Earnings Call: Q3 2021

Sep 2, 2021

Day and thank you for standing by. Welcome to the Toro Company Third Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your host, Julie Karakas, Senior Managing Director of Investor Relations. Please go ahead. Thank you, and good morning. Our earnings release was issued this morning and a copy can be found in the Investor Information section of our corporate website, thetorocompany.com. On our call today are Rick Olson, Chairman and Chief Executive Officer and Renee Peterson, Vice President and Chief 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 all are aware of the inherent That may cause our actual results to differ materially from those in our prediction. 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. We believe these measures May be useful in performing meaningful comparisons of past and present operating results and cash flows to understand the performance of our ongoing operations and how management views the business. Non GAAP financial measures should not be considered superior to or a substitute for the GAAP financial measures presented in our earnings release and in this call. With that, I will now turn the call over to Rick. Thanks, Julie, and good morning. The Toro Company delivered record 3rd quarter results. We continue to benefit from robust demand in both our professional and residential segments, And our operations team went above and beyond to execute even as global supply chain challenges affected availability. Our employees, together with our channel partners, kept a sharp focus on serving the needs of our customers. As a result, total net sales for the Q3 were up 16% year over year. Professional segment net sales Increased 15%, marking the 2nd quarter in a row of double digit growth for this segment. We saw continued strength in Landscape Contractor and Golf Markets Worldwide, higher preseason shipments of BOSS Snow and Ice Management Products And strong demand for our rental and specialty construction equipment and Ventrac products. Our lineup of innovative products Combined with strong business confidence fueled robust demand. Residential segment net sales were up 23% And that comparison is on top of a 38% growth rate in the Q3 of last year. Growth in the quarter was driven by strong retail demand for our 0 turn and walk power mowers. Customers also continued to favorably to our all season Flex Force 60 volt product lineup, which offers power and durability with no compromise on performance. The recent actions we've taken to introduce innovative new products, refresh marketing and expand mass Retail distribution continues to strengthen the Toro brand and drive positive results. As noted last quarter, we expected Supply chain constraints and inflationary pressures to escalate at a rate faster than could be fully offset in the near term Through pricing and other mitigating actions. Despite these challenges, both segments delivered solid earnings growth In the Q3, professional earnings up 7.6% and residential earnings up 10.5%. I'll now touch on some of the key themes for the quarter. First is the robust and broad based We continue to see across our markets worldwide. This has been driven by consumer and business confidence as well as customer investment Priorities focused on outdoor environments. We continue to capitalize on these drivers with our commitment to investing in new product developments, Our best in class distribution and our talented teams. 2nd, the continued escalation of Global supply chain and inflationary challenges. This included component availability constraints as well as material, freight And wage related cost headwinds. Our operations team took extraordinary steps to enable us to source Produce as effectively as possible in this incredibly dynamic environment. We also continued to execute on our productivity and synergy initiatives, Demonstrated disciplined expense control and implemented market aligned pricing actions. Regardless How long these pressures persist, we remain focused on managing the factors within our control. 3rd, in line with general economic trends, we saw an increasingly challenging labor market, including wage pressures And workforce availability limitations in some of our manufacturing locations. Across the enterprise, We have talented and dedicated teams committed to serving our customers. We're focused on having the workforce and other resources In place to put ourselves in the best position to meet demand and deliver our products to the right places at the right time. I want to extend my personal thanks to our team and channel partners for their unwavering commitment to serve our customers while navigating this extremely challenging operating environment. Our innovative product portfolio, outstanding team and deep relationships with our channel partners and end customers Set us apart and position us well for long term growth. We have the financial capacity to invest in the future, And we continue to allocate capital to best drive value for all stakeholders. This fiscal year, we've made Strategic investments in key technologies, both organically and through acquisitions to advance our priority areas of alternative power, Smart, connected and autonomous. Our healthy cash flow also has allowed us to return capital to shareholders Accelerating profitable growth, driving productivity and operational excellence and empowering people. I'll discuss our outlook further following Renee's more detailed review of our financial results. With that, I will now turn the call over to Renee. Thank you, Rick, and good morning, everyone. As Rick said, our record results for the 3rd quarter We're driven by robust demand in both our Professional and Residential segments against the backdrop of increasing supply chain, inflation and labor We grew net sales for the quarter by 16.2 percent to $976,800,000 Reported EPS was $0.89 per diluted share, up from $0.82 last year and adjusted EPS was $0.92 per diluted share, up 12.2 percent from $0.82 in the prior year. Both of our segments delivered Record top and bottom line third quarter results. Professional segment net sales were up 15.2% to $718,500,000 This increase was driven by broad based demand in landscape contractor, golf, Snow and Ice Management, Rental and Specialty Construction and Ventrac Products. This was slightly offset by lower sales of underground Professional segment earnings for the 3rd quarter were up 7.6 percent to $122,300,000 and when expressed as a percent of net sales, decreased 120 basis points to 17%. This decrease was largely due to Higher material and freight costs, partially offset by net price realization and productivity improvements. Residential segment net sales for the 3rd quarter were up 23% to $252,100,000 This increase was primarily driven by strong retail demand for 0 turn and walk power mowers. Residential segment earnings for the quarter were up 10.5 percent to $31,500,000 and when expressed as a percent Net sales down 140 basis points to 12.5%. This decrease was primarily driven by the same factors as Turning to our operating results for the quarter. We reported gross margin of 33.9%, A decrease of 110 basis points compared to the same period in the prior year. Adjusted gross margin was 33.9%, down 130 basis points on a comparative basis. These decreases were largely due to the same factors that affected professional And residential earnings. SG and A expense as a percent of net sales for the quarter increased 20 basis points to 21.4%. This increase was primarily driven by more normalized spending compared to the Q3 of last year and a legal settlement in the Q3 this year. Operating earnings as a percent of net sales for the 3rd quarter decreased 130 basis points to 12.5%. Adjusted operating earnings as a percent of net sales decreased 80 basis points to 13.1%. Interest expense was down $1,300,000 for the quarter to $7,000,000 driven by lower debt levels and decreased interest rates. The reported effective tax rate for the 3rd quarter was 18% and adjusted effective tax rate was 19.3%. Turning to the balance sheet and cash flow. Accounts receivable totaled $301,200,000 down 2.2% from a year ago, primarily driven by channel mix. Inventory was essentially flat to last year at $665,600,000 However, finished goods were significantly lower, driven by strong retail demand, While work in process was higher, this was a reflection of the supply chain variability and our efforts to procure higher levels of key components when available. Accounts payable increased 53% from last year to $411,400,000 This was primarily due to the timing of purchases as well as more normalized spending compared to last year. Year to date free cash flow was $429,000,000 with a conversion ratio of 123%. This positive performance was largely the result of higher earnings and lower working capital, primarily driven by higher payables. At the end of the quarter, our liquidity remained at $1,100,000 This included cash and cash equivalents of $535,000,000 and full availability under our $600,000,000 revolving credit facility. Our cash balances are elevated from pre pandemic levels, Largely driven by our desire to ensure adequate liquidity at the onset of the pandemic. And our cash is further strengthened By the accelerated demand we're experiencing along with the related working capital impacts. Over the past 9 months, we've deployed the majority of Cash generated year to date, including the funding of our Turflinks and Left Hand Robotics acquisitions, An increase in our regular dividend with $85,000,000 paid out so far this year. The resumption with $177,000,000 through the 3rd quarter and $100,000,000 in debt pay down. We've also increased our capital expenditure budget, reflecting our commitment to invest in key technologies and ensure we have the capacity We remain disciplined in our capital allocation strategy, fueled by our strong balance sheet. Our priorities have not changed and include reinvesting in our businesses to support sustainable long term growth, both organically and And through acquisitions, returning cash to shareholders through dividends and share repurchases and maintaining our leverage goals to support financial flexibility. As we enter the final quarter of our fiscal year, We're benefiting from strong demand momentum and our leadership position in the markets we serve. At the same time, Customer demand continues to up pace supply and production. We're not immune to the challenges facing companies worldwide, and we remain focused on serving Winning in our markets and managing the factors within our control. We previously indicated that operational headwinds Would be most pronounced in the Q3. As a result of the collective work of our teams to fulfill additional demand, We were able to deliver a stronger 3rd quarter than we had anticipated. This resulted in lower finished goods heading into the 4th quarter. We remain focused on procuring materials, components and other resources to accelerate the pace of production in the face of supply chain, Inflation and Labor Pressures. With this backdrop, we are updating our full year fiscal 2021 guidance. We now expect net sales growth of about 17%, up from 12% to 15% previously. We anticipate the professional segment growth rate will be similar to the company average with the residential segment exceeding the company growth rate. Looking at profitability, we now expect overall adjusted operating earnings as a percent of net sales for the full year to be Similar to fiscal 2020. We expect professional segment operating margins to be similar to last year. As we expect residential margins to be down compared to last year, but still well above historical levels. This reflects our volume leverage and strong operational performance year to date, offset by increasing supply chain inflation and labor pressures. We continue to take actions to counteract these market dynamics. Based on current visibility, we now expect Full year adjusted EPS in the range of $3.53 to $3.57 per diluted share, up from our previous range of $3.45 to $3.55 This higher EPS guidance reflects our strong year to date performance, the robust demand environment and continued solid business execution, while also taking into account The headwinds previously discussed. All in, we remain well positioned to capitalize on this period of profitable growth as we continue to execute on our strategic long term priorities. I will now turn the call back to Rick. Thanks, Renee. The guidance Renee just discussed reflects continuing strong demand across our end markets as well as our current operational outlook. Looking at global key demand drivers for the remainder of the fiscal year and into fiscal 2022, we are watching Consumer and business confidence levels along with developments related to COVID-nineteen, customer Prioritization of investments to maintain and improve outdoor environments, a continuation of strong momentum in golf And government support and funding of infrastructure investments. These end market factors should continue to drive strong And in the Q4 and into next year, our biggest challenge remains our ability to produce to meet retail demand across all of our markets, Given the current operating environment, we believe constraints will begin to ease as we see improvements In key material and component availability, logistic channels and other COVID related factors. Our operations team remains committed to doing everything reasonably possible to meet increased production requirements and grow market share In this challenging environment, when operating constraints begin to ease, we expect to be in a better position to build field inventory from our current We remain focused on driving productivity and synergies, prudently managing We are well positioned to Capitalize on long term growth opportunities with our strong cash flow, market leadership, investments in innovation and trusted relationships. A few recent examples that highlight our commitment to innovation and relationships include for the 2nd year in a row, A Partner of the Year Award from Tractor Supply Company, this time as Omnichannel Partner. From Green Industry Pros, The selection of 3 of our products for their 2021 Editor's Choice Awards, citing innovation and utility as factors. The 3 products include the Exmark 96 inches Laser Z Diesel, the Toro Z Master 4,000 And the Z Spray LTS Spreader Sprayer. In August, 2 of our rental and Specialty Construction Offerings received Editor's Choice Awards from Rental Magazine, including the Ditch Witch SK3000 full size Stand on skid steer, which offers the most power in its class and the Toro Swivel Mud Buggy Superior traction and maneuverability. And finally, the International Sustainable Irrigation Expo recently recognized our AquaTrax Azul, micro irrigation solution as new product of the year. In addition to awards, Our innovative products have been showcased at recent marquee events. Earlier this summer, our Parrot Irrigation Systems helped Keep the playing fields in top condition at many of the Euro Cup Championship sites. In July, our irrigation and Turf Equipment supported Paul Larsen and his team at Royal St. George's Golf Club as their expert work was on pole display at the Open Championship. And more recently, our turf and irrigation solutions helped Tokyo's Japan National Stadium and Kasumi Guseki Country Club maintained pristine conditions for this summer's high profile events. Our mission to deliver Superior innovation and customer care is deeply rooted in our purpose of helping our customers enrich the beauty, Productivity and sustainability of the land. This long standing focus on sustainability extends to our communities where we have a strong legacy of giving back. A few recent examples highlight this legacy. First, close to our worldwide headquarters, we partnered with Better Futures, An organization that works to transform the lives of men post incarceration and support Minnesota's environment. Our donations of equipment and training resources help further the organization's mission. 2nd, on a national level, we've partnered with The American Rental Association Foundation on a new community impact project. This initiative is improving communities across These are just a couple of examples of the many ways our company employees are giving back Promoting sustainability, supporting our customers and communities is an important part of our culture and core to who we are as a company. In closing, we are optimistic as we finish fiscal 2021 and head into 2022, Also acknowledging the continuing dynamic environment. We believe our updated guidance appropriately reflects both the risks and the opportunities we face. We have strong fundamentals and momentum across our businesses and are well positioned to capitalize on future growth. As always, Our extended team is the key to the Toro Company's long term success. Thank you to our employees Thank you. Thank you. Our next question comes from the line of Renee and I will take your questions. Thank you. Our first question comes from the line of David MacGregor with Mungbow Research, your line is open. Please go ahead. Yes. Good morning, everyone. And congratulations. It was a very difficult environment in which to operate. So that was a reasonably good quarter being considered. I guess I'd be interested in maybe talking a little bit about sales guidance, Up 17%. How much of that at this point would look like price versus volumes? Yes. As we look at it, David, we would say the Majority relates to volume. We just continue to see very strong business fundamentals and very strong demand. So the majority would be volume. And I guess, you made a pretty good case last quarter for why you need to protect your golf dealers on their large project bids, but You feel you've made adequate progress in passing through cost inflation in all your other product groups? And how will that pass through look different in the Q4 and then maybe into 1Q versus what we This quarter. Yes. So just talking about pricing. In the current normally, we don't really have A big backlog situation that we're looking at. We usually talk about lead times. We stay very current with our orders. We are in a remarkable situation right We do have extended lead times combined with pretty significant cost increases. So this is a different situation and we are not in a position to protect those prices that are So that is part of the discussion with our customers. Obviously, there are special circumstances and so forth, but This is a different environment. Yes. And I would just add that we have taken multiple market based pricing actions Today, we'll continue to evaluate that in this environment. David, we are seeing our quarter to quarter price realization improve, But we haven't fully realized all of the pricing actions, but we certainly expect to do that in the future. Right. Because I think the thesis last quarter was that you were These price increases, they'd have a partial impact on 3Q before having a more meaningful and pronounced impact on 4Q. I'm guessing that's still the expectation, but were there additional price increases announced since our last earnings call? There were it varies business by business, but there were additional price increases that were Effective during that time period, what we're also seeing though is more pronounced impact from the supply chain and from inflation As well as we close out the year, we'll continue to assess the situation and take action Where we need to, to be able to keep our focus on serving our customer well, but also Profitable growth as well. And David, just adding to the earlier comments, what you said is also true. We do have there's variability And how quickly you can implement price increases even if we're not protecting the far out distant orders Just by the nature of the business, some things are transactional, you can change them overnight, others are part of negotiations or Bid packages and they're just a little bit more complicated. So there's still a delayed ramp up in realizing the full price impact in In our financials and we're still on that curve from the actions that we've taken so far and we will take actions as needed. Okay. My second question is with regard to the residential growth. How much of the 23% was Cactus Supply? And I know you've lapped The introductions there now, but they are adding stores and I think you're still adding listings. But you've got Tractor Supply, you've got the product refresh, there's the Flex Force. So you've got a number of initiatives in there that would be contributing to that growth. I guess I'm trying to isolate against those initiatives what the growth was in the legacy Residential Business. And I think you touched on it, David. It's really a broad based Growth, so certainly not unique to Tractor Supply. And over the last year, we talked about trying to parse out the Drivers between the stay at home initiative and the other things that we're doing. We kept reminding everyone of the work that was done with the products, with the Marketing with the branding messaging, with the merchandising, along with new channel partners. And as some of those Strong drivers of the stay at home initiatives start to wane, we're seeing continued strength with those other drivers and that's the bulk of where that growth is coming from. Okay. All right. Thank you very much. Thank you. Thank you. Thank you. And our next Question comes from the line of Tim Wojs with Baird. Your line is open. Please go ahead. Hey, everybody. Good morning. Good morning. I guess just my first question, kind of circling back on the inflation side. Is there any way to What the annualized kind of inflation and supply chain impacts might be on a dollar basis? Just trying to think Maybe as a percentage of revenue or COGS, just trying to understand maybe where that is today if you kind of snap the line versus where it was maybe 3 months ago In terms of just kind of absolute magnitude? Yes. From an inflation standpoint, I would say the most significant inflation that we're seeing Material and commodity inflation, in particular, steel and resins have been significant to us. But there's also inflation that we're seeing related to Logistics and transportation, again, nothing unique to Toro, all the things that you're seeing, I'm sure, across many of the companies that you And wage inflation has become more significant later in the year. We can break it out specifically as far as a dollar impact, but you are seeing As well to try to mitigate that, we do expect we'll see continued price realization as we go forward. We do In fact, that Q4, we're going to continue to see a lot of the same situation as far as inflation and freight and other logistics challenges. And those will probably, in the short term, accelerate a little bit. And we tried to include that, Our best estimate in our guidance. But the fundamentals for the business are really, really strong. Right, right. Okay. That makes sense. I guess when you think about the pricing realization relative to inflation, I mean, do you think you kind of at this point, can kind of offset it by the 1st quarter or by kind of early next calendar year, how would you kind of think about it today just relative to what you're seeing? Yes. I mean, part of it depends on How long the inflation persists, there's differing opinions on that. We'll certainly continue to be very engaged in understanding that and We do expect we'll see continued inflation into next year. We think the commodity piece will moderate And supply and demand eventually kind of balance in many of those areas. The timing is the one that is a little We do think when we look at logistics that some of the short term freight issues will normalize. I mean, again, Supply and demand and some of the constraints and congestion we're seeing will normalize, but we think freight is probably fundamentally going to cost more in the future, I'm in labor as well. So as we look forward, we think we'll have some of these continued challenges. And again, we'll take appropriate market based Okay. Okay. And then just maybe on technology investments, the last one I have. I mean, anything You can share with us about the new product development pipeline and maybe any potential announcements over the next few quarters. And really, I'm thinking more on the landscape and maybe golf sides. Sure. We continue to make investments as we have internally for the last number of It's very much focused on the key technology areas of which autonomous smart and connected products And the alternative power and the acquisitions that we made early this year have met Actually say far exceeded our expectations in helping us accelerate those initiatives. And I think You had a chance to see at the golf show, the last in person golf show we had in 2019, our vision of what Technology looks like going forward for golf and that was not those were not just concepts, Products for the future, that reflects the direction that we're going. And we are on track with our plans. And you'll see A steady introduction of products in those categories over the next several years, that's really the fruit of our labors and working in those areas. And that's one of the most exciting things actually that's going on right now. Okay. Okay, great. Well, good luck on the rest of the year, guys. Thank you. Thank you. Thanks. Thank you. And our next question comes from the line of Sam Darkatsh with Raymond James. Your line is open. Please go ahead. Good morning, Rick. Good morning, Renee. How are you? Good morning, Beth. I'm doing well. How are you? I'm well. Thank you. Got a couple of 2, 3 topics. One of them is a Piggyback on what Tim just asked. I mean, as it stands right now, what is the expected price benefit To fiscal 2022 sales on a year on year basis based on what you've already announced in the channel? Yes. Certainly, our price is not at our normal range. From a price standpoint, we normally talk about 1 to 2 points of Price realization is certainly more significant to that, given the fact that we've taken multiple pricing actions, as well as same we're focused Some of our promotions and programming as well in this environment, that is down as well. As we We'll continue to assess price and take other further actions, but it's certainly an order of magnitude greater than our normal Can you give a sense of what order of magnitude means, At least based on what has already been announced, are we talking about 5%, 10%? What sort of price increases have been announced? Yes. I think, Sam, those are the kinds of ranges that we're talking about. It's Across a lot of different businesses that see different levels of cost impact. So it's hard to say in summary In the midst of the price increases, but those are the kinds of numbers we talk about relative to usually talking about 1% or 2%. And we always want to remind everyone as well that we're also focused on offsetting those in every other possible way that we can through productivities, the work that we did with synergy leading into the pandemic that had been done And really triggered by the Charles Machine Works acquisition set us up to be able to offset a number of the cost Increases that we would have seen. So that's a it's the whole bundle, but pricing is a bigger tool that we're needing to use this year than it has in the past. We are absolutely committed to our margins as we have in the past. And every one of our businesses is driven to improve So if commodity prices and general Cost inflationary pressures stabilize from today. Do you think that the pricing actions and the market Demand would warrant your normal 25% incremental margins next year? Or are those pricing more designed to get price cost neutrality and therefore your incremental margins might be lower conceivably than the normal 25 next year. Yes. We'll continue, Sam to evaluate price. And as the inflation environment unfolds, we'll have better information related We'll always price to market and we have a very rational market that we operate in. Our competitors are rational So we'll as we do expect that there will still be an inflationary environment going into at least the beginning of next year. And some of these other headwinds, as I mentioned, are going to be there. So we'll continue to evaluate price and take the appropriate actions. With that focus, as Rich said, on Certainly serving our customer, but also ensuring we're growing market share and we're doing so in Two other quickies if I could. The 4th quarter implied guidance Was trimmed, although obviously the Q3 was much better than you expected. Remind me specifically what happened with The Q4, was it a timing of shipments into the Q3 or what specifically happened with the Q4 versus your prior view? Yes. No, we did we definitely did see it's hard to predict the cadence in this environment. And so we did see a stronger third quarter With higher demand and really exceptional execution by our operations team, they just did a fantastic job. So a piece of it is timing Between the quarters and also just looking at the inflation environment, as I mentioned earlier, we do see that continuing to accelerate at this point in We do think that will reach its equilibrium and start to normalize and come down, but we are anticipating that a number of Supply chain challenges will remain, including inflation in the Q4 with better or greater price realization as well. And my last question, I promise. Rick, talk about the potential effects from an Structure stimulus fill, specifically on Ditch Witch. I'm thinking about things like rural broadband and lead pipe replacement And drinking water improvements, what are Ditch Witch's exposure or potential exposure to these specific areas? It's a great question. The fundamentals for that business are extraordinarily strong and have a long term reach. This is we called out that's one of the areas that we're particularly challenged on the operations side right now because it shares Key components with some other industries that are also seeing a great increase in demand like agriculture, like construction, etcetera. We fully expect to work through those issues and we have an extremely concentrated effort to make sure that we can work through those challenges Because the demand is incredible for that area. Before we went into the pandemic, we were talking about the conversion to 5 gs And the need to install the infrastructure for 5 gs that goes from an antenna density of 10 miles down to 500 to 800 And all of those antennas need to be connected back to the main infrastructure. There's the Infrastructure work that is there as a deficit that needs to be repaired, that's underground everywhere we are. The recognition then going into the pandemic of the broadband gaps of the haves and the have nots and the need to bring broadband to all locations And the importance of that and equalizing economic opportunity, therefore, getting a lot of investment. And more recently, we've just been looking at, we talked about the downside of the petroleum, which had another small adjustment down. It was not significant Because that reduction was taken last year, the plus side is for alternative energy, every solar field that's put in, every Wind generation system that's installed onshore, offshore needs trench equipment and directional drills to put that together. So there's an offset, and we could not be more excited about Sure, with the Charles Machine Works acquisition and the drivers that are there. Thank you for that terrific color. Thank you both. Thank you. Thank you. And our next question comes from the line of Ross Giliard with Bank of America. Your line is open. Please go ahead. Hey, good morning, everybody. Good morning. Good morning. Rick, maybe you can expand a little bit on that Ditch Witch Can you quantify like the magnitude of the revenue declines you've seen over the last 6 months? I mean, it sounds like you're setting That business is setting up for having potentially really easy comps next year. How much longer before that business turns positive On a year on year basis and just with the disruption you're seeing, are you just seeing like a big spike in backlog in that business right now? We as I said before, we usually don't track a lot of backlog. But in this case, the answer is yes. We do see Significant backlog for product in that area of people standing in line for equipment. So that's therefore our extreme focus on the operations part The reductions that we're talking about in the bigger scheme of things, I actually don't have the exact number in front of me, but it's relatively small as As part of the professional business, the reduction. But the demand is extraordinarily solid and There are not too many really there aren't any substitutes. We believe our competitors are in the same situation. The Charles Machine Works has benefited in some ways by being part of a larger organization. We've been able Work with our long term suppliers to help get supplies and key components to be able to build as much as we possibly can. It's not enough right now and that's where we're focused on getting that solved. So are we talking about like The low to mid single digit production declines on a year on year basis with orders that are up strong double digit, like is that like a fair way to characterize what's In underground construction? Orders are up strong double digit. It's probably true. I don't have that right in front of me specific to that business. And in terms of the decline in shipments? Yes. At a taurol level, it would be low single digits at the taurol level. Okay. Can you talk a little bit more specifically on what's happening with gas engines? How severe are the shortages? I mean, Seems like there's been some capacity rationalization with Briggs filing and some other players exiting The gas business, how are you doing on gas engine? I mean, are you living do you feel like you're living hand to mouth? Are you having to raise prices On gas powered equipment at a clip greater than the corporate average just to sustain margins? Well, most of our product is gas or diesel powered today. So engines are one of the key components that cut across every single product line. And as you would expect, that's one of the key constraints from a component standpoint. So the answer is yes, That is a key constraint for us and all of those factors, I believe that you mentioned, including the price impact of extraordinary measures that Suppliers are taking to produce engines and for us to bring them in as quickly as possible are all contributing both to Supply disruptions in some case, but also the inflationary factors. But does that feel like more of a structural headwind, Rick? I mean, I don't know a lot of people are going to be adding gas engine supply in the future. And if it does, like do you worry at all that gas powered equipment Price itself out of the market at some point if we end up in like a more acute like longer term shortage or do you truly view this as just a transitory issue For the next like 6 to 12 months. We view it primarily as a transitory issue that The supply will find its balance with the demand. How is that though? Like what was it? Is that just Because demand will slow or is anybody actually adding capacity in this market? There are Opportunities to add capacity and there are also a number of engine manufacturers and alternatives. Okay. All right. And then just my last one is just on the back to the implied Q4. I mean, if My math's correct. I think you're implying like a 20% earnings decline on a 13% revenue increase. I mean, can you quantify that cost Headwind specifically in the Q4, in dollar terms a little more specifically. And I'm just wondering, do you go into next year with negative earnings comps in the first half of the year Based on what you're seeing now. Yes. We did mention that we do see some of the inflationary and supply Issues continuing and in fact accelerating in the Q4. We do expect, I mean, as we look through the year Into 'twenty two, some of those issues will be with us at least in the first half of the year. That being said, we'll continue to focus on What we can control and we will focus on certainly our productivity and our internal efforts, but we will continue to also take market based Pricing decisions that are going to be consistent with what I mean, it's not unique to Toro, the situation. So we're going to see it across Our industry and have seen it across our industry. So we would expect that everyone will be rational and take We are really excited about the strength of our business. Our demand is very And the business fundamentals are strong. And again, very proud of the execution we've had year to date, from our operations team. And we'll all stay focused on the long term, making sure we're growing our market share, but also growing it profitably and improving our margins. Thanks very much. Thank you. Thank you. Thank you. And our last question comes from the line of Eric Bouchard with Cleveland Research, your line is open. Please go ahead. Thanks. Two things To cover, first of all, just a little bit of clarity. The inflation and challenges from the supply chain, Totally understand what's going on. Can you just clarify a little bit, like all those challenges were in place in 3Q and profits grew. All those challenges in place are going to be all those challenges are going to be there in 4Q and it sounds like through 1H. And you're talking about earnings profits down in 4Q year over year. And Your last comment made me think, does that mean profits are down in the first half of next year. What's so different in 4Q in the first half of next year relative to what just happened in this current quarter? Yes. I would say 2 things. 1 is Q4 was a very, very strong quarter for us. So part of it is just I'm sorry, Q3 was a very strong quarter for us last year and Q4 as well last year. So I think that comparisons are It's just more difficult from that standpoint. If you think about the rebound that we experienced through COVID, really the first half was more impacted by COVID, and then we started to see That strong rebound in the second half of the year. So part of it is just the cadence. And then if you look at a particular quarter, the comparison, we do expect to see More inflation and more supply chain disruption in Q4. It's relatively a little bit smaller quarter for us as well. We do expect some of those issues will accelerate. As we talked about earlier, we also believe that some of those will moderate as we go into next year. Exact timing is to be determined based on what happens with the economy. But we'll continue to we expect to see greater price in Q4 than we saw in Q3, and we expect going into next year that we'll take appropriate price actions as well. Okay. And then secondly, in terms of backlog, Rick, you commented that It's a bit unusual for the backlog situation to be what it is, obviously reflecting the strength of demand relative to where supply is. Do you have visibility in terms of when you can meet that backlog and work that down? We have an ongoing estimate of when that will be. And it's just as you would imagine by the nature of our Sure. For our businesses, it varies pretty dramatically. The longer lead time periods would be in the areas we talked about Charles Machine Works with the Ditch Witch business, for example, because of when you have components, there's still a lot of content to build those machines. So that tends to extend the lead time. Others are more a matter of when Commodities become more available, we can turn those around very quickly. So it's pretty widely ranging from Minimal to much longer term. Okay. And I guess Real time, if you would, is the backlog continuing to grow now in the last 30 days? Or is the backlog peaked and now it's just a function of working it down? The backlog is continuing to grow. Okay. Thank you. Thank you. Thank you. And I'm showing no further questions at this time. And I would like to turn the conference back over to Julie Caricus for any further remarks. Thank you, Michelle, and thank you all for your questions and interest in The Toro Company. We look forward to talking with you again in December to discuss our Q4 and full year results for fiscal 2021. This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.