The Toro Company (TTC) Earnings Call Transcript & Summary

Good morning. I'm Sam Darkatsh. On behalf of Raymond James, we'd like to welcome you to this morning's presentation by The Toro Company. With us today from Toro, Rick Olson, Chairman and CEO; Renee Peterson, Vice President, Treasurer and CFO; and Julie Kerekes, Treasurer and Senior Managing Director of Global Tax and Investor Relations. For those unaware, Toro is a leading worldwide manufacturer of professional turf maintenance and landscaping equipment, irrigation systems, snow and ice management, underground utility, rental and specialty construction and residential yard products. And instead of reading off all the brands, I'll just refer you to the slide here, I think it's a little bit for both [indiscernible] , Rick. In any case, the format of today's presentation, Rick, I think it's going to have about 15 or so minutes of prepared remarks, and then we'll -- we should have time for Q&A, either from the room or from me. So with that, Rick, welcome. Thank you.

Thank you, Sam. And can you hear me okay?

Okay..

Excellent. Well, thank you, Sam. Thank you for being here and for your interest in The Toro Company. We'll be using just some slides from our investor deck that's available on Toro.com under the Investors section. There are also hard copies available, I believe, in the back like one of those to follow along. You're familiar with this, so I'll be able to skip through this, the safe harbor comments. Before we get into some of the details about the company, I want to give you a little bit of an overview that really tells -- if you want to understand who The Toro company is, this is what you need to understand. We are a group of people that get up in the morning obsessed with helping our customers be successful in enhancing the beauty, productivity and sustainability of the land. That's our theme that drives us from a purpose standpoint. We drive -- we earn the right to be the market leaders in each of the markets that we participate in. We're driven to do so. We do that by providing incredibly cool products and solutions and a lifetime of service and support as our customers have never experienced. All that is within the context of sincere and long-term relationships. We are a 107-year-old company, and we have continuous customer relationships that are more than 100 years old. So as we focus on creating the future, we have a very strong foundation to stand on both the knowledge of the outdoors and the relationships that go along with those. Just a little bit of a summary of who we are, a rich history, as I mentioned, in the outdoor environment. We have best-in-class distribution pretty much across the board, whether you're talking about the golf industry, the underground business, those are relationships and channels that are built over many decades. Innovation and brands are a key part of who we are, one of the best recognized brands in the outdoor space, certainly one of the power brands with strong financial performance and a focus on capital allocation, which is a big part of our story. If you're not familiar with The Toro Company, may think of lawn mowers and snow throwers, -- it's probably the most common thing people say if you say who's The Toro Company, oh, the lawn mowers, snow throwers our company. That's about 25% of our business. I've been with the company for 30 years, and that's actually -- that's reversed during those 30 years. When I started, it was literally a lawn mower and a snow thrower company that also made some commercial products. Very intentionally, that's been shifted so that we are really a B2B business today. We also have products that are [ solds ] and very visible to residential customers as well. And it's an important part of our business, but it's a smaller piece. Equipments is 90%, but we have an important irrigation and water component as well. That's a complement to the Equipments in many of our markets, they go hand-in-hand, and about 80% North American base, and that's something that's actually shifted. It was as much as a 1/3 or around 30% international. But through some of the acquisitions, some of those have been more North American focused. I'll just go through -- so starting -- I don't know if you can see, but this is the professional segment. I think it's a little -- it's on the black portion there. But within the professional segment, I'll talk about some of the important elements of that, the landscape contractor portion. So this would be people that you might see pulling equipment around on trailers or maintaining properties. They would also be used on commercial properties where they may be station full-time schools, municipalities and so forth. And this cuts across Turf, Snow & Ice and Lighting & Irrigation. On the turf side, the biggest portion, the biggest market is the zero-turn mower market. And we have leading brands, the leading brands and leading market share position with Exmark is actually the leading Z brand for professionals. Toro -- combined with Toro and with now Spartan as of last month or 2 months ago. We have the lead market share in those categories. One thing I would just point out is if you go to website, revolution.toro.com, you can see our electrification of -- in this category. So beginning this spring and into the mid-summer, we'll have a full line of 0 emission products for landscape contractors. So that puts them in a position to tell their customers that they are completely 0 emission. And that's where a lot of that is being driven from municipalities and customers that are driven to say, on my property and my campus, we need to be 0 emission. And we now have a very practical solution for that will -- the response has been fantastic. Going on to snow and ice management. The biggest piece of that is BOSS snow and ice management, so it's snow plows, ice spreading equipment and everything that's related to it. It's -- BOSS was an acquisition from 2015 and they are the leading brand -- independent individual brand in that category with market share leadership as well. And then lighting and irrigation. Lighting and irrigation, even though it may be installed at a home is sold to a professional contractor that does the installation. So it is a complement to both residential properties, commercial properties and of course, Golf, that's a big part of the Golf story as well. Underground & Specialty construction, what is now the largest portion of this is -- was acquired from -- through the acquisition of Charles Machine Works in 2019. We acquired the Ditch Witch brand, which is the biggest piece of this, but also complementary brands across the bottom. You can't see those. But from very large trenching equipment, American Augers does large diameter horizontal drilling but horizontal drills and trenchers that are used for essentially the life cycle of pipe and cable. So if you can imagine the drivers before we got into the pandemic, the drivers were 5G installations. So competing companies installing 5G was the biggest driver of this business continues to be a major one. We got into the pandemic. There is a recognition of the divide between the haves and have-nots for broadband. So tons of investment going into broadband, taking it to rural locations. And then most significantly is the infrastructure legislation that has passed. A good portion of infrastructure is focused on our customers in this category with Ditch Witch, we have 50% market share. The other -- the competitor is Vermeer. It's a company in Pella, Iowa. But it's back and forth, 40% to 60% in that range, market share by category in the products used to install fiber optics. And then the related utilities that go with that, there would be aging infrastructure, water systems, sewage systems and how that relates to the environment are big drivers of business. Just -- I also just want to mention the compact utility area prior to the acquisition of Charles Machine Works. This compact utility business was the core of this business, and it continues to be a growth driver for us and a very profitable growth driver started really with landscape contractors, special equipment to help landscape contractors, but the efficiencies related to the stand-on configuration of those machine instead of getting inside of a cage have caused it to grow into categories well outside of landscaping. So it's just a very efficient machine and continues to be a big driver for us. And that's both on the Toro side and Ditch Witch side. And this machine on the right is actually an electrification project, and we will have a complete line of electric products in that category, which actually takes us into the indoor construction area and destructuring area as well as the outdoor environment. Last couple of areas I mentioned, golf is an extremely important piece of our business. And the golf market right now is absolutely incredible. Our customers are the healthiest that they've ever been in our history with the surge of golf within the last couple of years, but also a trend in golf being very healthy, driven by things like Topgolf, that's turned into a feeder for people playing on traditional golf courses. We have leading market share worldwide. There are 30,000 golf courses roughly in the world. Half of those are in the United States. And we have roughly 50% market share worldwide, so U.S. and international. We are the only company that has equipment and irrigation, which is increasingly important as technologies converge to allow the entire system on a golf course to work together, equipment and irrigation and the other pieces that superintendents need to manage with technology applications. Golf, again, part of our legacy, we had worldwide market share leadership by about 19/25 and that is -- this is a business that's deeply rooted in relationships and long-term relationships that are very difficult to change. Micro-Irrigation, a complement to our water businesses in other parts of the market. We're focused on a very small portion of the overall ag irrigation. It would be for a very high-value products like you would see in a salad bar, for example, with highly engineered, very precise application of water to control outputs, but also to control input costs, it's 80% efficient and it's only about 20% penetration at this point. So still a lot of opportunity there. And then switching to the other segments. So everything we talked about at this point around the professional side. On the residential side, we have one of the top -- 1 of 3 power brands. So if you walked out to the street and said, name a lawn mower name a snow thrower probably wouldn't be able to name a snow thrower here, but in Minnesota, if you were asked to name of snow thrower, you'll say, well, there's at least a 1 in 3 chance or it's actually better than that, that they would mention Toro. So it's very much a power brand. That's a great place to start but we have been focused on innovation in this area since 1950. And going through probably the most significant transformation in that entire history right now transitioning to electric battery products. And so today, just as I mentioned in the landscape contractor world, we have a complete offering, which is a 0 compromise solution for residential customers that they can store snow, they can maintain their properties, they can trim all with 0 emission solution, which is a very fast growing piece of our business today. And we've got -- our focus has been on 0 compromise. We have not always been first to the marketing categories, but we've been the first to the market with solutions that are 0 compromised. Key channel partners for us. As you can see, I believe Tractor Supply is presenting in this room a few hours from now but they have been a fantastic partner for us just since 2020 -- 2019, I believe. And they complement our business, our significant business with the Home Depot because they reach much further into the smaller towns and rural areas. And then a key differentiator for us with other competitors in those mass markets, is the dealer network. We have an incredible dealer network. So no matter where you buy the product, you can stand wherever you're standing, you're not far from a Toro dealer. So if you do have difficulties, there's a place to go. And they do -- they've also grown as we've grown our mass business, they've also grown revenue. Sustainability has been a part of our purpose forever, but we are redoubling our efforts in sustainability to help tell our story. We will have sustainability -- our second sustainability report coming out this summer. We have the person responsible for ESG and sustainability reports directly to me. And we have a great opportunity not only internally with how we produce our products, a much greater opportunity externally and driving to environmentally positive solutions, as I've talked about, including on the water side of the ability to be much more efficient with water. Just mention, this is for reference. This is -- we don't -- this is not guidance by any means, but we do provide visibility because we talk a lot about it internally. Our employee initiatives have been a key part of helping our teams focus on stretch goals. And you can see the effect, if you go back a couple more years, you would see more kind of flat line performance. But a key to our financial performance and performance overall as a company has been creating these initiatives. And the latest is Drive for 5, which we have a goal with our internal team to exceed $5 billion net sales by '24, with organic growth and exceed $750 million annual adjusted operating earnings This, again, not guidance, but it gives you a glimpse of what we're talking about internally and these have been important drivers for us. Last thing I will mention here is just the importance for us in how we use our resources and our capital allocation, innovation is really the threat of who we are. So we maintain investments in innovation regardless of the economy. The percent of sales for R&D actually went crazy during recessionary periods, but we maintained that investment, and we always launch out of those periods with great products and in a very healthy way. We track something called the Vitality Index that's used for all of our businesses, which means 35% of sales need to come from products that were introduced in the current to the prior 2 years. And if you're off that track as a business, you need to have a plan to get back on it. And then our percent of sales continues as we acquire companies because they are interconnected even with common components and designs, we can leverage the research and development. So we're getting -- for every incremental dollar, we're getting something bigger because we look across the entire company and focus a lot on leveraging our innovation dollars. So with that, as I mentioned, we are a 100-year company, but we're very much focused on creating the future, we've got the resources to invest to continue to grow the disciplines that go along with that. So with that, Sam?

Thank you, Rick. I'll start with a couple of questions, then we'll open it up from folks for the room. So the perfunctory question this week. Remind us your direct Russian and Ukraine exposure and maybe Eastern European exposure a little more broadly? And what contingencies you have available to you?

Sure. Yes. Our direct exposure to Russia and Ukraine is insignificant. So that's not a substantial risk to us. We do have facilities in Poland and Romania, but we have -- first of all, they're relatively small, and they're not directly involved at this point. We don't expect them to be. The bigger factor for us is just going to be the macro effect on oil prices and commodity prices, which we have factored in to the best of our ability to our guidance last week. We did think real time in terms of what was happening as we provided guidance.

So to that end, what is your exposure to oil and plastics as a percent of your cost in roundabout terms? And how do you go about buying plastics and what have?

Yes. It's -- we buy plastics on -- we buy resins and anything really to petroleum on an ongoing basis. So we have sort of a laddered effect of contracts to -- so the impact in the near term is relatively minor. I think the biggest impact for petroleum will be general transportation costs and fuel costs that all companies are going to experience. So our -- the key resins, polypropylene is oil based, but our larger volume is polyethylene, and that's a natural gas-based feeder stock.

Any questions from the room? Talk about the latest with supply chain, right? Oh, there was a question, I'm sorry. I apologize. Oh, perfect. Well, Telepathy in the room, it's wonderful. Supply chain updates. Where are you seeing the most profound pressure? Where are things perhaps loosening up for you? Help us with that.

Putting -- maybe putting aside the Russia, Ukraine situation, we've been seeing some, I would say, that's in the right direction that we connect and seeing the trend and improvement in supply chain. In terms of where the largest impact is, I would say the greatest impact for us is on the professional side because a lot of those products, the core components of those machines are used across a lot of different industries. So the same higher horsepower engines, hydraulic systems, hydraulic motors, hydraulic pumps, wire harnesses and electronics cut across our businesses, but they also go to ag, construction, other heavier applications. And so those underlying suppliers at the same time, they were being stressed with absenteeism their subcontractors. There are being hit with tremendous demand on many different fronts from different markets. And for us, the reason why that's more impactful is because that's our more profitable side of the business. So the residential side has been constrained, but a lot of those suppliers are focused on the lawn and garden business as opposed to being spread across others as well.

Which is a segue to my next question. If this microphone was a magic wand and I was able to eliminate overnight all supply chain constraints, no more labor issues, no more freight or shipping issues. And you were just able to run flat out 3 full-time ships through all your facilities, how much more volume can the organization produce? I know you have a lot of different businesses, but how much more volume can the organization produce versus where it's at right now?

Yes. First of all, that sounds like a wonderful world that you just described. I hope to experience that at some point. But for us, capacity planning is a constant process. So we do it formally on a yearly basis, but it's really an ongoing process. So we add capacity, not just when we wake up one day and think that we realized that we need it. Capacity is not going to be a problem for us, but it's completely overshadowed by the supply chain at this point. So we're bringing constantly capacity online even today facilities being built. And that's somewhat reflected in the higher capital spending, and that's been -- it's been an elevated level for the last couple of years. But not everything you can just add a unit of capacity as you add units of volume. There are some steps that have -- that are in there, but we've been tackling those over the last number of years.

So after -- because CapEx is elevated this year. If you look out -- I mean, who knows what the demand and supply picture is a year or 2 from now. But assuming some sort of a general trajectory, what do you expect CapEx to be in the coming years versus this year?

Renee, maybe you want to -- as a normal run rate?

We would expect CapEx to come down to our normal run rate between 3%, 3.5%. But again, as Rick said, in the short term, it's looking at some technology changes, some automation to resolve bottlenecks, but we don't expect to continue at that spend.

Thank you. Any other questions from the room? Yes, in the back.

[indiscernible]

That's one of our main areas. If kind of the extended version of this presentation would be to talk about our focus areas. But on the technology side, it is battery #1, #2 smart and connected, solving problems for our customers with labor skills and so forth. Number 3 is robotic and autonomous. We made in 2021, 2 acquisitions of left hand robotics in Colorado and turf links in Portugal, 2 areas of robotic strength. And that's just a supplement on our internal group working on autonomous. We introduced the first practical fairway robots at the Golf Show in February. And this is -- we've had the capability to do this for a long time, but it's really the practical part of it that is the key and the safety portion that goes along with it. And so that's a very important part of our business, and you will see a steady stream of product solutions in those categories going forward. So it's a key part of where the research and development dollars are going.

This gets an outsized amount of attention, especially because your residential business is fairly small as a percentage of your overall mix, but the movement away from gas-powered towards electric, how does that affect Toro? Are you indifferent? Are you advantaged by the move away from gas towards electric, give your thoughts in terms of where the industry is now, where it's going and its effect on the business?

I think our competitors have taken different views in this area. Some are extremely committed to gas as a solution. And gas is going to be a needed solution for a long time. We're positioning ourselves to be indifferent. So we want the customer to be able to pick. At some point, we're going to be actually a little bit more biased towards 0 emissions solutions just because of our environmental priorities as well and encouraging our customers to go in that direction. But we are indifferent. We make similar profits in both categories. And when you get into electric, you actually gain some other things like the ability to control better, the ability to do things that you can't do with a kind of a not smart hydraulic system. So if you think about a Greens mowers, that's electric, we can individually control wheel motors to provide optimum traction without destroying turf on green, those kinds of things are much easier to do when you get -- so it's not just converting a dumb power source to battery. It's -- we really are focused on what can you do now that it's electric, what are all the things that you can do? And how can that be enabled to be autonomous and how can it be smarter than a traditional machine. So that's really where our focus is. We're indifferent. We like both.

Last question, unless there's going to be another 1 from the room. The organization has been much more acquisitive over the past 3 to 5 years beyond BOSS, CMW Venture, now Intimidator. First talk about Intimidator, how did the deal come about? That's a $200 million business. I think you paid $400 million for it. Talk about how that came about, what the strategic fit is and then going forward, what sorts of perspective, M&A opportunities are there, both with respect to where they might fit in the portfolio as well as size and scale?

Yes. So maybe going backwards from the questions, we really look at building out each of our working out from our core customer groups and markets that we're in today. We're not randomly out picking something that has no connection. It's really how can we build from our strength in areas that add to that. And with regard to Intimidator. Intimidator was a result of a very systematic approach of looking at markets that we wanted to grow. We wanted to grow the Z professional market. And the 2 current brands that we had, the 2 brands at the time, Exmark, absolutely the preeminent commercial-grade professional product -- Toro commercial-grade products, but extremely strong with the residential, more residential people and that left kind of a [ B ] in the middle, and we looked at every Z manufacturer in the world, and the name that was at the top of the list was Spartan. They have got -- they have to be the fastest-growing brand today. They're focused on the homeowners with acreage with that key middle segment with high featured, high-powered products that appeal to that group and they have complementary strength, especially in the Southern United States. And so they were a perfect fit. So that we approached them. We already had a relationship with them. That's where all of these deal opportunities start and the time was right for them, partially because as an entrepreneurial company, they're struggling with the same supply chain issues that everybody else is. So it's the fun factor for them had dropped off quite a bit, and it was a perfect match.

And going forward?

Yes. Going forward, we -- the process never stops. We always cultivate opportunities by building relationships and being very systematic about the kinds of businesses that we want to acquire and the kinds of markets that we want to grow. And so the process never stops. But we have a very disciplined approach to making acquisitions and I don't know what the hit ratio is of companies that might sound good, but when you look at it more closely, it's maybe 1 out of 5 that actually are the right fit.

And the timing is perfect. We're done here. We'll meet you down at the breakout room with filed following. Thank you, Rick. Very good.

Thank you. Really appreciate it.