Q1 2022 Toro Co Earnings Call

Good day, ladies and gentlemen, and welcome to the Toro Company's first quarter earnings Conference call.

Gigi and I'll be your coordinator for today.

This time all participants are in listen only mode, we will be facilitating a question and answer session towards the end of todays 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 managing director of global tax and Investor Relations. Please proceed Ms <unk>.

Thank you and good morning, everyone. 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 and 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.

Looking statements 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, everyone.

We began fiscal 2022 by delivering solid first quarter results in what remains a very dynamic operating environment.

We achieved six 8% topline net sales growth for the quarter over a strong first quarter comparison last year.

Our team's intensely manage the supply chain and our manufacturing operations working to achieve the best possible outcomes.

We actively manage production in partnership with our suppliers and aligned our manufacturing schedules based on material availability.

The supply chain challenges along with the surge of the omicron periods impacted our volume and mix within the quarter.

However, as the quarter progressed, we did start to see some improvements in manufacturing efficiencies.

We do expect the current supply chain dynamics to resolve over time and are beginning to see some signs of improvement.

Obviously, we also acknowledge the recent geopolitical events are closely monitoring those developments and any potential impacts.

On our last earnings call. We can we communicated profitability expectations for Q1 in reference to sequential improvements over Q4 of last year.

As a reminder, in Q1 of last year, we experienced an acceleration of demand without the current magnitude of inflationary pressures and product availability constraints.

With that in mind, we performed in line with our expectations by delivering sequential improvements in gross margin this quarter over Q4 of last year.

Our team executed well operationally achieving productivity benefits and increased net price realization.

Importantly demand for our innovative products has remained robust across our businesses and we have strengthened our market leadership by remaining steadfast in our commitment to serving our customers well.

I'd now like to highlight some key advances in two major areas of strategic priority.

First we continue to bring our technology advancements to market to accelerate profitable growth over the long term.

We introduced new products in each of our key technology areas for battery electric smart connected and autonomous solutions.

Starting with battery, we have a growing suite of electric products for both residential and professional customers.

These products are carefully designed to meet the promise of our brands by offering superior performance and durability supported by an extensive customer care network.

This addition is our new all electric ultra buggy for material handling and our specialty construction business.

It was unveiled at the world of concrete show in January .

The ultra buggy delivers eight hours of continuous runtime by leveraging the same hyperscale battery system as our Revolution series commercial grade mowers.

Along with our E dingo compact utility loader. The ultra buggy also provides a zero emission solution for indoor construction and renovation applications.

Speaking of the Revolution series initial reservations for these new battery powered commercial grade stand on zero turn riding mowers have exceeded our expectations.

The Revolution product line brings together the best of both worlds with the productivity durability and expenses support network that customers expect from US along with the next generation benefits of zero emissions noise reduction and all day run time on a single charge.

Moving to Smart solutions, we just launched our new Workman Gtx line of commercial grade utility vehicles.

These all season vehicles have a broad range of applications across our markets and feature a proprietary groundspeed governing system.

This patented system allows for the perfect amounts of power for any job no matter the desired speed.

This feature also enables lower fuel consumption and noise levels.

<unk> was designed with first utility and durability in mind.

It offers 2000 pounds of tolling capacity, 25% more cargo capacity is on the competition and Leverages, our broad product offerings with an integrated boss snow plow amount.

Another advancements in smart solutions that drive productivity and helps with skilled labor challenges as our new pro core 648 area.

This machine is the gold standard for Greens operation.

It features an innovative electronic drive control, which can maintain more consistent hole spacing on sloping train and allows for increased speed on turnarounds.

Machine can also minimized perf disruption, reducing the need to make manual repairs.

In the area of autonomous we have showcased several prototypes over the past two years and have invested in technology accelerating acquisitions we.

We intend to be a market leader in providing autonomous solutions as evidenced by our introduction of our first autonomous fairway mower at the recent gcs a golf industry show.

This product addresses the issue of labor shortages for our golf course customers, while enabling increased productivity and more consistent results.

As technology evolves, we intend to leverage our battery smart connected and autonomous product offerings across our broad portfolio.

We are excited about the positive reactions to our do an innovative applications as we further advance our technology leadership.

The second strategic area I'd like to highlight because our effective capital allocation, we continue to prudently deploy capital this quarter with the acquisition of the Intimidator group in January .

This acquisition positions us to be an even stronger player in the large and rapidly growing zero turn mower market enhancing customer reach and geographic strength.

We're excited about the addition of the complementary line of Spartan Motors, which are known for their exceptional performance features durability and distinctive styling.

The acquisition also provides us with a larger footprint to further leverage our technology investments as well as procurement and manufacturing efficiencies.

We are confident the combined efforts of our teams will enhance our long term growth by providing unparalleled products technologies and services to our customers.

In summary.

We made great strides in advancing key strategic areas. This quarter, our entire organization continued to demonstrate creativity perseverance and sound judgment as we navigated the challenges and opportunities in the current global environment.

As a result, we continue to build our business for sustainable and profitable long term growth and drove value for all stakeholders.

With that I will turn the call over to Renee for a more detailed review of our financial results for the quarter.

Thank you Rick and good morning, everyone.

As Rick said, we delivered solid results in the first quarter.

And drove sequential gross margin improvement over Q4 of last year in what continues to be an extremely dynamic operating environment.

We grew overall consolidated net sales to $932 7 million, an increase of six 8% compared to the first quarter of last year.

Reported and adjusted EPS were <unk> 66 cents per diluted share down from $1.02 and 85% respectively in the first quarter a year ago.

Professional segment net sales for the quarter were up three 5% to $672 9 million.

This increase was driven by net price realization, partially offset by lower volume in certain key product categories due to product availability constraint.

Professional segment earnings for the first quarter were $93 $3 million.

And when expressed as a percent of net sales 13, 9%.

This was down from 18% in the first quarter last year.

The year over year decrease was primarily due to higher material freight and manufacturing costs, partially offset by net price realization.

Residential segment net sales for the first quarter were $255 4 million up 17, 3% over last year.

The growth was primarily driven by increased net price realization and higher shipments of our zero turn riding and walk power mowers.

Residential segment earnings for the quarter were $31 8 million.

And when expressed as a percent of net sales 12, 4%.

This was down from 14, 7% in the first quarter last year.

The year over year decrease was primarily driven by higher material and freight costs, partially offset by increased net price realization and productivity improvements.

Turning to our operating results.

We reported gross margin of 32, 2% for the quarter.

Compared to 36, 1% in the same period last year.

The year over year decrease was primarily due to higher material and freight costs, partially offset by increased net price realization.

As expected, we did see sequential improvement compared to the fourth quarter of fiscal 2021.

We intended to restore and improve margins over the long term and continue to adjust pricing to market conditions and drive productivity and synergy benefits.

SG&A expense as a percent of net sales for the quarter with 22, 4%.

Compared to 19, 9% in the same period last year.

This increase was primarily driven by.

The favorable impact of a onetime legal settlement in the prior year that did not reoccur.

As long as increased investments in research and engineering and marketing.

Operating earnings as a percent of net sales for the first quarter were nine 8%.

Compared to 16, 2% in the same period last year.

Adjusted operating earnings as a percent of net sales for the quarter were nine 9%.

Compared to 14, 2% in the same period a year ago.

Interest expense for the quarter was $7 million.

Down slightly from the same period last year.

This was due to lower average debt levels and decreased interest rates.

The reported and adjusted effective tax rate for the first quarter with 22% and 29% respectively.

Compared to 18, 1% and 21, 5% in the same period a year ago.

Turning to our balance sheet and cash flows.

Accounts receivable were $366 million.

Up 19% from a year ago, primarily driven by higher sales and customer mix.

Inventory was $832 million up 23% compared to last year.

This increase was due to higher work in process and parks.

Accounts payable increased 30% from last year to $474 million.

This was primarily driven by higher purchase activity and inflation.

Free cash flow in the quarter was a $102 million use of cash. This was driven by additional working capital needs to support higher material and service parts levels, given the current supply chain environment.

We continue to follow a disciplined approach to capital allocation demonstrated by our actions in the quarter.

And fueled by our strong balance sheet.

Our priorities remain the same and include.

Making strategic investments in our business to support long term growth, both organically and through acquisitions.

Returning cash to shareholders through dividends and share repurchases.

And maintaining our leverage goal to support financial flexibility.

These priorities are highlighted by our actions including.

Our plan to deploy $150 million to $175 million in capital expenditures this year.

To fund capacity productivity and new product investments.

Our acquisition of Intimidator group in January .

A return of $106 million to shareholders this quarter with $75 million in share repurchases and $31 million and regular dividends.

Our gross leverage to EBITDA target remains the same.

In the range of one to two times.

We are benefiting from strong demand momentum across our diverse portfolio of businesses in.

In the current global operating environment, our biggest challenge remains meeting this heightened demand.

Based on our current visibility.

<unk>, we are making on margin recovery.

And the recent acquisition of Intimidator group we.

We are updating our full year fiscal 2022 guidance.

This guidance also considers the current geopolitical events, which continued to develop.

We will monitor the situation very closely and take appropriate action.

We now expect net sales growth in the range of 12% to 14%.

Which reflects the partial year addition of the Intimidator group.

<unk> over the remaining three quarters.

Along with the continued expectation for 8% to 10% growth for the remainder of our business.

The acquired business is reported under the professional segment.

And as a result.

We expect professional net sales growth at the upper end of the 12% to 14% range for the full year.

For the second quarter.

We anticipate total company.

As well as professional and residential segments net sales growth to be moderately below our full year expectations.

We continue to expect our quarterly sales cadence to be driven more by our ability to produce than historical demand patterns.

This is expected to result in less seasonal variation and typical between the quarters. This year.

Looking at profitability for the full year.

We now expect similar overall adjusted operating earnings as a percent of net sales.

Compared to fiscal 2021 for the total company.

And in the professional and residential segments.

This reflects the operational improvements, we're realizing as well as our acquisition.

With the addition of Intimidator at a lower initial gross margin relative to our company average we now expect gross margin in Q2 to be similar to Q1.

But improve in the second half of the year compared to the first half of the year.

For the full year, we expect gross margin to be similar to slightly below fiscal 2021.

Driven by the acquisition.

In light of the recent geopolitical events, we are holding our full year adjusted diluted EPS guidance.

The range of $3 90.

To $4 antenna.

Our adjusted diluted EPS guidance excludes the benefit of excess tax deduction for stock compensation as.

As well as one time acquisition related costs.

For the second quarter, we expect our adjusted diluted EPS to approach the record results. We achieved in Q2 of fiscal 2021.

Additionally for the full year.

With the acquisition included we now expect interest expense to be about $35 million.

Depreciation and amortization to be about $120 million.

And free cash flow conversion in the range of 80% to 90% of reported net earnings.

We continue to estimate an adjusted effective tax rate of about 21%.

We remain well positioned to capitalize on this period of profitable growth as we continue to execute on our long term strategic priorities.

With that I'll now turn the call back to Rick.

Thanks, Renee our entire team remains sharply focused on serving our customers as we are committed to building our business for long term sustainability and profitability.

The foundation for our future success is our world class innovation capabilities and enterprise wide operational excellence the combination of which we believe will drive sales momentum and margin expansion going forward and create value for all stakeholders.

As we head into the remainder of fiscal 2022 demand remains strong across the markets. We serve the ongoing replacement cycles for our products provide a steady foundation and we're keeping an eye on the following areas.

Consumer and business confidence together with inflation geopolitical developments and COVID-19 variance.

Customer prioritization of investments to maintain and improve outdoor environments.

<unk> on reduced emissions and customer preference for sustainable products, the continuation of strong momentum in golf markets.

And government support and funding of infrastructure projects, including the $1 trillion dollar U S infrastructure legislation.

Our innovative products and best in class distribution networks position us well to capitalize on current and future demand trends and the growing markets we serve.

I would now like to share a few comments on our golf market. We continue to see courses in their healthiest financial positions and years.

Around the World golf participation engagement remains on the rise in the U S. Golf rounds played were up five 5% in 2021 on top of a 13, 9% increase in 2020.

We're also seeing an improvement in supply and demand balance and even saw an increase in the number of municipal and private courses in the U S. During 2021.

As the market leader in turf and irrigation solutions as the only provider of both we have distinct competitive advantages in the space. This was evident last month at the Gcs a golf industry show in San Diego.

Traffic in our booth reflected strong interest in our array of innovative new products.

It's a great experience to be at the show again after the pandemic driven hiatus spend time with so many of our customers.

Not far from the Golf show was Super Bowl 56, Sulfides Stadium in Inglewood, California, our teams and equipment have a long and storied history of helping Super Bowl groundskeepers maintain pristine fueled conditions and this year was no exception.

Before and after the game are Workman, Gtx, and Ut X vehicles for us to help the sulfide grounds crew move fueled preparation materials. In addition, our gtx vehicles and real master products were instrumental in preparing the Bengals UCLA practice fields.

Our commitment to innovation has served us well.

Strength in those areas combined with our deep customer relationships effective capital deployment and superior distribution and customer care networks has driven consistent financial performance.

We believe these strengths will continue to generate tremendous value and position us to deliver compelling growth and shareholder returns for the long term.

As always our extended team is the key to the Toro company's long term success on that note I would like to thank our employees for their dedication and resilience and welcome the Intimidator group to the company.

I would also like to extend my gratitude to our channel partners customers and shareholders for their continued support.

With that Renee and I will take your questions.

As a reminder to ask a question you will need to press star one on your telephone.

Draw your question press the pound key please standby, while we compile the Q&A roster.

Our first question comes from the line of Eric Bouchard from Cleveland Research. Your line is now open.

Thank you.

Curious if you could give us a little bit of perspective on how.

How the supply chain is progressing.

It seemed like in the release you talked about.

Supply chain limiting shipments on the pro side.

I'm just curious is there progress being made when.

When do you think it gets back to normal and had been less of a limiting factor on your ability to serve customers.

Yeah. Thanks, Thanks for the question.

We are we are seeing improvement in our supply chain. The good news is demand remains exceptionally strong across our businesses. So it really is about being able to produce product at this point to meet that demand and.

We're marching consistent with our plan for the year and at this point we had we've.

We've seen both.

<unk> in our internal operational productivity and effectiveness and also some improvement from our supply chain.

Obviously within the last week, we've gone through analysis of the impact of what's happening.

Ukraine.

And that has offset some of the benefits that we've seen in a per our projection I do want to take the opportunity there was some.

<unk> information out just within the last day about our exposure to Russia, and Ukraine, It's really insignificant and we have no operations there and the impact on revenue is insignificant directly so we're really talking about the indirect impact on commodities.

Those types of things, but but from our from our perspective, putting that aside we had seen improvement just getting getting past some of the COVID-19 restrictions have helped us significantly with absenteeism. So that's been a boost.

Our suppliers are seeing that as well that will turn into a <unk>.

Secondary positive effect for them over the next several months as they can consistently produce components for us. So we do see improvements on that side.

Commodities.

The additional variable of the Ukraine War, but had started to see some improvements.

Okay, and then a follow up if I could.

The commentary on the full year guidance.

I just wanted to understand what was behind that which.

I think what you communicated was that in light of.

The geopolitical uncertainty that youre holding guidance.

Within that.

It seems to imply but I wanted to hear directly excluding the geopolitical uncertainty is the business performing different than what the original guidance had suggested.

Yes, Thank you Eric.

No I think our guidance.

Would reflect continuation of the progress that we were making overall as a company. There is more uncertainty as Rick pointed out given the geopolitical situations, where they tried to the best of our ability incorporate that into our guidance.

And I would say that the Intimidator acquisition as well that is the driver for the increased sales growth we remain remains thing.

The bulk of our business continuing to grow.

In line with our prior expectations from that standpoint, So we'll continue to monitor the situation and should the outlook change as always we'll take the actions that are necessary to be able to address that but we'll continue to focus on what we can control and remain nimble.

And take action as we need to as the situation evolves.

Okay. That's helpful. Thank you.

Thank you.

Thank you. Our next question comes from the line of Tim Walsh from Baird. Your line is now open.

Hi, good morning, everybody.

Maybe just to start on price and inflation.

Is there any way to kind of frame when you would expect price on a dollar basis to exceed inflation and maybe when that might flip positive on a margin basis at this point.

Yeah, I'll start and maybe Rick if you want to add your comments as.

As always Kevin we continue to price to market.

And the situation that we're seeing from a from a cost standpoint is not at all unique to the Toro company, it's something certainly we're seeing across our industry and much broader than that.

<unk>.

We did expect and we saw sequential gross margin improvement from Q4 to Q1.

And we're seeing increased price realization.

In this environment, we're also taking new actions as needed given the current situation over.

Overall, we are committed to restoring our margins and to improving them over time, and we always focus on.

Price and productivity and synergies as well.

As we look forward to make sure that we're doing everything that we can from an overall standpoint for the total year, we indicated that we expect.

Our margins to be similar.

Year over year.

And part of that also includes the impact of Intimidator, which has a lower initial gross margin.

But we do expect to see that gross margin improve in part because we're bringing them into a bigger organization with greater scale.

And.

We've learned quite a bit over the last number of years with the acquisitions and we feel confident in our playbook as well to really drive the synergies that we need as well as the sales growth as well.

So it's a business we know very well.

Continue to be very excited about bringing this.

In particular, the Spartan brand, yes, yes, exactly okay. So I guess margins being flattish would imply that the course up slightly.

Against that kind of intimidate or <unk>.

Evolution, yes that would be the case, Okay got you and then.

Then just on the order side.

I know demand remains pretty strong across the business I mean, any have you seen any order deferrals or just kind of cancellations just based on extended lead times of pricing where customers might just say, we're going to come back or do people keep the order the order pace I guess continued to be pretty pretty similar over the last.

Three to six months.

The order pace has continued with the strength that you're describing we have not seen a lot of drop off I think just having a little bit of commentary as we went into the season, where spring products are ordered from our channel.

We even thought.

Significantly larger.

The normal order percentage as a basis of based on the prior year and if you could say some of that 12, a shortage sort of reaction where people are ordering more but what it really responds to is the fact that the field inventory is very low.

So.

It also provides a buffer to us with any kind of.

Pause or disruption of and.

Supply that we've got a channel both.

That needs to be filled from a <unk>.

Inventory standpoint, and we would like to have higher inventories of finished goods offsetting some of our current.

Work in process.

And components.

<unk> internally.

I agree and just building upon that our customers remain financially very strong and keep in mind also they've been wanting to buy more inventory and our end customers that inventory I mean, the product is actually getting used for for their business. So there's a replacement cycle pizza and at this.

And time, they haven't been able to get as much of that equipment as they would like so we do think that demand is linked to that as well for the most part we don't have really discretionary type of products. Those are products that are needed as part of our business context. So if you think about a good portion of our current backlog or back order position.

It is coming from the underground business or the construction business.

Lot of that is anticipating business.

That our customers have thats going to require this this equipment and driven by things like the infrastructure Bill.

So there's a very solid base of demand golf courses demand from their customers is extraordinarily high.

Paused on some of their purchases in 2020, they're trying to make up for that plus keep up with the demand that continues to be there at an exceptional level of end user standpoint.

Okay. Okay I appreciate all the color guys. Thanks, thanks, so much.

Thank you.

Thank you. Our next question comes from the line of Ross Gilardi from Bank of America. Your line is now open.

Good morning, guys.

Ross.

I just wanted to ask you about the pro.

Segment missed our revenue number quite a bit.

Did it really live up to your expectations I mean, you seem to be saying that supply chain is getting a little bit better but.

Whereas the shortfall on pro what I realize its a production issue but.

What are the production issue is most acute.

I think the and Renee can comment specifically, but I think the first thing is you're looking if you're looking year over year.

We had inventory at that time, so we had a lot of product that we're shipping out of warehouse versus end of the line directly to customer.

It's more of the state that we're in today, we are seeing some improvements but.

The challenges with supply chain are most pronounced in those heavier duty professional product categories right now largely because a lot of those components are shared across many different markets, including egg construction other specialty equipment categories. So those suppliers are ultra.

Stress right now theyre getting better, but it's not going to be.

Light switch turn it back on type of thing at this point, so it's a 100% supply base.

Base the demand remains exceptionally strong.

Yes, I don't know that I have a lot to add to that I think you summarized it really well it's entirely related to supply chain constraints and again I think we feel that demand is solid and we need to just continue to produce and to execute to that.

Okay, Great. One of your competitors is talking about home depot dropping gas power outdoor equipment from 50 stores completely this year have you heard that and is that.

Baked into your guidance at all.

We are we're fully aware of.

What what our customers are key customers are doing.

And.

The really exciting thing for US is just to see the growth of our 60 volt Flex force category.

Because it is a smaller excuse me a smaller category overall for the company.

We didn't we wouldn't call it out, but we just have exceptional growth rates in those categories.

So even as we continue to expand.

Our position within traditional gas we have that.

That category continues to be very strong for us so well.

We're very much a part of all of those discussions and.

We were excited about the possibilities that thats creates for our customers and I would just comment I mean, just looking at for the in the quarter that we just ended I mean residential sales were up 17% on top of.

31% growth a year ago, and I think it speaks to the broad channel that we have and we continue as Rick said, although a smaller piece. The battery demand has has been significant.

So in stores that are pulling gas like would you expect to make up for it.

If they do that.

Sell more of your cordless offering in those same stores and net net the impact is basically zero.

That would be.

A general statements, we would have a store by store plan for each of those so that would be.

We were happy to sell electric products through our channel partners and to our customers just as much as we are gas product and keep in mind with the 60 volt, we really expanded our product line. So when some other adjacent categories that we weren't in before so it's certainly beyond the mowers and snow blower.

<unk>, which we do have strong product offerings and that we have.

A lot of other products that we sell as well too.

I think they're really astonishing thing, it's just where we circle back and where we are offering battery solutions.

For example in the snow categories, we just double or triple down on our reputation and brand and the features that we have that are independent of the power source, so where we start to offer.

Incredibly.

Viable products that work exceptionally well that are battery all of a sudden.

Customers get the benefit of our.

Expansive network, both mass and dealer oriented so the access to us from a servicing standpoint.

And just the reputation and smell the reputation that's really earned by the features the benefits the innovations in the <unk>.

Customer experience that youre going to get with the <unk> product.

Okay, Great guys and then the last one is just on Intimidator group I mean, you got it in the guide now.

The revenue guide up but the EPS didn't go anywhere.

Are the margins in this business is really low right now I mean are they experiencing some of the most severe.

<unk> supply chain issues in that in that business and since it's new to that.

The company do you feel like you have your arms around all the issues that they.

They will face because it would seem given that you it.

It's a pretty big revenue contribution just given that you've got it but most of the year that you think there'd be some accretion there and they're in or are you actually implying that the have you actually trimmed your underlying guide somewhat.

Given that you've you're holding the EPS outlook.

Despite having intimate around now.

Yeah, I'll start and again please Rick.

And your comments.

When we announced the acquisition, we did talk about it being modestly accretive it is important that it's not a full year.

But the issues that they are dealing with are very familiar to us and it's a business. The zero turn mower thats very familiar to us as well, it's a very complementary line.

We did comment that initially the margins are lower for Intimidator group, and it's really driven in part by their scale I mean there.

Although.

A good sized company there is so much smaller than our overall zero term business. So we we feel really confident that we know what we need to do and we will work with them to ensure that we get the benefits of them being part of the Toro company from a productivity and a synergy standpoint and work through some of the supply chain challenges that we.

As well as support their growth and then we see their growth is.

Something that's very attractive from that standpoint.

No.

We also recognize and we commented on.

But there are some.

Different dynamics related to the geopolitical situation that we tried to consider if this is very dynamic and relatively new information, but we also tried to incorporate that into our guidance to the best of our ability going forward. So I would just offer we're adding intimidator theres also the geopolitical.

<unk> that we tried to incorporate to the best of our ability do you have anything to comment.

Im not sure if I have the opportunity to just comment on the strategic.

Now but.

When we looked at how we could add to our market position within a very attractive category of disease.

The Intimidator group was absolutely at the top of the list. There was no question just in terms of the brand and growth momentum that they have.

The incredible passion and.

Both their team and their their customers for those products. The geographic strength. So it's a perfect complement to our strength throughout North America and some international.

And then.

Fundamentally there is very little.

Dealer overlap so we see tremendous capabilities and then it goes back to what Rene for our ability to leverage our investments, which which are substantial today and we will need to continue to be at a higher rate. So as we go through technology transitions.

This provides additional base for us to leverage those expenses and bring things to the market that will.

No.

The incredible innovations.

And the categories that we've talked about that.

<unk> group of customers will be able to benefit from.

Got it thank you.

Thank you.

Thank you.

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

Hi, This is Joe Nolan on for David Macgregor.

Sure.

Alright.

So just on professional margins I was wondering if you could give a little more detail on the breakdown between Gulf versus LTE versus specialty construction.

Yes.

We don't normally breakdown into two subcategories, but I mean, just in general when I. When we look at the professional business. We did see growth within the business is as we talked about earlier, we do continue to see supply chain constraints being probably the biggest challenge and and I would just say that.

Overall, we saw.

A little more pronounced within the professional business for the reasons that Rick had mentioned earlier just the broader use of the product that being said our professional customers remain in great financial position and their demand is very strong our field inventory is also.

Low across the board in both residential and professional so we see it more as a timing issue than a demand issue.

The situations that we are seeing none of the supply chain constraints are unique to Toro, we're seeing the same issues across the supply chain. So I think it's it's not a situation where.

They could go elsewhere and get that equipment.

We are definitely working this is.

Urgently as we can and we recognize that we need.

To support our customers in the interim we are seeing more service parts as a way for them to continue to operate that equipment.

As they look forward to getting those homegoods replaced over time.

Got it okay. Thank you for that.

And then.

Also can you talk about how snow contributed to growth in margins in the quarter.

Yes.

We look at the entire snow season, we had an exceptionally strong snow season, this year, which would really extend back into the fourth quarter of last year.

Great conditions, obviously for snow winter conditions.

<unk> produces a lot of demand.

Boss business was.

It was very strong in the first quarter.

Driven by the professional demand for those products and especially the snow Raider, which was part of an acquisition from a few years ago.

<unk>.

Really.

It's something like a five ex labor reduction tool for clearing.

<unk>.

Exceptional.

Demand for that product similarly on our Ven track side been track has been performing beyond our expectations acquisition from 2020, and they have a dedicated snow product line that.

Demand was was at record levels on the residential side. We also had a very strong year I've mentioned the strength of the new battery offerings.

And also.

We were we did we did constrain in our customers.

Customers and our channel partners would have wanted more residential snow this year.

With a couple of specific supplier issues on individual components. So.

Residential we know we could have shipped more channel partners wanted more on the professional side.

Outstanding your outstanding quarter for snow.

Okay very helpful. Thanks.

Thank you. Thank you.

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

Thank you good morning, Thanks for taking my questions.

Morning.

I guess I don't want to count on the professional side, but just I guess, one clarification of the you commented in the release today on challenging getting some of those products out to the customers. How should we think about those are just kind of.

Deferred sales they'll catch up once you get the product to ship out or is that a seasonal item you have to wait to kind of catch up so next year.

They'll take the product win on the professional side they will take the product when they can get it and we're working closely to allocate product. So the most critical.

Situations with trying to meet as much customer demand as we possibly can we know that.

But many if not most of our professional customers would like more product right. Now is reflected in our back order position, but they are continuing to work with us where we're working to help them out even with <unk>.

We've had an exceptional service parts business and we're going to continue to focus on that to make sure that we can keep their current equipment operational while they are waiting for equipment from us, but in our professional business, they're going to they're going to take the equipment when they can get it.

Not so much seasonally driven at this point, especially with the current field inventory.

Yes, Chris. It's in addition to the service parts just our network of service providers also is really helpful.

Certainly a golf course knee repair that equipment themselves, but you know like a landscape contractor may take that similar for the repair. So I think thats, where the benefit comes from the service network as well excellent point.

Just I guess, just lastly, I don't think we touched on in this call but.

The equipment rental market shaping up for the year.

Well, we've had so many other things to talk about we haven't talked about a rental for a while but is it also is booming at the moment the end demand.

Throughout the pandemic the more local rental locations, maybe one or two stores that part of the business was strong with even do it yourself projects at home the landscape contractors kicked in after that putting increased demand, which has continued and then as 2012.

One.

Rust <unk>.

Construction projects.

We're truly hit the major national rental companies.

Started to to grow in.

Currently we're seeing a lot of strength across all of those.

Those different channels. So rental is very strong and thats really the complement to our direct sales to landscape contractors and construction contractors. So.

It's really good across both of the brands.

<unk> systems brands from the Toro company the dingo.

Trade names, specifically and ditch, which would be the other area, that's really seen seeing the demand.

Great. Let me just ask one more if I could it sounds like demand across the spectrum is very strong I was just wondering if we didn't have the supply chain constraints could you meet demand with your current capacity or would you be looking to add capacity.

We would meet our demand, but it's also there's probably a two part answer we're also expanding capacity as we do continuously we continuously or looking at rolling demand and making adjustments in capacity. Some of that is reflected in the capital investments that you would see.

I was I was going to add a comment Tom that our Capex estimate, which is unchanged is 150 to 175 million for this year and Thats really focused on some capacity expansions as well as looking at automation within our plants driving productivity. So we're spending at that rate because.

We see the demand not just in the short term that we see the demand.

For a period of time, especially like with the infrastructure and some of the <unk>.

Market implications of that.

We feel it's the right time to invest and we get our highest returns from notes.

Internal investments.

Okay I appreciate the color. Thank you.

Thank you.

Thank you at this time I'm showing no further questions.

I'd like to turn the call back over to Julie characters for closing remarks.

Thank you Gigi and thank you all for your questions and interest in the Toro company, we look forward to talking with everyone again in June to discuss our second quarter fiscal 2022 results.

This concludes today's conference call. Thank you for participating you may now disconnect.

[music].

[music].

[music].

Good day, ladies and gentlemen, and welcome to the Toro Company's first quarter earnings Conference call. My name is Gigi and I'll be your coordinator for today at this time all participants are in listen only mode. We will be facilitating a question and answer session towards the end of todays 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 managing director of global tax and Investor Relations. Please proceed Ms characters.

Thank you and good morning, everyone. 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 and 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.

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, everyone. We began fiscal 2022 by delivering solid first quarter results in what remains a very dynamic opera.

Tomorrow.

We achieved six 8% topline net sales growth for the quarter over a strong first quarter comparison last year.

Our teams are intensely manage the supply chain and our manufacturing operations working to achieve the best possible outcomes.

We actively manage production in partnership with our suppliers and aligned our manufacturing schedules based on material availability.

The supply chain challenges along with the surge of the omicron variance impacted our volume and mix within the quarter.

However, as the quarter progressed, we did start to see some improvements in manufacturing efficiencies.

We do expect the current supply chain dynamics to resolve over time and are beginning to see some signs of improvement.

Obviously, we also acknowledge the recent geopolitical events are closely monitoring those developments and any potential impacts.

On our last earnings call. We can we communicated profitability expectations for Q1 in reference to sequential improvements over Q4 of last year.

As a reminder, in Q1 of last year, we experienced an acceleration of demand without the current magnitude of inflationary pressures and product availability constraints.

With that in mind, we performed in line with our expectations by delivering sequential improvements in gross margin this quarter over Q4 of last year.

Our team executed well operationally achieving productivity benefits and increased net price realization.

Importantly demand for our innovative products has remained robust across our businesses.

We have strengthened our market leadership by remaining steadfast in our commitment to serving our customers well.

I would now like to highlight some key advances in two major areas of strategic priority.

First we continue to bring our technology advancements to market to accelerate profitable growth over the long term.

We introduced new products in each of our key technology areas of battery electric smart connected and autonomous solutions.

Starting with battery, we have a growing suite of electric products for both residential and professional customers.

These products are carefully designed to meet the promise of our brands by offering superior performance and durability supported by an extensive customer care network.

The latest addition is our new all electric ultra buggy for material handling and our specialty construction business, which was unveiled at the world of concrete show in January .

The ultra buggy delivers eight hours of continuous runtime by leveraging the same hyper salt battery system as our Revolution series commercial grade mowers.

Along with our E dingo compact utility loader. The ultra buggy also provides a zero emission solution for indoor construction and renovation applications.

Speaking of the Revolution series initial reservations for these new battery powered commercial grade stand on zero turn riding mowers have exceeded our expectations.

The Revolution product line brings together the best of both worlds with the productivity durability and expenses support network that customers expect from US along with the next generation benefits of zero emissions noise reduction and all day run time on a single charge.

Moving to Smart solutions, we just launched our new Workman Gtx line of commercial grade utility vehicles.

These all season vehicles have a broad range of applications across our markets and feature a proprietary groundspeed governing system.

This patented system allows for the perfect amount of power for any job no matter the desired speed.

This feature also enables lower fuel consumption and noise levels.

<unk> was designed with first utility and durability in mind.

It offers 2000 pounds of tolling capacity, 25% more cargo capacity than the competition and leverages, our broad product offerings with an integrated boss snowplow amount.

Another advancements in smart solutions that drives productivity and helps with skilled labor challenges as our new pro core 648 S area.

This machine is the gold standard for Greens operation.

It features an innovative electronic drive control, which can maintain more consistent hole spacing on sloping train and allows for increased speed on turnarounds.

The machine can also minimized perf disruption, reducing the need to make manual repairs.

In the area of autonomous we have showcased several prototypes over the past two years and have invested in technology accelerating acquisitions.

We intend to be a market leader in providing autonomous solutions as evidenced by our introduction of our first autonomous fairway mower at the recent gcs a golf industry show.

This product addresses the issue of labor shortages for our golf course customers, while enabling increased productivity and more consistent results.

As technology evolves, we intend to leverage our battery smart connected and autonomous product offerings across our broad portfolio.

We are excited about the positive reactions to our new and innovative applications as we further advance our technology leadership.

The second strategic area I'd like to highlight is our effective capital allocation, we continue to prudently deploy capital this quarter with the acquisition of the Intimidator group in January .

This acquisition positions us to be an even stronger player in the large and rapidly growing zero turn mower market enhancing customer reach and geographic strength.

We're excited about the addition of complementary rely on Spartan Motors, which are known for their exceptional performance features durability and distinctive styling.

The acquisition also provides us with a larger footprint to further leverage our technology investments as well as procurement and manufacturing efficiencies.

We are confident the combined efforts of our teams will enhance our long term growth are providing unparalleled products technologies and services to our customers.

In summary.

We made great strides in advancing key strategic areas. This quarter, our entire organization continued to demonstrate creativity perseverance and sound judgment as we navigated the challenges and opportunities in the current global environment.

As a result, we continue to build our business for sustainable and profitable long term growth and drove value for all stakeholders.

With that I will turn the call over to Renee for a more detailed review of our financial results for the quarter.

Thank you Rick and good morning, everyone.

As Rick said, we delivered solid results in the first quarter.

And drove sequential gross margin improvement over Q4 of last year in what continues to be an extremely dynamic operating environment.

We grew overall consolidated net sales to $932 7 million.

An increase of six 8% compared to the first quarter of last year.

Reported and adjusted EPS were <unk> 66 cents per diluted share down from $1 and two sacks, and 85, respectively in the first quarter a year ago.

Professional segment net sales for the quarter were up three 5% to $672 $9 million.

This increase was driven by net price realization, partially offset by lower volume in certain key product category due to product availability constraint.

Professional segment earnings for the first quarter were $93 $3 million.

And when expressed as a percent of net sales 13, 9%.

This was down from 18% in the first quarter last year.

The year over year decrease was primarily due to higher material freight and manufacturing costs, partially offset by net price realization.

Residential segment net sales for the first quarter were $255 4 million up 17, 3% over last year.

The growth was primarily driven by increased net price realization and higher shipments of our zero turn riding and walk power mowers.

Residential segment earnings for the quarter were $31 $8 million.

And when expressed as a percent of net sales 12, 4%.

This was down from 14, 7% in the first quarter last year.

The year over year decrease was primarily driven by higher material and freight costs, partially offset by increased net price realization and productivity improvements.

Turning to our operating results.

We reported gross margin of 32, 2% for the quarter.

Compared to 36, 1% in the same period last year.

The year over year decrease was primarily due to higher material and freight costs, partially offset by increased net price realization.

As expected, we did see sequential improvement compared to the fourth quarter of fiscal 2021.

We intended to restore and improve margins over the long term and continue to adjust pricing to market conditions and drive productivity and synergy benefits.

SG&A expense as a percent of net sales for the quarter with 22, 4%.

Compared to 19, 9% in the same period last year.

This increase was primarily driven by the.

The favorable impact of a onetime legal settlement in the prior year that did not reoccur.

As long as increased investments in research and engineering and marketing.

Operating earnings as a percent of net sales for the first quarter were nine 8%.

Third to 16, 2% in the same period last year.

Adjusted operating earnings as a percent of net sales for the quarter were nine 9%.

<unk> to 14, 2% in the same period a year ago.

Interest expense for the quarter was $7 million down.

Down slightly from the same period last year.

This was due to lower average debt levels and decreased interest rates.

The reported and adjusted effective tax rate for the first quarter were 22% and 29% respectively.

Compared to 18, 1% and 21, 5% in the same period a year ago.

Turning to our balance sheet and cash flows.

Accounts receivable were $366 million.

Up 19% from a year ago, primarily driven by higher sales and customer mix.

Inventory was $832 million up 23% compared to last year.

This increase was due to higher work in process and parks.

Accounts payable increased 30% from last year to $474 million.

This was primarily driven by higher purchase activity and inflation.

Free cash flow in the quarter was a $102 million use of cash. This was driven by additional working capital needs to support higher material and service parts levels, given the current supply chain environment.

We continue to follow a disciplined approach to capital allocation demonstrated by our actions in the quarter.

And fueled by our strong balance sheet.

Our priorities remain the same and include.

Making strategic investments in our business to support long term growth, both organically and through acquisitions.

Returning cash to shareholders through dividends and share repurchases.

And maintaining our leverage goal to support financial flexibility.

These priorities are highlighted by our actions including.

Our plan to deploy $150 million to $175 million in capital expenditures this year.

To fund capacity productivity and new product investments.

Our acquisition of Intimidator group in January .

Our return of $106 million to shareholders this quarter with $75 million in share repurchases and $31 million and regular dividends.

Our gross leverage to EBITDA target remains the same.

In the range of one to two times.

We are benefiting from strong demand momentum across our diverse portfolio of businesses in.

In the current global operating environment, our biggest challenge remains meeting this heightened demand.

Based on our current visibility.

<unk>, we are making on margin recovery.

And the recent acquisition of Intimidator group we.

We are updating our full year fiscal 2022 guidance.

This guidance also considers the current geopolitical events, which continued to develop.

We will monitor the situation very closely and take appropriate actions.

We now expect net sales growth in the range of 12% to 14%.

Which reflects the partial year addition of the Intimidator group.

<unk> over the remaining three quarters.

Along with the continued expectation for 8% to 10% growth for the remainder of our business.

The acquired business is reported under the professional segment.

And as a result.

We expect professional net sales growth at the upper end of the 12% to 14% range for the full year.

For the second quarter.

We anticipate total company.

As well as professional and residential segments net sales growth to be moderately below our full year expectations.

We continue to expect our quarterly sales cadence to be driven more by our ability to produce than historical demand patterns.

This is expected to result in less seasonal variation and typical between the quarters. This year.

Looking at profitability for the full year.

We now expect similar overall adjusted operating earnings as a percent of net sales.

Compared to fiscal 2021 for the total company.

And in the professional and residential segments.

This reflects the operational improvements, we're realizing as well as our acquisition.

With the addition of Intimidator at a lower initial gross margin relative to our company average we now expect gross margin in Q2 to be similar to Q1.

But improve in the second half of the year compared to the first half of the year.

For the full year, we expect gross margin to be similar to slightly below fiscal 2021.

Driven by the acquisition.

In light of the recent geopolitical events, we are holding our full year adjusted diluted EPS guidance.

The range of $3 90.

To $4 antenna.

Our adjusted diluted EPS guidance excludes the benefit of excess tax deduction for stock compensation as.

As well as one time acquisition related costs.

For the second quarter, we expect our adjusted diluted EPS to approach the record results. We achieved in Q2 of fiscal 2021.

Additionally for the full year.

With the acquisition included we now expect interest expense to be about $35 million.

Depreciation and amortization to be about $120 million.

Free cash flow conversion in the range of 80% to 90% of reported net earnings.

We continue to estimate an adjusted effective tax rate of about 21%.

We remain well positioned to capitalize on this period of profitable growth as we continue to execute on our long term strategic priorities.

With that I'll now turn the call back to Rick.

Thanks, Renee our entire team remains sharply focused on serving our customers as we are committed to building our business for long term sustainability and profitability.

The foundation for our future success is our world class innovation capabilities and enterprise wide operational excellence the combination of which we believe will drive sales momentum and margin expansion going forward and create value for all stakeholders.

As we head into the remainder of fiscal 2022 demand remains strong across the markets. We serve the ongoing replacement cycles for our products provide a steady foundation and we're keeping an eye on the following areas.

Consumer and business confidence together with inflation geopolitical developments and COVID-19 variance.

Customer prioritization of investments to maintain and improve outdoor environments.

Regulations on reduced emissions and customer preference for sustainable products, the continuation of strong momentum in golf markets and government support and funding of infrastructure projects, including the one trillion dollar U S infrastructure legislation.

Our innovative products and best in class distribution networks position us well to capitalize on current and future demand trends and the growing markets we serve.

I would now like to share a few comments on our golf market.

We continue to see courses in their healthiest financial positions in years.

Around the World golf participation engagement remains on the rise in the U S. Golf rounds played were up five 5% in 2021 on top of a 13, 9% increase in 2020.

We're also seeing an improvement in supply and demand balance and even saw an increase in the number of municipal and private courses in the U S. During 2021.

As the market leader in turf and irrigation solutions and the only provider of both we have distinct competitive advantages in this space. This was evident last month at the Gcs a golf industry show in San Diego.

Our effort and our booth reflected strong interest in our array of innovative new products.

A great experience to be at the show again after the pandemic driven hiatus and spend time with so many of our customers.

Not far from the Golf show was Super Bowl 56, Sulfides Stadium in Inglewood, California, our teams and equipments have a long and storied history of helping Super Bowl groundskeepers maintain pristine fueled conditions and this year was no exception.

Before and after the game are Workman Gtx and Ucs vehicles were used to help with Sofia Ground's crew move fueled preparation materials. In addition, our gtx vehicles and real master products were instrumental in preparing the Bengals UCLA practice fields.

Our commitment to innovation has served us well our strength in this area combined with our deep customer relationships and effective capital deployment and superior distribution and customer care networks has driven consistent financial performance.

We believe these strengths will continue to generate tremendous value and position us to deliver compelling growth and shareholder returns for the long term.

As always our extended team is the key to the Toro company's long term success on that note I would like to thank our employees for their dedication and resilience and welcome the Intimidator group to the company.

I would also like to extend my gratitude to our channel partners customers and shareholders for their continued support.

With that Ron and I will take your questions.

As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key please standby, while we compile the Q&A roster.

Our first question comes from the line of Eric Bouchard from Cleveland Research. Your line is now open.

Thank you.

Curious if you could give us a little bit of perspective on that.

How the supply chain is progressing.

It seemed like in the release you talked about.

Supply chain limiting shipments on the pro side.

I'm just curious is there progress being made when.

What do you think that gets back to normal and had been less of a limiting factor on your ability to serve customers.

Yeah. Thanks, Thanks for the question.

We are we are seeing improvement in our supply chain. The good news is demand remains exceptionally strong across our businesses. So it really is about being able to produce product at this point to meet that demand and.

We're marching consistent with our plan for the year and at this point.

<unk> seen both.

<unk> in our internal operational productivity and effectiveness and also some improvement from our supply chain.

Obviously within the last week, we've gone through analysis of the impact of what's happening.

Ukraine.

And that has offset some of the benefits that we've seen in a per our projection I do want to take the opportunity. There was some bad information out just within the last day about our exposure to Russia, and Ukraine, It's really insignificant and we have no operations there and.

The impact on revenue is insignificant directly so we're really talking about the indirect impact on commodities.

Those types of things.

But from our from our perspective, putting that aside we had seen improvement just getting getting past some of the COVID-19 restrictions have helped us significantly with absenteeism. So that's been a boost.

Our suppliers are seeing that as well that will turn into a <unk>.

Secondary positive effect for them over the next several months as they can consistently produce components for us. So we do see improvements on that side.

Commodities.

The additional variable of the Ukraine War, but had started to see some improvements.

Okay, and then a follow up if I could.

The commentary on the full year guidance.

I just wanted to understand what was behind that which.

I think what you communicated was that in light of.

The geopolitical uncertainty that youre holding guidance.

Within that.

It seems to imply but I wanted to hear directly excluding the geopolitical uncertainty is the business performing different than what the original guidance had suggested.

Yes, Thank you Eric.

No I think our guidance.

Would reflect continuation of the progress that we were making overall as a company. There is more uncertainty as Rick pointed out given the geopolitical situations, where we're trying to to the best of our ability incorporate that into our guidance.

And I would say that the Intimidator acquisition as well that is the driver for the increased sales growth we remain remain thing.

The bulk of our business continuing to grow but in line with our prior expectations from that standpoint. So we'll continue to monitor the situation and should the outlook change.

Always will take the actions that are necessary.

To be able to address that but we'll continue to focus on what we can control and and remain nimble and take action as we need to as the situation evolves.

Okay. That's helpful. Thank you.

Thank you.

Thank you. Our next question comes from the line of Tim Walsh from Baird. Your line is now open.

Hi, good morning, everybody.

Alright.

Maybe just to start on price and inflation.

Is there any way to kind of frame when you would expect.

Price on a dollar basis to exceed inflation and maybe when that might flip positive on a margin basis at this point.

Yes, I'll start and maybe Rick if you want to add your comments.

As always Kevin we continue to price to market.

And the situation that we're seeing from a from a cost standpoint is not at all unique to the Toro company, it's something certainly we're seeing across our industry and much broader than that.

<unk>.

We did expect and we saw sequential gross margin improvement from Q4 to Q1.

And we're seeing increased price realization.

In this environment, we're also taking new actions as needed given the current situation over.

Overall, we are committed to restoring our margins and to improving them over time, and we always focus on.

Price and productivity and synergies as well.

As we look forward to make sure that we're doing everything that we can from an overall standpoint for the total year, we indicated that we expect.

Our margins to be similar year over year.

And part of that also includes the impact of Intimidator, which has a lower initial gross margin.

But we do expect to see that gross margin improve in part because we're bringing them into a bigger organization with greater scale.

And.

We've learned quite a bit over the last number of years with the acquisitions and we feel confident in our playbook as well to really drive the synergies that we need as well as the sales growth as well.

So it's a business we know very well we continue to be very excited about bringing this in.

In particular, the Spartan brand, yes, yes, exactly okay. So I guess margins being flattish would imply that the course up slightly.

Against that kind of intimidate or <unk>.

Evolution, yes that would be the case, Okay got you and then.

Then just on the order side.

I know demand remains pretty strong across the business I mean, any have you seen any order deferrals or just kind of cancellations just based on extended lead times of pricing where customers who might just say, we're going to come back or do people keep the order the order pace I guess continued to be pretty pretty similar over the last.

Three to six months.

The order pace has continued with the strength that you're describing we have not seen a lot of drop off I think just having a little bit of commentary as we went into the season, where spring products are ordered from our channel.

We haven't.

A significantly larger.

The normal order percentage as a basis of based on the prior year and you could say some of that 12, a shortage sort of reaction where people are ordering more but what it really responds to is the fact that the field inventory is very low.

So.

It also provides a buffer to us with any kind of.

Pause or disruption of supply that we've got channel both.

That needs to be filled from AR.

Inventory standpoint, and we would like to have higher inventories of finished goods offsetting some of our current.

Work in process.

And components inventory.

Inventory internally.

Agree.

And just building upon that our customers remain financially very strong and keep in mind also they've been wanting to buy more inventory and our end customers that inventory I mean that.

Product is actually getting used for for their business. So there's a replacement cycle pizza and at this point in time, they haven't been able to get as much of that equipment as they would like so we do think that demand is linked to that as well for the most part we don't have really discretionary type of products. Those are products that are needed as part of our biz.

<unk> context. So if you think about a good portion of our current backlog or back order position that was coming from the underground business or the construction business a lot of that is anticipating business.

Our customers have thats going to require this equipment and driven by things like the infrastructure Bill.

So there is a very solid base of demand golf courses demand from their customers is extraordinarily high.

Paused on some of their purchases in 2020, they're trying to make up for that plus keep up with the demand that continues to be there at an exceptional level of end user standpoint.

Okay. Okay I appreciate all the color guys. Thanks. Thanks, so much thank you.

You.

Thank you. Our next question comes from the line of Ross Gilardi from Bank of America. Your line is now open.

Morning, guys.

Got it.

I just wanted to ask you about the pro.

Segment missed our revenue number quite a bit.

Did it really live up to your expectations I mean, you seem to be saying that supply chain is getting a little bit better but.

Whereas the shortfall on pro what I realize its a production issue but.

Is that where the production issues most acute.

I think the and Renee can comment specifically, but I think the first thing is you're looking if you're looking year over year.

We had inventory at that time, so we had a lot of product that we're shipping out of warehouse versus end of the line directly to a customer that's more of the states that we're in today, we are seeing some improvements but.

The challenges with supply chain are most pronounced in those heavier duty professional product categories right now largely because a lot of those components are shared across many different markets, including AG construction other specialty equipment categories. So those suppliers are ultra.

Stress right now theyre getting better, but it's not going to be.

Light switch turn it back on type of thing at this point, so it's a 100% supply.

Base the demand remains exceptionally strong.

Yes, I don't know that I have a lot to add to that I think you summarized it really well it's entirely related to supply chain constraints and.

I think we feel that demand is solid and we need to just continue to produce and to execute to that.

Okay, Great. One of your competitors is talking about home depot dropping gas power outdoor equipment from 50 stores completely this year.

Heard that and is that baked into your guidance at all.

We are we're fully aware of.

What what.

Our customers are key customers are doing.

<unk>.

The really exciting thing for US is just to see the growth of our 60 volt Flex force category because it is a smaller excuse me a smaller category overall for the company.

We didn't we wouldn't call it out, but we just have exceptional growth rates in those categories. So even as we continue to expand our position within traditional gas we have that.

That category continues to be very strong for us so we're.

We're very much a part of all of those discussions.

We were excited about the possibilities that that creates for our customers and I would just comment I mean, just looking at for the in the quarter that we just ended I mean residential sales were up 17% on top of.

31% growth a year ago, and I think it speaks to the broad channel that we have and.

We continue as Rick said, although a smaller piece the battery demand has has been significant.

So in stores that are pulling gas like would you expect to make up for it.

If they do that.

Sell more of your cordless offering in those same stores and net net the impact is basically zero.

That would be.

A general statements, we would have a store by store plan for each of those so that would be.

We were happy to file electric products through our channel partners and to our customers just as much as we are gas product and keep in mind with the 60 volt, we really expanded our product line. So when some other adjacent categories that we weren't in before so it's certainly beyond the mowers and snow blower.

<unk>, which we do have strong product offerings and that we have.

A lot of other products that we sell as well too.

I think they're really astonishing thing, it's just where we circle back and where we're offering battery solutions.

For example in the snow categories, we just double or triple down on our reputation and brand and the features that we have that are independent of the power source, so where we start to offer.

Incredibly.

Viable products that work exceptionally well that are battery all of a sudden.

Customers get the benefit of our.

Expansive network, both mass and dealer oriented so the access to us from a servicing standpoint.

And just the reputation in snow the reputation that's really earned by the features the benefits the innovations and the customer experience that youre going to get with the <unk> product.

Okay, Great and then the last one is just on Intimidator group I mean, you got it in the guide now you've taken the revenue guide up but the EPS didn't go anywhere.

Are the margins in this business is really low right now I mean are they experiencing some of the most severe supply chain issues in that in that business and since it's new to the.

The company do you feel like you have your arms around all the issues that they will face because it would seem given that you.

It's a pretty big revenue contribution just given that you've got it but most of the year that you would think there'd be some accretion there and they're in or are you actually implying that the have you actually trimmed your underlying guide somewhat.

Given that you've you're holding the EPS outlook.

Despite having intimate around now.

Yes, I'll start and again, please Rick and add your comments.

When we announced the acquisition, we did talk about it being modestly accretive it is important that it's not a full year.

But the issues that they are dealing with are very familiar to us and it's a business. The zero turn mower thats very familiar to us as well, it's a very complementary line.

We did comment that initially the margins are lower for Intimidator group, and it's really driven in part by their scale I mean there.

Although.

A good sized company there is so much smaller than our overall zero term business. So we we feel really confident that we know what we need to do and we will work with them to ensure that we get the benefits of them being part of the Toro company from a productivity and a synergy standpoint and work through some of the supply chain challenges that we.

As well as support their growth and then we see their growth is.

Something that's very attractive from that standpoint.

No.

We also recognize and we commented on that.

There are some.

Different dynamics related to the geopolitical situation that we tried to consider if this is very dynamic and relatively new information, but we also tried to incorporate that into our guidance to the best of our ability going forward. So I would just offer we're adding intimidator theres also the geopolitical.

And that we tried to incorporate to the best of our ability Rick do you have anything to comment.

Im not sure if I have the opportunity to just comment on the strategic.

Now but.

When we looked at how we could add to our market position within a very attractive category of disease.

The Intimidator group was absolutely at the top of the World. There is no question just in terms of the brand and growth momentum that they have.

The incredible passion.

Of both their team and their their customers for those products. The geographic strength. So it's a perfect complement to our strength throughout North America and some international.

And then.

Fundamentally there is very little.

Dealer overlap so we see tremendous capabilities and then it goes back to what Rene for our ability to leverage our investments, which which are substantial today and we will need to continue to be at a higher rate. So that would go through technology transitions.

This provides additional base for us to leverage those expenses and bring things to the market that will.

Just.

The incredible innovations.

And the categories that we've talked about that.

<unk> group of customers will be able to benefit from.

Got it thank you.

Thank you.

Thank you.

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

Hi, This is Joe Nolan on for David Macgregor.

Sure.

Alright.

So just on professional margins I was wondering if you could give a little more detail on the breakdown between Gulf versus LTE versus specialty construction.

Okay.

Yes.

We don't normally breakdown into two subcategories, but I mean, just in general when I. When we look at the professional business, we did see growth within the businesses as we talked about earlier, we do continue to see supply chain constraints being probably the biggest challenge and and I would just say that.

Overall.

We saw that.

A little more pronounced within the professional business for the reasons that Rick had mentioned earlier just the broader use of the product that being said our professional customers remain in great financial position and their demand is very strong our field inventory is also.

So across the board in both residential and professional so we see it more as a timing issue than a demand issue.

The situations that we are seeing none of the supply chain constraints are unique to Toro, we're seeing the same issues across the supply chain. So I think it's it's not a situation where.

They could go elsewhere and get that equipment.

We are we are definitely working.

Urgently as we can and we recognize that we need to support our customers in the interim we are seeing more service parts as a way for them to continue to operate that equipment.

As they look forward to getting those homegoods replaced over time.

Got it okay. Thank you for that.

And then.

Also can you talk about how snow contributed to growth in margins in the quarter.

Yes.

We look at the entire snow season, we had an exceptionally strong snow season, this year, which would really extend back into the fourth quarter of last year.

Great conditions, obviously for snow winter conditions.

<unk> produces a lot of demand.

Boss business was.

It was very strong in the first quarter.

Driven by the professional demand for those products and especially the snow Raider, which was part of an acquisition from a few years ago.

It really has.

It's something like a five ex labor reduction tool for clearing side.

Sidewalks.

Exceptional demand for that product similarly on our Ven track side been track has been performing beyond our expectations acquisition from 2020, and they have a dedicated snow product line that.

Demand was was at record levels on the residential side. We also had a very strong year I've mentioned the strength of the new battery offerings.

And also.

We were we did we do.

Constrain in our <unk>.

Customers and our channel partners would have wanted more residential snow this year.

With a couple of specific supplier issues on individual components. So.

Residential we know we could have shipped more channel partners wanted more on the professional side.

Outstanding your outstanding quarter for snow.

Okay very helpful. Thanks.

Thank you. Thank you.

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

Thank you good morning, Thanks for taking my questions.

Morning.

I guess I don't want to count on the professional side, but I guess, just one clarification of the you commented in the release today on challenging getting some of those products out to the customers. How should we think about those are just kind of.

Deferred sales they'll catch up once you get the product to ship out or is that a seasonal item you have to wait to kind of catch up so next year.

They'll take the product win on the professional side they will take the product when they can get it and we're working closely to allocate product. So the most critical.

Situations with trying to meet as much customer demand as we possibly can we know that.

But many if not most of our professional customers would like more product right now is reflected in our back order position, but they.

They are continuing to work with us where we're working to help them out even with.

We've had an exceptional service parts business and we're going to continue to focus on that to make sure that we can keep their current equipment.

Operational while they are waiting for equipment from us, but in our professional business, they're going to they're going to take the equipment when they can get it.

Not so much seasonally driven at this point, especially with the current field inventory.

So it just puts it in addition to the service part is just our network of service providers also is really helpful.

Certainly a golf course knee repair that equipment themselves, but like a landscape contractor may take that similar for the repair. So I think that's where the benefit comes from the service network as well excellent point.

Just I guess, just lastly, I don't think we touched on in this call but.

The equipment rental market shaping up for the year.

While we've had so many other things to talk about we haven't talked about a rental for a while but.

It also is booming at the moment the end demand.

The pandemic the more local rental locations, maybe one or two stores that part of the business was strong with even do it yourself projects at home.

Landscape contractors kicked in after that putting increased demand, which has continued and then as 2021 progressed.

Construction projects.

Truly hit the major national rental companies.

Started to to grow in.

Currently we're seeing a lot of strength across all of those.

Those different channels. So rental is very strong and thats really the complement to our direct sales to landscape contractors and construction contractors. So that's it.

It's really good across both of the brands.

<unk> systems brands from the Toro company the Dingo trade.

Trade names, specifically and ditch, which would be the other area, that's really seen seeing the demand.

Great. Let me just ask one more if I could it sounds like.

Demand across the spectrum is very strong I was just wondering if we didn't have the supply chain constraints could you meet demand with your current capacity or would you be looking to add capacity.

We would meet our demand, but it's also there's probably a two part answer we're also expanding capacity as we do continuously we continuously or looking at rolling demand and making adjustments in capacity. Some of that is reflected in the capital investments that you would see.

I was I was going to add a comment Tom that our Capex estimate, which is unchanged is $150 million to $175 million for this year and Thats really focused on some capacity expansions as well as looking at automation within our plants driving productivity. So we're spending at that rate because.

We see the demand not just in the short term that we see the demand.

For a period of time, especially like with the infrastructure and some of the.

Market implications of that.

And we feel it's the right time to invest and we get our highest returns from those those internal investments.

Okay I appreciate the color. Thank you.

Thank you.

Thank you at this time I'm showing no further questions I would like to turn the call back over to Julie characters for closing remarks.

Thank you Gigi and thank you all for your questions and interest in the Toro company, we look forward to talking with everyone again in June to discuss our second quarter fiscal 2022 results.

This concludes today's call. This call. Thank you for participating you may now disconnect.