The Toro Company (NYSE:TTC) Q2 2023 Earnings Call Transcript

Edward Jackson: Good morning, thanks for taking my questions. I’m just going to ask really quick ones. First, just to kind of beat the inventory horse. If I listened to all the commentary from all the questions that have been asked so far, is it fair to assume is that we look into the back half of 2023 and going into 2024 that we should see kind of turns or days improve and at an absolute level, the inventory number go down and free up some of your inventory and drive some free cash flow?

Angie Drake: Yes. Our expectation is that we will continue to see inventory improve and that those terms will increase. As we — today, we still have — as we just heard on the question before that our finished goods inventory is largely in the residential area, but that’s where the improved — the increase came from. We still have a big need in our Professional segment to move finished goods inventory into our channels to field inventory, so an opportunity to move that WIP into finished goods. We did make good progress in WIP and we expect to really enter F 2024 in a better position and overall, that’s how it looks.

Edward Jackson: Okay. No, I mean, I care a lot about free cash flow, so it’s a pretty important question. Secondly, on the gross margin, I mean you’ve really seen some improvement within margins and obviously, the revenue mix is helpful. But the price realization clearly is having an impact as well. When we think through this year and kind of positioning out into 2024, do we — are those trends to continue? I mean, is there a likelihood that we will see your margins come back to, for lack of a better term, more historic, maybe like in the 34 — more between 34% and 35% just because you’re catching up with regards to inflation, and you see what I’m saying and then perhaps maybe the mix between Professional and Residential?

Angie Drake: We haven’t guided for F ’24 yet, but if we look back at our F ’23 guidance, we do expect gross margin improvement, although initially, we talked about our second half going to be — our first half is going to be higher than our second half. Now we’re looking at — sorry, opposite way. Now looking at our first half being higher than our second half really due to the manufacturing adjustments that we’ll see based on reduced volume. But our gross margin for Q3 will be similar year-over-year to what we saw in Q2. And we continue to see really overall productivity improvements throughout our plants as we continue to see those modest supply chain improvements and are continuing to improve our output.

Edward Jackson: So without putting words in your mouth, but putting words in your mouth, just sort of generically as we kind of roll through the things, improving supply chain, catching up with regards to cost inflation, et cetera, et cetera, that it’s fair to assume not like on a quarter-by-quarter basis, but just generally speaking, just a better margin environment for Toro as we kind of roll through the next year or two.

Angie Drake: We do expect F ’23 margin improvement, and we’ll continue to focus on long-term margin improvement as we go forward.