Great. Good morning, everybody. Why don't we get started? I'm Tim Wojs. I cover building products here at Baird, and we're happy to have the Toro Company join us again this year at our Global Industrial Conference. Toro is an equipment manufacturer with leading positions in golf, commercial landscape, specialty construction, snow irrigation, and residential end markets. From the company, we have Chairman and CEO Rick Olson on stage with me. We have Angie Drake, who's CFO, in the audience here, and Jeremy Steffan, who is the Director of IR. I just want to highlight Toro is currently in a quiet period. So our discussion today is going to focus on bigger picture topics about the company's business and strategy, and we're going to start with a few prepared remarks from Rick, and then we'll do some Q&A, so with that, I'll turn the floor over to you, Rick.
Great. Thank you, Tim. First of all, I just want to say thank you for being here because I know we're competing with the presentation of the outcome of the election and the impact on the economy or whatever it is, so thank you for being here. I appreciate it and appreciate the opportunity to talk with you a little bit about the Toro Company. I just have a handful of prepared slides, and then we'll go into the conversation, but for starters, if you really want to understand who the Toro Company is, you really need to understand this slide. We deeply believe in our mission, vision, and purpose, and we get up in the morning with the objective of helping our customers succeed in enriching the beauty, productivity, and sustainability of the land.
We are driven to earn the right to be the market share leaders in every arena where we compete. We do that by providing incredibly cool, innovative products and solutions for those customers to help them meet their needs. The thread that runs through all of this is relationships, and we're celebrating our 110th year anniversary this year. We have relationships in every direction from a supplier standpoint, customers, channel partners that are 100 years plus old. So even as we talk mostly about the future, we really stand on a foundation that is very solid and very unique. Just a little bit from a performance standpoint, over the last 10 years, since 2013, we've achieved 8.4% CAGR during that period. You can see the growth in earnings per share and just under 24% average return on invested capital.
One thing that's interesting, if you have casual knowledge of The Toro Company, people usually think of walk power mowers and snow throwers that you see at Home Depot or at a dealer or at Ace Hardware, and when I started several decades ago, almost four decades ago, 80% of the business was really about that, but during those four decades, we've made a very conscious decision and followed through on the idea of transitioning the company to a professional business as oppos ed to a residential business, and we'll talk a little bit about why in a couple of minutes. Just another thing, so you can see the transition, even since 2013, now less than 20% is residential.
On the right-hand side of the screen, you can see where some of that growth on the professional side has come from, notably the addition of the yellow portion, which is a much bigger portion of underground construction and specialty construction. A couple of specific markets to comment. Golf is one that I would highlight. It's been part of our business for more than 100 years, going back to 1919. And we have been the market share leader globally in that business with about 50% market share for equipment and irrigation for much of that time. And we're the only company that has both equipment and irrigation. This is an exceptionally healthy market right now, as you're probably well aware. The foundation of golf, the true golfers have been very solid for about 400 years or so, the core golfers.
There was a peak of golf in the late 1990s that was surrounding Tiger Woods and the excitement overbuilding of golf courses. We've worked through that, and we now have a very solid base of existing golfers and a growing base, and actually, that business is being fed by things like Topg olf, where 95% of participants say they're more likely to play on a golf course after having experienced a Topg olf type of experience. Infrastructure is another one I would mention.
This really touches our underground specialty construction business, primarily under the Ditch Witch brand, but also the compact utility loaders under the Toro brand, the Toro Dingo line, also known as Sitework Systems. The drivers here are numerous. When we first acquired Charles Machine Works and Ditch Witch in 2019, a lot of it was about telecommunications build-out. That's still big, but all forms of fiber for all purposes.
So, broadband purposes, telecommunications. A big one now is data centers that have an incredible amount of things going in and out of them underground: power, telecommunications, and water for cooling, and our equipment really covers the gamut of everything underground, so it is fiber, but it's also all forms of utilities: gas, electric, et cetera, plus things like sanitary sewers and so forth in cities, so all of those areas that have a lot of growth right now, and we see that projecting well into the future, certainly fueled by the investments and the realization during COVID and after that, that we need to invest in these areas. That's really accelerating that, and just a couple more comments, maybe just professional in general, and I talked about the company is mostly professional now.
The characteristics really that are different is these are essential products that are used in a regular replacement cycle. So even a golf course, you can't really choose to shut down a golf course and then open a golf course back up if there were economic difficulties. If you have the golf course, you have to maintain it every day. And if you have to maintain it every day, there's a portion of our equipment that's consumed every day when you do that. And you might be able to delay on your capital replacement cycle a little bit, but not a lot. And if you do, you've got to catch up with that at some point. So it's a replacement cycle business that's used in a professional context as part of a regular capital replacement process. And it's used heavily, which means it uses a lot of parts.
It relies a lot on secondary revenues for us, like service as well. I would just comment in general, for about the last eight years or so, we have been very focused on three priorities within our technology development area. The first is alternative power. So today, we have an increasingly very close to full options on gas-powered or zero-exhaust emission options from residential through our contractor areas. Higher power applications are a little bit of a unique situation, but we've built that out to basically give our customers and our channels a choice of what they prefer. The second is smart and connected. Smart really addresses a lot of things, but it's really taking some of the skill requirements, moving that from the operator more to the machine so that the machine does the skilled work and it takes less of a skilled worker. That's one aspect of that.
It also includes things like AI, if you think about irrigation systems, those types of things. And then the connected portion really is tying systems. So again, back to the golf course example because it's easy to understand: tying equipment, irrigation systems, and other systems together to make the management of the golf course easier for a golf course superintendent. And it's not easy to manage a golf course. So anything we can do to improve that is valuable to them. And then lastly, autonomous. So this really also runs across the gamut. We believe that at some point in the future of the Toro Company, virtually every product category will need to have an autonomous solution that will be right for some customers. We've been working on this again for about the last eight years. We've made a couple of acquisitions that have helped us accelerate our development.
And you will now and are seeing the introduction of those products into the marketplace, including what is a very extensive offerings within the golf area and landscape contractors as we go forward here. And I think maybe just one last slide. I think I've covered most of these, but maybe the last part of it I would just emphasize. We have a lot of forward things happening right now, but we're approaching that with a disciplined approach to capital investments and the way that we deploy our capital and our execution in general. And we have a strong balance sheet to be able to give us a lot of flexibility.
Super. Thank you for that, Rick. If anybody has any questions, you can email, raise your hand, or email session2@rwbaird.com. So maybe just to start, I don't know if you want to. You got several different markets that you kind of went through. You have golf, you have landscape, you've got resi, those types of areas. Just can you maybe kind of run through the status of each one of those kind of right now and any kind of differences in how you're kind of thinking about those markets?
Sure. Yeah, I did touch on some of these, but I'll just kind of tick through them, so golf, incredibly healthy right now, and certainly saw a surge during COVID, but people expected that to kind of tail off pretty quickly, and it's been more sustained. I think most importantly, it's the core that's steadily getting larger and it's healthier, so that just speaks to a more sustained future for golf. The underground is incredible at the moment. I would describe it that way, and we've been hesitant to add structural capacity in areas like golf because we know that's going to return to a little bit more of a normal growth rate going forward. The underground business has had more of a growth inflection, so we see a higher growth rate into the future driven by just so many layers of factors.
And based on the election, I would also say that that equipment is used heavily in the petroleum industry as well, whether it's transportation or on job sites, et cetera. The snow business, which on the professional side is primarily BOSS, our snow and ice management company that's in Michigan, we've had two years of poor snow. So that's been kind of in a timeout for the last couple of years. Otherwise, since 2014, it's been one of our strongest growth drivers. And it contributes substantially to our profit on the professional side. So we're waiting. We'd be pleased to see a more normal snow this year or even better than normal. And the other parts of snow for us would hit residential, the snow thrower business, and part of our Ventrac business. So that's snow.
Landscape contractor and the core of the landscape contractor business for us is the professional zero-turn mowers. That has been on a reset really for the last 12 months. Last year, not just this previous third quarter, but a year ago in the third quarter, we talked about just a sudden downshift of demand in that market, probably a build-up of pull forward during COVID, and then after COVID, where families had a chance to get out of their yards and travel and so forth, we saw a shift down in that area. The core professional piece of the landscape contractor stayed steady, but it was really the homeowners that were buying up into that. Some companies call it prosumer part of the business, but these are professional products that are purchased by homeowners. That was the area that was affected.
We've been going through an inventory adjustment, field inventory adjustment this last year. We mentioned on the third quarter call that we were about 80% of the way through the process of bringing that down. So that amounts to strong retail, which was good this year, and not shipping product into the market to make that adjustment. And I think I've covered, yeah, specialty construction. That's our compact utility loaders. That's more normalized. So we went through several years with back orders there. That's normalized with just kind of the normalizing of the construction business. And then lastly, residential. We had a very strong residential year. If you just read the headlines in the third quarter, I think we were up more than 50% in the third quarter. We have to read a little deeper because it's on a very easy comp from last third quarter.
But that being said, we had a very strong year with Lowe's in the first year. And the combination of Lowe's and all of our mass partners was very tough, just under a record year for us from a mass standpoint. So also very strong.
Great, so one thing that's kind of happening, it seems like in your business right now, you kind of have some end markets like landscape where maybe you're going through a kind of destocking cycle. Resi's kind of gone through a destocking cycle, and then you have other parts of the business like golf and underground where you've got backlogs where normally you wouldn't have backlogs. You've got higher lead times, so on that part of the business, could you just kind of talk about where lead times are in like a golf or an underground relative to normal and how investors should think about kind of soft landing that backlog to something that's kind of more appropriate or what you would consider to be more appropriate over time?
Yeah, our operations team has made huge progress this year in those areas that we've had high backlogs or backorder situations, backlogs. And particularly the two areas that remain are the underground construction area, so the horizontal directional drills, trenchers, and so forth, and then golfing grounds. And in both cases, we've made very strong double-digit plus kind of output improvements over the last couple of years. The supply chain has gotten healthier, but we still have backorders in both of those areas, as we talked about on the third quarter call. But lead times have moved maybe from on the golf side, if it's 18 months, we're down in the 12-month range and improving. A little bit longer on the underground business just because of the steady pace of new orders coming in.
Even as we've increased our output substantially, orders are backfilling those at a rapid pace as well. So I think kind of the big story is if you look at our top line growth and we've said low single-digit or single-digit kind of growth or flat to growth a little bit, the part that's missed is it is probably the largest range by business between those that are correcting on the downside and those that are driving on the top side. And what that portfolio strength gives us is the ability to continue to invest in new products and preparations for the recovery of those businesses, be able to pay for things like the inventory reset in the market with these backlogs that we have in some other businesses to be able to be strong in all the businesses when they return to normal.
Okay. Okay. Maybe just on kind of R&D, that's kind of your. I know you've mentioned a little bit about areas that you're focused on. Just, that's been a big commitment that you guys, Toro's done. I think you spent, was it like $150 million-$175 million in R&D last year. It's probably bigger than some of your competitors. So I guess how functional or cross-functional is the R&D effort? Because you've got four or five different businesses, but it seems like the same technology-wise do kind of split across the various segments. So how do you kind of cross-function the R&D piece?
Yeah, I think if you think of those themes like the alternative power, smart connected, and robotics, and the amount that we're spending, that's really just the surface. I think from a strategy standpoint, the most valuable thing that we've done is really worked on integrating the strategies across all of our businesses. So for example, a battery platform, instead of the first product that comes along, we create a battery platform. And then the next one that comes along, we create a battery platform. And they're in different divisions, so they may not talk to each other. We have instilled the discipline to say, we know all of these products are going to need to be a battery product at some point.
So let's create a giant wall chart of every product in every one of our businesses and group them by power requirements and create platforms of batteries that are scalable so that we can develop what we call a HyperCell battery system for the heavier products. So the smaller products may have one slice of a cell of those, but the product that we just introduced, an out-front rotary for parks purposes, has 17 batteries that are stacked together. They all use the same battery management system, which we can leverage on volume and refinement and development and technology. So that's really kind of the secret beyond the $170 or $180 million of R&D spend is we leverage it tremendously to be able to do more overall.
And the other thing I would add is as we've made acquisitions, especially since 2014 or 2015, we have been able to leverage programs like batteries because the companies that we acquired had redundant programs taking place, and we were able to leverage that. So even beyond the growth that you see in our R&D spend, it has a multiplier effect.
Okay. How does the business model or the pricing kind of work when you think about new technologies, right? So if somebody's using battery, they're not paying for gas. If somebody's theoretically using autonomous, they're not necessarily paying as much for labor. So how does that kind of change the price of your product or the economics of your businesses as these new products are adopted?
Particularly if you look at the professional side of our business, the upfront cost for the capital investment is significantly higher. So rule of thumb is maybe at least two, if not two and a half times higher initial cost for the equipment. And we can show a contractor, for example, that they can recoup that cost over time and lower fuel costs and other related expenses. And that's fine for some contractors. They may have an entire business that's surrounding zero exhaust emissions. They may have customers that require that, or they may live in a state or an area where that's required. On the other end of the spectrum, if you're a small contractor, it really means that you have to come up with two and a half times the upfront money to buy the equipment that you need.
So it's a little bit, it's a more difficult challenge in those cases. Even if we say, well, you can pay that off over two or three or four years, that becomes part of the decision process as well. But right now, battery products tend to be more expensive in total. It's a little bit less on the residential side.
Okay. And then I guess where are you in the various stages of adoption? And then kind of just level set us on where California and some of the legislative opportunities are and kind of how you're prepared for that.
Yeah, it was pretty easy to anticipate the direction of California and other locations. So we did get ahead of that. So we have both traditional petroleum or gas or diesel-powered products and battery solutions for those customers. So they do have a solution. And I think our perspective is to let our customers decide what is right for them. And roughly, if you can imagine, sort of the function is the higher power requirement, the lower the adoption, just in general. That's very generalized. The exception on that curve is golf. Golf has had a higher adoption. We are very close to having a complete fleet of zero-exhaust emission solutions for daily fleet for golf courses. And for them, there are just so many other benefits.
So the silence is a productivity benefit to them because they can get out and start working earlier in the morning if there's residential properties surrounding. They don't have to be concerned about hydraulic fluid leaks on a green or on a fairway. That can be a job-ending incident for several people, usually. And then when we enter into the electric world, especially professional products, it is a brand new arena for us for innovation. So we can do things, especially with control of machines that we could not do, you can't do with a hydraulic or a conventional mechanical system. So they do achieve higher productivity and are able to do things like using high productivity ride-on machines for greens versus a walk machine, which is kind of considered the top echelon. So they pick up a lot of benefits like that.
So generally, adoption is lower, the more power that's required. There are a couple of spikes, and notably, golf is one of them that has higher adoption.
Okay. Okay. Great. Maybe just topically, the election, kind of what are your kind of preliminary views on your exposure to things like components and tariffs and those types of things? And then you do have industries that have labor populations that might come from certain areas of the world. And so does the election kind of change the labor equation for some of your customers? And is that an opportunity for Toro?
Obviously, we need to wait to see how some of these things play out. But just based on the discussions that are taking place, one of the areas we see, obviously, the benefits, whether it's better assurance about taxes and we have a more clear direction on where those are likely to go. If you talk about tariffs, we have consciously de-risked ourselves from a China sourcing standpoint in the last eight years or so. So our exposure to China from a supply standpoint directly would be in single digits kind of numbers as a percentage of total cogs coming in. We do have operations in Mexico.
We've been operating there since the mid-1990s. And so that would be an area that those tend to be products that are more price competitive products. They tend to be more of the residential type of products that are lower margin in general. But we'll have to see how that plays out. We will be in a very similar situation to competitors in a lot of different industries in that case.
Okay.
We do have flexibility. We have a lot more flexibility with those products because they're less tied to the technology that's in a plant. So we could shift those more easily if necessary. We would make the best economic decision.
Any questions from the audience? Over here.
Rick, on the underground business, how does that differ in terms of your go-to-market distribution? Do you make any adjustments in the business to service that as well as you do your other?
One of the greatest values of that acquisition is it came with its own largely dedicated channel, so if you drive through on the outskirts of any given city, you will see a Ditch Witch, usually only one in that area, but a large Ditch Witch branded dealer, or we call them dealers in that case. It came with its own dealer network, and we've done nothing but work to support that and grow that, and they tend to be largely dedicated. Angie, would you say percentage of sales of Ditch Witch was 80%-90%, something like that? Yeah. Largely dedicated.
Very similar to the golf market in some respects because there are very long customer-supplier relationships. They consider their supplier of this equipment to be a key partner. There are a lot of technical challenges that have to be solved usually together on a given job site. It's beyond a transaction. It's a very deep relationship.
Thanks. Just a question on the competitors. Are they kind of in a similar situation that you guys are seeing? I guess what I'm trying to ask is, have you seen any kind of market share dynamic shifts? Just because we're in a good world, I can't get my hands on it very often, but someone somewhere else.
We would say there have not been market share shifts. Maybe specific slices of product categories where they may have chosen to put their components into one category. We chose to put them in another. But in the bigger picture, no change there. No change driven by those kinds of dynamics, with the exception of a few specific product categories.
And then what are you hearing from kind of just the distributors? Are the vendors kind of in the same space that you guys are in companies and designs?
Similar, yes. Yep.
And maybe last question here, Rick. You are kind of embarking on this AMP program from a cost perspective. Just kind of maybe review what you're trying to accomplish. I think it's a $100 million cost program. How that kind of layers in cost-wise over the next couple of years, and how do you think about reinvesting some of that?
Right. Yeah. AMP stands for Amplifying Maximum Productivity. Angie here is our sponsor of the program as our CFO, and it's really a commitment to find $100 million in productivity by the end of 2026. Most of the benefit of that will be more back-end loaded. We're ramping that process up right now. The largest sources of that productivity, the biggest sources would be obviously where the biggest opportunities are, cost of goods sold from a supplier standpoint, productivity across the board, but certainly within our plants, getting back to where we left off before COVID started, and then other opportunities, even things like route to market, everything that happens from the end of the assembly line until it gets delivered to the customer area that we hadn't had as much attention on.
I would say for us, the really helpful thing is we had an outside group come in and kind of point out where the opportunities are. Internally, after we've been working on productivity for a long time, you think you may have reached the asymptote, if you will. We see much more opportunity for productivity.
Great. Great. Well, out of time, so please join me in thanking the Toro team for being here, and the team will be available for break.