The Toro Company (TTC) Earnings Call Transcript & Summary

Good afternoon and welcome to The Toro Company's 2021 Annual Meeting of Shareholders. Thank you for joining us today. I'm Rick Olson, the Chairman and CEO. Following introductions, we will conduct the formal portion of our annual meeting followed by a brief update on our business and recent financial results. At the end of the meeting, we will answer questions submitted through the virtual meeting platform that pertain to this meeting. I'd like to begin by recognizing Gregg Steinhafel, Gregg has served as a member of our Board for more than 22 years, and he retired today. Throughout his tenure on the Board, Gregg applied and shared his deep business acumen, leadership experience, retail knowledge and strategic expertise. I would like to acknowledge and thank Gregg for his wisdom, insight and many years of dedicated, thoughtful and excellent service to The Toro Company. Thank you, Gregg. I would now like to introduce the current independent members of our Board of Directors who are joining us virtually and participating on a listen-only line: Janet Cooper, retired Senior Vice President and Treasurer of Qwest Communications International; Gary Ellis, retired Executive Vice President of Medtronic and our Lead Independent Director; Jeff Ettinger, retired Chairman and Chief Executive Officer of Hormel Foods Corporation; Kathy Harless, retired President and Chief Executive Officer of Idearc; Jeff Harmening, Chairman and Chief Executive Officer of General Mills; Chris Koch, Chairman, President and Chief Executive Officer of Carlisle Companies Incorporated; Joyce Mullen, President of Insight North America; Jack O'Rourke, President and Chief Executive Officer of The Mosaic Company; and Mike Vale, Executive Vice President of 3M Company. Thank you to our Board members for their contributions to The Toro Company. Next, I would like to introduce the representatives from KPMG, our independent registered public accounting firm, who are joining us virtually today. They are James Powell and Kyle Cruickshank. James and Kyle will be available at the end of the meeting to answer questions submitted through the virtual meeting platform that are relevant for KPMG. With that, I now call our 2021 Annual Shareholders meeting to order. I would like to introduce Angie Snavely, our Assistant General Counsel and Assistant Secretary, who will conduct the formal portion of our meeting.

Thank you, Rick. The polls are now open and will remain open as I proceed through the formal portion of this meeting. If you are a registered shareholder, you may vote through our virtual meeting platform during this time. If you previously voted, you do not need to vote during this meeting unless you wish to change your vote. Our first order of business is to establish proof of notice of this meeting. I confirm that we have received an affidavit of distribution establishing that notice of this meeting was duly given to each shareholder entitled to vote on January 19, 2021, the record date. Our next order of business is to confirm that a sufficient number of shares of our common stock are represented today to constitute a quorum for the purposes of transacting business at this meeting. Our inspector of election confirmed that a sufficient number of shares of our common stock are represented today, and therefore, we have a quorum. Because notice of this meeting was duly given and a quorum is present, this meeting is convened for purposes of transacting such business as they properly come before it. The first proposal before our shareholders is the election of 3 directors, each to serve for a term of 3 years ending at our 2024 Annual Meeting. The nominees for election are: Janet Cooper, Gary Ellis and Mike Vale. The second proposal is a ratification of KPMG as our independent registered public accounting firm for our fiscal year ending on October 31, 2021. The third and final proposal is the approval of our advisory say-on-pay vote. Please submit any final votes at this time. [Voting]

Thank you. I declare the polls for this meeting are now closed. I'm pleased to announce that prior to the meeting, our inspector of election informed us that, pending the final tabulation of votes, all of our director nominees have been elected and all other proposals have been approved. Final tabulations of each of these votes will appear in our required Form 8-K to be filed with the Securities and Exchange Commission. This concludes the formal portion of our 2021 Annual Shareholders Meeting, and I declare the meeting officially adjourned. Rick Olson will now spend a few minutes on our business and recent results. Following Rick's remarks, we will take your questions. Before I turn the meeting back to Rick, I would like to remind you of our forward-looking statement policy. During this meeting, we will make forward-looking statements regarding our business and future operating and financial results. These forward-looking statements are based on management's current assumptions and expectations of future events and actual events and results may differ from those predicted. Our most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q detail some of the important risk factors that may cause our actual results to differ from those in our predictions. Please note that we do not have a duty to update our forward-looking statements. In addition, we will also reference certain non-GAAP financial measures. More information about our use of such non-GAAP financial measures as well as a reconciliation of the most directly comparable GAAP financial measure to the non-GAAP financial measure can be found in our Form 10-Q filed for the first quarter of fiscal 2021 in the section titled Non-GAAP Financial Measures. The Form 10-Q can be found on our website. With that, I'll now turn the meeting over to Rick.

Thank you, Angie. We delivered robust results for fiscal 2020. We owe our successful performance to our more than 10,000 worldwide team members who demonstrated ingenuity, persistence and agility throughout a challenging year. Additionally, our channel partners safely served our customers with dedication and passion. Together, we persevered to meet demand and remain sharply focused on business execution as we faced uncertainty due to the ongoing pandemic. For fiscal 2020, we delivered $3.38 billion in net sales, net earnings of $330 million, earnings per diluted share of $3.03 and adjusted earnings per diluted share of $3.02. Our fiscal 2020 results were primarily driven by incremental contributions from the Charles Machine Works and Venture Products acquisitions, record performance from our residential segment, successful introduction of new battery-powered products for residential and professional applications and execution of productivity and synergy initiatives. Looking at our fiscal 2020 segment performance. Professional segment net sales increased 3.3% to $2.52 billion with Charles Machine Works and Venture Products adding incremental sales. In addition, our residential segment net sales were up 24.1% to $821 million, reflecting incremental shipments of zero-turn riding and walk power mowers as a result of our expanded mass retail channel as well as strong retail demand for these products due to a new and enhanced product line, favorable weather and stay-at-home trends. During fiscal 2020, we also launched our Sustainability Endures platform. Sustainability Endures directly ties sustainability to our mission to deliver superior innovation and superior customer care and also provides transparency on our continued efforts to address sustainably focused matters, including environmental, social and governance priorities. Finally, we remain focused and disciplined with our capital allocation strategy. For instance, in fiscal 2020, we completed the Venture Products acquisition, continued investments in research, engineering and capital expenditures and returned $108 million to shareholders through dividends. Strong earnings and our focus on disciplined working capital resulted in free cash flow conversion for the year of 140%. In the last year, it was inspiring to see how so many moved forward and did what was needed to help others and stay safe as the COVID-19 pandemic spread around the world. We prioritized the safety, well-being and support of our employees, customers and communities and established several key priorities, which remain in place today. At the same time, we maintain the critical functions of our manufacturing operations and continued to invest in innovation. Our employees managed these changes admirably. While working in significantly modified production environments or at home, they balanced personal challenges resulting from the pandemic. I am beyond proud of our team and will remember fiscal 2020 as one that highlighted the way we lived our values while caring for one another and serving our customers with determination. Despite the challenges related to the COVID-19 pandemic, we were pleased to fulfill our continued commitment of returning value to shareholders. As mentioned previously, in fiscal 2020, we paid $108 million in dividends. In addition, we increased our dividend in fiscal 2021. While we curtailed share repurchases in fiscal 2020 to focus on debt repayment and near-term liquidity, we resumed share purchases in the first quarter of fiscal 2021. Turning to our first quarter. We recently reported very strong results with continued momentum across our professional and residential businesses. We grew net sales for the first quarter by 13.7% to $873 million. Reported earnings per share was $1.02 and adjusted earnings per share was $0.85 per diluted share. This compares with reported earnings per share of $0.65 and adjusted earnings per share of $0.64 per diluted share for the comparable quarter last year. Professional segment net sales increased 9.3% to $650.2 million. This increase was primarily due to higher shipments of landscape contractor, zero-turn riding mowers and incremental sales from the Venture Products acquisition, partially offset by decreased sales of underground construction equipment to the oil and gas markets and the timing of international shipments of golf and grounds equipment. Residential segment net sales increased 31.3% to $217.7 million, setting another record. This increase was primarily due to strong demand for our snow equipment, Flex-Force 60-volt lithium-ion products and walk power mowers. Our disciplined capital allocation strategy includes investing in organic and M&A growth opportunities, maintaining an effective capital structure and returning cash to our shareholders. Our capital priorities remain the same and include reinvesting in our businesses to support sustainable long-term growth, both organically and through acquisitions, returning cash to shareholders through dividends and share repurchases and repaying debt to maintain our leverage goals. In the first quarter of 2021, we generated strong free cash flow, which allowed us to pay down $90 million in debt and resumed share repurchases. In addition, as announced prior to this meeting, the Board declared a quarterly dividend of $0.2625 per share. Our ongoing investments in research and engineering continue to fuel innovation and drive growth. We continue to focus and make investments in key technology areas like alternative power, smart connected and autonomous products to drive sustainable long-term growth. Notably, we recently acquired TURFLYNX and Left Hand Robotics, both of which are technology accelerators. In summary, we remain focused on accelerating profitable growth, driving productivity and operational excellence and empowering people. We are optimistic as we are heading into our peak selling season. While the environment remains dynamic as we continue to manage through COVID-related manufacturing and supply chain challenges, we have a number of factors working in our favor: a diverse portfolio of businesses and strong customer relationships, productivity initiatives to drive increased profitability and operational excellence, continued investments in innovative products and emerging technologies and as always, our team is the key to The Toro Company's continued success. On behalf of The Toro Company, I'd like to thank our shareholders for your continued support, and we look forward to updating you throughout fiscal 2021. We will now answer questions relevant to the annual meeting that were submitted through the virtual meeting platform.

Experienced technical difficulties with our annual meeting, but we will move forward into the question-and-answer portion of our meeting. And our first question is, Rick, is with regard to our use of stock options for the long-term incentive as well as the 3-year vesting schedule associated with the option.

Yes. Thank you for the question. And first of all, we believe strongly in aligning pay with performance and fundamentally aligning the interest of our management team with shareholders over the long term. The value in the options is contingent on long-term performance, which we believe is important. And the vesting over 3 years is a common practice, and it is aligned with ISS guidelines as well. And fundamentally, we -- just in summary, we had -- we did have 93% approval for say-on-pay, just to share the results of that particular vote. But we believe strongly in aligning our pay with performance, and we believe options are a good way to do that.

Okay. Thank you. That concludes the question-and-answer portion of our annual meeting. Thank you for joining us today.

This now concludes the meeting. Thank you for joining, and have a pleasant day.