Earnings Call: Q4 2019

Dec 18, 2019

Good day, ladies and gentlemen, and welcome to The Toro Company's Full Year 4th Quarter Earnings Conference Call. My name is Catherine, and I'll be your coordinator for today. At this time, all participants are in a listen only mode. We will be facilitating a question and answer session towards the end of today's conference. I would now like to turn the presentation over to your host for today's conference, Nicholas Rhodes, Director of Investor Relations for The Toro Company. Please proceed, Mr. Roetz. Thank you, and good morning. Our earnings release was issued this morning by Business Wire, and a copy of the earnings release can be found in the Investor Information section of our website, thetorocompany.com. On our call today are Rick Olson, 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 statements. Our earnings release as well as our SEC filings detail some of the important risk factors that may cause our actual results to differ materially from those in our predictions. Please note that we do not have a duty to update our forward looking statements. In addition, during this call, we will reference certain non GAAP financial measures. Reconciliations of historical non GAAP financial measures to reported GAAP financial measures can be found in our earnings release 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 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. Thanks to the dedicated efforts of our employees and global channel partners, we delivered strong 2019 results that included record net sales and earnings per share. Results were primarily driven by the transformational Charles Machine Works acquisition, strong demand for BOSS Professional Snow and Ice Management equipment, solid residential snow thrower sales, and positive contributions from our landscape contractor and specialty construction We met our net sales guidance, and we're at the high end of our adjusted We met our net sales guidance and were at the high end of our adjusted earnings per share expectations for the year. For the full year, we generated record net sales and exceeded the $3,000,000,000 mark for the first time. We also delivered earnings per share of $3 up 12.4 percent over prior year. In a year where we closed our largest acquisition, we were still able to return cash to shareholders while investing in our people, productivity, and future profitable growth. Turning to our core operating performance for the year, our Professional segment generated revenue of $2,400,000,000 reflecting incremental contributions from the Charles Machine Works acquisition as well as strong retail demand and new product introductions from BOSS, Exmark and our rental and specialty construction business. In the Q2, we completed the acquisition of Charles Machine Works, a market leader with products covering the full lifecycle of underground pipe and cable. This includes horizontal directional drills, walk and ride trenchers, compact utility loaders, vacuum excavators, asset locators and pipe rehabilitation solutions. With these enhanced underground construction capabilities, we can better provide services to our customers who profitably while profitably and purposefully growing our business. Charles Machine Works through its family of businesses with iconic brands such as Ditch Witch, American Augers, TrendCore, Subsite, Hammerhead and Radius generated strong incremental revenue. We introduced new products including the Ditch Witch JT24 directional drill and SK3000 stand on compact utility loader. Customers are enthusiastic about these new products as we saw at 2 key recent industry expos. Additionally, Hammerhead, the trenchless pipe rehabilitation solution provider launched the blue light LED cured in place lining system in North America. We're excited by this advanced technology and its growth potential. Lastly, our Charles Machine Works integration continues to progress well. We have retained top talent and are on track to achieve or exceed expected synergies. Moving to our legacy businesses, key BOSS milestones in 2019 included record revenue due to strong demand for snow equipment and parts. This resulted from late heavy snowfalls last winter and pre season bookings for the current selling season. In addition, we saw increased shipments of our new snow radar. Customers appreciate the productivity gains they are achieving with this new product. It turns a multi person job of plowing salting sidewalks into a one person operation. I applaud the effort and focus of the BOSS team. This business has been a strong performer and has been growing above the company average since its acquisition in 2014. Exmark sales increased for the year, driven by several new exciting product introductions. This includes the new Starus Stand On Zero Turn Mower and new lawn solutions products from our Z Turf line of sprayers, spreaders and aerators. The Z Turf line originated from our L. T. Rich acquisition. Our rental and specialty construction business also posted strong results. This reflected of the Dingo TXL 2000 compact utility loader and strong channel demand for the Dingo TX1000. Additionally, we saw strong rental channel bookings in the back half of the year. At the recent international construction and utility equipment exposition, we received positive customer feedback on our new TRx walk behind trencher family. These products offer Toro's innovative technology, an intuitive feature that automatically adjusts track speed based on trenching condition. Turning to our residential segment, we had positive growth for the year with increased snow thrower sales to both mass retail and dealer partners. Heavy snowfall across the Midwest last spring and pre season sell in during Q4 contributed to the strong performance. We also saw productivity benefits and pricing actions offset higher input costs. New introductions were positively received in the year and included the redesigned Power Clear and Power Max Snow Throwers. We also had good customer feedback on our newly launched suite of Flex Force Lithium Ion battery powered products with all season capability from mow to snow. The residential team's focus on innovation, productivity, people and channel should position us well in this important segment. Next, I'd like to share updates on several strategic enterprise investments. First, we are focused on key emerging technology areas that include alternative energy products that use battery and hybrid power, smart connected products, and autonomous technologies. Progress is on track in each of these areas and we have established product roadmaps that give us confidence that these investments can support future growth. 2nd, in addition to our continued lean investments, we are focused on several incremental productivity initiatives to fund future growth. These include investments in manufacturing automation, robotics and capacity expansion and investments in automation in our distribution centers. 3rd, we're making capability investments to better support our business needs. For example, we have established a technology acceleration center in India. This strategic hub augments our current new product teams in software engineering and supports the development of smart connected products. Additionally, we are implementing integrated business planning capabilities to more effectively align our business plans and resources with desired outcomes. We'll continue to make investments in innovation and technology to ensure our leadership in the marketplace. In summary, we delivered strong performance for the year, invested in our people and our business to drive innovation and productivity, returned cash to shareholders, and complemented our organic growth with strategic acquisitions. 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. We reported revenue of $3,138,000,000 in 20.19, a 19.8% increase from 2018. Was largely driven by strong professional segment revenue led by the Charles Machine Works acquisition, BOSS snow and ice products and Exmark branded turf Equipment. Diluted EPS totaled $2.53 for the full year compared to $2.50 in 2018. Adjusted diluted EPS increased 12.4 percent to $3 For the quarter, revenue increased to $734,400,000 primarily driven by the Charles Machine Works acquisition, BOSS product sales and channel demand for new golf product introductions in the quarter. These include the GreenMaster and RailMaster Mowers and Outcross vehicles. Diluted EPS was $0.35 compared to $0.36 last year. Adjusted diluted EPS increased 50 percent to $0.48 For the year, professional segments net sales increased 25.5 percent to $2,443,000,000 For the Q4, professional segment net sales increased 46.9 percent to $588,200,000 The sales growth was mainly driven by the acquisition of Charles Machine Works, which added incremental sales of $465,200,000 for the year $194,700,000 for the quarter. Excluding the Charles Machine Works acquisition, legacy professional segment sales were up 1.6% for the year. Professional segment earnings for 2019 were $380,900,000 compared with $399,800,000 in the same period last year, primarily reflecting higher expenses related to the Charles Machine Works acquisition. This included one time purchase accounting adjustments and the impact of our strategic decision to wind down the Toro branded underground construction portfolio in the 3rd quarter. Professional segment earnings for the Q4 were $61,200,000 essentially flat with the Q4 of last year. Residential segment net sales for 2019 were up 1% to $661,300,000 reflecting higher net sales of walk power mowers, snow throwers and parts. For the Q4, residential segment net sales increased 1.9% to $135,700,000 primarily due to strong sales of snow thrower products. Residential segment earnings for 2019 were up 0.5 percent to $65,200,000 Residential segment earnings for the 4th quarter were up 104.7 percent to $13,900,000 largely as a result of pricing and productivity initiatives. Moving to our operating results. Reported gross margin for 2019 was 33.4%, a decline of 2 50 basis points over the prior year. This was mainly a result of purchase accounting charges associated with the Charles Machine Works acquisition and the unfavorable impact of higher commodity and tariff related costs for the year. Excluding the Charles Machine Works acquisition related impacts and other non recurring items, adjusted gross margin was 35.1%, a decrease of 80 basis points over the prior year. For the Q4, gross margin increased to 33.4% from 33.2% in the prior period. As the impact from acquisition related charges was offset by positive effects from pricing actions and lower year over year commodity and freight costs. Adjusted gross margin increased 130 basis points to 34.5% in the quarter. For fiscal 2020, we expect to see gross margin improvement. SG and A expense as a percent of sales increased 130 basis points for the year, primarily due to the acquisition of Charles Machine Works. For the quarter, SG and A expense as a percent of sales increased 2 30 basis points, reflecting acquisition and integration related expenditures and higher intangible amortization related to the Charles Machine Works acquisition, increased warranty claims in several of our businesses and growth in engineering expense for new product development. As a result, for the year, our reported operating earnings as a percent of sales were 10.4% compared with 14.2% in 2018. Adjusted operating earnings as a percent of net sales were 12.9% for the year. 4th quarter reported operating earnings as a percent of sales were 5.9% compared with 8% a year ago. For the quarter, adjusted operating earnings as a percent of sales were 8.4%. Interest expense increased by $9,700,000 for the year and by $3,500,000 for the quarter. These increases were due to the additional debt to fund the Charles Machine Works acquisition. Net other income was up $7,500,000 for the fiscal year, largely due to realized gains on actuarial valuation changes for our pension and post retirement plans and higher earnings from our equity investment in RedIron. For fiscal 2020, we expect net other income to be about $13,000,000 which is approximately 50% lower than fiscal 2019. The largest driver of this decrease is the realized gain on the actuarial valuation changes in fiscal 2019, which is not expected to repeat in fiscal 2020. In addition, we have negotiated new terms with our inventory finance partner beginning in fiscal 2020 that will result in higher net sales and lower other income from our equity investment in RedIron. The reported effective tax rate was 14.9% and 12.4% for the full year and 4th quarter respectively. The adjusted effective tax rate for the full year and the quarter were 19.3% 17.7% respectively. For fiscal 2020, we expect an adjusted effective tax rate of about 20.5%. Turning to the balance sheet and cash flow. We ended the quarter with 151.8 $1,000,000 of cash and cash equivalents and $700,800,000 of debt. Our balance sheet continues to provide us flexibility to invest in innovation, acquisitions and productivity initiatives while returning value to shareholders. As expected, our working capital increased as of year end due to the inclusion of Charles Machine Works and we saw increases in inventory, payables and receivables. We expect higher depreciation and amortization as a result of the Charles Machine Works acquisition of about $95,000,000 for fiscal 2020. Capital expenditures are estimated to be about $100,000,000 Free cash flow conversion was about 89% for the year towards the high end of our guidance range of 80% to 90%. In fiscal 2020, we expect free cash flow conversion to be about 100%. We remain focused and disciplined with our capital allocation strategy. In 2019, we completed the Charles Machine Works acquisition, invested over $200,000,000 in R and D and capital expenditures, repurchased $20,000,000 of Toro stock and paid $96,000,000 in dividends. The strength of our business is funding investments in innovation, productivity and growth, while also returning value to shareholders. We increased our quarterly dividend by 11.1 percent for fiscal 2020 and continue to have ample capacity under our authorization. We remain committed to executing on our disciplined capital allocation strategy going forward. I will now turn the call back to Rick for his comments regarding our outlook. Thanks, Renee. Building on the record performance in 2019, our 2020 guidance reflects a full year of Charles Machine Works, anticipated volume growth, continued product introductions and additional productivity gains. Total company revenue for 2020 is forecasted to be about $3,600,000,000 an increase of nearly 15%. This reflects growth in both our professional and residential segments. Our adjusted diluted earnings per share for 2020 is forecasted to be in the range of $3.33 to $3.40 on higher volume and improved productivity. For the Q1, we expect adjusted diluted earnings per share of approximately $0.58 Keep in mind that even with the Charles Machine Works acquisition, our business remains seasonal and our 1st and 4th quarters are typically smaller. Let's review prospects for our various businesses. Starting with the professional segment, strong preseason bookings and early winter conditions in key markets have helped our snow and ice management business get off to a good start. We expect growth from BOSS during the season with continued success of the Snowrator. Additionally, new truck models favor incremental demand for new snowplows and ice management equipment. The outlook for our underground business is encouraging with strong market growth opportunities such as the 5 gs wireless build out. Our family of Ditch Witch products are the contractor tools of choice to support this expansion in major cities and to connect rural customers with high speed Internet. 5 gs deployment, which is in its infancy, requires substantially more fiber infrastructure than past wireless broadband solutions. Our new product introductions such as the JT24 directional drill offer our customers the power, productivity and versatility they are looking for in support of fiber installation projects. We have the right brands and products to support the full lifecycle of pipe and cable from install to repair and rehab. We believe our customer valued innovations will continue to make us the equipment provider of choice for infrastructure, utility, gas, wastewater and technology projects. The outlook for our rental and specialty construction business continues to be strong. Key indicators are trending positive with a stable housing environment and healthy U. S. Consumer. Additionally, the American Rental Association expects North American rental equipment revenues to grow in each of the next 5 years. That's important for our business as we launch several new products. These include the Ditch Witch SK3000 Mini Skid Steer, the Toro Dingo TXL 2000 compact utility loader and the Toro TRX walk behind trencher. Also, our new lithium ion battery powered eDingo provides customers the ability to work indoors free of exhaust emissions without sacrificing power or performance. In golf, given the recovery in year to date golf rounds played and our new product introductions, we're encouraged by the prospects for fiscal 2020. We're ready for the season with new products such as the Greensmaster 1000 Walk Greensmower, the Greensmaster E TriFlex All Electric Riding Greensmower and the Outcross Turf Tractor. Lastly, we see positive indications that weather delayed golf irrigation projects should materialize in fiscal 2020. We're excited by the upcoming product and technology innovations that will be introduced at the Golf Industry Show in January. We're also excited by anticipated demand for recently introduced products aimed at our landscape contractor customers. These include the Z Turf spreaders, sprayers and aerators, Exmark Staris and Toro Titan Zero Turn Mowers. With more consistent weather patterns, we expect strong retail to reduce our landscape contractor field inventory during the first half of the fiscal year. For the residential segment, we expect continued strong demand for snow throwers. Additionally, we are very encouraged by the early excitement and positive feedback for our turf business, including the recently introduced full line of Timecutter 0 turn mowers, our strategic partnership with the Tractor Supply Company, which provides us with broader customer reach, and our refreshed approach to brand positioning and product marketing. Lastly, an update on our current multiyear employee initiative, Vision 2020. With the transformational acquisition of Charles Machine Works, our financial profile has changed and so must our Vision 2020 financial goals. We will complete Vision 2020 in this 3rd and final year with a revised enterprise wide performance goal of adjusted operating earnings of $485,000,000 At the end of fiscal 2020, we expect to transition from Vision 2020 to a new multi year employee initiative. We will provide information on the new initiative during our Q4 earnings update in December 2020. In summary, we expect to continue to drive strong results through our focus on our key strategic priorities of profitable growth, productivity and operational excellence, and empowering people. Once again, thank you to our employees and channel partners for their contributions to success we achieved in fiscal 2019 and for their continued dedication in the New Year. We'd now like to take your questions. And our first question comes from Josh Chan with Baird. Your line is open. Hi, good morning Rick, Renee and Nick. Good morning, Josh. Good morning. Just wanted to start off with the tractor supply comment that you made at the end, Rick. Just wondering how impactful it might be in terms of your 2020 guidance and how should we think about the timing of that agreement kind of flowing through? Tractor supply is a significant driver of our results for 2020. We'll really start to see the shipments hit beginning in the Q2 and into the Q3. So it's not as much impact in the Q1. Just from a market standpoint, it really extends our reach into geographies that have not been as well served. We have a strong dealer network, but from a mass standpoint, it really tractor supply continues on into more rural and smaller town environments. So we're very excited about it and it looks like it's going to be a great partnership. All right. Thanks for that. And if I can switch to the professional segment, looking at the margins in the quarter, I know that there are some non recurring impacts that you outlined in the press release, but they kind of split between the corporate and professional segments. So I wonder, how should we think about sort of the non recurring charges and how much did that impact the professional segment margins in particular this quarter? Sure. Josh, if you look at our earnings release and a reconciliation of non GAAP information, Just speaking maybe to the operating line, the operating earnings line, we've got roughly about $80,000,000 of one time expenses in 2019. I would take that and probably split that about 25% of that goes to other and then about the remainder 75% goes to the professional segment. So that would be a good split for you to use. All right. Thanks. And then if I look into 2020 for professional margins, I guess, how much synergies are you expecting from Charles Machine Works? And then I would assume that you would expect the rest of the business to also have improved margins. Is that the right way to think about it? Yes, it is. We guided to in our IR package that we do expect gross margins to improve as we look at 2020. And what we would expect from just a synergy standpoint, first of all, is we had talked about $30,000,000 of synergies spread kind of ratably over 3 years. We really feel good about our situation with synergies. We've stepped back and looked at it more holistically across the organization. So to the point that you were making, it's not all going to show up just in the professional segment. We actually see improvement, the way we're approaching it across the entire organization. So, we should also consider though as we look at margins for next year, we just talked about Tractor Supply, great partnership and we're really excited about that. However, just keep in mind the residential margins are a little bit less than we would see. And we also have a full year of Charles Machine Works, which also has a little bit of a negative impact on overall margins. All right. Yes, that makes sense. And then I think last one for me. Does your guidance assume any stock buybacks in the year? Yes. There is some limited buybacks. As you know, we had focused post Charles Machine Works acquisition on paying down our debt. And we really are ahead of our original schedule for that. So we feel good about that. So all things being equal, we would look at share repurchases, a little bit later in the year. All right, great. Yes, thanks for the color and thanks for your time. Thank you. Thanks, Josh. Thank you. Thank you. And our next question comes from Mike Shlisky with Dougherty and Company. Your line is open. Good morning, guys. Good morning, Mike. Maybe just first follow-up quickly on Try to Supply. Certainly, there's going to be some organic tailwind given you have to sell into almost 2,000 stores in the springtime. But as far as what's being sold in the stores, I mean, these are probably going to be some higher acreage customers in those stores. Is there any way to kind of bracket for us whether you'll see margins that are kind of maybe not the same as professional, but a little bit higher than the average residential, given that there might be some heavier duty products there? Yes. I think we are, as we said before, very excited about tractor supply, and we would expect the margins to be similar in those categories. You're right, since they do tend to have higher concentrations in rural areas, there is a lot of interest in our Z line, for example, but we also have a complete line of the turf products and potential to expand on that as well. So it will be quite a complete line there, and we will tend to focus more on products for larger properties, but we'll have the complete product line there as well. Okay. And then shifting over to construction equipment, what I've been seeing, at least on the heavier construction side, that a lot of companies have kind of reined in production this winter to get their dealership inventories in line with their retail sales outlook. Can you comment on how you feel about your inventories at Charles Machine Works and your other construction products? And is there a chance you may have to pull back on the production just to kind of start the year, or do you feel pretty good about where inventories stand today? We actually feel good about construction in our excuse me, about inventory in our construction categories. As you know, last year, we had some strong new product introductions so that there is a lot of excitement about those new products from a sales and retail standpoint. So we have good flow there. So we our inventories are in good shape from a construction standpoint, from a specialty construction standpoint. And just keep in mind, we are in small segments, specialty segments of construction, so this is not we're not talking about bulldozers and excavators and so forth. This is for either very specialized applications or for more landscape contractor, smaller scale type of operations that are driven by different construction factors. Sure, of course. Right. And maybe one last one for me. Let's get just a little more color from you on the organic growth outlook for 2020. I guess first, do you feel like you're going to get some good organic growth from Charles Machine Works? And then secondly, from a broader perspective, can you give us any kind of number or range as to where as to what you think we should be modeling for organic growth overall next year? Yes, I would just Renee can comment on what we can talk about specifically with regard to organic growth. But we feel quite optimistic pretty much across the board on our markets. And there are obviously factors like weather that we can't control, but the factors that we can control, we feel very good about. We have a lot of new products that are entering the market. There's optimism in some degree in every market. We've got golf rounds, for example, started this last year through the spring, I think in June, I mean, it's June or May, down 4% year to date. And as of the last data that we saw through, I believe, October, they were in positive territory. So they made up tremendous ground during the season. That's obviously a nice revenue trend for the golf courses and helps to provide funding for new projects and new equipment. So pretty much across the board, we see some positives that we feel good about. And Charles Machine grew their business, and we expect to continue to grow their business in roughly the same rate that the Toro Company has been growing mid single digits type of growth longer term. Yes. I'll just add on to that if I may from an overall standpoint. If we look at it maybe from a segment point of view, we would look at pro being mid single digit type of growth rate, pretty solid as we look forward. From a residential standpoint, we normally would guide to GDP type of growth. We do expect that to be greater as we talked about with the Tractor Supply partnership being in its initial year. And then overall Charles Machine Works, as Rick was just talking about, we would expect to be basically that mid single digit type of growth rate. Again, we're including them now for a full year where we only had a partial year in 2019. Got it. Perfect. Thanks so much, guys. I'll pass it along. Appreciate it. Thank you. Thanks, Mike. Thank you. And our next question comes from David MacGregor with Longbow Research. Your line is open. Yes. Good morning, everyone. It seems to be up fairly substantially. Obviously, some of that is CMW, some of it is probably new products that you've talked a lot about, some of it's going to be raw material inflation. But is there any way to parse that out a little bit for us and give us a little bit of a better feel for sort of the composition of that increase? Yes. David, the biggest piece by far is Charles Machine Works. Sure. Just given the size. And as we had talked about in the past, we do see opportunities to improve Charles Machine Works working capital, but that's going into 2019 going into 2019, we do have a great lineup of new products. And so we are anticipating real strong introductions. Typical with the past, we would have some inventory build as we go into new product introductions. And then we talked about tractor supply as well. And in all honesty, as we ended 2019 from a legacy perspective, we started extremely strong with a very strong Q1. You might remember we had 10% sales growth overall for the company. And then the remainder of the year, weather wasn't as favorable. Everyone was very optimistic going into the year. So there's probably some impact just from the wet weather that we saw in 2019 as well. Okay. Thanks for that. Just with regard to tariffs, can you just update us on kind of the carryover impact into 2020? Yes. As we look at tariffs, so some of the latest changes that had occurred, were primarily focused on the List 4, which for us was not very impactful for still kind of a minimal impact, for that. We're just looking at as tariffs being about flat year over year. We talked about in the past for us it's somewhat hard to segment tariffs from tariff related inflation because we're more of an assembler of products versus a pure manufacturer. Many of the times we get the tariff kind of indirectly when we're purchasing the product or the parts from one of our suppliers. So it's hard for us to break out the exact impact of tariffs, but we're thinking it's going to be about flat year over year. Now maybe something will get resolved that would be beneficial. We can certainly hope for that. Yes, hopefully. Just on the walk power mowers, down in the 4th quarter, I guess we talked about the sort of battery power mower secular growth pattern in the past, but trying to get a sense of whether we finally got to the point where maybe sort of gas powered walk mowers are starting to lose more share to the battery powered product and your that particular product category is just succumbing to the secular trends in battery power? Yes. The battery powered portion has been a small but one of the faster growing segments of the lawn and garden and the walk part of mower segment. We have now a very solid 60 volt lithium ion battery package, and we're seeing nice response from customers on that, very positive feedback. So we think that as it settles in, it will be another power source and a lot of the focus will go towards the overall features and benefits of the products. And that's where we feel very positive about our offerings and our options. So it has been a growing segment. Gas powered products are not going to go away in the near future, but we will have an offering of what customers want, whether it's battery or whether it is gas. And we will maintain and have maintained our market share, and the battery offering will be and has been part of that beginning this year. In that case, do you think, Rick, that you may have just lost share in walk power mowers? No, we didn't. We actually maintained our share in a really tough environment, so it was tough for all competitors, meaning it gets very competitive in that environment and we maintain our share in water mowers. And the kind of industry was probably down in part related to weather. Yes. That's what I was trying to get at. Last question for me is just, you talked about the Flex Force lithium ion product that you are rolling out. I guess, how do you build retail and distribution support for that product now? We've had strong support. I can tell you from a mass standpoint, that we'll continue to get placements with our mass partners. For me personally, one of the areas of surprise is in our dealer network, it's had a very strong response, especially after the initial introduction and the reputation started to generate the feedback from our dealers has been very positive. I think they were surprised at the number of customers that came in looking for battery powered options. They have not historically been as strong in the battery area. So I think that's kind of a new and interesting development for us. Good. Thanks very much. Good luck. Thank you. Thank you. And our next question comes from Joe Mondillo with Sidoti and Company. Your line is open. Hi, good morning, everyone. Good morning, Joe. So a couple of questions. Just to clarify, Renee, regarding one of the initial questions on the Q and A, Regarding the adjusted professional income, you made a statement regarding the full year of fiscal 2019. I was curious is that sort of 70 five-twenty 5 breakout similar in the Q4 or is it at all any different? Yes, it would, what it really relates to some of the management actions are split more between the other and pro where, most of the acquisition related items fall more directly. So if I mean it's a reasonable split. It is the split for the year, but it would be reasonable for the quarter too, Joe. Okay. And then, so I'm just trying to think, in terms of the professional business, the legacy professional business, just curious if we have a scenario where weather is I'm just curious if we have a scenario where weather sort of reverts at all closer back to sort of the norm, how does that how should the business progress in that situation? You're going to have an easier comp, but then how are you thinking about inventories in the channel? Are inventories higher than normal because of the weather last year? Any color behind how you're thinking about that would be helpful. Right. Yes. So I think to summarize this last year, anything that had to do with growing grass or mowing or outdoor activities was really challenged from the early spring all the way through mid summer. And so that cuts across many different categories for us. So it was one of the more challenging years. I think it was the wettest year on record in Minnesota at least and for much of the Midwest. So that was kind of the thread of challenge that ran through our business this year. If we return to a more normal weather pattern, we have modeled the required inventory and the the required inventory and the effect on the inventory in our plan now, so that's really what is built into our plan. We also build in some flexibility to respond to greater or less than. And the key is really to do exactly that, to stay responsive to what's happening in real time and be able to adjust our requirement our production and supply chains as quickly as possible. So that's we stay nimble, and that's been the key to Toro for a long time. So do you think the inventories in the channel are a little high? And if so, would it sort of be maybe a little weaker performance earlier in the year? And as those inventories get absorbed, maybe stronger performance, especially given the comps that you have maybe towards the back half of the year? Is that a fair way of looking at it or We have a few categories where inventory is a little bit higher, but not outside of the range of what we've seen before. So that's all built into our plan. So that's the flow that we've built into our plan for 2020. It really acknowledges where there are those isolated cases. Yes. And as you said, Rick, I mean, that is an area we're very used to dealing with that and kind of the ebb and flow that comes with that. And we always make sure that we're focused on retail and keeping the field in good shape. So it's not at all out of the ordinary. And as we've talked about in the past, sometimes things can move between quarters for us. So we always encourage people to look over the total year, where you get the best perspective from our performance. Okay. And then, at the residential segment, you saw another pretty good quarter in terms of margin. Just curious what drove that? And did you see any I know I think you called out in the Q3 that you saw some tariff recovery income. Did you see any of that type of income in the Q4? Yes. Nothing out of the ordinary, Joe. We did see the impact of we had commented on pricing and productivity initiatives. So, saw that impact a little bit more concentrated. And as you expect margins to improve more in the second half of the year and we saw that sequentially. But there weren't any unusual one time items. We did see the commodities moderate and deflate a little bit in the quarter, but more than anything was pricing and productivity. Okay. And then two last questions. 1 on free cash flow. Just in terms of working capital expectations, You stated that you're anticipating earnings to free cash flow conversion of about 100% this year. Just wondering what how that translates into working capital? And then last question just on the tax rate, wondering what you're anticipating for that? Okay. So, first of all, on working capital, we would expect that, as we go into year end, we would see year end 2020 that working capital come down. We do believe structurally Charles Machine Works is at a higher working capital rate. We think over time we'll see some improvement there. And we had a number of items that were driving our working capital, in particular inventory to be a little bit higher at year end that we don't necessarily anticipate. Part of it being just the weather, part of it being the new products, the whole host of new product introductions that we have and then again tractor supply being new to us. So we would expect working capital at year end to be coming down and trending lower. From a tax rate standpoint, we would expect the adjusted effective tax rate to be 20.5% or thereabouts for next year. Okay. Thanks for taking my questions. Thank you. Thank you. Thank you. Our next question comes from Sam Darkatsh with Raymond James. Your line is open. Good morning, Rick, Renee, Nick, how are you? Good morning. Hi, Sam. Doing well. Happy holidays to each of you. Just most of my questions have been asked and answered. I just have a couple of housekeeping items. The guidance for 'twenty, the EPS guidance, the $3.33 to 3 point $4.0 What does that imply for GAAP EPS? We do not guide to GAAP and part of it is we just don't feel especially with the areas around the stock, excess tax benefit from stock comp is very difficult to try to estimate when options will be exercised. So that's part of the reason why we consider that to be a non GAAP item. So we haven't provided GAAP guidance. The obvious follow-up then is how do we figure the 100% free cash flow conversion I'm guessing that's based on reported net income? We tried to give you the elements associated with it. We just talked about working capital a moment ago as well as capital expenditures. We expect to be about $100,000,000 We I'm trying to think D and A, we had put in guidance as well. So we've got D and A, we expect to be about 95,000,000 dollars We tried to give you the elements. But can you quantify working capital or put a little bit more meat on the bone in terms of that? Yes. We haven't quantified it specifically. We just said that we would expect it to decrease from where it's at today at year end. Okay. So then should we assume that free cash flow would be up on a year on year basis at least? Yes. Okay. Yes, you will. As we were at 90% this year, we said 100% and our EPS, I mean, we're growing with the entire year of Chard Machine Works, so yes. So in terms of dollars, though, free cash flow will be up year on year? Yes. Correct. And then my final question, the professional organic in the 4th quarter was down. Now I know it was a more difficult comparison. This has been talked about already, I think, on this call. Are you expecting or assuming that organically professional will be down again in the Q1? Again, I'm looking at the comparison and it looks similar. And then if you could be more specific, Rick, in terms of what specific categories you're seeing the headwinds in pro right now organically, especially knowing that snow is so strong. I know you mentioned anything that has to do with cutting, but if you could be more specific in terms of where you're seeing it, so we can track it as it progresses? I think we touched on it a couple of times, but the inventory areas would be in the LCE area, so we would be making sure we get those at the point where we want them to be. A little bit in international and a bit in irrigation. And there's not a lot for irrigation. The Q1 is not there's not a lot of retail drive during the quarter, so it's always a little tough anyway, but those are some of the elements where it's coming from. So international LCE inventory and a bit of irrigation. And the organic growth expectations or organic sales expectations for Pro in the Q1 would be similarly pressured as it was in 4th? I think that's fair to say, yes. Okay. Thank you, each of you, and again, very happy holidays to you and your families. Thank you. Thanks, Pam. Thank you. Our next question comes from Tom Mahoney with Cleveland Research. Your line is open. Hi, good morning. Hi, Tom. Good morning. Traditionally, you guys have been able to achieve or realize price in the pro segment and certainly tariffs, I think that's been a part of the story over the last 12 or 18 months. Can you talk about whether there is price in the Pro segment in 2019 and if you expect that number to be similar or more or less as you look into fiscal 'twenty? Yes, we typically over time get between 1% 2% price in the last year and a half or so. We talked about the need to be on the high end of that due to some of the high input cost increase that we had. So some of those are not as strong in 2020. So we would not expect quite as much price during 2020, but we would still be staying in that range of 1 to 2 price realization. Okay. And then you mentioned a change in RedIron. Is that purely an accounting change or is there any change in terms of how any impact on the dealer network, any incremental benefits for them as you make a change there? Yes. No, there's no impact externally at all. And it's really, Tom, just geography on the P and L, but we wanted to point it out to assist with modeling. So it's really moving from equity investment being other income to really being an increase in net sales because of a lower sales is the driver to that. So it just moves between geography and the P and L, but no fundamental change other than that and no impact externally. You. This concludes the question and answer session. Mr. Rhodes, please proceed to closing remarks. Thank you for your questions and interest in The Toro Company. We look forward to talking again in the New Year to discuss Q1 results. Thanks, everybody. Thank you for participation in today's conference. This concludes the presentation. You may now disconnect. Everyone, have a good day.