The Toro Company (TTC) Earnings Call Transcript & Summary

Well, hi, everybody. Hello again. I am Mike Shlisky. I'm the analyst here at D.A. Davidson covering Toro Company. I'm here in Nashville at our 25th Annual Diversified Industrials and Services Conference. And I'm very pleased to have Edric Funk with us. He's currently the COO, but he's basically the incoming CEO of Toro starting, I guess, November 1?

That's right.

So the fiscal year ends October 31. It's first day, but it's been 30 years. So we'll preview that. It's not like it's your first day at Toro. Seasoned vet of Toro. We're here to ask a few questions about Toro, tell investors about it and hopefully get some time for some Q&A towards the end.

So first, Edric, tell us a little bit -- not everyone is aware, tell us a little bit about the high-level view. Just what does Toro do exactly and your key products?

Thanks for the invitation and for the opportunity to share that story. We exist to help our customers enrich the beauty, productivity and sustainability of land. And you might think of us creating value at the intersection of humanity and our natural ecosystems. So our products would be used in the beautification of the parks where communities gather, in the conditioning of athletic fields where kids play or the iconic stadiums where some of our favorite teams compete. On the golf courses where relationships are strengthened and where championships are contested and in backyards where barbecues are hosted or people relax after a challenging day. And Mike, if you haven't spent time in any of those settings today, you were probably still impacted by our products in the first 5 minutes after you woke up this morning. When you switched on the light and the electricity was there, when you use the water for your shower to brush your teeth, when you retrieve data on your phone or your laptop, all of the infrastructure that delivered those services are installed by our customers using our products. So as our team knows what we do really matters. And we use that as a motivation to invest in innovation that drives real value, to work to serve our customers exceptionally well, and we do all of that to deliver consistent and sustainable value to shareholders.

That sounds like a lot more than what some folks think Toro, which is a lawnmower company. So let's maybe dive into a little bit why you're not a lawnmower company. And I'll just give the preview. I think your lawnmower type residential stuff is probably 10% of EBITDA, but the rest is professional. So maybe tell us a little bit about more in depth what is the professional -- besides professional landscapers doing also mowing lawns. But what is the real mix of the business here beyond just caring for grounds? Tell us a little bit more.

Yes. Thanks for going there because the professional portion of the business is where our strategic emphasis resides. And we cater to professionals across a number of different markets, all of which connect to that purpose that I shared a moment ago. So many other people would know us for our presence in the golf market. And we're the only supplier of both equipment and irrigation to the maintenance teams that maintain golf courses. We're doing more and more to integrate those solutions and bring more holistic offerings to those golf courses. Several people would know of the significant acquisition we made in the Charles Machine Works Companies, which brought brands like Ditch Witch into the fold. And that's to focus on the underground infrastructure and underground and specialty construction market. I'm sure we'll talk a bit more about that, but a really important growth driver for the company because that's one of the markets that itself offers the biggest growth opportunity and a number of demand drivers, and an area that we're investing in significantly. And you mentioned professional contractors, whether they're caring for residential properties, corporate campuses, partnering with municipalities, whatever the case may be, another group who relies on our products to make their business run more smoothly and relies on us for their means of making a living. And across all of those professional segments, we know that a significant portion of their budgets, often more than 50%, is directed towards labor, which is a real challenge for all of them, and it's a place where we invest a lot of our time and innovation.

And you didn't mention it, but I want to mention it as well. Some of those same contractors who help mow the lawn and care for the grass in the off-season or plowing snow. So you do own a large snowplow brand as well, one of the largest, if not the largest, Snow Plow brand out there. It's complementary, right?

It is. You've got it exactly right. You're referring to the BOSS brand, and we've got both the plows that would go on trucks and then their Snowrator product is for clearing sidewalks and areas around parking lots and so forth. And you're exactly right, in areas that receive snowfall, a number of the contractors cross over and both do that winter hardscape maintenance as well as the turf care maintenance during the summer season. There's also some nice synergy with a number of our channel partners. And even outside the direct customer piece, we've already made reference to the underground infrastructure. This would be on the surface, the infrastructure that keeps people moving by keeping the roads clear, the parking lots and sidewalks clear.

Just to clarify for someone who doesn't know, underground construction, it sounds like a subway system, but it's really maybe is it like getting power lines in the ground or pipes, fixing pipes, things like that. So it's -- it's important for power grid expansion things along those lines. Am I on the right track?

Yes, you got it. One of the hot topics, of course, right now would be data centers. And...

You said the word.

Our products don't do a lot of work, although we're finding some interesting crossover on the data center sites themselves. But the majority of what we do is delivering the things that you described to those locations. It's bringing in the enormous amount of fiber optics. It's delivering the water that's used in cooling. It's the power that's required at those sites. The interesting thing, though, is all of those same things from an infrastructure perspective are important even outside of the data center space. We've got, of course, expansion and new development that's calling for that kind of infrastructure, but also a lot of aging infrastructure around the world, particularly here in the United States. From a power perspective, you talked about getting power lines underground. One of the drivers is we know that we've experienced things like wildfires that have been sparked by issues with the aboveground lines. It's good to get that underground and it's more aesthetically pleasing often. On the water side of things, the American Society of Civil Engineers had published a statistic estimating that we lose 6 billion gallons of drinking water a day between the treatment plant and being delivered to people's taps. And so replacing and repairing infrastructure in that space is really important. And data, not only for the data centers, but continuing to bring high-speed Internet to areas that have been underserved. All of those are drivers that we see extending well into the future.

Got it. Got it. And let's maybe just touch on your earnings results over the last couple of years. It's interesting. You've almost reported the exact same earnings number every single year for 3 or 4 straight years.

Thanks for pointing that out.

Well, that's not my favorite thing to talk about. We'll talk about the guidance for this year, which is different. But it's been flat is good at times. And there's been some ups and downs and different drivers that have made it flat, some great years, some bad years for certain markets. They've all balanced out is what I've been gathering. Tell us a little bit about some of the moving parts and how it has, in fact, because this could have been bad, but it ended up being flat. So tell us about how it ended up not being bad and ended up being okay.

I sure really appreciate that perspective because we all know that it...

I say very differently that question.

It has been a dynamic environment and really challenging, and our teams have worked really hard in order to deliver even that level of results, but that doesn't live up to our aspirations. And we've learned from that experience, but I'd say it's generally behind us. We weren't immune to what a number of other companies experienced in terms of demand that became very abnormal, disruption in the supply chain. But we've come out of that even stronger, and we now see a situation where our end markets are strong. We continue to have leading positions within a lot of those markets and just a lot of progress. Inventory would be one example that over the last 1.5 years, we've improved significantly. That's led to us now delivering more than 120% free cash flow conversion. We've seen margins improve, particularly in the residential portion. As you said, that's a small subset of our business, but it's one that was particularly challenged. We now see that back on a path to double-digit margin. And we're just really optimistic about the future. Our guide, as you alluded to, puts us back into double-digit earnings growth, and that's the kind of performance that we want to continue to see going forward.

Yes. So prior to the last couple of years, it was 10% growth every year, if not higher or a lot higher between the Great Recession and COVID basically. So 10-plus years, I think, of really strong growth that people really admired. There was a COVID overhang. There's strength in golf, but other areas got weaker, didn't snow for a couple of years. So things are -- there are some ups and downs, but you kept it kind of flat and you're -- as you just mentioned, you're back on that double-digit earnings growth trajectory. That's really strong. So you're kind of finally back on track after, I would say, a very tough COVID hangover. Tell us a bit about the targets that the Board or that your company is putting out there going forward. Do you really want to keep that 10% growing growth rate? Has that been a stated internal goal at least? Or do you have other aspirations?

Well, the -- first, maybe just to address the return to performance, it's all about execution. And that doesn't mean we didn't execute a number of things well, but during all that period of disruption, didn't see what historically has been a hallmark of the company. So we'll come back and certainly share more detail on some of the longer-term aspirations. But as I said just a moment ago, that double-digit earnings growth has been something that we've been proud of. It's something that we want to continue to deliver. It's the kind of thing that we want to provide. And we're focused on continuing to drive productivity. We've talked publicly a great deal about our AMP productivity initiative. That's delivered great results. We've talked about the strong end markets. We're capitalizing on the demand that's in front of us. And I referenced the residential margin, but across the company, looking to continue to expand margins. So we'll provide more detail, but those are the things that we're certainly thinking about and things that we know are important to our investors.

You just -- you touched on that the -- some of the cost reductions you made as part of what's called the AMP program. Any numbers behind that you can share with us, you've gone through that so far? And has cost reductions, are those permanent? And the mindset of cost control, how has it changed as an employee mindset the last couple of years?

It's probably before, during and after AMP that's worth referencing. Even before the AMP initiative came to be, productivity was an important part of our culture, and we were always looking to use productivity to offset the effects of inflation. But as we navigated the post-pandemic situation and all of the hyperinflation that we experienced, we knew that we had some extra work to do to get that back, and we wanted some additional focus from our employee base. And that's what led to establishing that initiative. We originally announced a plan to do -- to achieve $100 million of annual run rate savings. We ultimately increased that goal to $125 million, and we were excited for our CFO, Angie Drake, who championed that initiative to be able to announce at our last earnings call, we've already achieved that run rate savings. And that will flow through now to next year and beyond. So those are permanent and durable savings. And as we go forward, we shared in that earnings call, while the initiative ends at the end of this fiscal year, we've achieved what we intended, which was to reinvigorate the employee base to build that muscle and AMP and productivity will remain something that stays with us even belong the end of the formal program. And even while we shift our attention to other things like a return to growth.

Great. And as the incoming CEO, as I mentioned earlier, you're starting in about a month. But you've been at Toro for 30 years. You've headed up the golf division. You've done a couple of other areas over the years. So you're not new. But as the new CEO, is there anything that you're thinking about doing differently or at least anything that the Board, broadly speaking, even with or without the CEO change, anything new you think you've got going on for 2027 from a strategy perspective that we should know about?

Yes. Of course, there are things we're thinking about doing differently. We've talked a fair amount about this, and people obviously have the question with our leadership transition, what's going to change. And I've been consistently describing it as continuity balanced with evolution. And we think the continuity is important. We have a really powerful foundation that we work from. We've got a strong product portfolio, as you know, industry-leading brands. We have incredible relationships with our channel partners and end customers. And we have a culture that is genuinely built on innovation and disciplined execution. So I view those as just a really good place to start. But we know our customers' needs are evolving. Our markets are evolving. The world around us is evolving, and we have to evolve with that. And when I've shared specific examples, if we were to contrast maybe the last decade to the one to come, our current CEO, Rick Olson, did such a brilliant job of putting forth a vision that helped us to transform our approach to technology development and ushered in a lot of the work that we're doing from autonomous solutions to smart and connected products to alternative energy, those remain pillars of our technology development. That won't change. But what will shift is we're now at a point that we need to invest more in accelerating commercialization and accelerating adoption of some of those technologies. And that's one place that I'll focus. Another -- you've already highlighted some of the acquisitions that we've made and how those brands have contributed to the company. That will continue to be important. But as we go forward, we'll look for even more integration of the products. There's more technology that we can leverage across product lines and more alignment of our businesses, including the channels through which we serve our customers. And finally, as I said just a moment ago, we're coming off the heels of this extra attention and focus on productivity. That's not going to go away, but we're going to again get back to driving growth, which was also something that prior to the disruption of the pandemic and what followed had been something that we were known for and something that we're going to get back to. So the foundational pieces will be the same, but we have a number of things that will change, and we look forward to even sharing more detail on that here in the coming months.

Got it. You'll have earnings just before Christmas. Is that correct?

Yes, that's right.

Okay. All right. Great. Maybe let's just hone in on 1 or 2 of the end markets that have been interesting. The golf business, you were the -- until recently the Head of the golf business. You were CEO for a couple of years -- COO for a few years, but prior to that, golf. Tell us about the strength you saw during the COVID period. Golf is very socially distanced sport, I guess, because you're 200 yards away. Well, with me it's 10 yards away. Most people are 200 yards away. And it's been 6 years of pretty strong golf, people out there playing golf. How much do you think is left in the tank and interest in golf to continue? And maybe more importantly, how much is left in the tank for golf courses after a couple of years of continuing to spend on their green space equipment?

All good questions. Let's not forget golf has been around for centuries. So there's some pretty good resiliency there. And there's no doubt that COVID provided a boost to the game. But as I shared with some other people recently, the -- we were seeing the signs of improvement in golf even before COVID. A lot of the fruits of the labors of a number of organizations that, frankly, we've helped support in terms of growing the game. And today, we see more and more youth participating, female golfers, just a lengthy list of underserved demographics that are now playing the game of golf. And the surge of off-course opportunities that at one time, we wondered if would be in conflict with green grass golf have all just proved to increase the funnel of participants. And to your point, we've seen multiple years of records on top of records in terms of rounds played. That's driving more money into the industry. Private club memberships are full, waiting lists are robust, tee times are full. We're just seeing a lot of investment in the sport, and that's ultimately good for those of us that serve that marketplace. And it's not only on the equipment side where people know we have to go out and maintain the properties and everything else. But from an irrigation perspective, the useful life of an irrigation system might be 20 or 25 years. And if you go back to around the turn of the century, many people would know of the phrase, the Tiger boom associated with when Tiger Woods was ascending in popularity, and it was causing a significant influx in development of golf to rise to meet the demand. We kind of went from over demand undersupply to the other way around, given all the properties that were opened up. And then we went through a period where that was coming back to normalization. And now I think a lot of us would say it's in balance. And some would probably argue there's room for more and we're seeing some development because the tee times are -- can be tough to get. So we still see a lot of runway there, really, really important. And even as demand has, let's say, normalized after a concentration or a surge, that remains a really important market for us and a really valuable one to the company.

So golf courses are -- I assume they can raise prices at certain times, and they've got the money to spend on equipment and on irrigation. That's not changing, it sounds like.

And it's really allowing them to tap into -- I talked about the technology that we've been working on to a greater and greater degree, we're integrating the equipment and irrigation. I mentioned we're the only supplier that does both, and that gives us some unique opportunities to have equipment talk to the control system for the irrigation and to have -- while our equipment is out canvassing the property, it can collect passively moisture data, for instance, and feed that into the irrigation system and use that to make recommendations to the superintendents. We're tapping into AI, not only for our internal productivity, but in the products to help provide recommendations to the superintendents who can then look at what we're suggesting, accept that with a click of a button and do things that would have otherwise taken them hours to do to balance the water, save water, but ultimately bring their conditions into better balance and delight the customers that they're trying to serve.

Not driving out to 18 holes, it's visually checking every green and making sure it's not flooded. There's ways to find out using the -- potentially to spend less than a few minutes figuring out whether anything's flooded.