TTC - NYSE

Good day, ladies and gentlemen, and welcome to Toro Company's First Quarter Earnings Conference Call. My name is Carmen, and I will be your coordinator for today. [Operator Instructions]. 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 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 first quarter 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 Steffan, Director 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 presentation as well as in our SEC reports. During today's call, we will 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 2, please refer to this morning's earnings release and our investor presentation. With that, I will now turn the call over to Rick.

Thanks, Julie, and good morning, everyone. The first quarter of fiscal 2024 played out largely as we expected. Our team continues to operate with dedication, creativity and resilience as we took actions to best capitalize on near-term demand trends. We drove productivity benefits throughout the organization to offset higher material costs and made investments to enhance our market leadership positions and drive long-term growth. For the first quarter, we delivered net sales of just over $1 billion and adjusted diluted earnings per share of $0.64. These results include exceptional top line growth for our underground and specialty construction and golf and grounds businesses. Our ability to capitalize on continued strong demand in these end markets was the result of actions we've taken to increase output with more stable supply. The strength in our construction and golf and grounds businesses was offset by lower shipments of zero-turn mowers as expected, given elevated field inventories heading into the fiscal year. This compares to our first quarter a year ago when we benefited from channel replenishment of contractor-grade mowers following a period of constrained supply. The strength was also offset by lower shipments of snow and ice management products due to the low average snowfall. In addition, our results were affected by a few supply chain issues that delayed shipments for select product categories in our professional segment. Based on our first quarter results and our current visibility for the remainder of the year, we are reaffirming our full year fiscal 2024 net sales and adjusted diluted earnings per share guidance. Angie will walk through those details shortly. Throughout the quarter, we maintained a sharp focus on positioning the company to capitalize on long-term growth opportunities. We are developing new products aligned with market growth trends and prioritizing investments in the key technology areas of alternative power, smart connected and autonomous solutions. We believe that leveraging these investments across our broad portfolio will provide distinct competitive advantages, further strengthen our innovation leadership and drive accelerated profitable growth. Our competitive advantage and leadership was clearly on display at the recent golf course superintendent show in Phoenix, where we showcased our full suite of golf equipment and irrigation products. Importantly, the overall strength of the golf end market was also evident with the highest attendance since 2008 and representatives from all 50 states in 66 countries. Our boots included several new products, such as an expanded offering of fully electric versions of our proven and popular machines, which offer quiet operation with no compromise on performance. Our autonomous hybrid fairway mower that is designed to increase productivity and consistency and our latest smart connected irrigation control system that provides unmatched ease of use and unsurpassed precision. We are extremely well positioned in the attractive golf market as the only company to offer both equipment and irrigation solutions and as the global market leader in both. During the quarter, we also advanced our enterprise strategic priority of driving productivity and operational excellence. Our multiyear initiative that we've named AMP for amplifying maximum productivity is off to a great start. Our transformation office is in place and we are on track to deliver at least $100 million of annualized savings by fiscal 2027. As we discussed, we intend to reinvest a portion of the savings to further accelerate innovation and long-term growth. Finally, we maintained our focus on sustainability. This includes partnering with other industry leaders to share knowledge and solutions that promote environmental benefits, such as reduced, exhaust and noise emissions and less water and chemical usage. For example, we extended our 10-year partnership with GEO Foundation for sustainable golf, an organization focused on accelerating sustainability in and through golf worldwide. We believe our focus on innovation from enhancing our market leadership to driving sustainability benefits, provide significant long-term opportunities for The Toro Company. I'll discuss our outlook further following Angie's detailed review of our financial results and guidance. With that, I will turn the call over to Angie.

Thank you, Rick, and good morning, everyone. We remain confident in our ability to deliver value to all stakeholders, supported by our strong balance sheet, disciplined approach to capital allocation and innovation leadership. This along with our extensive distribution and support network positions us well to capitalize on growth opportunities in our attractive end markets. As Rick said, our results in the first quarter were aligned with our expectations. Looking closer at the numbers. Consolidated net sales for the quarter were just over $1 billion, a decrease of 12.8% compared to last year. Reported EPS was $0.62 per diluted share, which was down from $1.01 in the first quarter of last year. Adjusted EPS was $0.64 per diluted share, down as expected from $0.98. Now to the segment results. Professional segment net sales for the first quarter were $756.5 million, down 14.1% year-over-year. This decrease was primarily driven by lower shipments of zebra-turn mowers and snow and ice management products. This was partially offset by higher shipments of underground and specialty construction products and golf and ground equipment. Professional segment earnings for the first quarter were $112.8 million, down from $144.1 million last year. When expressed as a percentage of net sales, earnings for the segment were 14.9%, compared to 16.4% last year. The change was primarily due to lower net sales volume, partially offset by favorable product mix. Residential segment net sales for the first quarter were $240.1 million, down 9.3% compared to last year. The decrease was primarily driven by lower shipments of snow products and zero-turn mowers. This was partially offset by higher shipments of walk power mowers and portable power products. Residential segment earnings for the quarter were $23.5 million, compared to $37.8 million last year. When expressed as a percentage of net sales, earnings for the segment were 9.8%, compared to 14.3% last year. The year-over-year decrease was largely driven by product mix. Turning to our operating results. Our reported and adjusted gross margin were both 34.4% for the quarter. This compares to 34.5% for both in the same period last year. The slight decrease was primarily due to unfavorable product mix within the residential segment, mostly offset by favorable product mix within the professional segment. SG&A expense, as a percentage of net sales for the quarter was 25.6%, compared to 22.6% in the same period last year. This increase was primarily driven by lower net sales volume. Operating earnings as a percentage of net sales for the quarter were 8.8% and on an adjusted basis were 9.2%. These compare to 11.9% on both, a reported and adjusted basis in the same period last year. Interest expense for the quarter was $16.2 million, up $2.1 million from last year. The increase was primarily due to higher average interest rates and higher average outstanding borrowings. The reported effective tax rate for the first quarter was 19%, compared with 18.6% last year. The increase was primarily due to lower tax benefits recorded as excess tax deductions for stock-based compensation in the current year period. This was partially offset by a more favorable geographic mix of earnings. The adjusted effective tax rate for the first quarter was 20.8%, compared with 21.4% last year. The year-over-year difference was primarily driven by the geographic mix of earnings. Turning to our balance sheet. Accounts receivables were $489.1 million, up 29.6% from a year ago, primarily driven by timing of shipments to our mass channel and payment terms. Inventory was $1.18 billion, up 4% compared to last year. This was driven by higher finished goods balances, primarily zero-turn mowers and snow and ice management products. This was partially offset by improved working process levels enabled by more reliable component availability and productivity improvements. Accounts payable were $421.8 million, down 11.2% compared to a year ago, primarily driven by a reduction in material purchases. Free cash flow in the quarter was a $111.3 million use of cash. This was primarily driven by our actions to align production and inventory levels to demand, additional working capital needs heading into the spring selling season and lower net earnings. As a reminder, the majority of our operating cash flow is typically generated in the second half of our fiscal year. Importantly, our balance sheet remains strong. We continue to target a gross debt-to-EBITDA leverage ratio in the range of 1x to 2x. This, along with our investment-grade credit ratings, provides the financial flexibility to fund investments that drive long-term sustainable growth. Our disciplined approach to capital allocation remains unchanged, with priorities that 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. We are acting on these priorities in fiscal 2024, through our plan to fund $125 million in capital expenditures to support new product investments, advanced manufacturing technologies and capacity for growth, as well as our regular dividend payout increase of 6% over fiscal 2023. This is a reflection of the confidence that we have in our future financial performance and cash flows. As we look ahead to the remainder of the fiscal year, in our residential segment, we expect benefits from our expanded mass channel. In our professional segment, we expect benefits from the continued strength in demand and substantial order backlogs for our underground and specialty construction products and golf and grounds equipment. For these businesses, we made slight progress in reducing order backlog during the quarter, driven by the actions we've taken to drive increased output. On a total company basis, our open orders increased slightly sequentially from the $1.97 billion balance at fiscal 2023 year-end, driven by seasonal order patterns. Our order backlog is lower on a year-over-year basis. Our long care products, we are assuming more normal seasonal weather patterns, with spring being our first appreciable opportunity to see a meaningful reduction in field inventory levels. For snow and ice management products, we anticipate channel inventory will remain elevated heading into next season given the lack of snowfall activity this winter. With this backdrop and based on our first quarter performance and current visibility, we are reaffirming the full year net sales and adjusted diluted EPS guidance, we shared on our last earnings call. We continue to 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 adjusted gross margin, we continue to expect a slight year-over-year improvement, driven by productivity initiatives. We expect this will be partially offset by manufacturing inefficiencies, as we continue to rebalance residential and contractor grade long care equipment inventory levels. Turning to adjusted operating earnings, as a percentage of net sales. For the full year, we continue to expect a slight improvement over last year. We expect both the professional and residential segment earnings margins to also be higher than last year. We expect the other activities category to reflect higher expense, compared to fiscal 2023 as a result of our expectations for a return to more normal incentive compensation. With that, we continue to expect full year adjusted diluted EPS in the range of $4.25 to $4.35. Additionally for the full year, we continue to expect 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%. Moving to the second quarter of fiscal 2024. We anticipate total company net sales to be similar to slightly higher year-over-year. As a reminder, in the second quarter of fiscal 2023, we benefited from dealer and distributor inventory replenishment of contractor-grade zero-turn mowers, following a period of constrained supply. The same dynamic is not present this year. We anticipate this will be more than offset by expected incremental benefits from our expanded mass retail channel and our focus on driving increased output for our businesses with elevated order backlog. Given these considerations, we expect professional segment net sales for the second quarter to be down mid-single digits, on top of last year's strong comparison of 15.4% growth. We expect residential segment net sales growth for the second quarter to be up low to mid-20s, compared to the same period last year. Looking at profitability. For the second quarter, we anticipate total company adjusted operating margin to be lower than the same period last year. This reflects our expectations for segment mix and some continued inefficiencies as we align production to demand trends. We expect the professional segment earnings margin to be lower on a year-over-year basis. And the residential segment earnings margin to be higher year-over-year. Overall, we expect our second quarter fiscal 2024 adjusted diluted EPS to be meaningfully lower than last year's record results and more in line with fiscal 2021 and 2022 results. We continue to build our business for long-term profitable growth. We are deploying capital with discipline including prioritized investments in new products and technologies that address key market trends and that we believe will help our customers be successful. We are also confident in our ability to unlock significant benefits and opportunities with AMP, our multiyear productivity initiatives. It's an exciting time to be a part of The Toro Company. With that, I'll turn the call back to Rick.

Thank you, Angie. Our business fundamentals and market leadership remain strong. Our team continues to operate with agility, as we flex production for market conditions, enabled by more reliable component supply. We continue to drive increased output and improved lead times for our businesses with elevated open orders to better serve our customers. From a macro perspective, we are closely watching business and consumer confidence and spending patterns, as well as monetary policy actions, inflation, numerous upcoming elections and the current geopolitical environment. Turning to our end markets. I'll comment on the factors that could impact future results. For underground and specialty construction, we expect end-user demand to remain strong. This is supported by private and public spending to address global issues, such as aging infrastructure, broadband access and alternative energy build-outs. These funds are increasingly making their way to project starts. We're focused on helping our customers address these needs with our trusted channel and the most comprehensive equipment lineup in the industry. For golf, we expect continued strength in demand, driven by sustained momentum in new golfers and rounds played. For 2023, U.S. rounds played were the highest ever, marking the fourth straight year with more than 500 million rounds in total. We are focused on continuing to enhance our global leadership position in this attractive market with our complete suite of solutions, deep relationships and best-in-class service and support network. For municipalities and grounds, we expect continued healthy budgets and the prioritization of public green spaces. To capitalize on these trends, we're developing innovative products that drive productivity, including zero exhaust emission alternatives with no compromise on performance. For example, our new Groundsmaster E3200 battery-powered outfront rotary mower, builds on 50 years of innovation by The Toro Company, in this product category. This all electric model leverages our proprietary hyper cell, smart battery system to provide all day run time and quiet operation. For snow and ice management, we expect end market demand to be driven by replacement needs, following 2 consecutive seasons of below average snowfall. We will be watching late season storm activity and how that affects channel inventory levels. For residential and commercial irrigation and lighting, we expect uneven demand from contractors as a result of steady commercial demand but also continued caution around homeowner projects. For agricultural micro irrigation, we expect stable demand from growers, with the focus on maximizing crop yield, while minimizing water usage. We continue to develop automated solutions that address this need including our Toro Transpira direct plant sensing technology. This innovative solution was named 2023 New Product of the Year, by the Irrigation Association. For landscape contractors, we expect steady retail demand with some price sensitivity. We continue to expect interest in our high productivity, high capacity solutions that allow more work to be done with less labor resources. For homeowners, we expect retail demand to begin stabilizing the spring. For both landscape contractors and homeowners, we're watching weather patterns. In early spring as well as a return to more normal average temperatures and precipitation levels would be favorable. While market dynamics continue to have a near-term effect, we believe our well-established market leadership positions us to drive positive long-term results. This leadership is underpinned by our innovative products, trusted brand and extensive distribution and support networks. We also expect continued benefits from the essential nature and regular replacement cycle of our products. Our commitment to delivering superior innovation and customer care continues to drive our success. And this enduring commitment is bolstered by our strong balance sheet, disciplined capital allocation, an outstanding team of employees and channel partners. As a result, we have high confidence in our ability to drive sustained value for all stakeholders. On that note, I would like to thank our employees and channel partners for their dedication to serving our customers. I would also like to thank our customers and shareholders for your continued support. With that, we will open up the call for questions.

[Operator Instructions] Our first question is from Sam Darkatsh with Raymond James.

Three quick topics, if I could. First, Angie, I think you mentioned that there was slight progress sequentially with the backlog. But I think if my notes are right, that you said that the backlog was higher than the [indiscernible] sequentially. Does that -- first off, in my right. Secondly, does that imply that you're still seeing fairly healthy order growth? And then related to that, if you could give an update in terms of order cancellations?

You are right. We are up slightly seasonally. We are continuing to see strong demand in our underground and specialty construction and gold and ground groups. We are making some slight progress with our supply chain as it's become better. We're improving our output overall, and we expect to see that continue as we go throughout 2024. And I'll let Rick speak to the cancellations side.

Yes, Sam, that is not something that we've seen. So it's something we're very sensitive to or watching it closely, given the backlog that we've been managing for the last several years. We're just not seeing any appreciable cancellations at this point, if people are in the queue, they want to stay there. So that's not been a factor for us.

So when you're saying that it was up seasonally, sequentially, was it up more so than normal seasonality, less so in line? Just trying to get a -- give us a sense of the seasonal pattern versus what you're experiencing?

Yes. If you look just at an average year regardless of the level of output or the order level, this would normally be a higher period. So that's what we mean by seasonal, is that's normally an increase as we get orders. So we'll ultimately be fulfilled during the upcoming season. So -- but significantly better year-over-year and golf and grounds, underground, specialty construction actually are down. So it's really the more typical sales patterns in some of our other businesses that are driving that. So sequentially up a little bit because of the normal seasonal process in some of our businesses, but substantially better year-over-year, continue to make progress in that regard. Yes. Just to reiterate, that's being driven by much better output from our operations, from our plants. That's the very encouraging part of it.

Got it. Second quick clarification question, Angie. DSOs were up pretty meaningfully in the quarter. Is that a function of the initial sell-in to Lowe's?

Yes. As we referenced in our talking -- our comments, yes, that was really related to timing of shipments to our mass channel. We also have some extended terms that we have extended to our channel partners as they continue to wait on some certain pieces of components to kind of fill up their packages to be able to ship to their customers.

Got it. And then the last question. I noticed no share repo in the quarter. Why was that? And what would you need to see in order to commence repo activity?

Q1 is typically a peak time for cash usage, and we saw that same thing this quarter. So our first priority continues to be remaining to invest in our long-term profitable growth. And as we approach Q1, we're looking at paying down our revolver first, as a focus versus repurchases.

One moment for our next question, please, and is from the line of Tim Wojs with Baird.

Maybe just to start on just the EPS cadence and just trying to kind of think about kind of what you're implying, Angie, for the second quarter and maybe kind of the back half of the year. It sounds like Q2 should maybe be kind of in this, call it, $125 million to $130 million range. I guess what's the bridge kind of in the back half of the year? Because I think historically, Q2 has kind of been your seasonally strongest EPS quarter. So I'm just trying to kind of understand like what maybe is hurting Q2 that might get better in the back half of the year?

So our confidence for the second half really comes from our -- we're comparing against a sharp drop off from last year first, I would say. And if you look at our cadence, we're going to be more in line with F '22 for EPS. We're expecting our field inventory to be in a better place. We're also driving incremental output for our backlog, as we talked about earlier, as we continue to increase our volume output. And Q2 will be down some because of lawn care. We guided to a meaningfully lower year-over-year, again, that being more in line with fiscal 2021 and 2022 adjusted EPS.

Okay. Okay. Got you. And then just, I guess, on the underground business, any -- Rick, anything you can kind of talk about in terms of just kind of order patterns. I can appreciate that you're trying to get as much product out as you can, just to try to normalize the backlog. But how is the incoming order activity look? And maybe if you could kind of talk about some of the key markets like telecom and utilities there?

I think we've probably put more recently the emphasis on increasing our output, which has been pretty remarkable. I mean, every day, we're improving our outputs to work down this -- the backlog situation that we're in or the open order situation. At the same time, the demand continues to be extremely strong. And I mean, we happen to just recently do a deep dive on some of the commitments that are out there for funding projects. Just on one of the categories broadband in the U.S., more than $60 billion, I should say, $60 billion allocated to broadband. And then we don't talk much about what's happening in Europe, but substantially more for digital applications and the so-called Digital Recovery Act, mean $723 billion, of which probably $150 billion would apply to those markets where we have a presence. So it just looks like tremendously positive runway from what we can see at this point from the market demand, and we see the steady market demand at this point. So as we're able to increase our output within our footprint today and adding where we need to, where there are constraints, that's going to allow us to get a bigger piece of that as we go forward. And yes, so that's just one of the areas, but everything from the energy build-out to addressing the utility issues that we have worldwide, ultimately addressing the power issues with putting more power underground. I mean it's an incredibly exciting time to be part of this market and this business. And we're really pleased that we're in a position to be able to be a part of that.

Okay. Okay. Good. And then just the last one on pro landscape. Is there any way to kind of frame where kind of the utilization is, unlike a trailing 12-month basis in that business versus kind of where it normally is?

Utilization in terms of ...

No, in terms of like the manufacturing utilization. I'm just trying to understand kind of what the -- kind of -- I'm just trying to kind of figure out what the absorption hit is on just trying to think through pulling back on pro landscape production.

We do -- we probably don't have those specific numbers here, but just anecdotally, obviously, we've got lower utilization within those plants. The positive thing is that we've been able to flex the capacity there. So for example, even with Intimidator, we talked about, I think, at the last earnings call, we have lower production, obviously, of those products that go into the landscape contractor market. The positive thing is they have terrific operations there and a terrific workforce. We've been able to flex other products from our construction business and be able to produce product that would be difficult for us to do in the past.

Yes. I'd say we just -- we've included our best estimates in our guidance, based on what we see there.

Moment for our next question, please. Its from the line of David MacGregor with Longbow Research.

I wonder if you could just help us -- I mean there's a lot going on in your -- or your low single-digit top line growth guidance for this year. I mean you've got, as best as I can count at least 7 or 8 different variables that are in there. I wonder if you can help us just sort of bridging that or at a minimum, just address maybe the capacity investments you're making and what that might be contributing? And then maybe just building off of Sam's question on the backlog. Last quarter, Rick, you shared a number with us, the $300 million reduction in the backlog year-over-year in 4Q, is there any chance you can kind of update that number for us today? And then I've got a couple of follow-ups.

Yes. Maybe Angie can address that last part. But with regard to capacity and you talked about as many as 7 different factors, we certainly understand those. I mean the good news is the foundation of that confidence in the year really comes from the businesses, where we have open orders at this point. So golf grounds, underground and construction, and that's going to be driven by improved outlook within our plans. And we have -- we're seeing steady improvements in that direction. We'll continue to see that benefit throughout the year. We have on the residential side, it's clear that we're going through an adjustment there. But on the positive side, we have the new business with Lowe's and not just Lowe's, but really working with all of our channel partners to create -- first of all, great product, great support and a unique value proposition for each of their customers. So that's on the positive side. And, so we have a lot of variables but also a lot of drivers that can help us get to where we need to go. And with regard to capacity, we've been completely consistent with our strategy, where we're adding structural capacity, where we believe there's a longer-term different growth rate than it's been in the past, and we've been careful not to do that to use our flex capacity to alleviate back orders or open positions, where we think it's going to return to a more normalized growth rate. So that's -- we've been consistent with that and that's -- we believe that's the right approach right now.

And on your question on backlog, we don't typically break that out every quarter. So we're just trying to give a little color here. But we did have -- we weren't down and from F '23, as we reported at the end of Q4 last year. But we are just seeing that tick up slightly, just like we said earlier, seasonally based on what we're seeing in open orders coming in, in this first quarter of the year, which is very important us.

Right. Got it. Maybe I can follow up with you guys offline on the bridge. Just a couple of other things just quickly. The AMP investment or the AMP program, as you're rolling out of, is there investment in the quarter that maybe upfront expense that we should take into consideration?

Yes. As Rick said in his prepared remarks, AMP is off to a great start, we got our transformation office in place, and we did have some expenses in the quarter, which we will list -- we had in our earnings release, it's $3.9 million, which is in our reported SG&A numbers, and it will be adjusted out.

Got it. And then finally for me, just -- it seems like with these backlogs in golf and specialty construction, your Parts and Accessories business must be elevated or you must be maybe running at a level above what you would typically be. Is there any way of quantifying just what that might have contributed to the quarter? What you might be seeing in terms of parts and accessories benefit right now, both in terms of revenues, but also in terms of profit.

We don't break out parts specifically, but just anecdotally, it's -- it would be a typical run rate for us relative to part's contribution to sales. It's been maybe a little bit stronger during this period, but nothing extraordinary.

The next question, please. And it comes from the line of Tom Hayes with CL King.

Rick, I just wanted to get your thoughts on, especially around the lawn care segment, both residential and professional. As far as your thoughts about the continued battery adoption? Certainly, the residential segments well along that path. I was just wondering your thoughts on the professional side this year going forward?

Yes. We are -- the one thing I can say is we are extremely confident in the platforms that we produce, both on the residential side. The 60-volt is a fantastic product line getting additional access to our -- for our customers even as we go forward this year. On the professional side, we're extremely excited again, both about the products we've been able to introduce, which honestly are the culmination of the outcome of the focus that we've put on that area for 6 or 7 years. So it's fulfilling to see the uptake from our customers, especially in specific categories. Golf has seen a higher uptick and uptake of battery-powered products for a lot of reasons beyond just the zero exhaust emissions of noise, operator implications and so forth. And we just introduced the new Groundsmaster E3200, which will be the perfect product for municipalities. And those are some of our customers that are under the greatest need to provide zero exhaust emission products. So, we have a great lineup in both the residential and the pro categories, and we're pleased to see our customers get the product that they want. Just going to add, our focus really to be able to provide gas or electric or battery options and have a terrific solution for both customers.

Okay. I apologize for cutting you off there. Just maybe circling back, I know it's been under pressure for the last couple of quarters. Just maybe any thoughts on the Rental Equipment market?

Rental Equipment, from our perspective continues to be very strong. It's really -- most of it is some portion of contractor, particularly national accounts are looking at replacing aging fleets, that's been positive for us. And as there's been a little bit more construction activity, that's a driver of future demand for us as well.

And we are going to our last question, please. It's coming from the line of Ted Jackson with Northland Securities.

Most of my bigger questions have been answered, but just a couple of small ones. First, Angie, can you just talked a little bit about working capital and where -- are we still going to see [indiscernible] going to see a trend as we roll through '24 that we'll have a reduction in it mainly through inventory and more in the back half of the year? Is that a thesis that still kind of hold? Is that a trend that we should expect?

Yes, I understood your question correctly, you're kind of quiet. But it is some you're asking about working capital. We do expect to see working capital improvement throughout the year. The first quarter is typically our peak usage of cash. So as we are growing our inventory and working through that, but we do expect to generate more of our cash in the second half. As you can expect, the drivers behind that cash flow is also working capital, with the majority of our opportunity being and driving our inventory down. So, a continued sharp focus on that, Ted, as we go throughout the year to reduce our inventory, both finished goods and WIP.

And when I think about inventory, I'm trying to speak up a little bit, I tend to mumble and I look that kind of pre-coded. Is it fair to say that normalized inventory on kind of a days basis is, call it, 100, 110 days is or so? And is that a level that we could expect to see as you exit '24?

I don't know that we've provided that information, but we certainly are expecting to continue to improve it. When we look back pre-COVID, we've changed a lot. We're really a different company. As we look at our makeup today, we added the Charles Machine Works. We have a Ventrac. We've added Intimidator Group. We went through a period of needing to increase with inventory so that we could provide to our customers. So we're still rebalancing some of that. And of course, as we got into the winter season and in Q1, we saw a lack of snowfall that also increased our inventory level. So I don't have an exact number for you on days, but we certainly feel confident that we can achieve our free cash flow guidance, that we've put in place today.

Okay. Next question. A little nitpicky, but just to make sure I've got it right. What is the -- like the dividend payout on a per share basis right now?

The 6% -- a 10% increase year-over-year. I don't know that I have that right in front of me Ted.

That's okay. I can figure it out just a nitpicky one. And then with regards to the initiatives, the AMP initiatives and the savings you showed in your pro formas for this quarter. Is that something worth modeling? Is there a number that you would suggest that we put in, in terms of our pro forma numbers or just basically just back on that as you show it every quarter?

So for the benefits and the savings that we expect to achieve, we are expecting to get $100 million over the next 3 years. So by 2027, we expect to get $100 million in annual cost savings. We have built in, what we expect to see in F '24, but the majority of those savings will be in years 2 and 3. So more level on the back half of that project than the first part.

Okay. And then one more thing you could think of doing in marketing, given the weather we have, as a you thought about maybe marketing your lawn mowers in winter?

Well, the marketing has already started. And the good news is golfers are golfing. So that's a bit of a trade-off for us on a positive side.

And thank you, ladies and gentlemen. This concludes the Q&A session. I will pass it back to Ms. Kerekes for closing remarks.

Thank you, everyone, for your questions and interest in The Toro Company. We look forward to talking with you again in June to discuss our fiscal 2024, 2nd quarter results.