Q2 2022 Toro Co Earnings Call

June 2, 2022

A question and answer session to ask a question during the session we need to press star one on your telephone if you require any further assistance. Please press star Zero I would now like to turn the call over to your host Julie characters Treasurer, and senior managing director of global tax and Investor Relations you may begin.

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.

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.

All are aware of the inherent difficulties risks and uncertainties in making predictive statements our earnings release as both 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.

Julie and good morning, everyone.

The total company has a long history of consistently delivering financial results in line with our expectations and this quarter was no exception.

For the second quarter, we drove eight 7% topline net sales growth and that was on top of our strong 23, 6% growth in the second quarter of fiscal 2021.

Our topline growth was driven by net price realization continued strong demand for our innovative products and our ability to produce and what remains a highly dynamic operating environment.

We continue to see broad based demand across our professional businesses.

We also saw solid demand in our residential segment for zero turn riding mowers, although the late spring impacted retail demand for other products.

Importantly, we saw areas of incremental improvements in our supply chain.

On our last call, we indicated that second quarter adjusted gross margin would be similar to our first quarter.

Our team executed well and delivered a 30 basis point sequential improvement in adjusted gross margin compared to Q1.

We also reported a 390 basis point sequential improvement in adjusted operating earnings margin for the second quarter as we continue to drive margins towards historic levels.

Over the past couple of years, our employees and channel partners have been operating in what has been one of the most dynamic environments that many of us have ever seen.

Our team has been creative resilient and steadfast and working to optimize the factors within our control and serve our customers well, while taking care of one another.

As a result of the actions our team has taken to improve our near and long term performance. We are increasingly confident in our outlook for the fiscal year.

Therefore, we are raising both our sales and earnings per share guidance for fiscal 2022.

Renee will provide more insight into our improved outlook in just a few minutes.

Our market leadership is underpinned by a foundation of long term carrying relationships, which are central to our purpose of helping customers enrich the beauty productivity and sustainability of the land.

A few highlights since our last call demonstrate our dedication to this purpose.

In March Singapore's World renowned Sentosa Golf Club announced a 10 year partnership with the total company and our local distributor Jetson Jetson.

With its pledge to become the world's first carbon neutral a golf club Sentosa cited the importance of working with a partner who not only shares our commitment to the environment, but also supports their mission to deliver a world class playing experience.

In April we celebrated our acquisition of the Intimidator group with states and community leaders at our facility in Batesville, Arkansas the.

The Intimidator team shares our values and is passionate about serving customers supporting the community and doing business the right way.

This acquisition represents an incredible opportunity to share resources and technology to expand product lines and geographic reach.

And importantly, we're doing so in the large and growing zero turn more space.

The integration is off to a great start and we believe the combination of our teams will drive value for all stakeholders.

Throughout the quarter, we kept our focus on our strategic priorities of accelerating profitable growth <unk>.

Driving productivity and operational excellence and empowering people.

With this focus we delivered near term results. While also capitalizing on long term opportunities supported by our disciplined capital allocation and strong balance sheet.

And our manufacturing facilities, we are seeing the benefits of lean principles and are continuing to invest in automation and capacity.

We're improving our operations for enhanced resiliency flexibility and agility and are prepared to emerge from this dynamic period as an even more productive organization.

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

Thank you Rick and good morning, everyone.

As Rick said in the second quarter, we once again delivered on our expectations.

We drove sequential improvement in profitability over Q1, as our team executed well in what remains a constrained supply environment.

We grew net sales to $125 billion in.

An increase of eight 7% compared to the second quarter of last year.

Reported EPS for the quarter was $1 24 per diluted share.

From $1 31 for the same period a year ago.

Adjusted EPS was $1 25 per diluted share.

As compared to the record $1 29.

In the second quarter a year ago.

Professional segment net sales for the second quarter were $925 $8 million.

Up 11, 8% from the same period last year.

This growth was primarily driven by.

Net price realization and incremental revenue from our first quarter acquisition.

This was partially offset by lower volume in certain key product categories future product availability constraints.

Professional segment earnings for the second quarter were $165 $4 million.

And when expressed as a percent of net sales 17, 9%.

This was down from 22% in the second quarter last year.

The year over year decrease was primarily due to.

Higher material freight and manufacturing costs.

And the addition of our first quarter acquisition.

At a lower initial margin relative to the segment average.

Partially offset by increased price realization and productivity initiatives.

Residential segment net sales for the second quarter were $319 $7 million up one 5% from last year.

Building on the 22% growth we reported in the second quarter of fiscal 2021.

The increase was primarily driven by net.

Net price realization and higher shipments of zero turn riding mowers.

This was partially offset by lower sales of walk power mowers and portable power products.

Primarily due to the delayed spring weather patterns across many parts of the U S.

Residential segment earnings for the quarter were $37 $1 million.

And when expressed as a percent of net sales.

Seven 6%.

This was down from 14, 6% for the second quarter last year.

The year over year decrease was primarily driven by higher material freight and manufacturing costs.

Partially offset by increased price realization and productivity improvements.

Turning to our operating results in.

In Q2, we reported a gross margin of 32, 4%.

And adjusted gross margin of 32, 5%.

Both compared to 35, 1% in the same period last year.

The year over year decreases were primarily due to higher material freight and manufacturing costs.

And the addition of our first quarter acquisition at a lower initial gross margin relative to the company average.

Partially offset by increased price realization and productivity improvements.

Sequentially, we achieved a 30 basis point improvement in adjusted gross margin when compared to the first quarter of fiscal 2022.

We continue to manage the factors within our control.

And are making progress on net price realization and productivity initiatives.

We intend to restore and improve margins over the long term.

As part of this effort, we will continue to drive additional productivity and synergy benefits across the organization.

SG&A expense as a percent of net sales for the quarter was 18, 7%.

Compared to 19, 4% in the same period last year.

This improvement was primarily driven by net.

Net sales leverage and lower incentive expense.

Partially offset by higher indirect marketing expenses.

Operating earnings as a percent of net sales for the second quarter were 13, 7%.

Compared to 15, 7% in the same period last year.

Adjusted operating earnings as a percent of net sales for the quarter were 13, 8%.

Compared to 15, 7% in the same period a year ago.

Interest expense for the quarter was $8 million.

Up $900000 from the same period last year.

This was driven by incremental borrowing to fund our acquisition in the first quarter of this year.

The reported and adjusted effective tax rates for the second quarter were 26% and 28% respectively.

<unk> to 19, 8% and 29% in the same period a year ago.

Turning to the balance sheet.

Accounts receivable were $439 million up 12% from a year ago.

Primarily driven by higher organic sales and our acquisition of Intimidator grip.

Inventory was $892 million.

Up 42% compared to last year.

This increase was driven by higher work in process finished goods and parts.

This reflects our efforts to procure key components and ensure service parts availability for customers in this time of constrained supply.

In addition, this includes the incremental inventory from our first quarter acquisition.

Accounts payable increased 34% from last year to $567 million.

This was primarily driven by higher purchase activity.

In April we borrowed $200 million under a new five year term loan credit facility to refinance outstanding revolver borrowings used in the first quarter to fund the Intimidator group acquisition.

We intend to refinance an additional $100 million during the third quarter and.

And we are also prioritizing $100 million in debt Paydown by the end of fiscal 2022.

We remain within our gross debt to EBITDA target ratio of one to two times.

We continue to follow our disciplined approach to capital allocation supported by our strong balance sheet.

Our priorities remain.

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 goals to support financial flexibility.

These priorities are highlighted by our actions this year <unk>.

Including our plan to deploy approximately $150 million and capital expenditures to fund capacity productivity and new product investments.

Our $400 million acquisition of Intimidator group in January .

And our return of $138 million to shareholders year to date.

With $63 million in regular dividends and $75 million in share repurchases.

We continued to benefit from strong demand across our diverse portfolio of businesses.

Our biggest challenge remains meeting this heightened demand in the current global operating environment.

As Rick mentioned, we are increasing our full year fiscal 2022 guidance based on current visibility.

We will continue to monitor developments in the macro environments and our end markets very closely and take actions as appropriate.

For the full year, we now expect net sales growth in the range of 14% to 16%.

Up from our previous range of 12% to 14%.

This increase reflects our production outlook and net price realization expectations supported.

Supported by order backlog and continued strength in demand.

We expect less variation in net sales between our third and fourth quarters.

For the professional segment, we expect our full year net sales growth rate above the company average.

This assumes incremental net sales from the Intimidator acquisition at the second quarter run rate.

For the residential segment, we expect our full year net sales growth rate below the company average primarily due to the late spring.

Looking at profitability, we expect our positive gross margin momentum to continue.

We expect higher gross margins in the second half of the year compared to the first half.

For the full year, we expect gross margins to be slightly below fiscal 2021, given current macro factors.

The addition of intimidated group at a lower initial gross margin than the company average.

Moving to operating earnings.

For the full year, we continue to expect similar adjusted operating earnings as a percent of net sales.

<unk> fiscal 2021.

We now expect the full year professional segment margin to be slightly above last year.

In the residential segment margin to be slightly below last year.

This takes into account the operational improvements we are realizing.

The impact of continued supply chain and inflationary pressures along with our first quarter acquisition.

This also consider as more normalized spending in the second half as we expect to engage more directly with our customers.

Along with the continued prioritization of strategic research and development investments.

With this backdrop, we are also raising our full year adjusted diluted EPS guidance.

To a range of $4 to $4 15.

We expect our third quarter adjusted diluted EPS to be slightly higher than the fourth quarter.

As a reminder, our adjusted diluted EPS guidance excludes the benefit of excess tax deduction for stock compensation as well as one time acquisition related costs.

Additionally for the full year, we now expect interest expense to be about $36 million.

We continue to expect depreciation and amortization to be about $120 million.

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

And an adjusted effective tax rate of about 21%.

We remain well positioned as we continue to execute on our long term strategic priorities and invest prudently in our business for the future.

I will now turn the call back to Rick.

Thanks Renee.

As we enter the second half of the fiscal year end market demand remains very strong and we are well positioned in each of the markets we serve.

In addition, our products are not discretionary and provide a reliable source of replacement demand.

For our residential segment, our channel partners remain positive on retail demand in.

In addition, the arrival of seasonally warmer weather, coupled with strong preseason snow bookings should provide momentum as we move into the third quarter.

And our professional segment, we continue to see broad based demand across our markets and businesses.

We anticipate demand in the underground construction market to grow even stronger as public and private infrastructure investments are prioritized around the world.

The golf market is also as healthy as ever.

Over the past two years, we've seen new golfers picking up to support an even faster rate than in the peak of the Tiger Woods era.

We're seeing the return of travel to Gulf destinations.

As the exclusive equipment and irrigation partner to St Andrews, who will be on site to support them as they host the historic 150 Open championship in July .

Of course, given geopolitical events inflationary pressures and supply chain challenges the heightened level of uncertainty remains in the macro environment.

We are keeping an eye on overall business confidence as well as consumer sentiment and spending.

Our teams remained sharply focused on enterprise wide operational excellence and collaborating with our channel partners to serve our customers well.

We believe this focus and commitment coupled with our state of the art innovation capabilities and extensive distribution networks will drive sales momentum and value for all stakeholders going forward.

Strategic investments and alternative power smart connected and autonomous solutions continue to be key future growth drivers were.

We're bringing our technology advancements to market and leveraging innovation across our broad portfolio.

We're excited about the technology transformations that are happening in our industry and we're even more excited about our innovation leadership as evidenced by our breakthrough tech forward product introductions.

Last week, we announced the launch of our next generation autonomous more designed for residential yard care.

This robotic battery powered smart connected more features the industry's first vision based localization system with wire free navigation.

Our patented system enables quick and easy setup for homeowners without the costly installation or maintenance headaches of the traditional boundary wire system.

This robotic more joins our full suite of sustainable no compromised solutions for homeowners.

Our focus on sustainability extends beyond our products to the way, we invest in our people serve customers and support our communities.

Staying ability is fundamental to our strategic priorities and is ingrained in our purpose and actions.

In 2020, we launched our sustainability endures platform and we continue to commit resources and accelerate change to deliver measurable results.

The upcoming edition of our sustainability report will highlight goals and metrics that we expect will drive further change for all stakeholders in a meaningful way.

As part of our ongoing commitment to create a welcoming and inclusive workplace. We recently launched an employee resource group called the Women's initiative network.

Our commitment to diversity equity and inclusion reaches beyond our corporate walls and into our communities.

In April we announced our support of the RNA women in golf charter, becoming a signatory of this industry wide initiative.

This charter aims to create a more inclusive golf culture by enabling more women and girls to realize their full potential in all areas of the game.

As part of our involvement we will provide annual apprenticeships to promote diversity and the industry.

This initiative builds on our existing partnerships with organizations such as first T and the <unk> foundation to introduce and expand access to the game.

In closing the Toro company has a legacy of consistently delivering value to all stakeholders, we're making steady progress on manufacturing efficiency, while investing prudently to capture near and long term growth opportunities.

Going forward, we expect to remain well positioned for further success.

We expect our deep industry expertise and best in class distribution and service networks to strengthen our position in attractive end markets.

We are prepared to emerge from this period, even stronger more efficient and more agile.

As always our extended team is the key to the Toro company's success.

On that note I would like to thank our employees for your dedication and resilience.

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

With that Renee and I will open up the call for questions.

Ladies and gentlemen, if you ask a question or comment at this time. Please press. The Star then the one key on your Touchtone telephone. If your question has been answered or you wish to move yourself from the queue. Please press the pound key.

Our first question comes from Tim Willi with Baird.

Hey, everybody good good morning, nice job on the results good morning, Good morning Hugh.

Maybe I'm going to start with a two part question, but maybe just on the on the on the guidance raised maybe the 2% relative to the prior midpoint.

If you could maybe outline.

Where exactly what exactly is driving driving the updated guidance and then I guess when you look at the back half of the year. It does imply a pretty meaningful ramp in the revenue contribution from the first half so I think it's probably.

Something like 20% growth I think in the back half of the year to kind of get to the midpoint of the new guide. So could you just maybe walk through the bridge or the drivers of what is kind of changing from the first half to the second half.

Sure Tim all I'll comment on some of the drivers and Renee can comment specifically on the <unk>.

<unk> numbers and so for us it's really a combination the demand continues to be very strong and looks very solid into the future and then as we mentioned in our prepared remarks, we are seeing some improvement from our integrated supply chain perspective, So thats both.

Advancements that we're making internally plus some signs of improvement with our suppliers as well so the combination of the two.

<unk>.

And really actually quite similar to our previous.

Earnings release comments.

It happened at that time was really the <unk>.

Invasion in Ukraine. So we're.

Kind of back to where we were having kind of digested that aspect as well.

Yes, and as far as just the timing looking at the guidance if you.

Think about it we included Intimidators certainly the second half of the year as well as.

Continued improvement in price realization and slightly higher volume for the reasons that Rick has mentioned, it's Tim if you think about the revenue sequentially, starting with maybe Q2.

Versus the year over year growth rate, we do see some seasonality. So Q2 would be higher than Q3, and a little bit of a ramp down in Q4, but less than we normally would see so there it's more muted because of the fact that we do have a lot of demand. We also have backlog and field inventory to replenish.

As well last year in the second half of the year.

Excuse me is really when we saw the impact of the supply chain challenges really accelerate as well as inflation. So it's a little bit easier comparison.

Year over year, but our demand remains really strong we have a strong order backlog and as I said, we have dovetailed inventories. So we feel even better visibility into the second half.

Okay. Okay.

Really helpful. And then maybe on the margins in the back half of the year from maybe from a non.

And operating income perspective.

Okay.

I think you said kind of Q3.

In Q4, there won't be like a big difference in kind of the growth rates. How would you think of the margin contribution I mean, how much of the I guess implied year over year margin accretion in the back half of the year is kind of Q3 versus Q4.

Yes.

Talked about from a gross margin perspective, we expected the second half gross margin to be greater than the first half it's hard to really split that gross margin between Q3 and Q4.

Just at this point in time there is just.

It's difficult to estimate to that to that level, we do expect to that from an overall EPS standpoint that Q3 will be slightly higher than Q4.

And again, we gave some information regarding both pro and residential margins from a total year standpoint from an operating standpoint, we expect similar operating margins year over year.

<unk> the impact of Intimidator acquisition, we expect pro margins will be slightly above.

Fiscal 'twenty, one and Roz Roz margins slightly below fiscal 'twenty one.

Okay. Okay. Good.

And then maybe just the last question from me just on the new products I mean, any any way to kind of provide like a quantitative update on some of your new product introductions, whether it's just revolution series or some of the autonomous green mowers or what Youre seeing kind of battery powered products in residential just trying to frame how those are kind of performing.

And the initial feedback that you've received from customers there.

I think it's too early to be able to project that accurately but what we can say is the response has been absolutely fantastic across the board. So the Revolution series that we've talked about.

Last quarter.

Interest has continued that will help to contribute later this year.

Yes.

The launch of the robots.

Honestly are the introduction of the robot far exceeded our expectations in terms of interest in.

The number of social media and other outlets picked that up just.

We exceeded our expectations, so there's a ton of excitement.

And then just in general.

The investments that we're making in technology. We are just really kind of seeing what should be a steady flow of some really exciting products going forward that also gives us confidence in the future.

Contributes really too to your previous question as well.

Okay. Okay. Good good.

Look on the back half of the year and nice job guys. Thank you. Thank you.

Our next question comes from Sam <unk> with Raymond James.

Good morning, Rick Renee how are you good morning, Sam we're doing well.

A couple of quick questions, if I could first off.

With respect to price.

Could you remind us the timing and the magnitude of pricing actions I guess im talking about realization as opposed to asking prices, but realization.

This fiscal year, and then remind us how much price rollover youre expecting.

For fiscal 'twenty three.

Yes, we have been.

We are realizing more price within the quarter than we had in the previous quarter. So we're continuing to see that number increase and we're also very focused.

Excuse me on our productivity actions as you know Sam we always do everything that we can to try to mitigate cost increases the price increases as well from an overall standpoint, we've taken multiple price actions as we went through the year. So that's why we're continuing to see that price realization build.

As we look into fiscal 'twenty, three we will see some rollover because of that but we will also consider.

Normally we price going into the season, we will have to evaluate all of that in light of the competitive environment that we're in at that point in time.

But.

But that would be potentially then there would be other pricing actions at that point in time.

Over the long term, we are committed to continuing to improve our margins and to return those to our historical averages as well over the longer term.

So excluding pricing actions to come.

Whether normal or otherwise just trying to get a sense of the pricing rollover next year just from this year's actions would it be kind of low mid single digit is that the right way to think about it excluding any perspective actions.

Yeah, I would say that it is.

Normally we would say our prices one to two points of price is it has been higher than that and because we have taken multiple pricing actions there will be.

Some some element that rolls over into next year and I mean, that's a reasonable estimate.

Okay and then my second question has to do with inventories.

Inventories I know you were mentioning Renee.

Year on year.

More interested in I guess sequentially because it was up 20% sequentially Q2 over Q1 and that's.

Seasonally that's really unusual.

Are you all and I think intimidator was in both periods.

So I guess, what I'm getting at is.

What are your within your guidance what are you projecting for year end fiscal year end inventories <unk>.

What are your thoughts around production versus shipments in the back half of this year issue, Matt as you manage that inventory level. Okay.

Let me answer that question and please do if I Miss a piece of it. Please do help me with that but as I look at inventories. If you look at it sequentially Youre accurate. It's correct that intimidator was in both of those periods of time. So that's not the driver. It really is continuing to look at.

And managing that web to help us to.

Run more efficiently from a plant standpoint, we continue to be disciplined on what we're taking in but we are looking at long lead time items and items that are in particular short supply to be able to help us to manage our whip is continues to be higher than we would normally carry.

Looking at year end, we have a plan to bring that down and we would expect it to revert to a more normal level of work in process by year end. We also have some impact within the quarter of Hyatt higher finished goods primarily related to residential and that's the impact of the late spring. We were prepared you have to prepare for a more.

Normal environment, we're not concerned about that because as you know Samsung times are.

Timing of spring can split between either Q2 or Q3, and so we're not concerned about that but we'll see.

Fair amount of that pickup in Q3, and we'll sell that through but those are I think the two components that are a little different sequentially and we would expect to bring down our whipped by year end, we'll need to make an assessment related to finished goods just based on.

The environment that we're operating in we normally start to build some finished goods as we end the year and go into the following year from a seasonality perspective, we haven't been at that point to be able to do that in a while so we'll make that assessment as we go through the rest of the year.

Okay. So let me paraphrase if I could so.

Inventories in dollars by year end expected to be lower versus the fiscal second quarter.

Normally the case, but youre, maybe the effect is more pronounced this year.

And then your production versus shipments.

I guess I mean seasonally.

There are some differences, but on a year on year basis. Your production is going to be less than shipments were more than shipments help me understand that I am sorry Renee.

I would say our production will be equal to or slightly more than shipments as what we what we would estimate we don't have that much I mean other than the residential inventory that I mentioned, we don't have that much in finished goods inventory at this point.

Significant factor is the width and that's really been part of our success in being able to produce more consistently as being really prudent about making sure if we.

The opportunity to bring in key components that are the risk list. If you will that we would bring those in as we gain confidence in our supply chain. We will obviously manage that back down again, but this is not an environment, where you want things coming in five minutes before you need them.

So that's the factor really from a from a weather standpoint, let's say just the other thing is making sure. We have the components before we start building, a particular model and that results in a little bit higher average within itself, but the disruptiveness of the stopping and starting on our assembly lines is really one of the core issues, though.

We've been working on.

Got you and if I could sneak one more question and I apologize.

And if you mentioned this on the in the prepared remarks, and I missed it I apologize.

Acquired sales in the quarter from Intimidator.

It's about $60 million 65, we didnt mention it in the call it will be in the queue.

As well, but $65 million and we would expect a similar run rate for the quarter for the second half of the year as well Sam Thank.

Thank you very much I appreciate it.

Yes. Thank you.

Our next question comes from David Macgregor with Longbow Research.

Yes, hi, good morning, everyone.

Morning.

Yes, I wanted to just ask questions wanted to ask about the second half margin improvement expectations.

How much of that is working through the legacy priced backlog and just getting to better price realizations on what Youre shipping.

Versus maybe volume improvements as the supply channels begin to open up.

Yes, I would I would say continued price realization is is a component of it as I mentioned earlier our work on productivity.

It's also important from that standpoint, we do see inflation, continuing but the rate of inflation.

Moderating.

Somewhat as we look out at it first half to second half and then it does include a <unk>.

Two quarters of Intimidator versus one quarter, but all in all when we look at all of those factors. We do expect the gross margin in the second half of the year to improve over the over the first half, but it really is all of those factors, including Intimidator initial lower gross margin. So we're we're offsetting that with some of those other acts.

As well.

Just on that question before because I've got a follow up just on that question are you able to talk about what gross margins were in the quarter, excluding the acquisition.

How are you thinking about the second half full year number excluding the acquisition, yes, we haven't we haven't broken that out specifically other than to say that it is from when we look at it whether it's within the quarter are from a total year standpoint from a purely gross margin standpoint, it is dilutive.

From an overall standpoint, but the acquisition is really doing well they did contribute in a meaningful way as we just talked about from a revenue standpoint, and we talked about we do expect the acquisition to be modestly accretive and we're seeing that as well.

Okay. Thanks for that.

Yes.

Sam was asking about the rollover on pricing into 2023, maybe just thinking about volume in the same regard.

Rick you talked about products being discretionary, but just given the backlogs and the delayed product availability how much demand you would have normally been satisfying in 2022 do you think is now likely to occur in 2023.

We do believe.

The backlog or the order bank is continuing to grow throughout the first half of this year and although we talked about improvement in supply chain.

<unk> is continuing particularly strongly so we would expect that demand in the order bank to continue into well into next year and some of our categories.

Highlighted.

So examples would be the underground and construction business the golf business golf and ground those are some of the areas.

So we will definitely roll into next year as well.

Please go with your.

Quantitative context.

We have not broken that down in terms of.

Anticipated roll into next year at this point.

Okay.

The.

Back order position at the end of last year was.

One 6 billion.

Yes.

This is normally a 150.

Right correct approximately.

So last question for me is just on share repurchase activity and you did 75 million in the first quarter you held off on <unk> I realize you had some other things going on with respect to the acquisitions.

And you can see that in the inventory levels, but how are you thinking about your level of repurchase activity for this year.

Yes, we always.

Focus on our capital allocation in the order, we've talked about some internal and strategic M&A profitable growth really is our top priority as well as continuing to increase our dividends, we have focused a little bit more on debt pay down just given the intimidator acquisition. So we talked about the fact that.

For the year, we would expect about $100 million is our current go all around paying down from a debt standpoint for share repurchases. We always look to offset dilution and then we'll look at as we close out the year part of this also depends on as we talked about earlier the inventory that we think we need going into next year.

The company generates very good cash flow and we're expecting that for this year as well with the 80% to 90% conversion so.

<unk>.

Can certainly consider share repurchases will be closed out the year or certainly would do so next year again with that starting with that goal of offsetting dilution and then using that when it makes sense from an excess cash standpoint as well.

Okay makes sense, thanks very much.

Thank you. Thank you.

Our next question comes from Eric <unk> with Cleveland Research.

Yeah.

Alright, good morning.

Couple of things first of all on residential you talked about.

A late spring.

Can you just talk about a couple of things to give us some context of that first of all in terms of the updated sales guide is residential still expected what you thought coming into the season.

And then secondly, your conviction in regaining recapturing what was lost from this quarter and that is.

The remaining quarters of the year.

Sure.

Residential continues to be very strong very strong business.

<unk>.

The factor the primary factor that we're talking about is a late spring and in the Midwest has been historically weight as much as 30 days.

So that is the primary factor that we're looking at I think it's important to keep in context. The residential business is growing more than 20% for the last two years and grew 17% in the fourth quarter.

<unk>.

So the effects of the spring really is the primary factor and we feel very strongly and positively about the health of that business going forward all of the factors that we've talked about over the last couple of years are in place. The product line is refreshed we have new channel partners that are helping.

To sustain that new level of growth and then just the incredibly exciting technology introductions that are really helping to drive a lot of interest in that business with our customers, but with regard specifically to get them back the sales from the second quarter, we expect to pick up.

Lot of those sales in the third quarter. There is a loss period. It may not be 100% of those sales that we get back in this in the current period the third quarter.

They are working hard to get those back in it's a more favorable weather pattern in North America right now to help do that.

In terms of just to clarify within that in terms of the increased sales guide for the full year by two points.

With residential what changed within residential and pro within that I know you said it would grow faster than resi, but from your original expectation was all of the increase in pro or more than all of the increase in growth.

Yes.

We've obviously taken all those factors into consideration more of the driver would be on the pro side.

Okay.

And within that as the driver on the pro side.

Volume price or your ability to produce.

It's really all of those all of those factors.

Just.

An example, with regard to ability to produce we have our teams have worked incredibly hard together in a collaborative way. So we've identified constraints, maybe six months a year ago and help to design. Some alternative designs that give us a little bit more flexibility. So that's looks.

Driving some of our confidence in the rest of the year and a lot of that has to do with professional product.

I'd just add although the growth rates when you look at the second half are more significant from a from a sales dollar perspective, we really feel good having executed well in Q2, and we're seeing when we look at Q3 and Q4, our revenue that is more similar sequentially. There is still is a seasonal pattern associated with it so Q.

Two will be the largest quarter, but we also.

Don't need to double our production capability, it's really continuing to execute well and being able to produce product given.

Given that we have backlog and also field inventory replenishment as well so we feel good about that.

Okay and then another comment you made just love some clarity on you talked about more normalized spending with customers as you go through the back half of the year can you just give us perspective and context for what that is yeah. I'll give you. One example of that.

Very anxious to get especially our salespeople out making those contacts with our customers.

Eloping enriching those relationships in the over the last few years, although some of our.

Our.

Conferences have returned our tradeshows they havent been at a full attendance level I mean, I think everyone has been cautious and careful and we will continue to be but we will probably have a few more people attending some of those trade shows a few more people, making onsite visits. So we're it's more of that customer facing.

The reaction that we think will increase as we go throughout the rest of this year and into the future as well, but not as much from an internal standpoint, its more of the customer facing contracts.

Okay. That's helpful. Thank you.

Okay.

And I'm not showing any further questions at this time I'd like to turn the call back to Julie for any closing remarks.

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

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.

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Yes.

Okay.

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Ladies and gentlemen, thank you for standing by and walked through the Toro Company fiscal second quarter 2022 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during the session need to press star one on your telephone if you require any further assistance. Please press star zero I would now like to turn the call.

Over to your host Julie characters, Treasurer, and senior managing director of global tax and Investor Relations you may begin.

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 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.

Conciliations 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 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.

The total company has a long history of consistently delivering financial results in line with our expectations and this quarter was no exception.

For the second quarter, we drove eight 7% topline net sales growth and that was on top of our strong 23, 6% growth in the second quarter of fiscal 2021.

Our topline growth was driven by net price realization continuing strong demand for our innovative products and our ability to produce and what remains a highly dynamic operating environment.

We continue to see broad based demand across our professional businesses. We also saw solid demand in our residential segment for zero turn riding mowers, although the late spring impacted retail demand for other products.

Importantly, we saw areas of incremental improvements in our supply chain.

On our last call, we indicated that second quarter adjusted gross margin would be similar to our first quarter.

Our team executed well and delivered a 30 basis point sequential improvement in adjusted gross margin compared to Q1.

We also reported a 390 basis points sequential improvement in adjusted operating earnings margin for the second quarter as we continue to drive margins towards historic levels.

Over the past couple of years, our employees and channel partners have been operating in what has been one of the most dynamic environments that many of us have ever seen.

Our team has been creative resilient and steadfast and working to optimize the factors within our control and serve our customers well, while taking care of one another.

As a result of the actions our team has taken to improve our near and long term performance. We are increasingly confident in our outlook for the fiscal year.

Therefore, we are raising both our sales and earnings per share guidance for fiscal 2022.

Today, we will provide more insight into our improved outlook in just a few minutes.

A few highlights since our last call demonstrate our dedication to this purpose.

In March Singapore's World renounced in Tulsa Golf Club announced a 10 year partnership with the Toro company and our local distributor Jetson Jetson.

In April we celebrated our acquisition of the Intimidator group with states and community leaders at our facility in Batesville, Arkansas the.

The Intimidator team shares our values and is passionate about serving customers.

Courting the community and doing business the right way.

This acquisition represents an incredible opportunity to share resources and technology to expand product lines and geographic reach.

And importantly, we're doing so in the large and growing zero turn more space the.

The integration is off to a great start and we believe the combination of our teams will drive value for all stakeholders.

Throughout the quarter, we kept our focus on our strategic priorities of accelerating profitable growth.

Driving productivity and operational excellence and empowering people.

With this focus we delivered near term results. While also capitalizing on long term opportunities supported by our disciplined capital allocation and strong balance sheet.

And our manufacturing facilities, we are seeing the benefits of lean principles and are continuing to invest in automation and capacity.

We're improving our operations for enhanced resiliency flexibility and agility and are prepared to emerge from this dynamic period as an even more productive organization.

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

Thank you Rick and good morning, everyone.

As Rick said in the second quarter, we once again delivered on our expectations.

We drove sequential improvement in profitability over Q1 <unk>.

Our team executed well in what remains a constrained supply environment.

We grew net sales to $125 billion in.

An increase of eight 7% compared to the second quarter of last year.

Reported EPS for the quarter was $1 24 per diluted share.

From $1 31 for the same period a year ago.

Adjusted EPS was $1 25 per diluted share.

As compared to the record $1 29.

In the second quarter a year ago.

Professional segment net sales for the second quarter were $925 $8 million.

Up 11, 8% from the same period last year.

This growth was primarily driven by <unk>.

Net price realization and incremental revenue from our first quarter acquisition.

This was partially offset by lower volume in certain key product categories.

Future product availability constraints.

Professional segment earnings for the second quarter were $165 $4 million.

And when expressed as a percent of net sales 17, 9%.

This was down from 22% in the second quarter last year.

The year over year decrease was primarily due to.

Higher material freight and manufacturing costs.

The addition of our first quarter acquisition.

At a lower initial margin relative to the segment average.

Partially offset by increased price realization and productivity initiatives.

Residential segment net sales for the second quarter were $319 $7 million up.

One 5% from last year.

Building on the 22% growth we reported in the second quarter of fiscal 2021.

The increase was primarily driven by net.

Net price realization and higher shipments of zero turn riding mowers.

This was partially offset by lower sales of walk power mowers and portable power products.

Primarily due to the delayed spring weather patterns across many parts of the U S.

Residential segment earnings for the quarter were $37 $1 million.

And when expressed as a percent of net sales of 11, 6%.

This was down from 14, 6% for the second quarter last year.

The year over year decrease was primarily driven by higher material freight and manufacturing costs.

Partially offset by increased price realization and productivity improvements.

Turning to our operating results in Q2, we reported a gross margin of 32, 4%.

And an adjusted gross margin of 32, 5%.

Compared to 35, 1% in the same period last year.

The year over year decreases were primarily due to higher material freight and manufacturing costs.

The addition of our first quarter acquisition at a lower initial gross margin relative to the company average.

Partially offset by increased price realization and productivity improvements.

Sequentially, we achieved a 30 basis point improvement in adjusted gross margin when compared to the first quarter of fiscal 2022.

We continue to manage the factors within our control.

And are making progress on net price realization and productivity initiatives.

We intend to restore and improve margins over the long term.

As part of this effort, we will continue to drive additional productivity and synergy benefits across the organization.

SG&A expense as a percent of net sales for the quarter was 18, 7%.

Compared to 19, 4% in the same period last year.

This improvement was primarily driven by.

Net sales leverage and lower incentive expense.

Partially offset by higher indirect marketing expenses.

Operating earnings as a percent of net sales for the second quarter were $13, 7%.

Compared to 15, 7% in the same period last year.

Adjusted operating earnings as a percent of net sales for the quarter were 13, 8%.

Compared to 15, 7% in the same period a year ago.

Interest expense for the quarter was $8 million.

Up $900000 from the same period last year.

This was driven by incremental borrowing to fund our acquisition in the first quarter of this year.

The reported and adjusted effective tax rates for the second quarter were 26% and 28% respectively.

Impaired to 19, 8% and 29% in the same period a year ago.

Turning to the balance sheet.

Accounts receivable were $439 million up 12% from a year ago.

Primarily driven by higher organic sales and our acquisition of the Intimidator group.

Inventory was $892 million.

Up 42% compared to last year.

This increase was driven by higher work in process finished goods and parts.

This reflects our efforts to procure key components and ensure service parts availability for our customers in this time of constrained supply.

In addition, this includes the incremental inventory from our first quarter acquisition.

Accounts payable increased 34% from last year to $567 million.

This was primarily driven by higher purchase activity.

In April we borrowed $200 million under a new five year term loan credit facility to refinance outstanding revolver borrowings used in the first quarter to fund the Intimidator group acquisition.

We intend to refinance an additional $100 million during the third quarter and.

And we are also prioritizing $100 million in debt Paydown by the end of fiscal 2022.

We remain within our gross debt to EBITDA target ratio of one to two times.

We continue to follow our disciplined approach to capital allocation supported by a strong balance sheet.

Our priorities remain.

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 goals to support financial flexibility.

These priorities are highlighted by our actions this year, including our plan to deploy approximately $150 million and capital expenditures to fund capacity productivity and new product investments.

Our $400 million acquisition of Intimidator group in January .

And our return of $138 million to shareholders year to date with.

With $63 million in regular dividends and $75 million in share repurchases.

We continue to benefit from strong demand across our diverse portfolio of businesses.

Our biggest challenge remains meeting this heightened demand in the current global operating environment.

As Rick mentioned, we are increasing our full year fiscal 2022 guidance based on current visibility.

We will continue to monitor developments in the macro environments and our end markets very closely.

And take actions as appropriate.

For the full year, we now expect net sales growth in the range of 14% to 16%.

Up from our previous range of 12% to 14%.

This increase reflects our production outlook and net price realization expectations.