Earnings Call: Q2 2021

Jun 3, 2021

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 and facilitator 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 conference It is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's conference, Julie Kerikest, Treasurer and Senior Managing Director of Investor Relations for The Toro Company. Please go ahead, Ms. Carcass. 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 Financial Officer. We begin with our customary forward looking statement policy. During this call, we will make forward looking statements regarding our business and future financial and operating results. You 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 materially from those in our predictions. Please note that we do not have a duty to update our forward looking statements. In addition, during this call, we will reference certain non GAAP financial measures. Reconciliations of historical non GAAP financial measures to reported GAAP Financial measures can be found in our earnings release or on our website. We believe these measures may be useful in performing meaningful comparisons of past and present operating results 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 And this call. With that, I will now turn the call over to Rick. Thanks, Julie, and good morning. The Toro Company delivered very strong results for the Q2 of fiscal 2021, driven by robust broad based Our team continued to execute well in this dynamic environment, managing the supply chain challenges affecting our industry and the global economy and working together with our channel partners to serve customers and fulfill retail demand. As a result, net sales for the 2nd quarter were up 24% year over year. Professional segment net sales increased 25%, continuing the growth trend for this segment and setting a new record. The increase was primarily driven by a strong demand for golf, landscape contractor, irrigation and rental and specialty construction products. Our lineup of innovative products combined with increasing business confidence in the economic recovery helped fuel Exceptional demand. Residential segment net sales for the Q2 were up 20% year over year, setting another record. This growth was led by a strong demand for 0 turn riding mowers and our all season Flex Force 60 volt home solutions products. In addition, enhanced retail placement boosted sales of our snow equipment and late season snowstorms helped clear the channel. The introduction of innovative new residential products coupled with the refreshed marketing and expanded mass retail distribution continue to strengthen our brand And drive growth for this segment. We also set records for earnings in both segments this quarter As we drove productivity and operational synergies enterprise wide, professional earnings were up 57% And residential earnings grew 24%. Reflecting on the outstanding results this quarter, we note 3 prevailing themes. First, demand has been exceptionally strong. We see this continuing for the foreseeable future, albeit with year over year growth rate that will ultimately stabilize off a higher base. This demand is driven by improving consumer and business confidence coupled with public and Private investment priorities and current lifestyle trends. We expect to capitalize on these drivers with our commitment to new product development, Best in class distribution channels and a strong balance sheet that provides the financial flexibility to invest in the future. 2nd, along with the exceptionally strong demand, we've seen escalating supply chain and inflation challenges. These challenges are not unique And are having a global impact. Our teams have worked effectively to keep up with increased demand while navigating the current supply We've also focused on mitigating material freight and wage inflationary pressures through productivity and synergy initiatives, Disciplined expense control and market aligned pricing actions. We will continue to prioritize important investments to support growth. 3rd, we're leveraging our strong balance sheet to position the company for future growth. As we continue to generate strong free cash flow, we are allocating capital to best drive value for all stakeholders. This year we've made strategic investments in technology accelerators through the acquisitions of TurfLinks and Left Hand Robotics. These teams have immediately helped us advance our innovation roadmap. At the same time, we've continued to invest organically in Key technologies, including alternative power, smart connected and autonomous. As an example, our expanding line of Flex Force 60 volt products Will soon include a battery powered 2 stage snow thrower, which is ready to launch and is generating a lot of excitement in the field. Our healthy cash flow also allows us to return capital to shareholders while maintaining ample liquidity. Year to date, We've paid down $100,000,000 of debt, invested $107,000,000 in share repurchases and paid out $57,000,000 in dividends. While we work to capitalize on this period of great growth, we remain committed to our employees and channel partners And continue to diligently manage and mitigate COVID related risks. We're keeping the health and safety of our team in the forefront while executing operationally to get the right products to the right places at the right time. Through the So We Can campaign, we're incenting our employees to get vaccinated. We extend sincere thanks to both Our team and our channel partners for their continued commitment to keeping each other safe, while also going above and beyond to meet the needs of our customers. Looking ahead, we remain focused on our enterprise strategic priorities of accelerating profitable growth, Driving productivity and operational excellence and empowering people. We will continue to execute against these priorities to position the company for long term sustainable growth. I'll discuss our outlook further following Renee's more detailed Thank you, Rick, and good morning, everyone. Our record second quarter was driven by robust demand across our Professional and Residential segments coupled with strong operating performance. We grew net sales by 23.6 percent to $1,150,000,000 Reported EPS was 1 point Up from $0.91 last year. Adjusted EPS was $1.29 per diluted share, up from $0.92 in the prior year. Moving to our segment results for the quarter. Professional segment net sales were up 25.3 percent to $828,400,000 This increase was primarily due to strong demand for golf, landscape contractor, irrigation and rental and special Construction Products slightly offset by lower sales of underground construction equipment driven by supply disruptions that impacted product availability and continued softness in oil and gas markets. Professional segment earnings were up 57.3 percent to $167,100,000 And when expressed as a percent of net sales increased 410 basis points to 20.2%. This increase was primarily due to productivity improvements, including COVID related manufacturing inefficiencies In the Q2 of last year that did not repeat, net price realization and volume leverage, partially offset by higher commodity costs. Residential segment net sales were up 20.2% to $315,000,000 This increase was primarily driven by strong retail demand for Zurn Turn riding mowers due to new and enhanced products, Higher sales of Flex Force battery electric products, mainly driven by successful new product introductions And higher shipments of snow equipment as a result of late season storms and expanded retail placements. Residential segment earnings were up 23.9 percent to $46,000,000 and when expressed as a percent of net sales, Up 40 basis points to 14.6%. The increase was primarily driven by Productivity improvements, including COVID related manufacturing inefficiencies in the Q2 of last year that did not repeat net price realization And product mix, partially offset by higher commodity costs. Turning to our operating results for the 2nd quarter. We reported gross margin of 35.1 percent, an increase of 210 basis points from the prior year. Adjusted gross margin was 35.1%, up 170 basis points. These increases were primarily due to Productivity improvements, net price realization and favorable mix, partially offset by higher commodity costs. SG and A expense as a percent of net sales decreased 10 basis points to 19.4%. This favorable performance was primarily driven by volume leverage and lower indirect marketing Partially offset by higher incentives due to improved performance and the reinstatement of certain costs that have been part of the company's fiscal 2020 pandemic driven expense reductions. Operating earnings as a percent of net Sales increased 220 basis points to 15.7 percent and adjusted operating earnings as a percent of net sales Increased 170 basis points also to 15.7%. Interest expense was down $1,500,000 To $7,100,000 driven by reduced debt and lower interest rates. The reported effective tax rate was 19.8% And the adjusted effective tax rate was 20.9%. Now turning to the balance sheet and cash flow. At the end of the second quarter, our liquidity remained consistent at $1,100,000,000 This included cash and cash equivalents of $500,000,000 and full availability under our $600,000,000 revolving credit facility. We have no significant debt maturities until April of 2022. Accounts receivable $391,200,000 down 2.3% from a year ago, primarily driven by channel mix. Inventory was down 12% from a year ago to $628,800,000 primarily as a result of increased demand. Accounts payable increased 28.8 percent from last year to $421,700,000 This was primarily due to increased purchases of components as well as more normalized expenses. Year to date free cash flow was $292,400,000 with a conversion ratio of 115%. This positive performance was largely the result of higher earnings and lower working capital, driven by higher payables and reduced inventory levels. Our disciplined capital allocation strategy fueled by our strong balance sheet includes investing in organic and M and A growth opportunities, Maintaining an effective capital structure and returning cash to shareholders. Our capital priorities remain the same and include Reinvesting in our businesses to support sustainable long term growth, both organically and through acquisitions Returning cash to shareholders through dividends and share repurchases and maintaining our leverage goals to support financial flexibility. At the midpoint of the fiscal year, demand momentum is strong and our leadership position in the markets we serve is solid. Like many other companies, we are continually adjusting through these dynamic times. The economy is experiencing a surge in demand, while supply Why is struggling to keep pace? In the long run, we expect the positives from the heightened demand trends across our markets to endure and outweigh the near term pressures. While we continue to drive productivity and synergies and take appropriate market based pricing actions, Our operating margins in the second half of our fiscal year will be pressured. This is driven by the escalation in supply chain challenges as well as material, freight and wage inflation, which we expect will result in manufacturing And higher input costs relative to our prior guidance. With that backdrop, we are updating our full year Fiscal 2021 guidance. We now expect net sales growth in the range of 12% to 15%, up from 6% to 8% previously. We expect Professional and Residential segment net sales growth rates to be similar to the For our company, with residential trending slightly ahead of professional. This is due to the strong demand we continue to see across our businesses. Looking at overall profitability. We continue to expect adjusted operating earnings as a percent of net sales For the full year to be slightly higher than fiscal 2020. This reflects the strong performance in the first half, coupled with a more challenging supply chain and inflationary environment in the second half. Given our strong balance sheet and future growth expectation, We are increasing our estimated capital expenditures for the year to $130,000,000 up from $115,000,000 This aligns with our priorities of investing in key technology areas and ensuring we have the capacity to meet future growth. Based on current visibility, we now expect full year adjusted EPS In the range of $3.45 to $3.55 per diluted share. This increase reflects the robust demand environment, while also taking into account the near term supply chain and inflationary pressures. We anticipate The impacts of these pressures to be the most pronounced in the Q3 before our mitigating actions are more fully realized. We expect adjusted EPS per diluted share in the 4th quarter to be similar to fiscal 2020 against a very strong Q4 of last year. Looking to the rest of the fiscal year, we remain excited about the broad based demand for our product. We are well positioned as we continue to execute on our long term strategic priorities and invest in innovation to capitalize on future growth opportunities. I'll now turn the call back to Rick. Thanks, Renee. As we look ahead to the remainder of the year, We're watching a number of key drivers in our end markets. For residential and certain professional businesses, continuing consumer interest in home investments. For landscape contractors, capital investments, including catch up purchases of prior deferrals, driven by improved business confidence. For golf, continued strong momentum in general, the reopening of international courses and the return of resort golf. For grounds equipment, the prioritization of outdoor space maintenance and improvement by municipal and other tax supported entities. For underground, increased government support and funding for infrastructure spending. This includes broadband build outs, Alternative Energy Investments and Critical Need Infrastructure Rehab and Replacement. For Rental and Specialty Construction, Strong demand by both professional contractors and homeowners. For snow and ice management, channel demand given lower end of season inventory levels. In short, these end market drivers should continue to support robust demand. Our biggest challenge for the remainder of the year will be our ability to produce at the desired rate, given the supply chain constraints we are facing. We believe the constraints will improve as key commodity availability normalizes, global vaccination rates improve, COVID restrictions ease and logistical capacity finds a balance. We anticipate demand will remain strong even after supply chain constraints At that point, we expect to be in a position to rebuild field inventory levels across our channels. Our operations team remains committed to doing everything possible to meet the increased production demands. With our team's dedication, Our innovative suite of products and our market leadership as well as our consistently strong cash flow to support growth investments, we are well positioned to capitalize We're also well positioned to capitalize on electrification trends, given our expertise and leadership across our markets. We are committed to developing electric products that offer both power and durability with no compromise on performance. For example, in March, our 60 volts personal pace recycler mower was named Editor's Choice by Popular Mechanics in its evaluation of electric lawnmowers. Build quality and cut quality were cited as the two reasons Toramores have received more Editor's Choice Awards than any other brand. In addition to the residential Flex Force line, we have an increasing number of professional battery powered products, including our all electric greensmower And lithium ion workman utility vehicle. Sustainability is fundamental to our enterprise strategic priorities And our focus on alternative power, smart connected and autonomous technologies is embedded as part of our sustainability and doors strategy. It's the right thing to do and provides the opportunity for our company to create value for all stakeholders while helping our customers achieve their sustainability goals. A recent win highlights this focus. 1 of our European channel partners, Jean Haybrook of Rieseink Group Was awarded a 4 year preferred supplier agreement and fleet management partnership with the city of Amsterdam. The city has an objective of 0 emissions by 2,030 and we are excited to partner with them in achieving this goal. Another example is our new 20 year partnership with the National Links Trust in Washington DC. Their mission is to protect and promote accessible and affordable municipal golf courses to positively impact communities. We are honored to support this mission together with our distributor, Turf Equipment and Supply Company as well as our longtime partner, Troon, The world's largest golf management company. Involvement in this project exemplifies who the Toro Company is, a team focused long term caring relationships, our communities and the environment. In closing, we're optimistic as we begin second half of our fiscal year. We believe our updated guidance appropriately reflects the risks we face in the current operating environment, while also accounting for the robust demand we expect. We have strong momentum across our businesses and are positioned to capitalize on future growth drivers. Thank you. Thank you. Renee and I will take your questions. Thank Our first question comes from the line of Sam Darkest from Raymond James. Your question please. Yes. Three questions if I might. The first, you mentioned that your production constraints Should ease in the coming months. I'm more interested in potential inflation In RAS and Components next year, I think you normally do your negotiations with your vendors in that kind of August, September area, Which suggests that there might be further pressure for next year. Can you talk around that in terms of whether you see Maybe even more inflation next year or has that already been the worst of its behind you? Yes. As we look at inflation, it is a global issue that we're dealing with. And In particular Sam, we're seeing inflation that was higher than our initial expectations and we have tried to factor that into our guidance for this year. But in particular, steel and resin are particular components that or raw materials that are we're seeing more of that inflation as well as some freight And wage inflation as well. As we look forward, we do expect for the second half for inflation to continue Going into next year, I mean part of it we'll have to see how the economy unfolds. I mean there's differing points of view on inflation. Some see it as more of a temporary A blip other seat is longer term. The thing that we will do is we'll continue to focus on the things we can do to mitigate to the best And we feel very lucky that we had a strong pipeline of synergy and productivity efforts across the enterprise. We will always manage costs prudently. And we also will take market based And look at also promotions and other marketing programs as well. So we'll have to see how next year But what we also see is demand is remaining very strong and the business fundamentals look encouraging going forward as well. To that last point, could you help us with respect to what volume growth was versus price In the Q2 and then prospectively within your 12% to 15% sales growth guidance for the year, Renee? Yes. As we look at, we did take market based pricing actions within the year and we'll look at also if There are additional market based pricing actions we have to take. The majority of the growth would have been volume based Certainly within the quarter, but we're continuing to look at as inflation becomes clearer to us what type of actions we We need to continue to take for the rest of the year. But again, we don't start with price. We'll start with what we can do internally to try to control To the best of our abilities. And again, demand looks to be remaining strong for the remainder of the year and beyond as well. So the incremental price I'm sorry, the incremental sales growth guidance is mostly Price or it's mostly volume or I'm just trying to get a sense of when you decided to raise your expectations for sales for This year presumably for the back half, how much of that was volume versus price? Yes. We don't break it out Specifically, but I mean when we're looking at growth that's double digit, I mean that's more volume based and price based. Got you. And then my last question and I'll defer to others. Thanks. The residential business up 20% In the quarter, which is terrific, obviously, just trying to reconcile that though with the growth That was cited by both Home Depot and Tractor, which are your obvious large channel partners that were well in excess of 20%. I think they were both talking about 30 plus. First off, what was going on there? How to reconcile the difference there, especially knowing that you talked about additional placements too? Yes, I can't speak specifically to the Home Depot and Tractor Supply numbers that you're quoting. We had an exceptionally strong quarter from a residential perspective. In fact, the stay at home probably kicker That's on top of the work that we've done extended even further than we expected at this point. We expect that effect to wane at some point. But the fundamental things that we've done continue. So we're pleased with our growth That's all the places that you're mentioning. So I can't speak specifically To the comparison that you're talking about, but the fundamental things that we've done with refreshing the product line, Expanding placements and building the brands and the messaging have been very effective from our perspective. Thank you both. Thank you. Thank you. Thank you. Our next question comes from the line of Tom Mahoney from Cleveland Research. Your question please. Hi, good morning. I had two questions. First, is there a way to characterize the production speeds You guys are able to achieve now relative to pre COVID levels? I would say without a specific Percentage, we're still largely in the COVID operation mode. So our manufacturing Actually improved efficiency and productivity relative to where we were, let's say, 9 months ago. But we're still in a position where we've got social distancing on our assembly lines. We've stretched those out. There are certain practices that we have to continue to follow from a safety standpoint that just result in ultimately some But we are seeing improvement both in optimizing that process, plus as we get additional Associates vaccinated that helps us with additional flexibility. So we saw a nice improvement of our own productivity and efficiency internally. And we expect that to continue as the pandemic situation improves and we get more people vaccinated. I would just add that I think we have seen some impact from the supply chain disruption that has been escalating as we went Through the year and we're also managing that very well. I mean the team is really doing an excellent job of doing all that is possible, but that causes some Additional disruption, maybe it's COVID related. It's the stopping and the starting of assembly lines and so forth that just builds in additional inefficiencies. And as that improves, we should also expect to see improved manufacturing because of that as well. Okay. And then just to follow-up on the residential lower point that you guys were just making. Is there any signs in the demand that you're seeing as spring has progressed Of interest in home spending waning, whether it's mix or if you look at volume on a sequential basis? And then along with that, Any change in appetite from retailers or dealers to take inventory in that part of your business on the residential side? We really have not seen that trend diminish at this point. So we continue to have very strong demand in our residential segment. The stay at home is certainly part of it, but the things that we've done over the last several years to reboot that business are fundamental Drivers that will continue on beyond the pandemic situation. And remember the comparisons that we're looking at are off of high base From last year at this time and really through the entirety of fiscal 2020. So we continue to build on top of what seemed like a very high base, and the effects of the stay at home continues. Also, field inventory is in it's actually lower than we would like to see. And in terms of your question, like The willingness to take inventory is very high. The field is hungry for inventory in fact at this point. Great. Thank you very much. Thank you. Thank you. Our next question comes from the line of Tim Wojs from Baird, your question please. Hey, good morning everybody. Maybe just kind of dovetailing on the last question, Rick. I'm not sure if you can quantify it or not or provide any numbers, but I guess how would you kind of characterize Broader inventory or broader field inventory levels versus kind of a normalized level. I'm just trying to understand maybe what a rebuild opportunity is for you over the next 12 months. As you would expect with very strong demand over the last several periods and with some of Supply constraints, our inventory field inventory is lower than we would like to see it at this point. So that and that's pretty much true across All of our businesses in both segments. So there is opportunity and very much willingness to refill the field And that's another bit of capacity or opportunity that's out there for us. And just given The demand environment and some of the supply constraints, I mean, is that something that you think really falls more into fiscal 2022 than this year? Realistically, as we forecast forward, that's something that perhaps starts to happen at End of fiscal 2021, but certainly into the 1st portion of 2022. Okay. Okay, great. And then, I guess, on the supply chain, where are you seeing from a component perspective, where are you seeing kind of The tightest constraints and just kind of any color internally on how you're positioning yourselves just to make sure that you're getting at least your fair share of components from your Our ops team is doing just a miraculous job of working really off of the base of the way We do business with our suppliers to look at long term relationships. It still happened that we had been through as part of our synergy efforts With Charles Machine Works and integration efforts, we had just gone through some contracts, re upping contracts And focusing on some key suppliers as key partners. So that's a great base to go from. And what you can look at is really some of first of all the basic commodities. So steel is our number one commodity. And I think relative to last year at this time, it's the market index is up about 300%. We don't see That much because of the contracts that I mentioned earlier, but those are major drivers of Some of the costs are inflationary factors. Resin is another one that's up probably 100% from last year, the base last year at this time. That's been affected by some externalities like the weather situation in Texas that knocked out a good portion The supply chain resources there, the facilities that make the resin. So that's something that is being fixed, But it's just taking a while to get everything back online and then catch up with the shortage. So those raw materials always find their supply demand balance, but that's taking longer than it would normally based on a number of factors. And then the other factors with Suppliers are just the same challenges that we're working through, getting your workforce back, Operating in a COVID safe environment and responding to demand that's come back very quickly. Okay. Okay, great. Good luck on the rest of the year guys. Thanks for the questions. Thank you. Thank you. Thank you. Our next question comes from the line of David MacGregor from Longbow Research. Your question please. Yes. Good morning everyone. My first question is on the supply channel and yes, good morning Rick. First question is on the supply channel. And just what's your best estimate of the total quarterly expenses being incurred right now as a result of the supply channel and labor disruptions? Just trying to get a sense of once the world normalizes and you get back to a steady state, how much of this goes away? Yes. I don't think we can give you that number exactly. What we do see is probably the strongest effects In the second half, we're going to see the full effects in the Q3, particularly the net effects Some of the mitigation actions that we're taking will not be seen completely until the Q4. So we'll probably see the peak effects The inflationary factors in the Q3 by themselves. I mean, but the good news is the fundamental Demand continues to be there and we believe that that's going to be there long after we work through the supply chain issues. And I would just add when we look at the total year, we do expect our operating margins to be up slightly for the year. And we also expect pro margins to be up and residential to be similar or down. So we're encouraged when you look at the total year And we also expect as our guidance reflects that EPS will be up year over year as well. Okay. I guess, sorry for drilling you with model questions here, but I guess similarly on SG and A, you noted the reinstatement of certain costs that And reduced in 2020, how much more of those 2020 reductions will be returning in the second half of this year? Can you quantify that for us? We don't have an exact number. I mean part of what we're seeing as well is there are certainly a return. We had some Salary reductions that took place and some other costs certainly T and E was one of them that will still be at a lower level As well as we look at the second half of the year. Incentives are also David a big change year over year in part because for For fiscal 2020, we were adjusting down our incentives based on performance expectations and for 2021, would we be adjusting those up. So you see some of that impact in Q2 and you'll see some of that for the rest of the year. And volume also impacts I mean part of the SG and A is more Based on volume, so with volume being up, and it's all included in our guidance, but I know It's difficult to break that out. Right. I guess, I wanted to ask a question. You called out the increase in CapEx. And I guess I just want to tie that back to market share question here. And I guess thinking about your operating scale benefit that you have just Competitively speaking, I think you would have a fulfillment advantage in this environment over smaller players whose problems are probably even greater than yours, frankly. Do you have the capacity to take share right now? Are you taking share and if so can you talk about where in the business? We do have capacity to take share and we are taking share in a number of places. I think some of it goes all the way back To some of the things we talked about with our supply chain and the advanced work that was done with our supply chain to I'll be able to support the demand that we did see coming even back in the winter prior to the spring season. And we continue to be excited about the future and it's not only the ability to Supply product, but it's really driven by the innovations, the changes that we've made with our products that really have people excited. We've mentioned the 60 volt flex force, but that's becoming that lithium ion powered portion of our business is becoming appreciable. If you look at the opportunities with our underground business before we started the pandemic there was a huge opportunity with 5 gs, The recognition in the pandemic that there's a broadband gap that needs to be closed and then all of The infrastructure investment that's coming for underground utilities, for And repair and rejuvenation are strong. And then we didn't really talk a whole lot about golf, Golf has seen a tremendous surge through the pandemic, and there's good evidence that that's going to be sustained at a higher level. I think the year to date numbers for golf are something like 44%. I know that's against a pandemic base, but even if you look back To like the 'seventeen through 'nineteen period, it's up about 20% year to date. So those drivers of the The team itself have our golf courses in very good financial shape, and the cost investment that they want to make is to make sure the golf course is in good shape. That means equipment and irrigation systems. So I just want to make sure I'm clear on this. Are you saying that you're gaining share in the golf business? The golf business in general has been a low single digit type of growth business over time. So we have steadily Taking share and that trend continues, but it's not the dramatic kind of moves that it would be a fast faster growing market. Great. Okay. And then last for me is just on the underground construction. You reported sales declines in the Q2. I guess that was A little bit of a surprise, but can you talk about what you're seeing in that business and how that's reflected in your guidance? Is this just a timing issue around 2Q and you We expect to see stronger underground in the second half and as a consequence supporting that growth in revenue? Sure. Thanks. Well, Christine, just in summary, is absolutely incredible demand for the underground business. And we've talked The last several quarters are a little bit about the downside of oil and gas, but it's really all about the supply Hi, Simon. So it's really about producing the products to meet the demand. And had we been able to do that in totality over this last quarter, You would not have seen the effect that you just talked about. So very, very strong long term. I mean, in long term, Significantly stronger demand in most of the drivers for that business. And that really Is that improving? I think to the point that you raised about CapEx. We're making an increase in our CapEx really focused on capacity and technology. In some cases, we can enhance our In some cases, we can enhance our production capacity to be more productive with some capital to put Into place and we have a really strong balance sheet and it offers us that opportunity to continue to invest. Our top priority is always going to be Profitable growth both organic and M and A. And we feel it's a good investment for us to make for the future because we think that demand is Remain strong for some period of time. Right. Okay. Well, thanks very much, Rick. Thanks, Renee. Good luck for this quarter. Thank you. Thank you. Our next question comes from the line of Ross Gilardi from Bank of America. Your question please. Good morning guys. Good morning. Good morning, Ross. Hey, Rick. Can you talk a little bit about within that 20% growth in residential that How the growth in gas powered equipment compares to electrified product and just what is your general split of gas powered versus electric on On LTM basis or however you would choose to break it out? We called out I think 3 categories. These was the first one. The 60 volt lithium ion portion was a big portion. It was a significant portion of the growth and that's really picking up significant momentum. If you think we don't break it down specifically, but we can tell you that it's Becoming a more significant driver of growth. And it's really our focus, what's appealing to the customers is our That meant that it's a no compromise choice of gas to battery, and that message has been very well received. So battery electric, still a relatively small portion of the overall business and even in this quarter, but one of the fastest growing areas. But particularly the Z category was very strong. Well, just what I'm getting at, I mean, you also said snow contributed positively towards The end of the quarter, which is more of a weather impact and as one of the questions earlier touched The retailers seem to grow faster. Some of your competitors seem to have grown a lot faster, at least The Q1, the comp is a little bit different and the product mix is different, but specifically within outdoor. And I'm just wondering if some of the lagging relative Some of those things I just cited is tied to just gas powered equipment losing share of the overall pie. Yes, I would say absolutely not. And I left out snow as one of the drivers. Actually, that was my mistake, but that was a very important part of our business in the quarter and actually through the entire snow season. We've taken market share in most categories within snow and have seen particular Great demand on our battery powered products for snow. We are just going to be introducing a 2 stage Battery powered snow products, I'm slated to have one at my house, and I can't wait because I had a chance to demo it here. Fantastic piece of equipment, and it's got all of the Toro characteristics as well, which is the support and the brand that's going to be behind it as well. So We feel very positive about snow. We've added placements with our key partners over this last season, and we feel very excited about it And we know that we're taking share. Within snow, but just overall, I'm Talking more broadly within the overall category, it's just outdoor power equipment. I mean, it's hard to see how gas powered Equipment is taking share from electric equipment right now. Would you agree with that or no? Well, you have to keep in mind that gas is still by far the dominant power source for power equipment beyond trimmers And hand sold products, by far, gas is still the largest component. So as we expand our channel, as we And our product offerings, we can continue to take share within gas at the same time we build out our electric offerings. Okay. And then maybe this one's more for Renee. Just Renee, on the your ability to control costs, I mean, certainly, Toro has got a great record on managing the cost structure and so forth. But just The spirit of what some of the other questions we're asking too, you've got this raw material inflation. You're saying that you can continue to manage your costs very carefully. You've kind of already been doing that For the last year, I mean, don't you have to have a natural level of SG and A inflation over the next 6 to 12 months while you're getting hit with This raw material inflation just as the economy continues to reopen, you add capacity, presumably you're going to have to add some Personnel and so forth start traveling again, going to trade shows, just all the things that you would normally be doing. Just Can you really hold back SG and A like in this type of economic acceleration right now to offset some of the cost inflation? Yes. I don't know that we will necessarily offset all of the cost inflation with SG and A. So, just to clarify that I think we will make sure 1st and foremost within SG and A that we invest in technology and innovation. I mean That doesn't change regardless of the economic environment. We will make good choices about other SG and A, but we are seeing If you look at the SG and A rate, we're seeing a slight benefit from SG and A, but I mean all of the Things that you're saying are happening. We need to we do have some volume related SG and A that will happen as volume Increases will leverage our fixed cost structure, but probably more of the larger offsets for the inflation will be the continued focus on Productivity, we do have some benefit from product mix as well. And then, we'll make market based pricing And decisions as well, but all of those would help us to offset, not just the SG and A piece. Okay. Then just lastly, on this underground construction business, just It's clearly a supply side issue, the demand is there, but is this just you don't have enough capacity? It's like I'm just trying to understand how much of this is under your control In terms of ramping back up, are you dependent on some component suppliers or you just need to get additional capacity up? And then You mentioned oil and gas is a source of weakness. Can you remind us what portion of the business is tied to oil and gas? Is that pipeline construction that is just remaining very weak That is kind of dragging the business down. Am I understanding that correctly? Yes. So for the first part of your question, it's really the forces They're affecting the entire industry. So it's the key components that are in the Suppliers are not fully up to speed yet. So in some cases, we're on allocation, but that would be true across the industry as well. Lots of common components from engine, hydraulics, even fasteners, those types of things that are The roots of the constraints at this point. And in terms of the significance of oil and gas, it's Small portion of our underground business, low single digits in total to the Toro company. Okay. Thanks very much. And you asked about pipelines. That's obviously part of it. But as the oil price continues to stay higher, That's bringing on some oil capacity that uses our equipment beyond pipelines as well. Got you. Thank you very much. Thank you. Our next question comes from the line of Mike Schulinski from Cowen. Your question please. Hey, good morning guys and congrats on what I think is your first $1,000,000,000 sales quarter. Thank you, Mike. I guess I want to follow-up on questions that were asked earlier, maybe in a different way. Can you maybe share In either business, were there any pull forwards of orders and deliveries due to some of your customers anticipating Higher prices or some shortages later on in the year? No, Mike. In fact, it would probably be just the opposite. In the cases where we're not able to completely fulfill orders, those are still there for us to get. In fact, what happens in these circumstances is there can be a little bit of a piling on of orders. So even if you sort that out, which we do, We have strong demand into the future, and there's no pull forward element. Okay. Got it. I also want to ask about your inventory levels. Some of the commentary I just wanted to clarify, Renee, from your prepared comments. You had an all time record quarter over $1,000,000,000 in sales and you've got a great outlook, but your inventories are kind of flat year over year pretty much. And I'm sorry, it was actually flat from 2 years ago from the pre pandemic Q2. So I'm kind of could you give me tell us did you If you could, would you have had higher inventories at the end of the quarter? And how much more of the capital would you have wanted to invest, if you could have, If you didn't have any shortages? Yes. No, we would have built inventory up, I mean, given the volume demand that If we could have and I guess within the inventory just an additional clarifying comment. What we're seeing is maybe It's the same level as 2 years ago, but our finished goods is down quite significantly and WIP is up. And it really goes to the supply chain challenges that Rick commented on We are trying to do our best and we will invest in what to help to mitigate some of that to the extent that we can. Right now, our supply chain is just struggling to meet the higher demand. And so we will as we look over time, we would rebuild that inventory To a more normal level and in a more normal mix within that, I think that's also going to take some time To be able to do that given the demand strength that we're seeing not just for this year but even going into next year. Okay. Got it. And maybe just one golf question for you. Rick, I'm not sure if you can parse this out, but I'm starting to see some really different trends Between munis and private courses, I mean, we're seeing the munis have just massive budgets to buy whatever they can. And the private courses are seemingly having a little more trouble The cash flow because they still can't do, at least not until recently, weddings or larger events or major food and beverage, given some of the COVID restrictions. Can you tell us if your golf business has seen any bifurcation in the trends From Uniti to a private recently? We have not, and I just reviewed the feedback from our Sales team recently, and I would say there's no differentiation. In fact, there's probably more emphasis on the private course Interest in investing in their golf course itself. And keep in mind, we talked about we've talked about this a lot. But If the golf course is open that means that the golf course has to be maintained. So our equipment gets used whether there in the same way. So if you don't make those purchases on the routine that you're on in, then you need to make up for those At some point, because the equipment is ultimately consumed over time. And that's what we saw coming out of the Great Recession In 2010 2011 was a lot of makeup purchases that happened to get people back on their capital replacement track. It's really it's so great to see the munis come back strong. Like you said, they are healthier than ever because they are More base dependence on fees. And the biggest thing is just the great interest in using the golf courses that's continuing. And we see that in parks as well that even where municipal budgets are constrained, the general public is prioritizing green spaces and Parks because of what it has meant to them over this last year. Okay. That's great color, Rick. Thanks so much. I'll pass it along. Thank you. Thank you. Thank you. And our final question Today, you could say a follow-up from the line of David Maguire from Longbow Research. Your question please. Yes, thanks for taking the follow-up question. I guess Just a quick question on capital allocation and share repurchases specifically and a big spend in the Q2. How are you thinking about the cadence of that program over the balance of the year? Ultimately, do you think we're going back to kind of those 20 17, 2018 levels of total spending or Could your repurchases actually exceed those levels this year? Yes. Our capital allocation priorities really remain the same. As I mentioned earlier, in the discussion around CapEx, our top priority will continue to be to focus in long term profitable growth. And we'll look at that both organically, that's probably our highest return, as well as any M and A opportunities. So we continue to focus on our pipeline. We'll grow our dividend as our earnings grow. And then we kind of look at the latter priority being share repurchases. But we want to make sure we're offsetting dilution that we remain disciplined around that. And as the pandemic continues to recover, we So I would say you would expect us to act in that manner and part of it depends on if we see great growth Opportunities that yield a higher return that we would invest there first, but if not, then we'll invest in share repurchases as well. I'm just wondering how you're thinking about M and A in that context then, because on the one hand you're acquiring a business that's probably also Experiencing fulfillment, you're just buying somebody else's problems. On the other hand, taking a longer term view, you're acquiring a platform for growth. So how are you thinking about M and A Right now as a priority within capital allocation, just based on what you're seeing in the funnel and what people are showing up at your door with? Yes, just in general, we would always look at long term. So capacity might be a factor Given the short term constraints that we're in, but ultimately we're looking at the long term value that could be added to the company for acquisition always. All right. Thank you very much. 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 Julie Kerikus for any further remarks. Thank you for your questions and interest in The Toro Company. We look forward to talking with you again in September to discuss our results for the Q3 of fiscal 2021. Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.