Earnings Call: Q2 2019

May 23, 2019

Good day, ladies and gentlemen, and welcome to The Toro Company Second Quarter Earnings Conference Call. My name is Jonathan, and I will 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. As a reminder, this I would now like to turn the presentation over to your host for today's conference, Heather Hilly, Director of Investor Relations and External Communications for The Toro Company. Please proceed, Ms. Hilly. Thank you, and good morning. Our earnings release was issued this morning by Business Wire, and a copy of the earnings release, including a reconciliation of non GAAP financial measures, can be found in the Investor Information section of our corporate website, sotorcompany.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 as well as information regarding non GAAP measures. During this call, we will make forward looking statements regarding our business and future financial and operating results. You all are 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 that may cause our actual results to differ from those in our predictions. Please note that we do not have a duty to update our forward looking statements. Our earnings release and this related call contain certain non GAAP measures. Given the significance of Charles Machine Works and the closure of this acquisition on April 1, 2019, we have revised our definition of non GAAP financial measures to exclude the impact of one time costs associated with acquisitions, including transaction and non reoccurring integration costs and one time purchase accounting adjustments that are not operational in nature. This is in addition to the previously excluded impact of the excess tax deduction for share based compensation. 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. Reconciliations of adjusted non GAAP measures to reported GAAP financial measures are included in the schedules contained in our earnings release. Such non GAAP 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 measures presented in our earnings release and this related call. With that, I will now turn the call over to Rick. Thank you, Heather, and good morning to all of our listeners. We accomplished much during the Q2 from successfully closing our acquisition of Charles Machine Works ahead of schedule to achieving nearly double digit sales growth in both our Professional and Residential segments despite significant headwinds. Net sales for the quarter grew 9.9 percent to $962,000,000 with reported net earnings of $1.07 per share and adjusted net earnings of $1.17 per share. Professional segment sales grew 9.6% for the quarter, driven by the acquisition of Charles Machine Works. Increased sales across our landscape contractors, snow and ice management, ag irrigation and the Toro branded rental and construction product lines also contributed to our Professional segment results for the quarter. Our Residential segment registered a 9.4% sales gain as a result of demand for both walk and riding mowers as well as for snowblowers and portable power offerings. Importantly, international sales increases enhanced our results for both segments. Following a brief commentary on the state of our businesses today, Renee will discuss our financial and operating results in more detail. First, our rental construction businesses delivered strong second quarter results driven by our successful close of the Charles Machine Works acquisition and strong dealer channel demand for our latest innovations, including the revolutionary Bingo TXL 2000 Compact Utility Loader. Orders written in connection with the American Rental Association show in February were up versus last year. The Charles Machine decision to pursue this transformational acquisition. Our people share intense visceral commitments to innovation and customer service. The timely addition of Charles Machine Works made a strong contribution to our 2nd quarter results. Our landscape contractor businesses also achieved 0 turn riding and walk behind professional mowers suggest contractors are bullish about the cutting season. Sales to large acreage owners also contributed to the business' 2nd quarter results. Late season snowfall across the Midwest helped loss wrap up a successful winter on a high note with a final sales rush. Combined with the start of preseason shipments for next winter, this late season activity helped deliver a particularly strong quarter for the professional snow and ice management business. Weather has not been so kind to our golf and grounds golf and sports fields and grounds businesses. Cold, wet, even snowy conditions delayed mowing operations and kept some golfers off the links. However, new products like the Groundsmaster 1200 and our latest electric walk and riding greensmowers are being well received by the market. We were honored to close out the quarter with the signing of an 11 year equipment and tournament support agreement with Hazeltine National Golf Club. Toro and our local Toro distributor, MTI Distributing, will have the opportunity to support Hazeltine's superintendent, Chris Tridibaugh and his team as they prepare the course to host several major events, including the 2019 KPMG Women's PGA Championship, the 2020 USGA Junior Amateur, the 2024 USGA Amateur and the 2028 Ryder Cup. Our relationship with Hazeltine began when the club opened in 1962. Increased golf and ag irrigation sales for the quarter helped offset challenges faced by our other domestic irrigation offerings that were hampered by unfavorable weather. Our latest innovations continue to appeal to customers across our irrigation businesses. Moving to our residential business. The late season Midwest snow events drove increased retail demand for snow blowers in the quarter and helped clear field inventory levels to set up a promising preseason booking program. Early spring sales events sparked a strong retail response during less than optimal spring conditions, boosting demand for our walk and riding mowers. Our walk power mower business further benefited from increased placement of our 30 inches Time Master and the successful April launch of an exciting new line of lithium ion battery powered walk power mowers, which will be discussed in more detail later in the call. Solid demand for electric blowers and trimmers capped off Residential's positive second quarter While results varied on a regional and business basis, total international sales increased nicely for the quarter despite unfavorable currency exchange rates and weather challenges. The addition of Charles Machine Works and strong demand for golf grounds and both golf and ag irrigation products drove growth in the Professional segment. Residential sales improved based on demand for walk power mowers, most notably for the latest Hayter Harrier models. 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. As we reported earlier this morning, net sales for the quarter grew to $962,000,000 compared to $875,000,000 for the same period a year ago. We also delivered net earnings of $115,600,000 or $1.07 per share compared to $1.21 in the Q2 of fiscal 2018. As Heather mentioned, given the significance of Charles Machine Works and the closure of this acquisition on April 1, 2019, we have revised our definition of non GAAP financial measures to exclude the impact of one time costs associated with acquisitions, including and non recurring integration costs and one time accounting adjustments that are not operational in nature. This is in addition to the previously excluded impact of the excess tax deduction for share based compensation. Adjusted net earnings for the quarter were $126,000,000 or $1.17 per share compared to adjusted net earnings of $130,300,000 or $1.20 per share in the comparable 2018 period, a decrease of 2.5%. Year to date net sales were up 9.9 percent to $1,565,000,000 We achieved net earnings of $175,100,000 or $1.62 per share. Adjusted net earnings for the 1st 6 months were $182,700,000 or $1.69 per share compared to adjusted net earnings of $182,400,000 or $1.68 per share in the comparable 2018 period, an increase of 0.6%. Please see our earnings release for a reconciliation of financial measures calculated and reported in accordance with GAAP as well as adjusted non GAAP financial measures. Professional segment sales were up 9.6 percent for the quarter to $723,500,000 Year to date, professional sales were up 10.8 percent to $1,178,500,000 These increases were driven by the addition of Charles Machine Works and the demand for a landscape contractor, snow and ice management, aggregation and Toro branded rental and construction products. Professional segment earnings for the quarter totaled $150,100,000 down 9% from $165,000,000 in the same period last year. For the 1st 6 months, professional segment earnings were $238,100,000 a 1.2% decrease compared to the same period last year. Earnings were negatively impacted by one time purchase accounting related to Charles Machine Works, inflation and tariff related costs and weather, which negatively impacted early retail demand and caused supply chain challenges. Pricing and productivity initiatives helped partially offset the decline. 2nd quarter residential segment sales increased 9.4 percent to $232,100,000 Year to date residential sales were up 6.4 percent to $377,300,000 Demand for walk and riding mowers as well as snow blowers drove those gains. Residential segment earnings in the quarter totaled $22,000,000 a decrease of 16.2% from a year ago. Year to date earnings declined 16.5 percent to $35,000,000 Unfavorable commodity costs, tariffs, product mix and higher freight contributed to the decline in earnings, which was partially offset by pricing and productivity actions. Now to our key operating results. Gross margin declined 360 basis points to 33.4% for the quarter and by 280 basis points to 34.3% year to date. Adjusted gross margin decreased 260 basis points to 34.4% for the quarter and by 220 basis points to 34.9 percent year to date. Unfavorable commodity costs, tariffs, product mix, freight, supplier challenges and production and shipping delays related to poor weather were responsible for the declines for both periods, which were partially offset by pricing and productivity improvements. We continue to expect to see gross margin improvement in each of our businesses in the second half of the year. SG and A expense as a percent of sales increased by 160 basis points for the quarter to 19.1% and by 60 basis points to 21% for the 1st 6 months. Acquisition integration and transaction costs largely responsible for these increases. Operating earnings as a percent of sales for the quarter were 14.3%, a decrease of 5 20 basis points and 13.3 percent year to date, a decrease of 3 40 basis points. Adjusted operating earnings for the quarter decreased by 310 basis points to 16.4 percent and by 200 basis points to 14.7 percent for the 1st 6 months. Interest expense increased by $2,000,000 for the quarter and $1,900,000 year to date due to additional debt related to the Charles Machine Works acquisition. The reported tax rate for the 2nd quarter was 15.8% compared to 22.4% last year. The adjusted tax rate for the 2nd quarter was 19.9% compared to 23% last year. For the 1st 6 months, the reported tax rate was 15.5%, down from 34.7% in the same period last year. And the adjusted tax rate was 20.2%, down from 22.6% last year. With the addition of the Charles Machine Works acquisition, the company now expects a full fiscal year adjusted tax rate of about 20.5%. Next, accounts receivable for the quarter totaled $428,600,000 a 30% increase over the same period last year. Net inventories for the quarter increased 54.8 percent to $611,300,000 Trade payables increased 28.9 percent to $391,700,000 The Charles Machine Works acquisition was largely responsible for these increases. As we discussed when we announced our acquisition agreement, we did not repurchase any shares of stock during the quarter in favor of reducing our debt by over $200,000,000 There are about 7,000,000 shares outstanding under our authorization. I'll now return the call to Rick. Thank you, Renee. While inflation, tariff related costs and the weather continue to be a challenge, we are confident of delivering another good year. This confidence is founded on a number of factors. 1st, field inventories are in good shape to address customer needs. Assuming a return to more normal weather conditions, we are well positioned with strong portfolios of innovative products to capitalize on current demand and new growth opportunities across our businesses. 2nd, we have taken steps to mitigate supply chain challenges throughout the enterprise by collaborating with suppliers to ensure consistent delivery of critical components. In addition, we will continue to optimize inventory levels and have made significant capital investments in our plants. These investments, which include a state of the art paint system, new fiber optic lasers for fabrication purposes and new technology to streamline our parts sorting and packing process, should increase capacity, reduce costs through enhanced productivity and provide an ergonomically improved work environment. 3rd, the transformational addition of Charles Machine Works not only vastly expands our presence in the rental and construction businesses, but is proving but is providing opportunities to capitalize on synergies across the enterprise. Our integration management office comprised of leaders from the 2 formerly separate companies is making great progress on the integration. Furthermore, we are we contracted with a leading consulting firm to assist with the process. Our goal is to ensure we remain a strong dynamic organization, adept at anticipating potential obstacles yet agile enough to meet unpredictable challenges so we can continue to win in the marketplace. Thanks to the good work of our integration team, we believe we are on track to achieve the acquisition specified run rate synergy target as well as improvements in working capital and other savings across the company. This acquisition is a catalyst for looking across the enterprise to drive productivity improvements and operational excellence. Now let's review prospects for our various businesses. While construction rates are moderating, forecasts call for continued growth. Ongoing enhancements in communication, technologies and the potential for increased infrastructure spending present encouraging news for our newly expanded rental and construction portfolio. All of our brands will continue to innovate and focus on supplying real solutions for our customers' needs. Our combined expertise and product portfolio will help strengthen our leadership position. As the independently developed electric Ditch Witch Trencher and Electric Toro compact utility loader concept units units show, together we have the potential to revolutionize this important growth industry. Next, the momentum our landscape contractor businesses built through the Q2 should continue into the 3rd. Innovative advancements like the Starus that are designed to enhance productivity of contractor crews should continue to be in high demand as landscape contractor companies deal with labor shortages. WASS faces similar positive market conditions. Last season's snowfalls helped get preseason orders off to a good start. The performance of our snow and ice management business is in line with expectations of continued year over year growth. Turning to our Golf and Grounds Equipment businesses. We expect retail to pick up as weather improves. Golf course revenues should benefit as rounds played recover, enabling investments in new equipment. Municipal orders for grounds products should also pick up mid summer in connection with new budget cycles. The golf irrigation pipeline of pending major golf course renovation and upgrade projects remain strong. The ongoing success of our innovative Infinity sprinkler line and the launch of our next generation Lynx 7.0 control system later this summer should help us gain share this year. Although contractors face labor issues, we anticipate that our contractor irrigation and lighting business abilities should further bolster irrigation and lighting installations. Perhaps our most exciting recent introduction is a new line of 60 volt lithium ion battery powered walk mowers. We take our position as the leader in the walk power mower business seriously and want to make sure that we provide the best lithium ion battery powered offering. We call them the Toro Flex Force Power Recyclers. While consumers often expect that buying a cordless product means compromising on features or power, with Toro, buyers can expect the same performance that our Gas Power models deliver. These are powerful fully featured mowers built on the same 22 inches steel deck recycler platform as our traditional line. They start with the push of a button and have plenty of power to deliver the high quality of cut our customers demand as well as powering our legendary personal pace self propelled drive. Homeowners can recycle, bag or side discharge clippings and when the job is done, minimize the mower's garage footprint with the popular Smart Stow feature. Additionally, these mowers are part of a complete family of 60 volt Flex Force products that includes a blower, trimmer and coming this winter, 3 new 21 inches PowerClear snow blowers. Such innovation will help continue our walk power momentum through the season. Favorable weather should promote rider sales as well. Looking forward, Customers are enthused about our next generation single stage line. The battery powered Flex Force units joined 4 new residential and 2 new commercial gas power clear models. They feature modern styling, large engine step up models, high capacity shoots, increased fuel capacity and enhanced ergonomic controls. Along with the new 2 stage models launched a year ago, these units should help extend our leadership as America's number 1 snowblower brand. On the international scene, we anticipate continued growth in our in golf from emerging markets and are tracking a large number of municipal tenders for grounds equipment. Moreover, we are preparing to launch several new products across businesses. During the Q2, we will unveil a new 6 foot out front rotary mower, a new riding greensmower and a 60 volt program in select markets. Trade tensions, elections in the U. K. And Brexit all pose challenges that may impact results. Our international team stands ready to address these challenges and capitalize on both existing and emerging opportunities. Before I close, I want to recognize our employees and channel partners who are essential to our success. I want to thank them for their steadfast commitment and hard work. I especially want to acknowledge the contributions of our new employees and value dealers from Charles Machine Works. Their hard work is evident in the very positive impact they made on our 2nd quarter results. While aware of potential risks related to the challenges challenging trade environment and tariffs, fluctuations in currency, exchange rates, supply chain issues and weather, we believe the company is on track to deliver another good year. We will diligently work through any disruption. With the addition of Charles Machine Works, we now expect revenue for fiscal 2019 to be about $3,200,000,000 with adjusted net earnings of about 2 $3 For the Q3, the company expects adjusted net earnings per share of about $0.70 to 0 point 7 $5 This concludes our formal remarks, and we will take questions at this time. Our first question comes from the line of Joe Mondillo from Sidoti and Company. Your question please. Hi, good morning everyone. Good morning, Joe. I just was hoping to cover a couple of basics on the acquisition in terms of And then also what sort of normalized D and A you're And then also what sort of normalized D and A you're looking for, for whether you want to give me the whole entire company or what, that'd be great. Thanks. Yes. Thanks for the question. So we have now included Charles Machine Works in the Professional segment, and they were a significant contributor to the segment. So far this year, if you look at the first half results, the Professional segment is ahead. But in the Q2, some of our businesses, the Golf and Grounds business and Irrigation, were challenged by some of the weather impact and some of internal supply issues. So but other parts of the professional business like the landscape contractor, specialty construction and BOSS all had fantastic quarters and are on track for the year. So overall, we feel good about the position of the Professional business. Obviously, Charles Machine Works was a major contributor to that. Weather is affecting some of the segments, but we feel positive going forward. And Joe, maybe I could address the In our Investor Relations presentation that was posted on our website this morning, we did include revised cash flow guidance and revised capital expenditure guidance. We didn't specifically address D and A although it's embedded in the free cash flow guidance. We're still working through our provisional purchase accounting. There'll be a little more detail on that when we publish the Q as well. And we're just very early in on the acquisition. So we're still working through some of the details. Okay. So it's sort of difficult. So the Q1 you saw a growth in the professional segment of 13%. I know that wasn't sustainable rates, but just trying to hash out what kind of organic growth versus acquisition, I guess because of competitive reasons you don't want to divulge the revenue for CMW. Is that the case? That's fair to say. And I think I would just say again, the underlying business, we mentioned the challenges in a couple of the underlying businesses and markets, but overall, Pro, we feel good about the first half. So far, we've had good results in many of the segments so far. Yes. And I would just building upon that, I would just add that where we did see the challenges related to weather, we feel those are the same challenges that our competitors would have seen. And I think, Ricky, you would say that market share remains solid. Yes. There's no question with the new products that we've talked about in the past, the StarUs from the landscape contractor side under Exmark brand, the outcross and the commercial area, the new Triflex Greensmowers and so forth, We feel fantastic about the product line that we have, the innovations and any impact that would be there from weather is the same thing that our competitors are feeling. Our field inventory is in great shape, even in the more challenged areas, field inventory is at below what it was last year. So we're in good position. Okay. Last nuance question for me and I just have one more question after that is the $20,000,000 of sort of one time type costs, did that all fall in the professional segment or was some of that in corporate or corporate costs? Yes. So it would be split about 50% in the professional segment, about 50% in other. And just to give you a little more information on that, in particular within the Professional segment you're going to see the impact of the inventory step up in that part of the purchase accounting. Within the other segment you would see more of the transaction related expenses. And then integration expenses really, as in this case and also as we go forward could be included in either one of those segments, due to the enterprise shaping, impact of Charles Machine Works, some of those initiatives will be broader, and impact areas outside of Charles Machine Works. So then those would be in the other section. Okay. And then I wanted to ask about, sort of the guidance for the year and then I'll pass it on to the next person. The annual guidance sort of suggests that the Q4 is going to be see some pretty year over year growth. And I'm just wondering is that related to anything related to sort of CMW and maybe what they have the backlog or what sort of driving that thought process of the strength there? Yes. If you look at if you reflect back on our comments for the full year previously, we did anticipate to we did anticipate getting the full benefits of our actions in response to the increased tariff and commodity costs situation that we're facing. So in Q4, we will see the full benefit of the actions that we took beginning last year and fully coming into place just as we speak. We do expect the second half to have improved margins and the Q4 is really the quarter where we see all those benefits coming in and then we're comping against a quarter last year that included much of the effects of the tariffs and the increased costs. And I would just say, the profile as we've commented in the past for Charles Machine Works is a little bit different. And so it is going to change our quarterly profile as well. It isn't as seasonal as the Toro business and impacted by different factors. So that is a piece of also what we're seeing in Q4. And maybe just to add on a couple of other factors, the fall is obviously when many of the golf irrigation projects take place and even those that would have taken place earlier this year have been pushed out to that period. And then we are expecting a very good snow season based on a number of factors. The new products that we have coming out that I mentioned in the earlier remarks and then the fact that the inventory was pretty well cleared out of the field due to the late season late in the winter season snow events. So we're in good shape there to have a very solid beginning to the snow year. Okay, great. Thanks. I'll hop back in queue. Thanks a lot. Thank you. Thank you. Our next question comes from the line of Sam Darkatsh from Raymond James. Your question please. Yes, this is Josh filling in for Sam. Thank you for taking my questions. Thank you, Josh. Hi, Josh. Hi. So going back to Charles Machine Works, average sales? Yes. I mean, all things being equal, it's less seasonal. It's not exactly linear, as we learn more and more about the company, but it is not going to be as, weighted toward Q2 and Q3 as the legacy Toro business would be. And that was one of the factors that was really attractive to us when we looked at the acquisition was helping us to balance out, some of the natural seasonality that we have as a company. It's really we talked about previously that it was really tied to different market drivers and we really have immediately seen the benefit of that, that it's not really tied to weather situations, for example, as opposed to the communications build out, infrastructure investments and so forth. So it's we're seeing the benefit of being tied to different drivers already in terms of stabilizing demand. Got it. And just to be extra clear on what assumptions are included in the guidance, can you talk about whether you're including recent increases in the tariffs on Chinese goods and the reduction in steel tariffs? So at any given moment, when we provide guidance, looking forward, we look at all of those factors, and we try to make our best judgment on what the impact for Toro will be. So we had factored in some of the reduction that we were starting to see in steel. In fact, we built that into our original plan for the year. So we do have that built in. And from a tariff standpoint, we have now, based on the knowledge that the, List 3 is going to 25%, We have built that into our guidance for the year as well. So we're disappointed that, the tariff, did increase or that we don't have a better tariff situation, but we've now built in our best thinking about what that's going to be for the rest of the year and that it does include List 3 at 25%. What might the benefit be if those were to be removed? Yes. We haven't specifically called out the impact of the tariffs and in part because it's very difficult for us to segregate some of the tariffs, direct tariffs from the tariff related actions. And we've talked about in the past, steel is a great example of that. Most of the steel we're buying is not actually impacted by direct tariffs, but yet we saw steel price change in our global economy because of the tariffs. So it's hard for us to segregate those 2. And therefore, we talked about it more in total. And the last one for me. You mentioned in the release some specific supply related issues in the Gulf and Irrigation segment. Are those ongoing or have those been fully resolved? Yes. The we're living both the positives of strong economy and the negatives. And the negatives are that our suppliers are strained to keep up with demand across all of their customer base. So that with the same kinds of issues of that they have, which are labor getting workers, etcetera. And what we particularly saw in the last quarter here is also weather was had an impact on our in our markets, but it also had an impact on our supply chain beginning in April. In the month of April, we don't usually expect to lose days of production due to needing to close plants essentially, and our suppliers saw that as well. So the answer to your question is, we are managing those intensely, and we believe that we are on top of those, but they continue to be a challenge. We don't expect the supplier challenges to completely go away anytime soon. But we believe we are managing those in a way that supports our business plan forward. Yes. And just building upon that, we have taken actions, as Rick said, and implemented processes that we believe will address those issues for the remainder of the year, in particular around inventory. We will selectively bring in some higher levels of critical components to help us manage. We're working closely collaborating with our suppliers. But we'll also carry a little bit more finished goods, higher levels of our fast churning finished goods to give us a little more flexibility in this dynamic time. At the end of the quarter, we actually if you would extract Charles Machine Works out of inventory, we saw our inventory for the company less Charles Machine Works actually go down. And we actually had less finished goods and a little bit higher work in process than normal. So we think that going forward there are some steps we can take to help us to better balance that. Got it. Good luck for the next quarter. Thank you. Thank you. Thank you. Our next question comes from the line of Tom Mahoney from Cleveland Research Company. Your question please. Hi, good morning. Good morning. I wanted to ask about the organic revenue assumption inside of the new 3,200,000,000 guidance. Is it fair to say that's unchanged in the kind of 4% plus range like you guys had talked about prior? I think that's including Charles Machine Works, we would be back at that mid single digit sort of range for the company, but with a larger base obviously. Yes. And more of that again being weighted toward pro versus residential, but no change in the fundamentals. Okay. Got that. And then the driver of less finished goods going back to inventory, the driver what segments or lines were drivers of less finished goods in inventory year over year on a Toro organic basis? So primarily, golf and grounds from a finished goods of our key bread and butter products and would have been able to convert some of the WIP to finished goods. So that's just what Renee referred to is, we have a little bit higher WIP than we would expect to have relative to finished goods, and we would have preferred to have a few more units available in some of our key bread and butter products. Got it. And then just structurally on CMW, can you talk about the distribution network that that business utilizes it? And we're all familiar with the distribution network and the strength of it in the Pro segment that you guys utilize. Can you just compare and contrast the CMW distribution network to the core Toro Pro distribution network? I think this is one of those examples that the more we learn about Charles Machine Works and the more work that we do on the integration, the more pleased we are. I had a chance to visit one of our dealer one of our Ditch Witch dealers and had a chance to meet with a group of them, and I could not have been more impressed. We have now a terrific new channel in the construction market, very high quality, very professional partners with Ditch Witch and the other brands that are part of Charles Machine Works. So it's been one of the very positive discoveries, just how good that channel is. It's not something we were able to do as much deep due diligence into because, for obvious reasons, visiting dealers was difficult. But now that we have a chance to do that, it is it has been very pleasing what we've seen there. Understood. Thank you. Thank you. Thank you. Our next question comes from the line of David MacGregor from Longbow Research. Your question please. Hi, Rob Aurand on for David MacGregor this morning. I wanted to ask you about residential profitability. You made the comment in the release that it's going to improve throughout the year. You have a competitor ramping up at Lowe's. Can you talk about the extent that might impact your promotional cadence for the rest of the year? Yes. We feel good about the residential business. As we had talked about, the residential business was especially hit by the commodity and tariff situation. So that's been the challenge from a profitability standpoint over the last year with regards to new or different competition or changes. We have great respect for the Craftsman brands. We know that they're in a new location. But at the same time, we've been competing with the Craftsman brand for a very long time. And obviously, their mass partner has been out there for some time. So there's in some respects, there's newness, but in other respects, it's not dissimilar to what we've faced in the past. And I can just say we are incredibly pleased to be with our partner in the Mass area, The Home Depot and feel that we have the right partner there. And it has been a key part of the success of taking our market share from low single digits to leading market share in walk power mowers, for example. And we are pleased with our partnership today and looking forward to doing even more going forward. So we feel we understand what's going on and we feel good about our position. Okay. And then with the $0.70 to $0.75 guidance you've given for the Q3, can you quantify what accretion from CMW is in that? Yes. We when we gave the guidance for both the quarter and for the year, we've really tried to look at this as a new combined enterprise. So we're not specifically breaking out the impact for Charles Machine Works, but have included that in our guidance to the best of our GreenMaster 1000 coming out this spring and the Triflex this summer, Can you give any kind of initial commentary around what you're getting from customers, how preorders are trending for those new products? Yes. The response for those lithium ion, fully lithium ion products has been fantastic. And I can just say from a personal standpoint, I had a chance to mow a green, for example, with our new TriFlex and I have some baseline of experience. I will say, if I were buying a product that I were going to operate, that's the one that I would get. There are lots of reasons why people are interested in the fully lithium ion product emissions, but it's also operator experience, so less noise, which has a lot of benefits and less noise, for example, in the context of a residential development that might be that can get started earlier in the morning. So there is great, that can get started earlier in the morning. So there is great demand and interest. And I can just say that they will be very pleased with the results and being able to mow 18 plus greens with a single charge. It's just it's going to be a great experience for people, for the operators and the golf courses. In particular, we're also excited about 60 volts within residential. 60 volts also, and this is one of those areas we talk about the leverage between our commercial business and residential. The expertise that we're developing in both areas back and forth have been helpful and our 60 volt line for, the residential walk power mower is, it's only been out there for a short time, so there are only a handful of reviews. The reviews publicly have been very positive. And once again, I can say my personal experience is it's a great product. It's not one that compromises. And just to be able to have an electric, it's really looking at the whole product, including people really love about it is it's got our personal PACE drive system, which is preferred in the marketplace and has been a key differentiator for us for a long time. All right. Thank you very much for answering my questions. Thank you. Thank you. Our next question comes from the line of Josh Chan from Baird. Your question please. Hi, good morning, Rick, Renee, Heather. Hi, Josh. Good morning. I just wanted to ask about the from a top line perspective in terms of weather. Would you say that that impacted all of your businesses including the ones that grew or was it sort of more isolated I guess? And then I guess as a follow on to that when you say that your guidance assumes normal weather, do you assume that you also kind of capture that lost revenue in the back half of the year? Or is it more normal in the second half, I suppose? Yes. So the weather affected our businesses to varying degrees, in some cases positively and in some cases negatively obviously. So for example, the snow season that we ended up with was a big driver of our BOSS Professional Snow and Ice Management Business and helped us return to a more normal snow year for the residential snowblower business. And looking forward, then some of the more challenged ones would be coming out to buy a mower in the spring as a residential customer or looking at replacing equipment from a golf and ground standpoint. Some of those were more challenged by that. But we what we assume going forward is that we take our best estimate of what's happened so far and then project that for the year. Now if you look out the window where you are, at least where we are, we see cold and rainy. So that does that's not a good thing looking forward. But as we look to the forecast here, it looks like a couple of days of sun for the Memorial Day. So we take our best shot looking forward. We assume a return to more normal weather real time at this moment. You look out the window, it's raining and it's 50 degrees. So that's those are just all the factors. We do our best to incorporate what we think will be normal weather going forward. Yes, that makes sense. Hopefully, it warms up a bit for you guys there. We agree. And then on the just the definition of adjusted EPS, in addition to sort of the one time items, there's like an ongoing intangible asset amortization that usually comes with these deals. Does that ongoing piece of amortization get included? Or is it excluded too from EPS? Yes. No, we would consider that to be more operational or ongoing. So we would not exclude that in our non GAAP measures. So it would be included in both the GAAP and then not excluded from a non GAAP standpoint. All right. That sounds good. And then I guess my last question is, is there any comment you can make about gross margin? I recognize, Renee, that you said that gross margins in the businesses should be up in the second half, but I realized that Charles Machine Works probably impacts that calculus as you kind of boil it down to the consolidated level. So any type of guidance update on the full year, I guess, adjusted gross margin? Yes. As we've talked about across the enterprise, we do expect, as you said, gross margin will improve in the second half across all businesses. However, you're correct that Charles Machine Works would be dilutive overall. And so that will be included mainly from a mix standpoint is how I would think about that impacting. It is included in our guidance both Q3 as well as Q4. And we think that in Q3 it's really going to be that turning point where we start to see the improvement accelerating into Q4, but the mix impact from Charles Machine Works would be dilutive. Okay. Thanks for your time and good luck in the rest of the year. Thank you. Thank you. Our next question comes from the line of Tom Hayes from Northcoast Research. Your question please. Thank you. Good morning everyone. Hi, Tom. Hey, Rick, I was just wondering, I did see the new 60 volt mower in 1 of the in Home Depot in the last couple of weeks. I was just wondering, does that displace a gas mower that you currently had kind of slotted in that spot or is this kind of an opening of a new category? It's precisely, I would have to check with our team to know exactly how that fit in with the lineup. I do not believe that it displaced the gas model at this point. I can't say that with 100% confidence, but I do not believe so. It was definitely incremental to our model lineup in math. Okay, great. And then just Renee, I think you kind of booked around $20,000,000 in acquisition related costs in the quarter. Could you just kind of give us some kind of scope or scale on the expected acquisition cost for the balance of the year? Yes. As we look forward, we're still it's very early in the acquisition, about 45 days or so. We certainly had some of the more significant ones recognized in the quarter with the transaction related expenses. So the majority of all of those expenses are behind us. We'll see more from a purchase inventory step up purchase accounting standpoint. We'll see that continue for the next couple of quarters as we work through that inventory levels. And then we will have ongoing integration expenses. So I don't have a specific amount to share with you as it is somewhat fluid as we work through, the integration. But certainly some of the largest transaction related expenses are behind us. Great. And just finally Rick, you sound fairly positive on the outlook for the snow season coming up. Just wanted to confirm that and make sure most of that's kind of driven through the inventory channels, probably got reduced by the late storms here? Yes, exactly. There's some regional variation in that. So the Midwest had a much stronger snow year last year or much more snow. So inventories are bare bones from a field inventory standpoint. The East Coast was not as heavy of winter, but had some events. So it's on average, our field inventories are in very good condition in those markets for both single and 2 stage, especially so in the Midwest, but we also feel on average we're in good shape. Great. Thanks. Appreciate the color. Thank you. And our final question today is a follow-up from the line of Joe Mondillo from Sidoti and Company. Your question please. Hi, everyone. Thanks for taking a follow-up. Just first off, curious on the synergies with I know it's still early in this acquisition, but any change of sort of thoughts on how much and the timing of how that plays out over the next 3 years? Yes. I would just say as Renee mentioned, we're 45 days in, but we are on track with the run rate achieving the runway for the $30,000,000 that we talked about and we feel very positive about the opportunities that we see and perhaps to go beyond that at some point here, especially as we look at the overall enterprise, not just specifically the intersection of our 2 companies. So we feel very positive about the work that the team has done so far with the assistance that we've had from the outside that's really helped us start to execute very rapidly. And we feel good about our commitments and we believe as we look across the whole company that there are opportunities to do more as a company. Okay. And then, Renee, I thought correct me if I'm wrong, I thought you said that the full year tax rate would be 20.5%. If that's correct, I think that assumes 26% in the back half of the year? Yes. Often our tax rate can move around from quarter to quarter. We're trying to give you the best total year tax rate, but part of it depends on also discrete items as well. So that may be the case. If you look historically, our Q4 tax rate can also in particular is the one that we see the most change, as we close out the year. Smaller quarter and smaller items have a bigger change on the tax rate, they're discrete items. Okay. I think we were thinking, sort of low 20s, for the year initially. Obviously, with the acquisition and everything, it's changing things up. But could you just tell me would CMW sort of weight the average rate up or down relative to past? We did revise our total year tax rate to be slightly favorable from what we had told you before. That includes the addition of CMW, so looking at their footprint and their where they're earning their taxable income as well as there's been some additional guidance that has been given after tax reform in particular for some of the international areas. So both of those are impacting and improving our tax rate from a total year standpoint. Okay. And then just lastly on the debt, could you just walk me through what that debt is made up of now and at what rates? Yes. We so we had published when we signed our credit agreements information related to that, we had 2 term loans that we had for $200,000,000 $300,000,000 each, both 3 5 year term loans and they were at a LIBOR plus type of rate. And then we entered into a private placement for $200,000,000 It's split into 2 tranches, dollars 100,000,000 that is a 10 year and $100,000,000 that's a 12 year and those are on a fixed rate basis. The specific interest rates are detailed out in our filings that we had, but we felt really good about the ability to secure both the fixed rate as well as the term loans at very attractive rates. I had also mentioned that one of our priorities has been then to try to pay down that debt although we're still within our targeted debt to EBITDA range of 1% to 2%, we were on the higher end. And because of the cash flow that we had and the focus on that versus share repurchases, we had paid down about $200,000,000 to date and we do think that Charles Machine Works will contribute to our cash flow for the year. So we'll continue to re prioritize or to prioritize debt repayment in the short term, but continue to look for growth opportunities as well. Okay, great. Thanks for taking my follow-up questions. Good luck and talk to you soon. Yes. Thank you. Thank you. Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Heather Hill for any further remarks. Thank you for your questions and interest in Toro. We will talk with you again in August to discuss our Q3 results. Thank you and have a good day. Thank you, ladies and gentlemen for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.