continued inflation into two next year, we think that commodity piece will moderate.
And.
Supply and demand eventually kind of balance and many of those areas. The timing is the one that is a little difficult to call right. Now we do think when we look at logistics and some of the short term freight issues will normalize I mean again.
Demand in some of the constraints that will congestion, we're seeing will normalize, but we think freight is probably fundamentally going to cost more in the future and labor as well. So as we look forward. We think we'll have some of these continued challenges and again, we'll take appropriate market base pricing actions to be able to offer.
No problem.
Okay. Okay, and then just maybe on technology investments. The last one I had I mean anything you can share with us about the new product development pipeline and maybe any potential announcements over the next few quarters and really I'm thinking more on the landscape and maybe golf sites.
Sure.
<unk> continued to make investments as we have internally for Alaska merger is very much focused on that.
Key technology areas of which.
Thomas.
Smart and connected products.
<unk> alternative power.
And.
The acquisitions that we made earlier this year have.
Matt actually say far exceeded our expectations in helping us accelerate those those initiatives.
And I think you have.
A chance to see at the golf show the last in person Golf show, We had 19, our vision of what technology looks like going forward for golf and that was not those are not just concepts.
Products for the future that that reflects the direction that we're going in.
We are on track with our plans.
Youll see a steady introduction of products in those categories over the next several years.
Really the fruits of our labor and working in those areas.
That's one of the most exciting thing is actually what's going on right now.
Okay, great well good luck on ask me here guys. Thank you. Thank.
Thank you.
Thank you and our next question comes from the line of Sam Darkish with Raymond James Your line is open. Please go ahead.
Good morning, Rick Good morning, Rene how are you.
Alright, well. Thank you all how are you.
Thank you.
Couple of two or three topics one of them is a piggyback on what Tim just asked.
I mean as it stands right now.
What is the expected price benefit to fiscal 'twenty two sales on a year on year basis based on what you've already announced in the channel.
Yes, certainly.
Certainly our price is not at our normal range.
Price standpoint, we normally talk about one to two points of price realization and is certainly more significant to that.
Given the fact that we've taken multiple pricing actions as well as at the same we're focused on some of our promotions and programming as well in this environment that is down as well.
As we look forward, we'll continue to assess price and take other further actions, but it is certainly an order of magnitude greater than our normal level in this type of cost environment as well.
Can you give a sense of what order of magnitude means.
At least based on what has already been announced or were talking about 5%, 10%, what what what side of what sort of price increases have been announced.
Yes, I think those are the kinds of ranges that we're talking about it's across a lot of different businesses that see different levels of cost impact. So it's hard to say in summary.
In the midst of the price increases, but those are the kinds of numbers, we've talked about relative to usually talking about one or 2%.
And we always want to remind everyone as well, but we're also focused on offsetting those in every other possible way that we can through productivity.
The work that we did with synergy leading into the pandemic that had been done really triggered by the Charles machine works acquisition.
<unk>.
To be able to offset the number of the cost increases that we would've seen so.
It's the whole bundle.
But pricing is a bigger tool that we're needing to use this year than it has in the past and we are absolutely committed to our margins as we have in the past and every one of our businesses is driven to improve and return to and continuing to build on our historic margins.
So if commodity prices and general cost inflationary pressures stabilized from today.
Do you think that the pricing actions and the market demand.
Demand would.
Lauren your normal 25% incremental margins next year or are those pricing actions more designed to get price cost neutrality, and therefore, your incremental margins might be lower conceivably than that normal 25 next year.
Yes, we'll continue Sam to evaluate pricing and as the inflation environment unfolds.
Better information related to that will always price to market and we have a very rational.
A market that we operate and our competitors are rational as well.
So we'll we do expect that there will still be in <unk>.
Scenario environment going into at least the beginning of next year.
Some of these other headwinds as I mentioned are going to be there. So we will continue to evaluate price and take the appropriate actions with that focus as Rick said, I'm, certainly serving our customer but also.
We're growing market share and we're doing so in a profitable manner.
Two other quickie is if I could.
The fourth quarter implied guidance.
Was trimmed although obviously the third quarter was.
<unk> better than you expected.
Remind me specifically what happened with the fourth quarter was it a timing of shipments into the third quarter or what specifically happened with the fourth quarter versus your prior view.
Yeah, No. We did we definitely did see it.
Hard to predict the cadence in this environment and so we did see a stronger third quarter with higher demand and really exceptional execution by our operations team. They just did a fantastic job. So a piece of it is timing between the quarters and also just looking at the inflation environment as I mentioned earlier, we do see.
Is that continuing to accelerate at this point in time would you think that will.
Reaches equilibrium and start to normalize and come down, but we are anticipating that a number of supply chain challenges will remain including inflation in the fourth quarter with.
Better or greater price realization as well.
And my last question I promise Rick.
Talk about the potential effects from an infrastructure stimulus bill specifically on ditch witch I'm thinking about things like rural broadband and lead pipe replacement in drinking water improvements what or ditches.
Exposure or potential exposure to these specific areas.
It's a great question the fundamentals for that business are extraordinarily strong and have long term reach.
This is we called out that's one of the areas that were particularly challenged on the operation side right now because its shares key components with some other industries that are also seeing a great increase in demand like agriculture like construction et cetera.
We fully expect to work through those issues and we have an extremely concentrated effort to make sure that we can work through those challenges.
The demand is incredible for that area before we went into the pandemic, we were talking about the conversion to <unk> and the need to install the infrastructure for <unk> that goes from an antenna density of 10 miles down two 5% to 800 feet and all of those incentives need to be connected back to the.
The main infrastructure there is the.
The infrastructure work that is there is a deficit that needs to be repaired underground.
Everywhere we are the.
The recognition than going into the pandemic of the broadband gaps of the house and the have nots and the need to bring broadband to all locations and the importance of that and equalizing economic opportunity therefore, getting a lot of investment in <unk>.
More recently, we've just been looking at we've talked about the downside.
Petroleum, which had another small adjustment down it was not significant because that reduction was taken last year. The plus side is for alternative energy every solar field Thats put in every win generation system, that's installed onshore offshore.
Needs.
<unk> equipment and directional drills to put that together. So there is an offset.
We could not be more excited about the future with the Charles machine works acquisition and the drivers that are there.
Thank you for the terrific color. Thank you both.
Thank you. Thank you.
And our next question comes from the line of Ross <unk> with Bank of America. Your line is open. Please go ahead.
Hey, good morning, everybody.
Hey.
Good morning.
Rick maybe you can expand a little bit on that ditch witch.
And Sir can.
Can you quantify the magnitude of the revenue decline.
Clines, you've seen over the last six months I mean, it sounds like Youre setting.
Business that business is setting up for having potentially really easy comps next year, how much longer before that business turns positive.
On a year on year basis, and just with the disruption youre seeing or you're just seeing like a big spike in backlog in that business right now.
We as I said before we usually don't.
Track a lot of backlog, but in this case the answer is yes, we do see.
Significant backlog for products in that area of people standing in line for equipment. So therefore, our extreme focus on the operations part of that equation.
The reductions that we're talking about in the bigger scheme of things I actually don't have the exact number in front of me, but it's relatively small as part of the professional business the reduction.
But.
The demand is extraordinarily solid.
They are not too many.
There arent any substitutes, we believe our competitors are in the same situation.
The Charles Machine works has benefited in some ways by being part of a larger organization, we've been able to.
Work with our long term suppliers to help.
Get supplies in key components to be able to build as much as we possibly can that's not enough right now and Thats where were focused on getting that getting that solved.
So are we talking about like.
Low to mid single digit production declines on a year on year basis.
With orders that are up strong double digits like is that like a fair way to characterize what's actually happening in underground.
Construction.
Orders are up.
Strong double digit this product is probably true I don't have that right in front of me specific to that business in terms of the <unk>.
The decline in shipments.
Yes, it does add toro level would be.
Low single digits net <unk> level.
Okay.
Yes.
Could you talk a little bit more specifically on what's happening with gas engines.
How severe are the shortages I mean, it seems like there's been some capacity rationalization.
Rigs.
Filing and some other players exiting.
The gas business, how are you doing on gas engines living do you feel like Youre living.
Hand to mouth are you having to raise prices on gas powered equipment at a clip greater than our corporate average just to sustain margins.
While most most of our product as gas or diesel powered today. So engines are one of the key components that cut across every single product line.
And as you would expect that's one of the key constraints from a from a component standpoint. So the answer is yes that is a key constraint for us and all of those factors I believe that you mentioned, including the price impact of.
Extraordinary measures that our suppliers are taking to produce engines and for us to bring them in as quickly as possible are all contributing both to supply disruptions in some case, but also the inflationary factors.
But does that feel like more of a structural headwind Rick I mean, I don't know a lot of people are going to be adding GAAP pension supply in that.
In the future and if it does like do you worry at all that gas powered equipment.
Prices itself out of the market at some point, if we end up in like the more acute like longer term shortage or do you truly view. This is just a transitory issue for the next leg.
Six to 12 months.
We view it primarily as the transitory issues.
The.
The supplier will find its balance with the demand.
How is that they'll like what was it is that just because demand will slow or is anybody actually adding capacity in this market.
They are there are opportunities to add capacity and there are also a number of.
Engine manufacturers and alternatives.
Yes.
Okay, Alright, and then just my last one is <unk>.
Just on the back to the implied fourth quarter.
If my math is correct I think youre, implying like a 20% earnings decline.
13% revenue increase I mean can you can you quantify that cost headwinds specifically in the fourth quarter in dollar terms, a little more specifically and I'm. Just wondering do you go into next year with negative earnings comps in the first half of the year based on what Youre seeing now.
Yes.
We did.
I mentioned that we do see some of the inflationary and supply chain issues continued manufacturing accelerating in the in the fourth quarter.
We do expect I mean, as we look through the year into 'twenty. Two is some of those issues will be with us at least in the first half of the year that being said, we will continue to focus on what we can control and we will focus on certainly our productivity and our internal efforts, but we will continue.
Also take market based pricing decisions.
That are going to be consistent with what I mean, it's not unique to toro the situation.
We're going to see it across our industry and have seen across our industry. So we would expect that.
Everyone will be rational and take appropriate pricing as well.
We are really excited about the strength of our business our demand is very.
Very solid and the business fundamentals are strong and again very proud of the execution, we've had year to date.
From our operations and we'll all stay focused on the long term, making sure we're growing our market share, but I will.
Growing it profitably and improving our margins.
Thanks very much.
Thank you. Thank you.
Thank you and our last question comes from the line of Eric Bossard with Cleveland Research. Your line is open. Please go ahead.
Thanks to two things.
To cover first of all just a little bit of clarity.
The inflation and challenges from the supply chain totally understand what's going on.
Can you just clarify a little bit like all of those challenges were in place in <unk> and profits grew.
The challenges in place Theyre going to be all the chances are you're going to be there in <unk> and it sounds like through one H.
And Youre talking about earnings profits down in <unk> year over year in your last comment made me think does that mean profits are down in the first half of next year whats so different than <unk> in the first half of next year relative to what just happened in this current quarter.
Yes, I would say two things one is.
Q4 was a very very strong quarter for us so part of it.
Yes.
Q, sorry, Q3 was a very strong quarter for us last year and in Q4 as well last year. So I think the comparisons are just more difficult from that standpoint, if you think about the rebound that we experienced through COVID-19 really in the first half was more impacted by Covid and then we started to see that strong.
Rebound in the second half of the year. So part of it is just the cadence and then if you look at a particular quarter. The comparison, we do expect to see.
More inflation and more supply chain disruption in Q4, it's relatively a little bit smaller quarter for us as well.
We do expect some of those issues will accelerate as we talked about earlier. We also believe that some of those will moderate as we go into next year does that timing is is to be determined based on what happens with the economy.
We will continue to we expect to see greater price realization in Q4 than we saw in Q3.
And we expect going into next year that will take appropriate price action as well.
Okay.
And then secondly.
In terms of backlog, Rick you commented that it's a bit unusual.
<unk> for the backlog situation to be what it is.
Reflecting the strength of demand relative to where supply is do you have visibility in terms of when you can meet that backlog in and work that down.
We have.
Ongoing about estimate of when that will be and it's just as you would imagine by the nature of our businesses it varies pretty dramatically the longer.
Lead time periods would be in the areas, we've talked about with Charles machine Works' ditch Witch business. For example, because of when you have components that are still a lot of content to build those machines.
So that tends to extend.
The lead time.
Others are more a matter of.
Commodities become more available we can turn those around very quickly so it's pretty widely ranging from minimal too.
Much longer term.
Okay, and I guess.
Real time, if you would is the backlog continuing to grow.
Now in the last 30 days or is the backlog.
Peaked and now it's just a function of working it down.
The backlog is continuing to grow.
Okay. Okay. Thank you.
Thank you.
Thank you.
I am showing no further questions at this time I would like to turn the conference back over to Julie <unk> for any further remarks.
Thank you Michelle and thank you all for your questions and interest in the Toro Company. We look forward to talking with you again in December to discuss our fourth quarter and full year results for fiscal 2021.
This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.
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