Earnings Call: Q2 2020

Jun 4, 2020

Good day, ladies and gentlemen, and welcome to The Toro Company's Second Quarter Earnings Conference Call. My name is Daniel, and I will be your coordinator for today. At this time, all participants are in a listen only mode. We will be facilitating the 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, Nicholas Rhodes, Managing Director of Investor Relations for The Toro Company. Please proceed, Mr. Rhodes. Thank you and good morning. Our earnings release was issued this morning by Business Wire and a copy can be found in the Investor Information section of our corporate website, thetorocompany.com. On our call today are Rick Olsten, Chairman and Chief Executive Officer and Renee Peterson, Vice President, Treasurer and Chief Financial Officer. We begin with our customary forward looking statement policy. During this call, we will make forward looking statements regarding our business and future financial and operating results. You are all aware of the inherent difficulties, risks and uncertainties in making predictive statements. Our earnings release as well as our SEC filings detail some of the important risk factors, including those related to COVID-nineteen 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 or on our website. The company believes these measures may be useful in performing meaningful comparisons of past and present operating results to understand the performance of its ongoing operations and how management views the business. Such non GAAP financial measures should not be considered superior to, as a substitute for, or as an alternative to, and should be considered in conjunction in conjunction with the GAAP financial measures presented in our earnings release and this call. With that, I will now turn the call over to Rick. Thanks, and good morning. I'll start by acknowledging the sad and disturbing recent events in the Minneapolis Paul metro area and across the nation that began with the horrific death of one of our community members, George Floyd. Our hearts go out to the family and friends of Mr. Floyd and the communities directly affected. Regrettably, these events are representative of of circumstances, we must stand for what is right. The Toro Company has a long standing focus on the importance of respect for all in our workplaces, in how we conduct business and in the communities we serve. In addition to the events of the past week, we all continue to deal with the effects of COVID-nineteen. We hope all of you and your families are safe during this difficult time. It was humbling to see how so many people and organizations moved forward without hesitation to do what was needed to help others as the COVID-nineteen pandemic spread around the world. In response to the coronavirus, we prioritized the safety, well-being and support of our employees, customers and communities. In addition to our value of respect for all, as previously mentioned, some of our other core people values include caring relationships, trust and integrity. Even through significant personal family challenges, our team has transformed the way we work to protect the safety of one another, support our customers and help our communities. I am deeply grateful for all of our employees around the world, many who are coming into facilities each day to develop, test, build and ship our products. The team's flexibility, resourcefulness and resolve is being demonstrated as we've acted to make our facilities safe and implement work from home policies. At the same time, we are maintaining the critical functions of our manufacturing operations. All of this is vital called Together We Can Do More. Through this initiative, we directly donate and match all employee contributions made to COVID-nineteen relief efforts. In addition, the Toro Foundation contributed $500,000 to organizations supporting families and communities most directly affected by the pandemic. Recognizing the financial strain among our employees and their families, we expanded the availability of the Melrose Hoffman Employee Critical Need Fund. Additional voluntary contributions were made to that fund by our leadership team and the Board of Directors. To quote our legendary former Chairman and CEO, Ken Melrose, who sadly passed away last month, everyone has the potential to contribute to achieving the goals of the company. If you unleash that potential, success will be a natural byproduct. These words mean a lot coming from Ken, who successfully led the Toro Company through some of the most challenging times in our history. Thanks again to our amazing team who have certainly lived up to Ken's model of excellence during the past few months. I'll turn now to our business and financial review. From a business perspective, our focus has been on maintaining ample liquidity, growing our position in the market and balancing short and long term objectives. Our results this quarter were net sales of $929,000,000 down 3.4% from the prior year, primarily due to reduced professional segment retail demand as a result of COVID-nineteen. We reported adjusted diluted earnings per share of 0.92 dollars down 21.4 percent from the prior year. To provide specific information, 5 business segments. In the Professional segment, total net sales were $661,000,000 down 8.6%. Sales benefited from incremental contributions from the Charles Machine Works and Venture Products acquisitions. This quarter, we passed the 1 year anniversary of the Charles Machine Works acquisition. We are fortunate to have this business and its employees as part of our company. Charles Machine Works added scale and diversification to our portfolio, opened access to new markets and provided additional opportunities for synergy and value creation across the company. We are on track to achieve or exceed our stated synergy targets. Offsetting the gains from acquisitions were declines in most of our professional businesses as a result of soft retail demand due to COVID-nineteen. The declines were most pronounced in commercial, golf and grounds, which saw fewer shipments of turf equipment and irrigation products. This was driven by budget deferrals at golf clubs and municipalities. Landscape contractor businesses, which had fewer shipments as our channel partners aligned field inventory levels with reduced retail demand and rental, specialty and underground construction businesses, which experienced reduced sales volumes as a result of global economic slowdown and the impact on the construction in oil and gas markets. It's important to note that professional segment performance tracking consistent with our expectations of modest growth until mid March. In April, we experienced additional and significant declines in most of our professional markets. We typically do not discuss the current quarter in our earnings calls. However, we appreciate that this quarter is very different. So we'll share some color on what happened in Maine. For the Professional segment, it was largely a story of new equipment purchase deferrals and focus on service and repair. We're seeing continued challenges across golf and grounds, landscape contractor and rental, specialty and underground construction businesses. These challenges stem more from lowered budgets and deferred purchases than from temporary facility closures. For golf, most play has resumed and demand for rounds has been robust. However, lower food and beverage and event revenue has negatively affected club budgets, putting pressure on new equipment purchases. For our municipal grounds customers, budgets have been lowered or diverted to non ground support, which has resulted in reduced equipment demand. The repair and defer story is the same with landscape contractors. However, with the lessening of stay at home In rental, specialty and underground construction, 5 gs infrastructure and broadband spending increased modestly in May, with high demand for system capacity as a result of stay at home orders. Underground infrastructure, rehab and repair projects remain steady. However, this is being offset by continued construction and oil and gas project softness, reduced capital spending from national rental accounts resulting in new equipment purchase deferrals and lower dealer retail. In the residential segment, sales were up 12.9% in the 2nd quarter. This was mainly driven by incremental shipments to our expanded mass retail channel and strong retail demand. Some of the demand drivers were favorable spring weather, new products focusing on home and garden improvements during stay at home orders. Our product sales through captive and partnered e commerce sites were up significantly in the Q2. For May, residential segment momentum continued driven by the same trends. Regarding operations, all of our facilities are currently open with some operating at reduced capacity. During the Q2, some sites closed temporarily due to government orders or to manage inventory levels. We will continue to align production to customer demand, comply with government orders and ensure the safety of our teams. We had no supplier related shutdowns in the quarter. Regarding cash and financial flexibility, we continue to have a strong balance sheet and ample liquidity. We took measures in the quarter to ensure that we have sufficient cash given the economic climate. For the remainder of fiscal 2020, we are taking across the board pay cuts leadership and eliminating merit increases and discretionary retirement plan contributions. We also reduced expenses and paused new hires except for critical positions. At the same time, we have preserved jobs and retained key talent. We continue to benefit from productivity initiatives and enterprise synergy opportunities as a result of recent acquisitions. As with past periods of economic challenge, we know what works and how to play to our strengths. Our culture and business management approach are well adapted to respond to uncontrolled external variables. While certain factors do lie out of our control, our diverse portfolio and flexibility help us adjust to shifting situations while continuing to provide long term growth and sustain free cash flow. We will continue to invest in the future for the benefit of all of our stakeholders. With that, I will now turn the call over to Renee for a more detailed discussion of our financial results. Thank you, Rick, and good morning, everyone. The Toro Company is comprised of a balanced portfolio that enhance our customers' productivity across the seasons. The company has a strong balance sheet that enables us to allocate capital effectively among a variety of alternatives, including new product development, acquisitions, dividends, debt pay down and share repurchases. Q2 was no exception. While the COVID-nineteen affected our results, we were able to adjust our operations and move the business forward. We reported net sales of $929,000,000 in the quarter, a 3.4% decrease from the Q2 of fiscal 2019. Diluted EPS was $0.91 for the quarter compared to 1 point $7 last year. Adjusted diluted EPS was $0.92 down 21.4% compared to the Q2 of fiscal 20 19. For the 1st 6 months of fiscal 2020, net sales increased 8.4%. Diluted EPS was 1.5 $5 compared to 1 point Year to date adjusted diluted EPS was $1.56 compared to $1.69 a year ago. Before I review segment results, I'll cover liquidity. Back in March, we entered into a 3 year term loan agreement for 1 $190,000,000 This was to refinance our revolving credit facility borrowings incurred in connection with Venture Products Acquisition, which closed on March 2. With the funding of this new term loan, the company now has liquidity of approximately $800,000,000 including cash and cash equivalents of $200,000,000 and availability under our revolving credit facility of approximately $600,000,000 We have no significant debt maturities until April 20 22. We continue to work closely with our banking partners and monitor credit markets. Receivable collections continue to track similar to last year. All of this gives us confidence in our ability to weather the current and potentially extended period of macroeconomic uncertainty. I'd like to provide more color on some of the actions we've taken so to maintain our strength as a company given the unprecedented speed and depth of the pandemic. From a demand perspective, we've executed business continuity plans and worked to ensure product availability in areas where demand remains strong, such as residential segment. Additionally, we scaled back production in areas where demand was weaker. As Rick discussed, we have taken actions to align costs with near term demand and we'll continue to look for ways to make our cost structure more flexible and competitive. Meanwhile, we focused on maintaining productivity and synergy initiatives, which were driven by recent acquisitions and then extended across the enterprise. Now to the segment results. For the 2nd quarter, Professional segment net Works and Venture Product acquisitions, which together added incremental net sales of $142,000,000 Professional pullback. Until mid March and the impact of COVID-nineteen, sales were tracking to modest growth, in line with our expectations. We saw a modest sales decline in the second half of March and a more significant reduction in April as compared to prior year performance. For the year to date period of fiscal 2020, net sales increased 6.6 percent compared to the same period of fiscal 2019. Professional segment operating earnings for the 2nd quarter decreased 29 0.2% to $106,000,000 reflecting a 460 basis point decline operating earnings as a percent of sales, primarily due to manufacturing variance as a result of COVID-nineteen related facility closures and social distancing initiatives incremental marketing, engineering and administrative costs as a result of the Charles Machine Works and Venture Products acquisitions, higher warranty expense and unfavorable product mix. This was partially offset by favorable net price realization, productivity and synergy gains, lower commodity and tariff costs, and decreased incentive compensation expense. Year to date, professional segment operating earnings declined 12.3% compared to the same period in the prior fiscal year. Professional segment operating earnings decreased 360 basis points to 16.6%. Residential segment net sales for the 2nd quarter were up 12.9 percent to $262,000,000 mainly driven by incremental shipments of 0 turn riding and walk power mowers to the expanded mass retail channel as well as strong retail the same period of fiscal 2019. Residential segment operating earnings were up 68.5 percent to $37,000,000 This reflects a 4 70 basis point year over year increase in segment operating earnings to 14.2%. This improvement was largely driven by productivity and synergy gains, lower commodity and tariff costs, lower freight costs, and SG and A leverage. This was partially offset by an favorable manufacturing variance and higher warranty expense. Year to date, residential segment operating earnings increased 67.2 percent to $58,700,000 On a percent of sales basis, segment earnings reported gross margin for the Q2 of 33%, a decrease of 40 basis points over the prior year period. Excluding acquisition related charges and one time costs associated with the inventory write down of the Toro branded underground business, adjusted gross margin decreased 100 basis points to 33.4%. The decrease in adjusted gross margin was primarily driven by manufacturing variance due to production downtime and inefficiencies as a result of COVID-nineteen related closures and product mix with higher residential segment net sales compared to Q2 of 2019. This was partially offset productivity and synergy gains, favorable net price realization within our Professional segment and lower commodity and tariff costs. For the 1st 6 months of fiscal 2020, gross margin was 35.1% compared with 34.3 percent in the prior year period. Adjusted gross margin was 35.3% compared with 34.9% in the 1st 6 months of fiscal 2019. SG and A expense as a percent of sales increased 40 basis points to 19.5 percent for the quarter due to incremental marketing and engineering costs as a result of of incentive compensation costs and lower transaction and integration costs. SG and A expense as a percent of sales for the 1st 6 months of fiscal 2020 was 22.3%, up 130 basis points from the prior year period. Operating earnings as a percent of net sales decreased 80 basis points to 13.5% for the 2nd quarter. Adjusted operating earnings as a percent of net sales decreased 2 40 basis points to 14%. For the 1st 6 months of fiscal 2020, operating earnings as a percent of net sales were 12.8% compared to 13.3 percent ago. Adjusted operating earnings as a percent of net sales for the 1st 6 months of fiscal 2020 were 13.1% compared with 14.7 percent a year ago. Interest expense increased $2,000,000 5.4 $1,000,000 for the 2nd quarter and year to date respectively compared to a year ago. Increases were due to higher debt outstanding related to the Professional segment acquisitions. For the full year, we anticipate interest expense of about $34,000,000 The effective tax rate was 18.9% for the 2nd quarter and the adjusted effective tax rate was 20%. For the 1st 6 months of fiscal 2020, the effective tax rate was 18.8% and the adjusted effective tax rate was 20.4%. For the full year, we anticipate an adjusted effective tax rate of above 20.5%. Turning to the balance sheet and cash flow. Accounts receivable totaled 400,000,000 dollars This was down 6.6 percent from a year ago as a result of lower professional segment sales at the end of 2nd quarter driven by reduced demand due to COVID-nineteen. This was partially offset by incremental segment sales to the expanded mass retail channel and additional receivables as a result of the Venture Product acquisition. Inventory was up 16.8 percent to $714,000,000 from a year ago, primarily due to higher finished goods in our professional segment due to COVID-nineteen related sales reduction, increased raw materials and work in process as a result of production downtime due facility cloned a year ago. This was mainly due to decreased material purchases as we aligned production levels with reduced sales volume. Incremental payables from Venture Products partially offset the decline in purchases. We expect depreciation and amortization for fiscal 2020 of about $100,000,000 which includes approximately $3,000,000 of fair value step up related to the acquired inventory from Venture Products. We are now estimating lower capital expenditures of $80,000,000 versus our prior keen focus on near term liquidity has reaffirmed our capital allocation priorities for the year. Consistent with our objectives following the Venture Products acquisition, we will continue to prioritize debt repayment in order to manage our leverage targets, curtail share repurchases for the year and consider strategically compelling acquisitions. In May, we declared our regular quarterly dividend. Based on our current outlook and strong financial position, we expect to maintain our dividend. As a result of the many and evolving COVID-nineteen related factors we discuss today and more that could emerge should the current economic climate extend for a prolonged period, we do not have the ability to predict its impact on our businesses and financial results. As such, we withdrew our 2nd quarter and full year guidance late in March and will not be providing new detailed financial third quarter or full year guidance on this call. That said, we do want to share with you some of our thinking about the remainder of the year. At this point, based on current information regarding the global economic outlook, the company expects the most pronounced year over year sales and EPS percentage declines in the Q3 of fiscal 2020. We also expect negative year over year 4th quarter capital outlays and cash preservation, mostly in the Professional segment. On the positive side, our products have a natural replacement life, so we anticipate net sales will rebound in future periods. COVID-nineteen related factors that could impact these expectations include: 1st, the company's ability to continue operations and or adjust our production schedules due to governmental actions that have been and continue to be taken in response to COVID-nineteen pandemic. 2nd, supplier risk and the company's abilities to obtain commodities, components, parts and accessories in a timely manner and at anticipated costs. And finally, prolonged periods of economic stress that may affect customer liquidity and could impede customer buying patterns. While we do not know how long this COVID-nineteen uncertainty will continue, we anticipate an easing of these pressures as we head into fiscal 2021. In summary, with our flexible business model and culture as our foundation, we have taken the necessary steps to be in a position to grow as we enter fiscal well and continued to invest in technology and innovation. And we are prepared to take further actions to serve our customers in multiple potential economic scenarios. I will now turn the call back to Rick. Thanks, Renee. As we've seen so far in 2020, we have been agile in our response to the pandemic and remain committed to our core values of innovation and caring relationships built on trust and integrity. While our near term visibility is limited, we have taken measures to ensure a solid financial position as we move forward. We are confident in our ability to continue serving our global customers throughout and far beyond the pandemic. As we look ahead, we are optimistic about our many exciting opportunities. Our investments in alternative power, smart connected products and robotic and autonomous technologies will drive an entirely new cycle of innovative products across our markets. We continue to expand our full featured portfolio of battery powered products as customers see convenience and an opportunity to reduce emissions. We expect that customers who deferred new equipment purchases will return to historic buying patterns as the economy improves. In past recessionary times, when we saw new equipment purchase deferrals, we experienced strong growth in the recovery. In construction, and the recovery. In construction, the build out of 5 gs and rural broadband should benefit sales of our underground equipment like the new JT24 horizontal directional drill. In golf and grounds, we will continue to innovate to increase productivity and solve customer challenges. For example, our IntelliDASH course management platform helps turf professionals integrate data and use information to simplify operations and use water and other resources more efficiently. We continue to support contractors with an expanded line of high productivity solutions. For the snow and ice season, this includes the BOSS SnowRaider and Ventrac SSV. And for the growing season, the Exmark Staris and Toro Grandstand Multiforce. These are just a few examples of how we're creating long term growth through new product development and strategic acquisitions. We also expect continued homeowner interest in home and garden improvement. We have an exciting array of new products, including an expanded portfolio of 60 volt solutions, refresh brand content and marketing and a new channel partner that is broadening our reach. In closing, our strategic priorities are enduring. Now and long after we emerge from this challenging time, we remain focused on accelerating profitable growth, driving productivity and operational excellence and empowering people. I'd like to again recognize the dedication and resilience of our employees and channel partners and offer my sincere thanks to our customers and shareholders for your continued support. With that, Renee and I would be happy to take your questions. Your first question comes from David MacGregor with Longbow Research. Good morning. I guess, where I'd like to start is and thank you for the additional color. That's helpful. But you talked about the 3rd quarter as being potentially the worst from both a revenue and an earnings standpoint. I wonder if you could just open that up a little bit and just talk about some of the individual business units and the dynamics that you expect would contribute to that net result? Sure. I could talk just maybe hit a few of the businesses. I think the most important thing to watch would be the general macroeconomic trends and general consumer confidence, business confidence throughout the next period here as being a significant factor along with what the weather does throughout the summer and the trajectory of the COVID virus. So there's those macro pieces. And if you look at some of the individual areas, if you look at golf, we've all seen in the news that the rounds played have been very positive since the COVID government restrictions were released. So there's a strong demand for golf rounds. However, that's one piece of golf club revenue. So we need the food and beverage, the events sort of revenues to continue coming back as the restrictions are released. And the rate at which that happens will provide more revenue flexibility to continue investing in equipment. If you look at LCE, that's a business confidence factor for those small businesses in many cases. And a solid mowing season this year will put revenue in their pockets. And so they've got confidence that the economy is recovering the return to making their capital purchases because that equipment does get consumed as part of the usage process for them. Ground, what happens to municipal budgets or some of them they hold by the federal CARES Act and other acts that are helping to offset some of the expenses that they've had elsewhere. Residential, if there's strong growing conditions, we see the trend continuing with the interest in investing in your home and making that a place that you want to spend time. Underground, the resumption of 5 gs and broadband projects, and we're seeing signs that spending in those areas with contractors and the groups that are installing their systems is coming back. So that would be something to watch there. And then construction and rental, we know that some elements of construction will be a more extended recovery. But any signs there on the rental side, we've seen strong rental usage from homeowners. So the smaller rental shops in municipalities that particularly rent to homeowners have done extremely well. It's really more of the construction elements, the larger national rental accounts that a lot of the business is tied to construction. That's a factor. So that gives you just a little bit of flavor of what kinds of factors that we're looking at going forward. The other thing to watch would just be COVID as it relates to our operations and our supply chain. If there are widespread disruptions caused by that or specific regions that were affected by those will be factors as well. But just gives you a little bit of flavor of the factors that we're looking at as we go forward. And I would just offer, David, that this is similar to what we saw. There's many parallels to the 'eight, 'nine recession where we saw the residential, segment really hold up well, again, as Rick said, more influenced by weather. And we saw more deferrals within the professional segment with a pretty strong recovery when we came out of that recession. And also I would just offer, keep in mind in Q3, we don't have that incremental benefit from Charles Machine Works as an acquisition. As Rick mentioned, we've passed that 1 year anniversary and so that's integrated into our business going forward. Right. Is there any way of assessing just how much revenue was dislocated from 2Q into 3Q due to plant closures and product availability and backlog and those types of issues? Sure. We had, as you can imagine, with the multiple directives by states and by region, it was an incredible challenge to keep our operations running. But our team did a great job of residential side. A few product categories we had, and from a residential side. A few product categories, we had some delays. Some of that could spill into this next quarter. But for the most part, it's opposite story. We've been able to take some sales opportunities because we had availability versus our competitors. Right. And last question for me is just the decremental margins were rather large in the quarter. Obviously, things hit it's hard to be nimble with your costs. But how should we think about decrementals moving into Q3 Q4? Do you have an opportunity to start maybe normalizing costs down to reflect what's going on at the top line or how should we think about that? Yes. If you look at history, I mean what we've seen first from an incremental standpoint is we tend to be between 20% 25% incremental margins, really depending on product mix and segment mix as well. If you again using maybe the 'eight, 'nine downturn as an example, what we saw there in the short term, we saw a higher than that rate from a decremental standpoint, just as we adjust our cost structure. And we tend to continue to invest in innovation and new products. That served us very well in that particular case, coming out really strong and able to again capture market share coming out of the recession. If we view this as a longer term economic downturn, we certainly would take some other more aggressive fixed cost actions as well. But at this point in time, we haven't tried to take out capacity or anything like that because we do expect that, although this is we'll fill into next year that we're going to see that recovery and we want to make sure that we are able to respond to that recovery when it occurs. Got it. Thanks very much and good luck. Thank you. Thank you. Thank you. Our next question comes from Mike Schliskey with Dougherty Colliers. Your line is now open. Good morning. Good morning, Mike. So you've been talking about some of the pro customers reducing their CapEx. That's really not surprising. It just came in at a tough time of the year during the 1st part of the spring. I'm kind of curious, do you think you've actually just lost sales for the year? And if you didn't get it in March or April, it's not going to happen because of the way that the seasons run? And perhaps as a related question, is there a certain base business? Is there can you give us a sense of kind of a percent of that segment that runs on a 3 or 4 year lease cycle? And do you feel like you've got a good sense as to everyone who is off lease is trading in and buying something new even though it's a tougher environment that just can't have no machine. I'm kind of curious as to kind of what is the base business in the Professional segment? Great. To answer the first part of the question, we think it's probably a combination of all of those possibilities. So what definitely happened is when our professional customers realized that we were in an economic downturn situation, they responded like we did. They pulled back on expenses. They held their capital purchases and they preserved their cash. As we start to see the economy begin to grow again, those projects that have been on pause are they're now evaluating. Obviously, most of our products are consumed as they are used to some extent. So the product has been used. Golf courses have to be maintained regardless of the economy. The grass has to be mowed. There are other projects that continue on with or without the economy. So respect, for the capital projects that are delayed, it means that it moves out, but it does not, in most cases, go away. To answer your question about the lease renewal that are 3 or 4 year leases, that's pretty typical in our golf environment. Right. And I don't have the exact information on the renewal or trend for those. Yes, I would say for the golf and grounds, for the golf in particular, it's probably close to about half of the business goes through lease, but that's not a typical thing within like landscape contractors. So that would be specific to the Gulf portion of the business. And again, folks can't just end the lease, bring back the machine and not have anything. So in general, you've seen renewal or a new machine out the door or they're still kind of holding off temporarily? Yes. With from a Gulf leasing standpoint, I think they would be more likely to renew their lease. It's more in the individual who isn't leasing today and they're making the decision to buy or not, we tend to see that particular customer migrate more towards repair. So it really be those leases that are coming due, they happen to come due right now in the middle of the situation. They've got to make a decision if they go ahead and renew normally, which is probably most likely. They could also extend late leases or they've got other options as well. Okay. And then turning to residential. You had a large channel partner rolling out in the quarter. For some reason, you didn't name them. I won't name them either, but I know who they are. I'm kind of curious, has the sell through there, even with the crisis, has it been as good as we expected, let's say, 6 months ago? Is it kind of going to your expectations? Also kind of curious, were you able to ship everything into the stores, whether it was signage and the actual products themselves in time before the COVID crisis hit? And also kind of curious, are you able to shift any kind of restock now? Are you up and running on that level? We are extremely pleased Tractor Supply Company, and that is going on as planned. And in spite of overall economic situation and COVID situation, the sales there have been well within the band that we would expect. So we've been very happy with that. And it's complementary to our other channel partners. The Home Depot, for example, has done extremely well. Our other mass partners in total have done well. The dealer business has seen incremental growth. So it's a customer driven demand. And we are pleased with all of our mass partners as well as the progress that's been made with dealers. Tractor supply extends and is complementary and reaches further into the rural and farm markets and large acreage owners. That's great to hear guys. I'll pass it along. Thank you. Thank you. Thank you. Our next question comes from Joe Mondillo with Sidoti. Your line is now open. Hi, good morning everyone. Good morning. Just want to say I appreciate your opening remarks, Rick. My first question, just related to golf. I was wondering if you could sort of talk about equipment versus irrigation. Have you were you seeing any, maybe positive performance or better than equipment on the irrigation side, given that that's more sort of capital projects? Did you have any projects undergoing? And so as those capital projects run off, does irrigation get worse? Or just talk about irrigation versus equipment. Yes. I think equipment would be very much in keeping with the discussion that we've had about capital purchases and consumption of the product, if you will, through its life cycle and leases, those kinds of considerations. For irrigation, there are other factors. So the fact that some courses were shut down for the COVID restrictions created some opportunities to get on to the courses and do some work from an irrigation standpoint. Our irrigation business for golf has held up very well, partially also because of we've had good availability. So we've had marketplace. And then for major projects that have been that were planned, a few of those dropped out, but they were quickly replaced by other projects that were in the queue because there is the constraint is there are a handful of contractors that are sort of the trusted people that do the installations. And so where there is availability for them that freed up, it was immediately filled with a project that was in the queue. Now what happens at the end of the line? Do some of the projects that were delayed come back in again? There's a little bit more question a little bit further out. But in the near term perspective, golf irrigation has done well and projects the mix is a little bit different on projects, but the total has been very solid. Right. And when you look at the channel inventory levels at the Professional business, maybe if you compare it to 2,009, it looked like this quarter, the organic growth was off similar to maybe one of your worst quarters in 2,009. So when you think about channel inventories and the way that even more specifically, the timing of this sort of economic shutdown, right, your prime time, seasonal time, how do you think about channel inventories as we go through the year and into next season? I know it's sort of early, but just wondering your thoughts on that. Yes. From a I mean from a positive standpoint, our a positive standpoint, our field inventories for the professional side are actually in great shape. And we've been able to continue over the last couple of quarters, we talked about higher field inventory in some categories like landscape contractor and maybe commercial. Both of those have we've been able to manage those down in spite of the current situation. So we're making good progress there. That leaves capacity as well in those channels as we begin a recovery process as well. So we're in good shape from a professional side. Are you referring to your Toro inventories in the channel just how that's potentially going to affect later this year or into next year? Yes, I'm really referring to our channel inventory. I don't have as much visibility on other professional competitor inventories in the field, especially right now, given the changes. Okay. And then last question for me. Just on your specialty construction and CMW business specifically, I think in your prepared remarks, you stated that things were trending actually relatively pretty positive. I think maybe you stated a little offset by construction in oil and gas. But just curious, how does that have you seen the worst in that business sort of in this trend given April, a lot of cap equipment is expected to sort of see the worst in April time period, maybe May. Do you anticipate improvement in that business sequentially going through the rest of the calendar year? Or how do you view that business and where we're at today? Yes. First of all, we've talked about one of our tests for acquisitions, which is how do we feel about it a year later. And I will say we feel even better about it a year later. We could not be more pleased with the acquisition of Charles Machine Works and now Venture Products. From underground businesses that are covered by Charles Machine Works. They had a similar response to Toro legacy products in this end markets in this economic situation. And roughly the same response back in 2,008, 2,009, 2010 in terms of coming back. The separate factor would be oil and gas. So roughly 10%, a little bit more than 10% of the business is tied to oil and gas. And that's going to be on a different cycle. That will probably be a slower recovery, bringing those markets back. But the big drivers that are different than 2,008 through 2010 are the 5 gs and the broadband. And we have already seen signs that even if they pause some of those projects or they had to because of board restrictions, Those there's a lot of momentum about completing those build outs, build out of 5 gs and the recognition of broadband gap for many parts of the country in the U. S. Here and actually around the world. I mean, the positive thing is that we have we are on track with our synergies, and we have been very pleased to see how those synergies extend beyond the intersection of Charles Machine Works and the Toro Company to other parts of our business, including just as an example, the positive margins that you see in residential in a part are due to the benefits that we've seen from additional scale in some of the categories. Okay. And just a follow-up. In the context of the economic shutdown and whatnot, would you expect Charles Machine Works to sequentially improve through the calendar year? Is that visible or? I think when you look at overall, maybe answering it from an overall standpoint, if you adjust for the impact that we saw, the benefit that we saw from Charles Machine Works in Q2, we would expect at the overall company level that we will see improvement, as we go through the remainder of this year. Again, Q3 is a larger decline, but driven by the fact that in Q2, we saw the decline, but driven by the fact that in Q2, we saw the benefit from the acquisition. So overall, we're seeing that. And I think the same is true for Charles Machine Works. I think it would follow the rest of the company with regard to essentially, it's a sequence of less negative as time goes on. That's going to nominally match the economic cycle. Thank you. Our next question comes from Tim Wojs with Baird. Your line is now open. Hi, good morning, everybody. Thanks for the details. Good morning. Maybe just on the guidance or the qualitative guidance for the Q3, I just had a clarification. Is the guide of Q3 being kind of the most pronounced on a sales basis on a year over year basis, is that a total growth number or an organic number just because Charles Machine Works was kind of included in the 2nd quarter still and I'm just trying to kind of clarify that comment. Yes. No, Tim, that would be a total number, not an organic number. The organic number would show, as Rick just said, improvement as we go less negative as we go through the remainder of the year. So that's a total. Okay. Okay, perfect. And then maybe just on the Gulf side, if we do start to see if we see a continuation of good rounds played and then also just a pickup in food and beverage, Do you think golf could see a rebound in terms of new equipment sales over the summer? Or do you think that that really just kind of gets deferred into next year if you had to give us your best guess? Yes. The best response is it will be a combination of those. So some of those, especially in areas where the restrictions have been released more quickly, will come back quickly. And in some cases, they've just committed to buy the equipment that's needed because it's recognized that that's what the organization is about. There are other parts of golf that will definitely be slower to come back, and those would be resort golf, for example, on TBD in terms of how quickly travel comes back, where people start to feel more comfortable going through airports. And so that will be on a little different cycle. Individual business decisions, right now, there are a few we have customers that said, we don't see this as a long term issue. We're going to go ahead and maintain our equipment replacement cycle. Others have said, we lost all of our food and beverage revenue and weddings and banquets, so we're going to hold off. So it's really a spectrum. I'd like to give you a clean answer, but that's what's happening. No, that's helpful. No, I appreciate that. And then maybe just last question on residential. I know the sellout and kind of sell in has been pretty strong here to kind of begin the year. But just given the expansion into tractor supply, do you think the structural margins in residential, there's a new level that you're kind of getting to and that we can continue to see that improve over the intermediate term, maybe back to kind of that low double digit type frame you were in 4, 5 years ago? Yes. What I would say, Tim, is we're not providing specific guidance in this quarter, but we did talk about residential margins in Q1. And what we had shared is we expected Q2 to remain pretty strong. I mean, it is the benefit of that incremental volume and also some of the productivity and synergy actions that Rick just mentioned. We did say that based on the outlook at that point in time, we expected them to moderate in the second half of the year. And that's very consistent with what we normally see. And at that time, we thought it would be more moderating into the low teens, but maybe a little lower than that because of the impacts of COVID-nineteen. But we do definitely see a benefit from some of the synergy and productivity actions across the portfolio as well as volume benefit by having an expanded channel that should carry forward as well. Okay. That's it. That's all I have. Thanks guys and good luck on our C. S. Thank you. Thank you. Thank you. Our next question comes from Sam Darkatsh with Raymond James. Your line is now open. Good morning, Rick. Good morning, Renee. And I hope you and your families are well and safe. Great, Dan. Thank you. So just a couple of clarification questions. And if this was covered, I missed it, I apologize. Could you help specifically quantify what May sales were down, just so we can get a sense of as things improve at least what's the base from where it would improve? Yes, we didn't specifically talk to May sales from a quantified standpoint. What Rick said, I believe, was that we did see improvement in May versus what we have seen in April. So kind of recounting some impact the second half of March, a more significant decline in April, and we saw May improving as far as that trend. Could you quantify one of those, maybe April or May, just for scope for us, if you could? Yes. And the seasonal business, I don't we don't have all the monthly detail with us because every one of our months are a little bit different within the quarter. But I think we felt good about the trend we were seeing in May, and I'm seeing that improve across all of the businesses. Got you. Okay. And then, and again if I missed this, I apologize. Snow, the snow season was challenging this year again, particularly in the Northeast, which I think you're underweight. But how would you look at the snow inventories and the prospective preseason to come, if you could, Rick? Sure. Yes, if you look particularly at snow in the second quarter, that was year over year below the prior year, both on the residential side and professional. But that would be probably a little bit more typical. The last couple of seasons have been the winter season, at least in the Midwest, has extended well into April. Some would argue the 1st part of May. So there were stronger late season sales last year than this year. Overall, the snow season for us, both on the residential and the pro side, has been it's been a decent snow year for us. I think it reflects 2 things. We have done a lot of work with the residential team on our product lineup. We have great products with a lot of innovation that people are responding to. And then we are, as you said, overweighted to Midwest, and we had a decent winter in the Midwest, upper Midwest, especially this last season. So preorders, as you can imagine, in the middle of the COVID situation, are were a little bit less than we had hoped for the coming season. But the channel is telling us that it's not reflecting their lack of confidence in the business, but they're more likely to make those purchases within the season versus pre ordering them. And from the professional side, the Snowrator, we've talked about in the past, but that continues to be very solid. And now the Ventrac SSV sidewalk vehicle, those are open spaces for us that have a huge productivity story associated with them that our customers really see. My last question and thank you for that. That was helpful. My last question would be, there's a fair amount of noise with the acquisitions on some of the balance sheet items. Could you help us, Renee, in terms of where your goal is for fiscal year end inventories? Certainly. So when we look at inventories, they are higher at this current point in time, just due to the sudden change in demand and the efforts to realign. And Rick talked about field inventory also being lower. When we look at year end, we do expect, Sam, that we'll probably carry a little more inventory than we traditionally have, just because of the desire to try to buffer some of the potential supplier issues that could occur. That serves us well as we look at how we've managed through this year. And we plan to continue the same unless the supplier environment really improves substantially. And then social distancing the impact that it has on our capacity will also impact us. We're assuming social distancing is going to be something that's in place for the foreseeable future. So we're kind of planning around that. And that has some impact on the inventory that we would carry based on certain plant locations. It's not every plant location. And then the last thing is just being ready for the recovery. We do view this as something that we'll see that recovery as we go into F 'twenty one. And what we have seen from past recessions is that recovery for us happens pretty quickly. And we want to be prepared based on the financial strength of the company. We feel that would be a good investment. So inventories in dollars would be up on a year on year basis by the end of the fiscal year, by the end of October, is that how to think of it then despite the sales declines? Yes, that would be accurate. Okay. Thank you very much. I appreciate it. Again, be well. Thank you. Thank you. You too. Thank you. Our next question comes from Tom Haines with Northcoast Research. Your line is now open. Thank you. Good morning Rick and Renee. I appreciate you taking my question. I guess just quickly most of my questions have been asked and answered. But maybe Rick on a year to date basis, it looks like your international revenue is up slightly. Just wondering if there's any markets or products that are kind of driving that that stood out to you? Yes. Let's see. I think overall, I'm not sure we are up overall for international on the pro sides. We are up a little bit. And that would be driven really regionally. So in Europe, for example, driven by golf projects that continued until right up until the COVID things happened would be the biggest driver. Parts of Asia had a very good year. They're counter seasonal with us. So those would be the big drivers. But no major standout sort of factors there. And together, residential and professional, I think, we're actually we may actually be down a little bit. Thank you. This concludes our question and answer session. Mr. Rhodes, please proceed to closing remarks. Great. Thank you all for your questions and interest in The Toro Company. We look forward to speaking with you again in September to discuss our results for the Q3. Thank you. Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.