The Toro Company - Q3 2024

Transcript

Operator (participant)

Good day, ladies and gentlemen, and welcome to The Toro Company's Q3 earnings conference call. My name is Tawanda, and I will be your coordinator for today. At this time, all participants are on a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's conference, Julie Kerekes, Treasurer and Senior Managing Director of Global Tax and Investor Relations. You may begin.

Julie Kerekes (Treasurer and Senior Managing Director)

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, thetorocompany.com. We have also posted a Q3 earnings presentation to supplement our earnings release. On our call today are Rick Olson, Chairman and Chief Executive Officer, Angie Drake, Vice President and Chief Financial Officer, and Jeremy Steffen, Director of Investor Relations. During this call, we will make forward-looking statements regarding our plans and projections for the future. Forward-looking statements are based upon our historical performance and current expectations and are subject to risks, uncertainties, and other factors that may cause actual results to differ materially from those contemplated by these statements. Additional information regarding these factors can be found in today's earnings release and in our investor presentations, as well as in our SEC reports.

During today's call, we will also refer to non-GAAP financial measures, which we believe are important in evaluating the company's performance. For more details on these measures, the most comparable GAAP measures, and a reconciliation of the two, please refer to this morning's earnings release and our investor presentations. With that, I will now turn the call over to Rick.

Rick Olson (Chairman and CEO)

Thanks, Julie, and good morning, everyone. Our team executed with discipline and agility in the Q3 as we continued to position the company for a strong future by advancing our key strategic priorities of accelerating profitable growth, driving productivity and operational excellence, and empowering our people. Our team delivered top and bottom-line growth in a very dynamic environment, which included continued strength in our businesses with elevated order backlog, along with an uptick in caution across homeowner-facing businesses. We drove sales growth by capitalizing on an ever-expanding portfolio of innovative products that solve our customers' most pressing needs, coupled with our best-in-class distribution networks. We also drove improved profitability as we achieved productivity and net price benefits while continuing to align production to demand trends. For the Q3, we delivered a nearly 7% increase in net sales to $1.16 billion.

Our residential segment grew 53%, driven by increased shipments to our mass channel, as expected, following aggressive destocking by that channel last year, coupled with the strategic addition of Lowe's this year. The residential segment continued to benefit from the strength of the Toro brand, successful new product introductions, and better weather conditions compared to last year. Within our professional segment, we delivered net sales growth in our underground construction and golf and grounds businesses, where strong demand is keeping order backlog at high levels. We successfully drove increased output within our existing manufacturing footprint to address this sustained demand and best serve our customers. In doing so, we continued to improve backlog, but still expect elevated levels for these businesses heading into next fiscal year, given the influx of new orders.

This strength was offset by lower shipments of snow and ice management products and contractor-grade zero turn mowers. This was expected, given elevated field inventories in our dealer channel and industry-wide. As summer progressed, we saw macro factors drive more caution from homeowners and dealers than originally anticipated. These factors included general consumer uncertainty, high interest rates, and the current geopolitical environment. This uptick in caution resulted in trade-down activity and purchase deferrals, which led to lower than expected shipments of residential and professional segment lawn care products during July. Even so, we continued to execute on our objective of normalizing dealer field levels for these products, and once again, made significant progress in both the professional and residential segments. We are now about 80% of the way back to normal for dealer field inventory levels for these products.

Moving to the bottom line, we delivered adjusted diluted earnings per share of $1.18, an increase of 24% over last year's $0.95. This increase reflects our progress in driving productivity and manufacturing efficiencies, along with positive net price and prudent management of SG&A. Importantly, our free cash flow improved substantially compared to last year, a reflection of our disciplined execution and focus on working capital. Based on our visibility for the remainder of the year and considering the expected continuation of increased caution in our homeowner-facing markets, we are revising our full-year fiscal 2024 guidance. Angie will walk through those details shortly. Throughout the quarter, we advanced our enterprise strategic priorities to drive shareholder value for the long term.

I'd like to comment specifically on our key priority of driving productivity and operational excellence, as our team did an outstanding job in delivering productivity gains this quarter. We remain on track to deliver at least $100 million of annualized run rate savings by fiscal 2027 from our multiyear productivity initiative named AMP, for Amplifying Maximum Productivity. As we've discussed, we intend to prudently reinvest up to 50% of the savings to further accelerate innovation and long-term growth. As a part of our AMP initiative, we recently held a wide-scale supplier summit with more than 100 key suppliers represented. We shared our vision for the future, with transformational productivity being an enabler of further innovation, investments, and growth. Based on the feedback we've received, suppliers left the summit engaged and excited to partner with us on our product development and productivity objectives.

We also made targeted portfolio adjustments this quarter with AMP to further position the company for profitable growth. These include the sale of our Australia-based Pope products, residential garden watering, and irrigation business, and the rebranding of our Intimidator and Envy products. This rebranding allows us to leverage marketing investments and capitalize on the strength of the Spartan brand name. We are already realizing benefits from AMP, and we expect these benefits to accelerate over the next two years. Importantly, everything we are doing with AMP helps us fuel our existing strategic priorities of accelerating profitable growth, driving productivity and operational excellence, and empowering our people. With that, I'll turn the call over to Angie to discuss our financial results and guidance before I return to provide commentary on the outlook for our businesses.

Angie Drake (VP and CFO)

Thank you, Rick, and good morning, everyone. We were pleased to drive productivity and price benefits in the quarter and make progress in addressing both order backlog and field inventories. While shipments of lawn care products were impacted by homeowner and dealer caution, we are confident in the strength of our market share and are well-positioned for the future. Consolidated net sales for the quarter were $1.16 billion, up 6.9% from Q3 last year. Reported EPS was $1.14 per diluted share, compared to a loss of $0.14 in the Q3 of last year. Adjusted EPS was $1.18 per diluted share, up 24% from $0.95. Now to the segment results.

Professional segment net sales for the Q3 were $880.9 million, down 1.7% year-over-year. This decrease was primarily driven by lower shipments of snow and ice management products and lawn care equipment as we work to reduce field inventories, and lower shipments of compact utility loaders with the replenishment of field levels as a result of improved output in recent quarters. This was partially offset by higher shipments of golf and grounds products and underground construction equipment, as we continue to address the robust demand and significant open orders for these businesses. We also saw net price realization in the quarter. Professional segment earnings for the Q3 were $165.7 million, compared to $13 million last year.

When expressed as a percentage of net sales, earnings for the segment were 18.8%, compared to 1.5%. The positive change in profitability was primarily due to last year's non-cash impairment charges of $151.3 million, as well as productivity improvements, favorable product mix with the appreciable growth in golf and grounds shipments, and net price realization. This was partially offset by higher material and manufacturing costs and lower net sales volume. Residential segment net sales for the Q3 were $267.5 million, up 52.6% compared to last year. The strong growth was primarily driven by higher shipments of products to our mass channel. Residential segment earnings for the quarter were $32.6 million, a substantial increase from $3.8 million last year.

When expressed as a percentage of net sales, earnings for the segment were 12.2%, up significantly from 2.2%. The year-over-year increase was largely due to net sales leverage, productivity improvements, and net price realization, primarily driven by lower floor plan costs. This was partially offset by product mix and higher material and manufacturing costs. Turning to our operating results for the total company. Our reported and adjusted gross margin were 34.8% and 35.4%, respectively, for the quarter. This compares to 34.4% for both in the same period last year. The increase was primarily due to productivity improvements and net price realizations. This was partially offset by higher material and manufacturing costs and segment mix, with growth weighted to residential.

SG&A expense as a percentage of net sales for the quarter improved slightly to 22%, a 20 basis point improvement over the same period last year. The improvement was primarily driven by net sales leverage and lower marketing costs, partially offset by higher incentive expenses. Operating earnings as a percentage of net sales for the quarter were 12.8%, compared to a negative 1.8% in the same period last year. On an adjusted basis, operating earnings as a percentage of net sales were 13.7%, a 150 basis point increase over 12.2%. Interest expense for the quarter was $14.5 million, down from $15 million last year. The decrease was primarily due to lower average outstanding borrowings, enabled by our significant improvement in free cash flows.

The reported effective tax rate for the Q3 was 17.3%, compared with 47.6% a year ago. The decrease was primarily due to the tax impact related to non-cash impairment charges last year, combined with a more favorable geographic mix of earnings this year. The adjusted effective tax rate for the Q3 was 18%, compared with 19% last year. This also reflects a more favorable geographic mix of earnings. Turning to our balance sheet. Accounts receivable were $523.3 million, up 36.2% from a year ago, primarily driven by increased shipments to our mass channel, as well as payment terms to that channel. This increase was as expected, given our strategic partnership with Lowe's, which continues to provide positive momentum within the residential segment.

While not a part of our accounts receivable balance, we once again saw significant improvement in Red Iron DSOs, a decrease of about 30 days. This is a reflection of our progress in rebalancing dealer field levels of lawn care products as sell-through continues to exceed sell-in. Inventory at the end of Q3 was $1.08 billion, down 3% compared to last year, and slightly lower sequentially from last quarter. The year-over-year decrease was driven by a reduction in both lawn care equipment, finished goods balances, and work in process. These reductions were partially offset by higher levels of compact utility loaders as those inventories normalize, and higher levels of snow and ice management products, as expected, given last winter's lack of snowfall.

Accounts payable were $437.8 million, up 7% from last year, primarily driven by the timing of material purchases. Year-to-date free cash flow was $270.5 million, an improvement of over $200 million compared to last year. As a reminder, the majority of our operating cash flow is typically generated in the second half of our fiscal year, based on seasonal flow. We expect that same cadence this year. For the full year, we are confident we will deliver a free cash flow conversion rate of at least 100% based on reported net income. This is significantly higher than the past two years and back in alignment with our ten-year historical average. Importantly, our balance sheet remains strong.

Our leverage ratio is within our stated target of one to two times on a gross basis, and we continue to have investment-grade credit ratings. This provides financial flexibility to fund investments that drive attractive returns. Our disciplined approach to capital allocation remains unchanged, with our first priority to make strategic investments in our business to drive long-term profitable growth, both organically and through acquisitions. We are acting on this priority with our plan to fund $115 million in capital expenditures during fiscal 2024. This will support new product investments, advanced manufacturing technologies, and capacity for growth within our existing footprint. Our next priority is to return capital to shareholders, both through our regular dividend and share repurchases. We've increased our dividend 6% this year and have consistently grown our dividend payout over time.

This demonstrates the conviction we have in our strong and sustainable future cash flows. With respect to share repurchases, we continue to fund repurchases with excess free cash flow while maintaining our leverage goals. We've invested almost $110 million through Q3 to repurchase nearly 1.2 million shares, while also paying off our outstanding revolver borrowings. And we plan to continue repurchasing shares in the Q4. This is a reflection of our substantial improvement in cash flow this year, along with our strong conviction in future growth opportunities. As we close out the fiscal year, we continue to expect benefits from the sustained strength in demand and significant order backlogs for underground construction products and golf and grounds equipment. For these businesses, field inventory levels remain lower than ideal and backlog remains elevated, although we continue to make good progress.

On a total company basis, order backlog has improved from the $1.97 billion balance at fiscal 2023 year-end. It is lower, both on a year-over-year basis and sequentially from last quarter, but still much higher than what we would consider normal. We will provide an updated year-end figure in our annual 10-K filing in December. For both segments, we expect to continue making progress in normalizing field inventories of lawn care and snow products, although levels remained elevated both for us and industry-wide. We factored this dynamic into our estimates. We've also factored in expectations for a continuation of the increased macro caution we started seeing in July for our homeowner-facing businesses. With this backdrop, and based on our current visibility, we are making some adjustments to our guidance. For the full year, we now expect total company net sales growth of about 1%.

For the Professional segment, we now expect full year net sales to be down low single digits, which implies mid-teens growth for the Q4. For the Residential segment, we continue to expect net sales to grow at a rate significantly higher than the total company average for the full year. We expect Q4 residential net sales to be down low single digits on a year-over-year basis. Looking at profitability, we now expect adjusted gross margins and adjusted operating earnings as a percentage of net sales to be slightly lower than last year, a reflection of product mix. Turning to segment profitability, we continue to expect both the Professional and Residential segment earnings margins to be higher than last year on a full year basis. For the Professional segment, we now expect a similar earnings margin to last year when you exclude last year's impairment charges.

For the Residential segment, we expect a high single-digit margin for the full year. For the other activities category, we continue to expect higher expense compared to fiscal 2023. This reflects a return to more normal incentive compensation. For the Q4, we expect an expense similar to Q1. With that, we now expect full year adjusted diluted EPS in the range of $4.15 to $4.20. Additionally, for the full year, we continue to expect depreciation and amortization of about $120 million-$130 million and interest expense of about $60 million. We now expect an adjusted effective tax rate of about 19.5%, driven by a more favorable geographic mix of earnings. We continue to build our business for long-term profitable growth.

This includes prioritizing innovation investments that we believe will deliver outstanding returns, driving sustainable margin expansion with disciplined execution, including our AMP initiative, and leveraging the talents of our team and the power of our best-in-class distribution networks. We are confident in our ability to drive significant benefits and opportunities for all of our stakeholders. With that, I'll turn the call back to Rick.

Rick Olson (Chairman and CEO)

Thank you, Angie. Our business fundamentals remain strong, and we continue to execute with discipline. For our businesses with sustained strength in demand and elevated backlog, we are successfully driving increased output within our manufacturing footprint. For our businesses that are experiencing a near-term increase in caution driven by macro factors, we expect to be very well positioned as those markets recover. We continue to benefit from our strong leadership position in attractive end markets, our ever-expanding suite of innovative solutions that perform necessary work with regular replacement cycles, and our deep customer and channel relationships, and importantly, our team is executing well, driving productivity and operational efficiency through our AMP initiatives and flexing production to align with market conditions and better serve our customers. Looking ahead, we are keeping a close eye on macro factors as well as demand dynamics in our specific end markets.

For the underground construction market, we expect demand to remain robust and order backlog to remain elevated heading into fiscal 2025. There is a very positive runway for projects to address global infrastructure needs, including communications, utilities, and data centers. These projects are supported by both public and private multiyear spending. Infrastructure spending remains a positive outlier in the broader construction industry, with strong growth forecasted for the foreseeable future. For specialty construction markets, which include our Toro Dingo and Ditch Witch SK lines of compact utility loaders, we are seeing a return to more typical patterns as supply and demand have come into balance with improved lead times. For rental markets, which are meaningful to our specialty construction business, expectations are for a return to mid-single-digit growth next year, following three years of double-digit growth.

As we discussed last quarter, our order backlog for compact utility loaders has normalized as expected. For golf and grounds, we expect to continue to see the prioritization of equipment and irrigation purchases, supported by healthy budgets and new course development. Worldwide, there are more than five hundred significant new and renovation golf projects in the pipeline across eighty-eight countries, and rounds played data continues to reinforce that the golf industry has had a positive reset. For the first six months of twenty twenty-four, U.S. rounds played were 2% ahead of last year's pace, which is notable given 2023 was the highest year of U.S. rounds played in history. Our worldwide market leadership position and new product pipeline to address the golf and grounds market is also as strong as ever. This includes our new Groundsmaster e3200 fully electric out-front rotary mower.

This machine leverages our proprietary Hypercell battery system to enable increased productivity with significantly quieter operation, zero exhaust emissions, and no compromise on cut quality. With the sustained strength in orders we continue to see in our golf and grounds equipment, we expect order backlog to remain higher than normal for this business into fiscal 2025. For landscape contractors, we continue to expect stable retail demand, driven by regular replacement activity, with some pockets of price sensitivity, given the interest rate environment and high field levels across the industry. For homeowners, we expect macro uncertainty will continue to drive caution, including trade-down activity, given higher interest rates. We expect demand to be driven by regular replacement needs, and certainly, favorable turf growing conditions would be beneficial. For snow and ice management, pre-season sell-in demand has been reduced as expected, following a second straight season of below-average snowfall.

However, contractor budgets are in good shape following a better turf growing season, and if more normal snowfall patterns return in fiscal 2025, we would expect in-season orders to pick up as well. The overall consensus is climate patterns are positioned to shift from El Niño to La Niña this year. If that happens, it could be more favorable for snow prospects. We continue to strengthen our position in this market with innovative solutions that help contractors achieve great results while reducing labor requirements. This includes our new entry-level Scout Snowrator, the latest addition in our powerful and versatile Sidewalk Warrior lineup. This new model has garnered much enthusiasm, and initial production is already sold out.

Before we take questions, I'd like to reiterate why we are so excited about the future and what we see as the greatest growth opportunities as we fulfill our corporate purpose of helping customers enrich the beauty, productivity, and sustainability of the land. The opportunities before us are the results not only of our work in fiscal 2024, but the many years of diligence in developing our diversified and complementary portfolio of businesses, our leading market positions, and our deep customer and channel relationships. First, we are excited about our underground construction business, where we are extremely well-positioned as a worldwide market leader with the most comprehensive equipment and brand lineup in the industry. In addition, together with our best-in-class channel, we have very deep relationships with our customers. These relationships, coupled with the sophisticated technology required, are difficult to duplicate.

What makes these competitive differentiators even more compelling are the near and long-term positive market demand dynamics. As a leader in this space, we are capitalizing on the rapidly growing demand for data communications infrastructure and energy grid modernization, as well as the global focus on replacing aging infrastructure. Second, much like our underground construction business, our golf business is exciting due to the winning combination of our strong market leadership and long-term market fundamentals. Here, we also have deep relationships with our customers and channel partners and a lineup of industry-leading products and solutions, including our full suite of reduced and zero exhaust emission offerings. Importantly, we have a distinct competitive advantage as the only company to offer both equipment and irrigation solutions for this market and as the worldwide market leader in both. Fueling our growth in golf is the sustained global momentum.

We are prepared to capitalize on this opportunity with continued innovation and our best-in-class service and support network. Third, we continue to strengthen our multi-brand leadership in the important zero-turn mower space. This represents the largest single lawn care category for both our professional and residential segments. We've enhanced our market leadership position through investments in our innovative product lineup and the strategic development of our independent dealer networks and mass partnerships. Our momentum in this space positions us extremely well for further growth, especially as these markets return to normal strength. Fourth, we have a proven ability to leverage our technology and innovation investments across our broad portfolio. This enables the accelerated development of new products that help our customers drive productivity and superior results while enhancing The Toro Company's competitive advantage and ensuring market leadership into the future.

We will continue to drive a return on innovation with prioritized investments in the key technology areas of alternative power, smart, connected, and autonomous solutions. And finally, we have a talented team that is determined to capitalize on all of our opportunities with discipline and build on our long history of delivering consistently strong financial performance. We have the best network of strategically aligned channel partners focused on going above and beyond to serve our customers every day. We have built a strong and agile organization that has been resilient through many macro cycles. We are ready to seize the opportunities that lie ahead to drive value for our customers, our channel partners, and our shareholders in both the near and long term. With that, we will open up the call for questions.

Operator (participant)

Thank you. Ladies and gentlemen, if you wish to ask a question, please press star followed by one one on your touch tone telephone. If you have questions, if your questions have been answered and you wish to withdraw your question, please press star one one again. Please stand by for your first question. Our first question comes from the line of Tim Wojs with Baird. Your line is open.

Tim Wojs (Senior Research Analyst)

Hey, everybody. Good morning.

Rick Olson (Chairman and CEO)

Good morning.

Tim Wojs (Senior Research Analyst)

Good morning. Maybe just my first question on the backlog. If you could maybe give us just a little bit of context. I know you probably won't give us a specific number, but just maybe a little bit of context, kind of, relatively where the backlog exited the quarter. And then any sort of, kind of, you know, context around orders, like is, you know, book-to-bill over one within golf, underground, those types of things.

Rick Olson (Chairman and CEO)

Yeah, sure. I'll take that, Tim. So on the backlog, if you look at by several comparisons, so if you look relative to the end of last year, we've made improvements in the backlog, reduced it. If you look at year-over-year, the backlog is down, and if you look sequentially, the backlog is down. It's really concentrated in the two areas that we've talked about, the golf and grounds and the underground areas. And the reason we have not cleared the backlog is because of the intake of orders. So the orders in those businesses continue to be extremely strong. From a factory output standpoint, we've made tremendous progress this year. We are at, you know, certainly pre-pandemic levels of production, if not record production in those plants right now.

So the momentum in both of those businesses is tremendous at this point, and that's really the reason for the continued larger backlog position. We do expect for both of those general businesses for the backlog to be more normalized by the end of 2025, but at this point, we still believe the backlog, certainly the backlog will extend into 2025, just for those two businesses where there continues to be you know extraordinary demand at this point.

Tim Wojs (Senior Research Analyst)

Okay. Okay, no, that's helpful. Thanks. And then just on the, on the lawn and garden or the landscape business, could you just help us tie the comments together around just kind of increased macro caution there, but also kind of getting through the channel inventory? I guess, do you think you're gonna land kind of in the same inventory position exiting this season, and you're just taking production down to get there? Or is it, you know, "Hey, we'll probably have a little bit higher channel inventory exiting the year, but it's still a lot more manageable than next year." Just trying to kind of marry those two things together.

Rick Olson (Chairman and CEO)

We, I think the number that Angie quoted was 80% of the way at this point in managing that field inventory down. The caution that we saw was from homeowners, especially on larger ticket items, a little bit of trade down. So it's, we saw continued strength on, you know, residential mass was tremendous in the quarter. But on the higher ticket items that tend to go through our dealer network, some of which were the inventory that we're managing down, just a little bit of caution coming in, especially in July, in the very latter part of our quarter, is what caused that slowdown. And it's really a combination of the end customer themselves, plus just the dealer restocking at that point of the year, given the macro environment.

Tim Wojs (Senior Research Analyst)

Okay, and I guess within Pro in the quarter, was the shortfall kind of relative to your guidance, specifically the landscape business, and was it really kind of tied to the weaker July shipments?

Rick Olson (Chairman and CEO)

Exactly, yes.

Tim Wojs (Senior Research Analyst)

Okay. Okay, great. I'll hop back in queue. Thanks for the time.

Rick Olson (Chairman and CEO)

Good. Thank you.

Operator (participant)

Please stand by for our next question. Our next question comes from the line of Sam Darkatsh with Raymond James. Your line is open.

Sam Darkatsh (Managing Director)

Good morning, Rick. Good morning, Angie. How are you?

Rick Olson (Chairman and CEO)

Good morning, Sam.

Sam Darkatsh (Managing Director)

Yeah, just a follow-on question to what Tim asked. I don't know if it was directly answered, but I think you all were looking to have normalized field inventories and, ostensibly, Red Iron DSOs by the end of the fiscal year. Are you still on track to do that specifically?

Rick Olson (Chairman and CEO)

We're on track and we're at 80%. We still have some of the year left to go. We may just be slightly, you know, not back to zero, but absolutely nothing like where we started this year. So relative to where we started this year, by far, closer to normal. Yeah, we've made tremendous progress, and it's really a combination of strong retail in those businesses, drawing down our inventory. There's, you know, relatively higher general inventory from competitors, et cetera, that are a factor, but we've done what we expected to do. We'll be close to getting exactly where we're expected to be.

Sam Darkatsh (Managing Director)

Gotcha. And then, last quarter, Rick, you indicated at least an early expectation for kind of mid-single digit organic sales growth for next year. I know you're not gonna be formally giving guidance for next year for a bit, but if you could update us at least on what your thinking is for next year's sales growth and how to unpack that, maybe give a more specific framework as to what gives you confidence in your projections as it stands?

Rick Olson (Chairman and CEO)

Yeah, so it's a little bit similar to my previous response. If you think about, I guess, the word that comes to mind is cautiously optimistic about next year. We have high confidence in the things that we're doing to position ourselves for growth next year, and the caution part is just mainly from a macro standpoint. That was really the driver in July. The discussion was, well, interest rate. There's uncertainty about interest rates, the economy. They talked about recession there for a few weeks. The political environment, the elections, et cetera, some of those we know will be behind us. Those are. That's on the cautious side, but from our side, we expect golf and grounds to continue to be very strong, has tremendous momentum.

The underground business continues to have a long runway in terms of growth for us, and our plants are now fulfilling that demand much closer to the rate that it's coming in. We will have year two with Lowe's as part of our general mass strategy that's honestly it's at record levels this year from a mass standpoint, if you look across all of our partners in that category. Snow, I mean, just keep in mind, this is a timeout year for snow because of the last two seasons. So if we have anything close to a normal snow season this year, that's gonna be a positive for us.

The field was already stocked as we came into this season, so that was, you know, completely missing from our results in the Q3, with the exception of a very small amount of shipments. We've, you know, made the progress in reducing our field inventory in those lawn care categories that go through our dealers. You know, incidentally, the contractor customers have continued to be strong. It's really the homeowners where the caution has been, and where that adjustment has taken place, and then just, you know, back to Lowe's, we will have the benefit of 12 months of business with Lowe's versus 10.

We'll be getting into the snow season with them, and you know, that's a very positive factor for us, along with all of our mass partners.

Sam Darkatsh (Managing Director)

My thank you for that answer. My final question, real quick, again, related to your original expectations for the quarter. Maybe this is too fine a point, but the change in tax rate from 21% to 19.5%, I guess that implies that the international business was considerably less robust than you thought. Was that the primary driver of the negative variance, Rick?

Angie Drake (VP and CFO)

I'll take that one, if it's okay, Rick. Really, that was driven by a favorable geographic mix of earnings, so both foreign and some state tax mix, Sam. And then we also did a transfer pricing study that helped us a little bit there. If we think about, you know, lowering that for the year, but next year, we also expect a lower, more like, you know, 21%, probably lower than 21%, somewhere 20% to 20.5%, but we'll provide a little more color on that in December.

Sam Darkatsh (Managing Director)

So international business was not materially different than your plan?

Angie Drake (VP and CFO)

It was not. It had some of the same impacts that we saw, that Rick talked about, on the residential and obviously the snow side of the business and the lawn care. But, yeah, mostly due to transfer pricing.

Sam Darkatsh (Managing Director)

Got it. Thank you very much. Appreciate it.

Angie Drake (VP and CFO)

Thank you.

Rick Olson (Chairman and CEO)

Thank you.

Operator (participant)

Please stand by for our next question. Our next question comes from the line of Michael Shlisky with D.A. Davidson & Co. Your line is open.

Michael Shlisky (Managing Director & Senior Equity Research Analyst)

Yes. Hi, good morning. Thanks for taking my questions.

Rick Olson (Chairman and CEO)

[crosstalk]

Angie Drake (VP and CFO)

Hi.

Michael Shlisky (Managing Director & Senior Equity Research Analyst)

Rick, I think you mentioned, if I heard this correctly, five hundred courses in eighty-eight countries are pursuing projects to improve their facilities on the golf side. Could you maybe share with us whether that is a mix, there's a large mix of irrigation in there, or are they packages of both combined or just the equipment? Just give us a sense as to the kind of opportunity that Toro could get versus, let's say, how this looked to you last year with the combination of irrigation and equipment project.

Rick Olson (Chairman and CEO)

Sure. Yeah, so pretty much anytime there's a renovation of the course itself, it's if it's a reshaping or improving greens or expansion or reconfiguration, it's just by definition, automatically an irrigation project because that all gets torn up. There are also. I don't think actually even that five hundred includes just pure irrigation upgrades, so this would be major, you know, either major renovations, expansions or brand new golf that involve moving dirt, but in every case of the five hundred, it's impossible to touch a golf course without doing something to the irrigation. So by definition, it's both.

Michael Shlisky (Managing Director & Senior Equity Research Analyst)

Fantastic. And then just on capital allocation, it wasn't really mentioned much in your prepared comments. Could you just update us on how the M&A market's looking, these days? Are there assets for sale? Maybe just kind of your perspective of what you're looking at, size-wise and industry-wise, that would be helpful. Thank you.

Rick Olson (Chairman and CEO)

With regard to M&A, you know, as we say, the process never stops. You're always building relationships, and that continues, and our capital allocations remain the same as you can see in our investor deck. But we are, we're always looking for opportunities that would enhance our current customer focus areas or be new opportunities. They tend to be adjacencies and product lines, but we're also open to, you know, anything that would be in our sphere. We just, we do want to, you know, we insist on maintaining the discipline that we have about making those selections and making sure that they enhance shareholder value is really the key for us and why we are, you know, very discriminating about those.

Michael Shlisky (Managing Director & Senior Equity Research Analyst)

Just to follow up there, Rick, are there any of the deals you're looking at in the tech space, like a Left Hand Again or other similar products, or are they all equipment, you know, iron?

Rick Olson (Chairman and CEO)

As a general category, technology is definitely one that we're always interested in. They tend to be smaller acquisitions that might be more entrepreneurial. But yeah, that is on our list of just primarily because the way that we can leverage our technology across different areas. So that makes them attractive, but they tend to be small, but can have a huge impact, just like what Tanda Robotics did for us.

Michael Shlisky (Managing Director & Senior Equity Research Analyst)

Sure. Thanks. I appreciate that. I'll, I'll pass it along.

Rick Olson (Chairman and CEO)

Thank you, Mike.

Operator (participant)

Please stand by for our next question. Our next question comes from the line of David MacGregor with Longbow Research. Your line is open.

David MacGregor (President)

Yeah, thanks, and good morning, everyone. Rick-

Rick Olson (Chairman and CEO)

Hi, David.

David MacGregor (President)

You've made repeated reference to... Hey, good morning, Rick. You've made repeated reference to the slowdown in July, so I guess it kind of begs the question about August, and if you can help us with kind of what we're seeing in August and how that weakness in July may have flowed forward.

Rick Olson (Chairman and CEO)

Yeah, August, I think, you know, still a little bit of caution, but, you know, probably a bit more normalized, I would say. We've included our expectations based on what we see in our guidance for the rest of the year. We obviously knew that snow was not gonna be a factor for the Q4, and we've already factored in based on the trajectory that we saw, that we're seeing, you know, in our guidance for the Q4. Still a little bit of caution from homeowners, but that's included in what we're providing so far.

Angie Drake (VP and CFO)

Yeah, I'd say we still expect to see that strong demand from underground and construction and golf and grounds, as well as we look forward. And it really positions us well for twenty twenty-five, where we're at today.

David MacGregor (President)

Right. Right. Thanks for that. I guess, I wanted to ask you about productivity, because, that's starting to come up in discussion more frequently, and I would guess at this stage of the game, we're far enough along in the AMP program that maybe the benefits are exceeding the upfront sort of investment costs. But, you know, if you look at the professional segment, you know, adjusting for the year ago, non-cash impairment charge, of course, you know, your margins were actually up 50 basis points, despite a pretty weak top line performance, so I guess, you know, just given the magnitude of the volume decrementals and the higher raw material costs, the productivity improvements must have been pretty substantial.

Like, can you just talk about where you are on AMP and where you are on productivity and, and how we should be modeling that going forward as a, as a good guy?

Angie Drake (VP and CFO)

Sure. Yeah, let me first start with just kind of the progress we made on AMP in Q3. We made some great progress. We continue to identify opportunities for synergies and work alongside that team, but the three notable highlights that we had in the quarter were the Supplier Summit that Rick mentioned in the prepared remarks. We had about a hundred key suppliers in, and they left here very excited about their opportunity to partner with us on our growth and aspirations. We also had some portfolio actions in the quarter. You saw the Pope divestiture. That is included in the residential segment. You'll see that in other income in the residential segment, and then we had some actions that we took to drive future synergies with our Spartan brand, and you'll see that in the professional segment.

Overall, the rest of the expenses with our transformational office and some of the personnel associated with that and consulting expenses are sitting in other activities, David. But overall, productivity continues to be a great project for us. We continue to focus on that, and we're confident in delivering that, at least $100 million by F-27.

Rick Olson (Chairman and CEO)

David, I would just add, as we-

David MacGregor (President)

Hey, Rick.

Rick Olson (Chairman and CEO)

David, I would just add, as we talked about with, particularly our, professional business in the underground golf and grounds areas, as those plants operate at a higher level, it, really creates the opportunity to, work on productivity, the absorption of the plants gets better, and, so manufacturing variance is less of an issue. So that contributes, to productivity as well as the specific initiatives that we have to ramp.

Angie Drake (VP and CFO)

We would just add that we're also leveraging our SG&A costs, so we've worked hard to control what we can.

David MacGregor (President)

Right. Great. Okay, maybe I'll follow up with you a little more on that offline, but just one more, if I could, and just, you know, you talked about material costs were higher in the quarter in both segments. You know, obviously, you've still got some higher contracted steel prices coming off the balance sheet and through the P&L. But can you help us understand just on the timing of the P&L benefits from lower steel costs? When do we start to see that? Are we waiting for a contract reset at the beginning of the year and then a ninety-day lag for it to come off the balance sheet? Or just how should we be thinking about timing around that, please?

Rick Olson (Chairman and CEO)

Yeah, with regard to commodity costs in general, I think that, you know, the biggest focus for us is actually an offshoot of our AMP initiative to work with our suppliers and partners to drive down our costs, both through just competitive pricing, but also through partnering with our suppliers to do better on costs. From a steel standpoint, in the overall market, we did see an adjustment probably about a year and a half ago or so, and we're in a little bit more of a plateau from a market standpoint. We still have major steel contract negotiations coming up, so that's still TBD, but we'll obviously be looking to drive as much improvement as possible on those costs.

Angie Drake (VP and CFO)

Yeah, and anything that we've seen there, we've included that in our guidance to the best of our ability.

David MacGregor (President)

Right. But I guess what I'm trying to really understand is just the timing. And so let's stand back from whether it's up or down, and just whatever it is, the timing, do we see that kind of contract reset at calendar first of the year, and then it's ninety days to come off the balance sheet? Or can you just help us with the timing?

Rick Olson (Chairman and CEO)

That's roughly correct, although there are some continuous processes of negotiation, so it's not everything happens right on a fiscal year basis. There are negotiations through the year.

David MacGregor (President)

Okay, great. Well, thanks very much, and good luck.

Operator (participant)

Thank you.

Rick Olson (Chairman and CEO)

Thank you.

Operator (participant)

Please stand by for our next question. Our next question comes from the line of Eric Bosshard with Cleveland Research Company. Your line is open.

Eric Bosshard (CEO)

Thank you.

Rick Olson (Chairman and CEO)

Sure.

Eric Bosshard (CEO)

Just a bit of clarity on the change in the revenue guide. As I listen, you walk through all this, and there's a lot of strength in backlog and the turf growing season, there's a whole number of things going well. It seems like narrowly, this is dealer sell-through and dealer orders that are homeowner driven. Is that the right way to narrow it, or would you narrow it differently than that?

Rick Olson (Chairman and CEO)

That's, that's the right way to narrow it. That is the biggest factor through the rest of this year.

Eric Bosshard (CEO)

Okay. And this was an area that was this homeowner piece of the business has been different and worse than expected for the last fifteen months. Is it incrementally worse now? Was there an assumption that it was stabilizing or getting better? I'm just trying to figure out this isn't the first time we've heard about that piece of the business. I'm just trying to figure out what's different now here in the back half from either the trend or the expectation and why?

Rick Olson (Chairman and CEO)

Yeah. I would say that it's consistent with our expectations going back to a year ago, where we recognized, based on a significant slowdown in the market at that time, and you know, dealers coming off of three years where they didn't have products and had built up inventory, that we needed to go through an inventory adjustment. And we have been. That's what we've been working on for the last year, and we've made tremendous progress. We are close to being on track with our inventory reduction plan. I think we've quoted 80%. Still have a few months to go in the year, and so that's really what the factor is.

We're acknowledging and it's obviously seen in our revenue that there was caution that came into our customers in July and shared with our dealers about taking stock at this time of year. That's the trajectory changed a little bit at the end of the year. This is, again, the end of the summer season in much of our selling area, so it's not unusual for both customers and dealers to make decisions. It wasn't. That's really where the factor came from. So we've been on track with the reducing inventory, as we suggested a year ago, been working on that. Retail is strong. Shipments have been much lower for us intentionally to rightsize that field inventory.

Eric Bosshard (CEO)

Okay. That answers my question. Thank you.

Rick Olson (Chairman and CEO)

Okay. Thank you.

Operator (participant)

Please stand by for our next question. Our next question comes from the line of Ted Jackson with Northland Capital Markets. Your line is open.

Ted Jackson (Analyst)

Good morning. Thanks for taking my question.

Angie Drake (VP and CFO)

You bet! Good morning.

Ted Jackson (Analyst)

I wanna circle around to inventory on the balance sheet, and just kinda wanna noodle around it for a bit. You know, you're doing a good job in terms of kinda, you know, working through that. When I think about your inventory on the balance sheet and, you know, play that out over, you know, the next 12 to 18 months, and first of all, I would expect it to, you know, eventually trend itself down to a more normal level. So, my first question is: When you look at your inventory at, say, a turns or days basis, what would your definition of normal be?

And then, behind that is: Am I correct to assume that, you know, hand in glove, in terms of bringing down that inventory level on your balance sheet, is you bringing down the backlog that you have with regards to underground construction and golf? You know, point being that, you know, you're seeing such strength in orders that you have, you know, you have this amount of inventory because you've got all this business that you've got to kinda work through. So, and then behind that even is kinda: At what point do you think you get to where that kinda normalized level is, you know, based upon, you know, say, turns or days? And so that's my question.

Angie Drake (VP and CFO)

So we continue to realign on our inventory, Ted, and we've had a sharp focus, as you know, on that all year long. We did make really good progress in the quarter, so we're down about $25 million sequentially. Some of that driven by WIP. So to your point on increasing output, some of that inventory is sitting in WIP so that we can address that backlog for our customers. And we've made great progress. So we've you know probably about $75 million to go. We talked last quarter about kind of heading in the right direction and where we wanted our inventory dollars to be. So I'd say we're to get to our ideal levels, we're looking at about $75 million still to go.

Ted Jackson (Analyst)

And then if I could ask one more question, and it's more not even a question, it's just more of a kind of a some commentary. You know, this morning, Callaway and Topgolf announced this kind of a separation. And you know, the rationale behind it is that you know, Topgolf has had some you know, call it, you know, performance issues, you know, as we've moved past COVID-19. And I know that the golf business for you is exceptionally strong, and you continue to comment yourself that you know, rounds played are up and everything. But you know, in the past, it's also been commented that you know, what one of the underlying drivers of that is the bringing in of new golfers through something like Topgolf.

Is there anything to read with regards to what's going on, you know, on that side of the business with regards to Topgolf in terms of kind of a longer term? Just figured I'd ask. And that's it for me.

Rick Olson (Chairman and CEO)

Yeah, certainly, it's an adjacency. It's a little bit different than our golf course business. And I know that one of the factors is there are more players in that particular field right now just because of the strength of golf. So I haven't had a chance to look at the information that you're looking at, but what it does reflect is just the overall interest level in the game of golf and continued growth in all forms, you know, on course, off course, and increasing data that says if you play off course in one of these forms, even on some of these social putting places, that it does increase your interest in playing golf on a grass golf course, and that's good for us.

Ted Jackson (Analyst)

Okay, well, thanks for taking my questions. Oh, and by the way, congratulations on the cash flow generation for the quarter. It was impressive.

Angie Drake (VP and CFO)

Thank you.

Rick Olson (Chairman and CEO)

Thanks.

Operator (participant)

Thank you. Ladies and gentlemen, this concludes the question and answer session. I would now like to turn the call back over to Julie. Please proceed with closing remarks.

Julie Kerekes (Treasurer and Senior Managing Director)

Thank you, Tawanda, and thank you, everyone, for your questions and interest in The Toro Company. We look forward to talking with you again in December to discuss our fiscal 2024 Q4 and full year results.