TTC - NYSE

Good day, ladies and gentlemen. Welcome to the Toro Company's Fourth Quarter and Full Year Fiscal 2023 Earnings Conference Call. My name is Val, and I'll be your conference coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session toward the end of today's conference. As a reminder today's call is being recorded for replay purposes. I would now like to turn the presentation over to today's host, Julie Kerekes, Treasurer and Senior Manager, Director of Global Tax and Investor Relations. Please proceed, Ms. Kerekes.

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 fourth quarter earnings presentation to supplement our earnings release, along with an updated general investor presentation. On our call today are Rick Olson, Chairman and Chief Executive Officer; Angie Drake, Vice President and Chief Financial Officer; and Jeremy Steffan, Director, Investor Relations. We begin with our customary forward-looking statement policy. During this call, we will make forward-looking statements regarding our plans and projections for the future. This includes estimates and assumptions regarding financial and operating results as well as economic, technological, weather, market acceptance, acquisition-related and other factors that may impact our business and customers. You are all aware of the inherent difficulties, risks and uncertainties making predictive statements. Our earnings release as well as our SEC filings details some of the important risk factors that may cause our actual results to differ materially from those in our predictions. Please note that we do not have a duty to update our forward-looking statements. In addition, during this call, we will reference certain non-GAAP financial measures. Reconciliations of historical non-GAAP financial measures to reported GAAP financial measures can be found in our earnings release and on our website in our investor presentations as well as in our applicable SEC filings. We believe these measures may be useful in performing meaningful comparisons of past and present operating results and cash flows to understand the performance of our ongoing operations and how management views the business. Non-GAAP financial measures should be considered superior to or a substitute for the GAAP financial measures presented in our earnings release and this call. With that, I will now turn the call over to Rick.

Thanks, Julie, and good morning, everyone. We delivered full year net sales and adjusted diluted earnings per share growth and while as an exceptionally dynamic operating environment. We saw strong performance across much of our professional segment throughout the year. This includes double-digit top line growth for our underground and specialty construction and golf and grounds businesses, driven by robust demand and actions taken to increase production on output. This strength offset the combination of weather and macro factors that led to a sharp reduction in homeowner demand and an acceleration of channel destocking for residential and professional segment later products during the second half of the fiscal year. Even with these significant factors, our total company net sales of $4.55 billion and adjusted diluted earnings per share of $4.21 both exceeded last year's record results. This is a testament to the benefits and the strength of our portfolio as well as the dedication of our extremely talented team of employees and valued channel partners. For the fourth quarter, net sales of $983 million were down compared to last year as expected. Adjusted diluted earnings per share of $0.71, although lower than a year ago exceeded the outlook we shared on our third quarter call. This was the result of our swift actions to align with current conditions in our various markets. We increased output for businesses with elevated order backlog, decreased output for lawn care products and drove productivity gains and prudent expense management across the enterprise. In addition, restructuring actions were taken to adjust headcount for these industry dynamics. I'll now highlight our full year results by segment. For fiscal 2023, on a year-over-year basis, professional segment net sales were up 7%. We capitalized on continued strength in demand across much of the segments, delivering top line growth for all businesses with the exception of contractor-grade lawn care solutions. Importantly, a stabilizing supply chain enabled us to increase manufacturing output for underground and specialty construction and golf and grounds products. As a result, we were able to improve lead times and better serve our customers. Residential segment net sales were down 20% in fiscal 2023 as we navigated unfavorable weather patterns along with a number of macro factors. These factors include rising interest rates, economic uncertainty and the continued normalization of demand patterns for products sold to homeowners following a period of exceptional demand during the pandemic. To put this in perspective, even with the performance this year, the residential segment has delivered time growth at an average annual rate of 7% since 2019. This is a result of our trusted brands, innovative products and increasingly robust distribution channel. We believe we are well positioned to further capitalize on these strengths as this market rebounds. On that note, we are excited to have our full line of Toro branded products available in Lowe's stores nationwide beginning with the upcoming spring selling season. The total company has a long track record of strategically managing the business to deliver consistent positive financial results and sustainable value for all stakeholders. Throughout the year, we advanced our three enterprise strategic priorities of accelerating profitable growth, driving productivity and operational excellence and empowering people. I'll highlight examples of each. First, we continue to strengthen our innovation leadership, which is the lifeblood of our company and key to driving long-term profitable growth. During the year, we prioritized investments in new products aligned with market growth trends, such as the launch of the AT120, the world's largest all-terrain horizontal directional drill. We continue to bolster our market leadership in the underground construction market with this and other new solutions designed to drive productivity and increase uptime for our customers. Our strong balance sheet also supported investments in transformational technologies leveraging across our broad portfolio. This includes the development of alternative energy, smart connected and autonomous solutions. These technologies provide customers with sustainable options and increased productivity, all with no kinds on performance. Recent examples include our expanded line of Workman utility vehicles and our new line of Vista people mover vehicles available in both battery and gas options. Both lines are built for versatility and reliability. Second, we drove productivity and operational excellence across the organization as we manage production and align costs with near-term demand in a quickly changing environment. We are carrying this momentum into 2024 with our recent launch of a transformational productivity initiative. We've named this multiyear initiative, AMP, which stands for our amplifying maximum productivity. We are dedicating resources to identify and implement sustainable supply based designed to value and route-to-market transformation. We expect this major initiative to result in more than $100 million of incremental annual cost savings by fiscal 2027. A portion of this, we intend to reinvest in the business to further accelerate innovation and long-term growth. And third, we focused on ensuring that our employees and channel partners were aligned and empowered to drive the best possible outcomes for all stakeholders. In a year that played out much differently than originally expected, our team remained nimble and supported our customers with their unwavering commitment to do business the right way. Before I hand the call over to Angie, I'd like to reiterate the high confidence we have in our ability to continue to capitalize on growth opportunities in our attractive end markets. This includes the sustained strong demand we've seen in our underground and specialty construction and golf and grounds businesses and the eventual rebound of homeowner markets. With that, Angie will walk through the details of our fourth quarter performance and our fiscal 2024 guidance.

Thank you, Rick, and good morning, everyone. Our results in the fourth quarter were aligned with our expectations, and we saw several businesses continue their strong momentum to close out the year. Consolidated net sales for the quarter were $983.2 million, a decrease of 16.1% compared to last year. Reported EPS was $0.67 per diluted share and reflects a $0.04 charge related to a restructuring program we initiated in October. The $0.67 was down from $1.12 in the fourth quarter of last year. Adjusted EPS was $0.71 per diluted share, down from $1.11. For the full year, net sales of $4.55 billion were up about 1% from $4.51 billion last year. Reported EPS was $3.13 per diluted share. This was inclusive of noncash impairment and restructuring charges and the tax impact of stock-based compensation. This result compares to $4.20 last year. On an adjusted basis, full year EPS was $4.21 per diluted share, up from $4.20. Now to the segment results. Professional segment net sales for the fourth quarter were $828.9 million, down 12.3% year-over-year. This decrease was primarily driven by lower shipments of contractor-grade long care equipment and snow products and increased floor planning costs. This was partially offset by higher shipments of underground and specialty construction products and golf and grounds equipment. For the full year, professional segment net sales increased 7.1% to $3.67 billion and comprised 81% of the total company net sales. Professional segment earnings for the fourth quarter were $124.5 million on resources, down from $159 million last year. When expressed as a percentage of that sales, earnings segment were 15% compared to 16.8% last year. The change was primarily due to higher material loss, lower net sales and increased floor planning costs. This was partially offset by productivity improvements and favorable product mix. For the full year, professional segment earnings were $509 million compared to $584 million in fiscal 2022. The fiscal '23 results include gross noncash impairment charges of $151.3 million. As a percentage of net sales, segment earnings were 13.9% compared to 17% last year. Residential segment net sales for the fourth quarter were $148.4 million, down 33.6% compared to last year. The decrease was primarily driven by lower shipments of products broadly across the segment, partially offset by the benefit of net price realization. For the full year, residential segment net sales were $854.2 million compared to $1.1 billion in fiscal 2022 and comprised 19% of the total company net sales. Residential segment earnings for the quarter were $4.5 million compared to $17.5 million last year. When expressed as a percentage of net sales, earnings for the segment were 3% and compared to 7.8% last year. The year-over-year decrease was primarily driven by higher inventory reserves, unfavorable product mix and lower sales volume. This was partially offset by the benefits of net price realization, productivity improvements and lower material costs. For the full year, residential segment earnings were $68.9 million compared to $112.7 million in fiscal 2022. As a percentage of net sales, segment earnings were 8.1% compared to 10.5% in fiscal 2022. Turning to our operating results. Our reported and adjusted gross margins were 33.5% and 33.6%, respectively, for the quarter. This compared to 34% and 34.1%, respectively, in the same period last year. The differences were primarily driven by higher material costs and inventory reserves partially offset by productivity improvements and favorable product mix. For the full year, reported and adjusted gross margin grew to 34.6% and 34.7%, respectively. This was up from 33.3% and 33.4%, respectively, in fiscal 2022. This positive result was primarily driven by net price realization and productivity improvements, partially offset by higher material costs. SG&A expense as a percentage of net sales for the quarter was 23.9% compared to 21.2% in the same period last year. This increase was primarily driven by lower net sales and increased investment in research and engineering. This was partially offset by lower warranty costs. For the full year, SG&A expense as a percentage of net sales was 21.8% compared to 20.5% last year. Operating earnings as a percentage of net sales for the fourth quarter were 9.6% and on an adjusted basis were 10.1%. These compare to 12.8% and 12.9% in the same period last year on a reported and adjusted basis. For the full year, operating earnings as a percentage of net sales were 9.5% and on an adjusted basis, were 12.9%. These both compared to 12.8% in fiscal 2022. Interest expense for the quarter was $14.9 million, up $3.4 million from the same period last year. Interest expense for the full year was $58.7 million, up $23 million. The year-over-year increases were primarily due to higher average interest rates. The reported effective tax rate for the fourth quarter was 19.1% compared with 17.9% last year. The increase was primarily due to the geographic mix of earnings and higher tax benefits recorded as excess tax deductions for stock compensation in the prior year period. The adjusted effective tax rate for the fourth quarter was 19.3% compared with 18.5% last year. The year-over-year difference was primarily driven by the geographic mix of earnings. For the full year, the reported and adjusted effective tax rate were 17.7% and 20.4%, respectively. This compares to 19.8% and 20.2% in fiscal 2022. Turning to our balance sheet as of year-end. Accounts receivable were $407 million, up 22% from a year ago primarily driven by payment terms and higher international sales. Inventory was $1.09 billion, up 3% compared to last year. This increase was primarily due to higher finished goods largely driven by decreased demand for products sold to homeowners. This was partially offset by improvement in work in process levels year-over-year, enabled by a stabilizing supply environment. Sequentially, inventory was down $25 million from the end of the third quarter, with improvement in both work in process and finished goods. Accounts payable were $430 million, down 26% compared to a year ago, primarily driven by a reduction in material purchases. Full year free cash flow was $164.4 million, which reflects a conversion ratio of 50% of reported net earnings as expected. While this was an improvement from fiscal 2022, elevated working capital continued to affect the result. For fiscal 2024, we expect to return to our historical average conversion rate of about 100%. Importantly, our balance sheet remains strong. Our gross debt-to-EBITDA leverage ratio is well within our target range of 1x to 2x. This, along with our investment-grade credit ratings, provides the financial ability to fund investments that drive long-term sustainable growth. We continue to allocate capital with our disciplined approach and consistent priorities, which include: making strategic investments in our business to drive long-term profitable growth, both organically and through acquisitions, returning cash to shareholders through dividends and share repurchases and maintaining our leverage goals. Our commitment to these priorities is demonstrated by our actions this year, including: our deployment of $142 million to fund capital expenditures that support new product investments, advanced manufacturing technologies and capacity for growth, and the return of $202 million to shareholders through regular dividend payments of $142 million and share repurchases of $60 million. We are pleased that our Board recently approved a 6% increase in our regular quarterly dividend for the first quarter of fiscal 2024. As we look ahead to fiscal 2024, we continue to be encouraged by our market leadership and believe we are well positioned to drive long-term profitable growth in each of our attractive end markets. In the near term, there continues to be a number of factors in play. First, we expect incremental growth from our expanded mass channel. We anticipate this will help offset the headwinds from continued consumer caution and elevated field inventory levels of residential and contractor-grade long care products. Of note, there has been some progress in reducing dealer inventories of these products since last quarter's peak. Second, we ended fiscal 2023 with a $2 billion order backlog which remains much higher than typical. This continues to be driven by the strong demand we are experiencing for our underground and specialty construction solutions and golf and grounds equipment. With a more stable supply of key components, we are enabling increased flexible production capacity and are leveraging our existing manufacturing footprint to do so. We expect this will further improve lead times and allow us to better serve our customers. And third, as expected, field inventories of snow products were elevated heading into the new fiscal year, driven by the lower-than-average snowfall totals last year. While this snow season has yet to fully play out, early snowfall activity has been light. With this backdrop and based on our current visibility, we are providing the following guidance for fiscal 2024. For the full year, we expect low single-digit total company net sales growth with Q2 and Q3 being our larger quarters. For the professional segment, we expect net sales to grow at a rate lower than the total company average. For the residential segment, we expect net sales to grow at a rate higher than the total company average. Looking at profitability, for the full year, we expect overall adjusted operating earnings as a percentage of net sales to be slightly higher than last year. We expect both the professional and residential segment earnings margins to also be higher than last year. We anticipate a return to more normal incentive compensation. And with that, we expect the other activities category to reflect higher expense compared to fiscal 2023. Turning to adjusted gross margin. We expect a slight year-over-year improvement. We expect this to be driven by productivity initiatives, partially offset by manufacturing inefficiencies as we continue to rebalance residential and contractor rate long care equipment inventory levels. With this backdrop, we anticipate full year adjusted EPS in the range of $4.25 to $4.35 per diluted share. Additionally, for the full year, we expect capital expenditures of about $125 million, depreciation and amortization of about $120 million to $130 million, interest expense of about $59 million and an adjusted effective tax rate of about 21%. Turning to the first quarter of fiscal 2024. We anticipate total company net sales to be down low double digits year-over-year. As a reminder, our net sales grew 23% in the first quarter of fiscal 2023, so a difficult comparison. We expect professional and residential segment net sales for the first quarter to also be down low double digits compared to the same period last year. Looking at profitability, for the first quarter, we expect total company adjusted operating margin to be lower than the same period last year. We expect the professional segment earnings margin to be slightly lower on a year-over-year basis and the residential segment earnings margin to be meaningfully lower. Overall, we expect our first quarter fiscal 2024 adjusted EPS per diluted share to be modestly lower sequentially and from the fourth quarter of fiscal 2023. We are looking forward to fiscal 2024 with confidence and optimism. As executive sponsor for AMP, I am personally excited about the significant benefits and opportunities our team expects to unlock with this initiative. This is made possible with a more stable supply environment and supported by our certain balance sheet. We continue to build our business for long-term profitable growth, and we remain confident in our ability to drive sustained value for all stakeholders. With that, I'll turn the call back to Rick.

Thank you, Angie. Our business fundamentals and market leadership remain strong. Our team has a long and proven track record of managing through a range of seasonal fluctuations and macro situations with agility and resiliency. During this period of exceptional demand for underground and specialty construction and golf and grounds equipment, we expect our agility in flexing production with stabilizing supply to help us continue to improve upward and lead times. Additionally, we expect our resiliency will help us navigate through the current rebalancing of homeowner and channel demand for long care solutions and position us well as this market recovers. We are closely watching business and consumer confidence and spending patterns as well as inflation, monetary policy actions in the geopolitical environment. While the rebalancing in homeowner markets has created some near-term headwinds, we believe our well-established market leadership positions us to drive positive long-term results. This leadership is reinforced by our innovative products, trusted brands and extensive distribution and support networks. We also expect continued efforts from the essential nature and regular replacement cycles of our products. I'll now comment on factors in our end markets that could affect future results. For underground and specialty construction, we expect end-user demand to remain robust. This is supported by increased private and public spending to address all issues such as aging infrastructure, broadband access and alternative energy build-outs. We are focused on helping our customers address these needs with our trusted channel and the most comprehensive equipment lineup in the industry, including innovative solutions for new installations as well as repair, rehab and replacement. For golf, we expect continued strength in demand driven by sustained momentum in new golfers and grounds played. This momentum is not just a U.S. trend. It's global. For example, since 2020, there has been an 18% rise in the number of on-course golfers participating in markets outside North America. And we are uniquely positioned in this space. We're the only company to offer both equipment and irrigation solutions, and we are the global market leader in both. An example of our leadership is our selection as the official turf maintenance irrigation provider for the Ryder Cup through 2029. This is a tremendous honor. For municipalities and grounds, we expect continued healthy budgets and the prioritization of public green spaces. The CapEx on these trends, we remain focused on developing innovative solutions that drive productivity, including zero exhaust emission alternatives with no compromise on performance. An example is our new Vista line of people mover vehicles with battery and gas-powered options available in multiple configurations. This is a growth opportunity for us in a new product category built on our foundation of more than three decades of proven success and reliability in the work utility vehicle base. For snowfall management, we continue to expect more subdued contractor demand following last year's below-average snowfall that resulted in elevated field inventories. We're keeping an eye on storm activity as a return to more normal snowfall would be positive. A steady cadence of new product launches continues to enhance our leadership position in this market including our new 8-foot aimless steel BOSS Blade file and our 72-inch Ventrac box plate attachment. Both files are designed to quickly and effectively clear large amounts of snow. For residential and commercial irrigation and lighting, we expect uneven demand from contractors and continue to watch consumer spending, weather patterns and housing market trends. The drought conditions across many geographies over the last year highlight the importance of water conservation. We are committed to designing solutions that address this need. We were honored to receive our ninth consecutive EPA WaterSense Award in October for our efforts in promoting the efficient use of water through our education and outreach. For agricultural micro irrigation, we expect stable demand from growers and are monitoring key indicators such as specialty crop prices, weather patterns and interest rates. We continue to engage our market position by expanding our offerings, including our development of end-to-end automated solutions that drive increased productivity and efficiency. For landscape contractors, we expect steady retail demand with some price sensitivity. We expect continued interest in our high productivity, high capacity solutions that allow more work to be done with less labor resources. Equally important to contractors is our best-in-class service and support network. For homeowners, we expect continued caution driven by the same macro factors we have discussed. For both landscape contractors and homeowners, we are watching weather patterns a return to more normal average temperatures and precipitation levels would be favorable as with an early spring. Despite the recent dynamics, we believe these remain excellent markets for us given our leadership position, along with the regular replacement cycles and essential nature of these products. We have high confidence in our ability to drive sustained value for all stakeholders over the long term. We are taking decisive actions to adjust our production and cost structure in the current demand environment and we are focused on prudent and disciplined capital allocation that delivers excellent returns. This includes our investment in AMP, which we believe will drive near- and long-term productivity and margin benefits. As always, our actions are guided by our enterprise strategic priorities of accelerating profitable growth, driving productivity and operational excellence and empowering people. On that note, I would like to thank our employees and channel partners for going above and beyond every day to help our customers enhance the beauty, productivity and sustainability of the land. I would also like to extend my gratitude to customers and shareholders for your continued support. I wish everyone a safe and happy holiday season. With that, we will open up the call for questions.

[Operator Instructions] Our first question comes from the line of Sam Darkatsh of Raymond James. Your line is open.

Three topics, if I could, to explore this morning. First, regarding the resi market, within the first quarter guide, how much, if at all, does the Lowe's load-in help the quarter? Or is that more so an April quarter dynamic? And then related to that, if you exclude the effects of the net effects of the Lowe's when -- what do you -- what are you incorporating within your guidance for the residential market for the year?

Okay. Well, I'll answer the first question first. With regard to Lowe's, most of the Lowe's impact will be in the second quarter. There is the start of the process shipping in the first quarter, but we'll have more significant -- most of the significant effects would be in the second quarter. And it's -- hopefully, it's clear that it will be a net benefit to residential overall.

Right. So then if you back out the net benefit of the Lowe's when -- what are you anticipating within your guidance for the base residential market for '24 again?

Yes. It would be all included within our guidance because of field inventory and so forth those are the adjustments that are kind of the net on the opposite side. But we do feel that residential will go through a summary period in 2024. And we've seen some positive signs from a retail standpoint at this point. So, it's really a matter excluding Lowe’s of what's in the channel between us and them.

Higher field inventory, Sam, we'll kind of start the year with that and then continue to align our manufacturing to our demand so that we can rebalance that inventory, but we are certainly poised to grow our share in residential.

Got you. Second topic, the backlog, you mentioned $2 billion. What is that sequentially versus last quarter? And then if you could give some color around the orders growth that you're seeing on a year-on-year basis? And then related to that order cancellation experience of late?

Yes. Starting with backlog year-over-year for our information is down about $300 million year-over-year. And your question sequentially is down from the third quarter slightly from the third quarter. So stepping down really in the second half of 2023, and actually bumped up slightly in the first and second quarters of 2023 and then a step down. So we have made probably the first significant net bite out of that backlog in the last couple of years. That's something we're working hard on. It mainly reflects the additional output from our plants and the healthier supply chain. So that's the situation with backlog.

And orders and order cancellations, what trends are you seeing there, Rick?

Minimal, very minimal order cancellations and continue to have a very strong order flow at this point. You're seeing the net impact of the backlog, but it's actually, I think we talked about last quarter, the 18 of those orders is actually improving. So we're fulfilling some of the long-term orders they are being replaced by new orders, and that's really the net that you see. But our goal is to reduce the open order situation just because most important for us is our balance to our customers, make sure we serve them in their expected time.

Got you. My final topic and then I'll defer to others, apologies. Steel prices have obviously been going batty over the past couple of months or so. As it stands right now, what is your raw material or your input cost stack for fiscal '24? And then related to that, do you anticipate pricing up, down the same accordingly as things stand.

Yes. So our commodities have been stabilizing, but we are certainly watching the steel prices and have considered that in our guidance. When it comes to price cost, we are -- for F '24, we are returning to kind of our 1% to 2% normal average pricing. We do expect to see some productivity benefits throughout the year, although we are continuing to work on really aligning our production to our demand. And so, we're seeing some manufacturing inefficiencies and variances continue.

Thank you. One moment, please. Our next question comes from the line of Tim Wojs of Baird. Your line is open.

Maybe just to start off in the professional business. I guess just to confirm, do you expect that business to grow positively in fiscal '24? And I know it's going to be kind of lower than the total company, but I just want to confirm that there's growth there. And then, is there a way within the professionals to maybe give us some color how you're thinking of some of the subcomponents, whether it's kind of underground and golf where you've got the backlog visibility and maybe what's kind of embedded in the guide for landscape there?

Sure. Well, first of all, back to the first part of the question, we do expect the professional business to grow slightly year-over-year. And the second part of your question is the important piece to understand, it's a range within the professional segment of expected outcomes. So, on the areas that coincide with where we have high back order at this point. So all grounds, underground construction, we do expect continued growth, mainly driven by improved output in our plants. And that's something that steadily increased or improved throughout this last year. So, we entered into the new year at a much better place with the supply chain with our plants. And if you go to the other end of the spectrum, we do expect continued rebalancing within the channel. On the landscape contractor side, especially the homeowner customers related to landscape contractors. So, the more commercial lease portion would be the part that we're talking about there. So, that's going to go through the rebalancing, probably acting more similar to residential markets.

Okay. Okay. So I mean is there a pretty -- it sounds like there's a pretty meaningful gap between the two, at least what's kind of factored into guidance?

It's a meaningful range of expected growth between the two spectrums, the two ends that I talked about.

Okay. Okay. Good. And then just on AMP, I guess how different is this program than what you'd kind of normally be doing around things like the supply chain and product design and things like that on an annualized basis just to improve productivity. I'm just -- I guess I'm trying to just to make sure I understand. Like is this something that would be purely incremental to what you'd kind of expect from a normal incremental margin perspective? Or is this something that does more to kind of support the normalized incremental margins? And I guess, how do we phase that in?

Yes. So I think what I'd start with, so it is different than our drive for five initiative, which is an employee initiative that will remain intact. AMP is really a transformational productivity initiative and the largest that we've ever done in PTC's history. It really -- we have been able to do this because our supply chain has really improved over time and allow us to focus more on productivity. It will be incremental. So, our goal is to get $100 million in annual run rate cost savings by 2027, which will be incremental to our normal gross margin and productivity improvements. And we do expect that savings to accelerate over time, probably seeing the majority of the savings come in years two and three.

Okay. Okay. That's helpful. And then just the last one. You gave us a little bit of color on the fiscal Q1 kind of expectations. Anything else to think about in terms of the cadence as we think about the rest of fiscal '24, either from a revenue or an EPS perspective?

Sure. Yes. So as we said in our prepared remarks, typically Q2 and Q3 are largest quarter. But if you think about kind of the cadence for our adjusted EPS, it is typically higher in the second half than it is in the first half and we expect it to be.

Thank you. One moment, please. Our next question comes from the line of Tom Hayes of CL King. Your line is open.

Rick, maybe just a little bit. I think you may have mentioned in your prepared remarks, but I just wanted to go back because we've heard some weakness in the channel, maybe just your thoughts on where the rental channel is right now?

From our perspective, the rental channel continues to be very healthy. It's been -- it was a strong driver for us in 2023 and order positions continue to be very strong. Obviously, there are adjustments taking place by category and by an individual customer, but we still see that as a healthy business for us.

Okay. And then maybe just, I know it's come up in a few other questions, but maybe just on the field level inventories on the residential and your professional lawn care. Do you think we're closer to the end of the destocking than kind of the midpoint or just kind of some additional color on kind of where you feel we are as far as the field inventory levels right now?

Field inventories are still meaningfully elevated from where we would like to see them at this time of year. Especially given for spring products, it's really the off season at this point. So, that -- we're not going to see major retail flow through until we get into the spring in North America, where we'll start to see the momentum, so still higher. Snow is higher. We had a relatively poor snow season last year. Not off to a great start so far this year, but that's all built into our guidance as we provided it.

Okay. Maybe just a -- sorry, go ahead.

Tom, just one last thing regarding on the pro side of things, field inventory is still very low, historically low for underground, specialty construction and the golf and grounds businesses. So, that's still a channel that needs to be refilled once the balance is found with demand and supply.

Okay. I guess, similar along the lines of that last point, I think last time you and I talked, you indicated that you felt the municipal budgets remain pretty solid and that would be a good indicator for your ground and golf-related revenue opportunities. Is that still the case? It sounds like it is.

That's still the case. I'm just looking at some golf information just this morning and the strongest growth in participation has actually been in municipal access golf courses. So, open access of golf courses with that strong from a golfing standpoint. Budgets continue to be strong and really prioritized to green spaces for municipalities. And I guess the last piece would be the investments that we've made to have zero emission products has really positioned us well with municipalities that tend to be the early adopters in making those investments. So, it puts us in a really good position from a municipal standpoint.

Our next question comes from the line of David MacGregor of Longbow Research. Your line is open.

I mean, arguably, the most important event for 2024 for you is the addition of the Lowe's business, which is just a tremendous addition to the enterprise. But if I could just maybe come back to Sam's question and ask it maybe a little bit differently. Within the low single-digit 2024 revenue growth guidance, what's the expected incremental contribution from the Lowe's business net of likely reductions to your other big box retail partners? And will this incremental business be accretive or dilutive to margins?

Net, we don't break down to the specifics of the mix. We also just -- if you think about the major ports and it goes through our dealer network as well. So, there are other elements that were not even kind of bringing into the equation here that are really key. Our dealer business has been very healthy. It's continued to grow for some time. And -- but the net with Lowe's will be a benefit overall for the residential business. Our desire is to continue to grow with all of our partners. So, we will continue to work on that with every -- all of our gas and dealer partners look for differentiated product mixes for them. And work to continue to grow that, but net effect with Lowe's would be a positive for residential.

And Rick, can you speak to whether the incremental business is accretive or dilutive to margins? And I've got a follow-up.

Should be consistent, it's not a big swing in either direction.

Yes. And our best estimates for that, David, are included in guidance.

Okay. On the surface, it looks like if you exclude the Lowe's business, your EPS forecast is down in 2024 versus 2023. I just want to make sure I'm reading that profile.

Yes. We are -- I mean we're still working to get through some of our manufacturing variances and rebalancing that inventory. So I think if you look at our overall EPS, we've got this homeowner demand that we're continuing to work through. And offsetting that, of course, with what we're seeing in our professional business and the backlog businesses that are doing well and it's proving out within volume.

Okay. And then my follow-up question is on free cash flow conversion. And I'm just wondering if you could walk us through the drivers behind the recovery of 100% free cash flow from 50% this year. It looks if you back into the math, it looks like you're anticipating inventories down approximately $300 million working capital down, maybe $275 million, somewhere in that order of magnitude. I was just wondering if you could help us -- is it all just working capital reduction or are there other things going on in there? Any help there would be appreciated.

Sure. Yes, the majority of that opportunity is going to be working at reduction. So as you know, we've had a focused effort on working capital really the last year, and we will continue to have a sharp focus on that. We want to convert that to 100%. And typically, we generate the majority of that free cash flow in the second half.

And that $300 million of that number, I just offered you, that's at a close approximation of how you're thinking about it?

I don't know that we've said exactly what that would be, but inventory is the sharp focus. And if you look at our inventory, we did see WIP decline both year-over-year and sequentially from Q3. So we are making some improvements.

Thank you. One moment, please. Our next question comes from the line of Eric Bosshard of Cleveland Research. Your line is open.

A couple of things, if I could. First of all, you've had historically these three-year programs that are generally focused on revenue growth, and I think you still got that one going on. What I'm curious about is the AMP program is notably different. And I think there was a company that the supply chain enables this at this point in time. I guess taking a half step back, I'm just curious like why the need for this, there hasn't been one like this historically. Is there something different with the business, with the market, with competition? I'm just curious what's different that created a need for this relative to the history of the business.

Yes, Eric, I'll take this one. So if you think relative to our employee initiatives, this is different. This is really laser focused on productivity and cost improvement. And if there is something that's unique and why now is the right time, we're coming out of a period out of the pandemic where it's been difficult to do some of that work, particularly with our supply base. Efficiency within our manufacturing plants, and we are now back at a point where we can go back to our focus on improving productivity within the plants, working with our supply base to improve pricing. The whole go-to-market portion that Angie mentioned in her prepared remarks of taking cost out of that and the scale to be able to leverage some of our costs. So now is the perfect time. It's something that cuts across everything else we do, and it helps us enable the other things that we're doing.

Is there anything from a market standpoint that is different in terms of price points, product, end market that is different that relates to this? Or is this -- as you characterize it kind of catch up for things that you were able to do during pandemic and supply chain. I'm just curious, if the end market is changing in a way that also amplifies the need for those?

It's not driven by any particular external factor, which it's always nicely a key to being competitive to be able to have options from our pricing standpoint. But it's not driven or triggered by a particular external factor that helps us be more competitive is one thing we can say. I just would to clarify. We have one year left of our employee initiative drive for five. We've left those stretch goals out there for 2024. That's an internal employee number, and we'll launch a new employee initiative that we'll announce in December of next year, so next year at this time.

Then the second thing, there was a comment also made a lot of moving parts within residential, but the comment made on positive retail signs. I just wonder if we could dig into that a little bit. What are the positive retail signs that you're seeing that provide encouragement in that business?

I wouldn't read too much into at this point, we just had the first housing starts, for example, has some correlation to residential business. We see a little bit of retail activity that's more positive. But this is a very low portion of the year for the bulk of our residential products. We're just giving -- there's a few tiny signs of improvement there. And the biggest factor for us is not going to be given so much of the retail, but it's what's between retail and us in that case. So, I just early signs, which I would not draw too many conclusions from but slightly positive.

And then the last comment I wanted clarity on there was a comment about returning to more normal price/mix realization within the business. And I was just trying to square that with -- there was also a comment made about landscape contractor more price sensitive than in the past. And so, I'm curious if there is a return to normal or if there is something different within price mix from an end market standpoint or within your opportunity in that area, just a clarity on that, if you would.

Yes. So, we talked about returning to a more typical average 1% to 2% price for the year. But the businesses that have high field inventory, we expect to see less realized price than the others. Does that answer your question?

Half of it. So do some get more than normal because some are getting less than normal to get you back to normal? I guess that's what I'm trying to figure out.

I think it relates to something we probably haven't mentioned as often, but we really have a market-based approach to pricing. So we get the price in the market that's relative to features, innovation, customer value. And this is the -- in our guidance reflects the total of that across all the markets.

Yes. So, it would be puts and takes as you get to.

Thank you. One moment, please. Our next question comes from the line of Michael Shlisky of D.A. Davidson & Company. Your line is open.

I wanted to first touch on the Amplify program. Do you have any sense of -- I guess it's a two-part question. One is, do you have any sense as to where you'll see a large cash outlay at the outset of the program to get some of these cost reductions done kind of on a onetime basis? Maybe secondly, have you figured out how much of the $100 million you want to reinvest, you said it was going to be a portion, but as the trip it's a small piece of it or almost all of it will go back to R&D or other kinds of growth issue?

Yes. So, we will see some onetime and restructuring charges that will be reflected in our GAAP earnings. We'll ramp those up over time as we implement and we'll communicate those as we evolve we have set up our transformational productivity office this quarter and are really beginning to get into all of those details. Your question on reinvestment, yes, we do intend to reinvest as much as maybe 50% of this in our -- back in our business. We want to invest in innovation and technology and in areas where we can see accelerating our profitable growth.

Got it. And then I wanted to just follow up on some comments you made about ramping up in the professional business in the last quarter so to get production rates moving. I'm kind of curious, was there anything down there that was out of the ordinary for Toro's history? Or is it just typically Toro's doing what it does best and kind of being settle when they have to? And I guess, given the backlogs you've got and some of the trends you're seeing, do you think you need to permanently grow the capacity of underground construction in golf and grounds and any other businesses with some additional permanent sort of bridge there? Or is it all just very temporary to kind of meet the current market conditions?

So, the first part of your question, the results are really the effect of doing what we do. So it's the combination of many disciplines within the Toro Company, really focused on our integrated supply chain team and incredible work that was done in our plants to get additional work output. That was based on a healthier supply base and more consistent supply of components without really enable that. If you break down the capacity question, that's really a split answer. So in areas where we see an inflection in growth rate going forward, underground construction et cetera, we are adding structural capacity to be able to support that into the future. We see a different growth rate than probably a historical growth rate in those areas. In areas that we know that we're going to return to a more typical glide path, it's like golf and grounds we're working not to add structural capacity that we would regret and instead using our existing capacity in a flexible way. So shifting production between facilities, working more extended hours, et cetera, that's really the solutions that we're looking for, for those businesses that we expect to return to more traditional growth rates.

Thank you. I'm showing no further questions at this time. I'd like to turn the call back over to Ms. Kerekes for any closing remarks.

Thank you, everyone, for your questions and interest in the Toro Company. We wish you all a joyful holiday season, and we look forward to talking with you again in March to discuss our fiscal 2024 first quarter results.