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Angie Drake

Thank you, Rick, and good morning, everyone.
We were pleased to deliver adjusted diluted EPS growth in the quarter, driven by improved profitability. Consolidated net sales for the quarter were $995 million, down slightly from Q1 last year. Note that Q1 last year included net sales from the Pope Products business, while the current year does not.
Reported EPS was $0.52 per diluted share compared to $0.62 last year. Adjusted EPS was $0.65 per diluted share, up from $0.64.
Now to the segment results. Professional segment net sales for the first quarter were $768.8 million, up 1.6% year over year. This increase was primarily driven by three factors. First, higher shipments of golf and grounds products as a result of increased output to address the sustained demand that has kept order backlog elevated.
Second, increased shipments of zero turn mowers. This is a reflection of strong channel demand for new models and improved build inventory levels. And third, net price realization. These positive factors were partially offset by lower shipments of compact utility loaders as expected following last year's channel replenishment and this year's increased macro caution.
Professional segment earnings for the first quarter were $127.2 million on a reported basis, up 13% from $112.8 million last year. When expressed as a percentage of net sales, earnings for the segment were 16.5%, up from 14.9%.
The positive 160 basis point change in profitability was primarily due to net sales leverage, product mix, and productivity improvements. This was partially offset by higher material, manufacturing and freight costs. Residential segment net sales for the first quarter were $221 million, down as expected from $240 million last year.
The decrease was primarily driven by lower shipments of snow products given elevated field inventory heading into the season, lower shipments of portable power products, the Pope divestiture last year, and higher sales promotions and incentives.
These factors were partially offset by higher shipments of zero turn and walk power mowers. Residential segment earnings for the quarter were $17.2 million compared to $23.5 million last year. When expressed as a percentage of net sales, earnings for the segment were 7.8% compared to 9.8% last year.
The decrease was largely due to higher material, manufacturing and freight costs, higher sales promotions and incentives, and product mix with less snow product. These were partially offset by productivity improvements.
Turning to our operating results for the total company. Our reported and adjusted gross margins were 33.7% and 34.1% respectively for the quarter. This compares to 34.4% for both in the same period last year. The reported gross margin reflects higher AMP charges compared to last year.
Additional changes on both a reported and adjusted basis were primarily due to higher material and manufacturing costs, partially offset by productivity improvements. SG&A expense as a percentage of net sales for the quarter was slightly higher at 25.9% from 25.6% a year ago.
The change was primarily driven by the higher AMP charges and was partially offset by lower marketing costs. Operating earnings as a percentage of net sales for the quarter were 7.8%, down from 8.8% in the same period last year.
On an adjusted basis, operating earnings as a percentage of net sales were 9.4%, a 20 basis point improvement from 9.2% in the first quarter a year ago. Interest expense for the quarter was $15 million, down from $16.2 million last year.
The decrease was primarily due to lower average outstanding borrowings and lower average interest rates. The reported effective tax rate for the first quarter was 20.1% compared with 19% last year. The increase was primarily due to lower tax benefits recorded as excess tax deductions for stock-based compensation in the current year period.
This was partially offset by a more favorable geographic mix of earnings this year. The adjusted effective tax rate for the first quarter was 20.2% compared with 20.8% a year ago, primarily driven by the geographic mix of earnings.
Turning to our balance sheet. Accounts receivable were $494 million, up slightly from $489 million a year ago, primarily driven by increased international shipments. This was partially offset by lower mass channel shipments as expected.
Inventory at the end of Q1 was $1.14 billion, down about 3% compared to last year and higher sequentially from the fourth quarter, as is typical due to the normal seasonal flow. The year over year improvement was primarily driven by lower balances related to lawn care products.
This was partially offset by higher levels of compact utility loaders as expected. Accounts payable were $447 million, up 6% from last year, primarily driven by higher material purchases. Free cash flow in the quarter was a $67.7 million use of cash, an improvement over last year.
The use is a reflection of our normal seasonal working capital needs heading into the spring selling season. As a reminder, the majority of our operating cash flow is typically generated in the second half of our fiscal year.
Importantly, our balance sheet remains strong and provides financial flexibility. We continue to target a gross debt to EBITDA leverage ratio in the range of 1 to 2 times. This, along with our investment grade credit ratings, provides the financial flexibility to fund investments that drive long term sustainable growth.
Our disciplined approach to capital allocation remains unchanged with key priorities of making strategic investments in our business to drive long-term profitable growth both organically and through acquisition, returning cash to shareholders through dividends and share repurchases and maintaining our leverage goals.
Examples of how we are acting on these priorities in fiscal 2025 include, first, our plan to fund $100 million in capital expenditures to support new product investments, advanced manufacturing technologies, and capacity for growth.
Second, our recent acquisitions in the trenchless underground space. Third, paying our regular dividend with an increase of 6% over fiscal 2024. And finally, executing on share repurchases, including $100 million in the first quarter.
We have continued repurchasing shares in the second quarter, a reflection of the confidence we have in our future financial performance and cash flows. As we look ahead to the remainder of the year, in our professional segment, we continue to expect benefits from the sustained strength and demand and elevated order backlog for underground construction equipment and golf and grounds products.
We also continue to expect backlog will be closer to normal by the end of fiscal 2025. Importantly, we expect the sustained strength in these businesses will help avoid a significant gap as demand and supply normalize.
We also expect the continued field inventory normalization of lawn care and snow products to provide some offsets. Speaking of field inventories, we are entering the spring turf season with dealer field inventories of lawn care products in a better position compared to where we were a year ago.
This has been driven by the work we have done over the past year to decrease shipments into the channel, coupled with retail sales through that has outpaced those shipments. This, along with the strength of our brand, channel, and new product introductions, sets us up well as homeowner markets eventually return to normal strength.
For snow products, field levels remain elevated heading into the second quarter but are trending in the right direction. While snowfall activity has improved compared to last year, year-to-date snowfall totals have still been meaningfully below historical averages in many key US markets.
We will be watching to see how late season storm activity clears the channel. In any event, we expect field levels of snow products to be in a better position compared to last year heading into our second half preseason sell-in.
Our guidance considers the below normal snowfall so far this winter, as well as the incremental China tariffs that came into effect in February. Due to the uncertain and rapidly evolving trade policy environment, this guidance excludes the impacts of all other incremental tariffs.
We are prepared to take operational and pricing actions as appropriate to mitigate any new tariffs with the continued goal of being a good supplier while protecting our market leadership and profitability. As a reminder, we have significantly reduced our exposure to China supply since the initial round of tariffs in 2018.
In addition, the vast majority of our manufacturing production takes place in the US, particularly for our higher margin professional segment. We do have production facilities in Mexico, primarily for residential and irrigation products.
With this backdrop, we are maintaining the full year net sales and adjusted diluted EPS guidance we shared on our last earnings call. This includes total company net sales growth in a range of 0% to 1% for the full year, which assumes continued strong demand and stable supply for our businesses with elevated backlog, a continuation of the macro caution we have seen in markets connected to homeowners and weather patterns aligned with historical averages for the remainder of the fiscal year.
It also considers the additional adjustments needed to normalize field levels of lawn care and snow products. For the professional segment, we continue to expect full year net sales to be up low single digits. For the residential segment, we continue to expect net sales to be down high single digits, which considers the continued rebalancing of our Math partners, as well as the full year impact of last year's Pope divestiture.
Looking at profitability. For the full year, we continue to expect improvement in both adjusted gross margins and adjusted operating earnings as the percentage of net sales. We also continue to expect both the residential and professional segment earnings margins to be higher than last year.
With this, we continue to anticipate full year adjusted diluted EPS in the range of $4.25 to $4.40. Additionally, for the full year, we continue to expect depreciation and amortization of about $125 million to $135 million, interest expense of about $54 million, an adjusted effective tax rate of about 20% and a free cash flow conversion rate of about 100% of reported net income.
Turning to the second quarter of fiscal 2025. We anticipate total company net sales to be similar year over year. We expect professional segment net sales to be up low single digits and residential segment net sales to be down mid single digits compared to the same period last year.
Looking at profitability. For the second quarter, we expect total company adjusted operating margins to be slightly lower year over year. We expect the professional segment earnings margins to be similar to the same period last year, and the residential segment earnings margins to be slightly lower.
Overall, we expect our second quarter fiscal 2025 adjusted diluted EPS to be slightly lower than last year's $1.40. We continue to execute with discipline and are excited about the momentum we are gaining with our customer centric technology investments.
This includes our robust new product pipeline aimed at driving success for our customers and for The Toro Company. We are also confident in our ability to unlock significant benefits and opportunities with our AMP productivity initiative as we continue to build our business for long-term profitable growth.
With that, I'll turn the call back to Rick.

Richard Olson

Thank you, Angie.
As I mentioned from the outset of the call, we are pleased with our bottom line performance to begin the year in what is a very dynamic operating environment. We continue to expect benefits from our market leadership and strong fundamentals, the ongoing success of our AMP initiative, and the essential nature and regular replacement cycle of our products.
With this and the continued agility and dedication of our team, we have confidence in our ability to deliver positive financial results into the future. We recognize the high degree of uncertainty that exists in the current macro environment.
This includes the economy, consumer and business confidence, and the geopolitical environment. We are closely monitoring the risks and benefits associated with potential policy and regulatory changes, including tariff developments.
The situation is rapidly evolving and changing, and we will remain nimble. We are prepared to quickly make adjustments to our operations and pricing as appropriate. I'd like to emphasize once again why we are confident and excited about our future.
First, the near and long term prospects for our underground construction business remain extremely compelling. This is supported by a rapidly growing demand for data communication infrastructure, data center build out, and energy grid modernization, as well as the global focus on replacing aging infrastructure.
In terms of the aging water infrastructure, recent surveys point to more than $630 billion in spending needed over the next 20 years to ensure safe drinking water in the US with most of those dollars expected to go to clean water distribution.
Outside of the US, a sprawling network of 30,000 miles of hydrogen gas pipeline is planned across Europe. These are just a few examples of many that support the widespread need and positive runway for infrastructure investments.
We are very well positioned to capitalize on this runway for growth as a worldwide market leader with the most comprehensive equipment and brand lineup in the industry and our best in class channel. The strength of demand combined with our deep relationships and our technology and innovation leadership make this an extremely attractive space for us and our shareholders.
Second, the near and long-term prospects for our golf business are also extremely compelling. Data continues to support the sustained strength of this market. US participation in on-course golf exceeded 28 million players in 2024, marking the seventh consecutive annual increase.
Last year's net increase of approximately 1.5 million golfers was the biggest single year jump since the year 2000. At the same time, total US golf participation, including both on and off course players, rose 5% and was up 38% when compared to pre-pandemic 2019 data.
All of this points to an extremely healthy end market with more new course development than any time since 2011. We are uniquely positioned to capitalize on this market as the only company to offer both equipment and irrigation solutions and as the clear market leader in both.
As you can hear from my earlier remarks, the strength of our innovation pipeline for this market is unmatched with our steady introduction of solutions that drive enhanced performance, productivity, and efficiency for our golf customers.
Third, we enjoy multi-brand leadership and the important zero turn mower space, which is the largest single turf care category for both our professional and residential segments. As these markets return to more normal strength, we're extremely well positioned to benefit from the share gains that we've realized with investments in our product lineup and the strategic actions that we've taken to strengthen our independent dealer networks and mass partnerships.
Fourth, our proven ability to leverage technology and innovation investments across our broad portfolio enhances the durability of our competitive advantage and market leadership. This leverage enables the accelerated development of new products aligned with market trends that help our customers with their most pressing needs, such as addressing labor challenges, be it shortages or skill requirements, conserving scarce resources such as water, while at the same time reducing costs, and improving outcomes with access to the most up to date technology advancements.
And finally, it comes down to the strength of our agile organization which has been resilient through many macro cycles. Our talented team is equipped and determined to capitalize on the many opportunities in front of us as we build on our 15th consecutive year of top line growth.
And we have a best in class network of strategically aligned channel partners focused on going above and beyond to serve our customers every day. All of this positions us extremely well to drive value for all stakeholders in both the near and long term.
With that, we will open up the call for questions.

Question and Answer Session

Operator

(Operator Instructions)
David MacGregor, Longbow Research.

David MacGregor

I want to start by just asking about AMP. And clearly, there's a very good level of progress being made here. But I just want to be clear around kind of the movement, some of the numbers here. You talked about $64 million run rate in cost savings to date. $50 million of that occurred in the first quarter which is up to a great start.
I guess how much of this reached the bottom line in the first quarter, if any at all? You talked about trying to redirect a portion of that into investment. Some portion of it falls to the bottom line. Try to help us understand just how much of that might have benefited 1Q.
And then just the cadence on these AMP benefits and the drop to earnings over the remaining three quarters of '25 would be really helpful.

Richard Olson

Yeah. Sure, David.
The timing of our emphasis on productivity could not have been better in the current environment. And Angie is leading this initiative. So maybe I'll let Angie do an overview. She knows basics.

Angie Drake

Yeah. First, I'll address your question on kind of the savings that we saw in the quarter.
So you'll see later with the 10-Q that we had $7 million in gross realized savings in the quarter. And remember, that we had mentioned that we will reinvest a portion of that. So not all of that necessarily drops to the bottom line.
So but everything that we have done and everything that we have reinvested, we've considered in our full year outlook and included in our guidance. To your point on how we expect to see this play out over the rest of the year, we did see that $49 million run rate savings in Q1, which gets us to $64 million in run rate savings to date.
The majority of that did come from the restructuring events that we did in December. And if you'll remember last year, we mentioned that we would expect to see the majority of the rest of what we have left in that $100 million run rate to be achieved in F25.
So we still have some opportunity with other things like supply base, route to market. The things that we have mentioned are working capital and efficiencies to play out for the rest of the year. However, we haven't defined that exactly by quarter.
We are confident in delivering that $100 million.

David MacGregor

And just to be clear on the numbers here. When you talk about the $49 million run rate and $7 million of gross realized savings, are you suggesting that it was $42 million in expenses and the gross difference is the $7 million? I just want to be clear on the math.

Julie Kerekes

No. The $49 million run rate just means that those savings will be into the future. So the $7 million is what was realized in Q1.

David MacGregor

It's a run rate.
And then secondly, can you just talk about pro snow? I know in the residential snow, you talked about volumes were down in the inventory dynamic in the channel. But on the pro side with BOSS, where are dealer inventories here?
And how should we read through to landscape contractor in the season ahead given everything we're hearing through our channel checks are that these guys have a pretty good plow season, which puts cash in their pocket. And there's obviously been deferred spending in LCE.
So just trying to think through the read from pro snow in this quarter to what ZTR pro grade ZTR could look like this summer.

Richard Olson

Sure. Be happy to answer that.
First of all, if you just look at the context of the winter. I know there were some kind of headline grabbing snow events. But honestly, the snow in Florida or Georgia does not really drive a lot of our snow product sales.
So overall, as across the US, snow relative to average was down about 13.5%. And if you look at the major snow markets, it was down more than 50%. I think here in Minnesota, we're down roughly two-thirds. We just had a snow event in the last couple of days that may have taken a little bit off of that.
But roughly, well over half a reduction from norm. But the different markets respond a little bit differently. And on the residential side, it tends to be heavy major events, heavy snow, major events that drive a lot of the business early in the season.
From a contractor perspective, the ideal event is a lighter snow event that's palpable because it's -- it can be done efficiently. And if you cover the ground that you need to clear, you get paid for that job. So a palpable snow might be one or two inches. That's kind of ideal.
And we did have a decent amount of those. So it helped to drive some of the business relative to the residential business a little bit better on the pro side. So field inventories, we are down a little bit year over year based on the winter was a little bit better than last year.
So in spite of my comments, it was a little bit better than last year. But still higher than we would have expected. But we've included all of that in our guidance at this point including the knowledge of where the inventories are.
The good news is with the facts that I mentioned a little bit better, quite a few snowable or palpable events in many markets. Contractor budgets we believe are going into the spring in better shape. In fact, good shape at this point. So that is a positive.
So kind of a complicated answer, but there's a few details that kind of are different depending on which part of the business we're talking about.

David MacGregor

Just last question for me. It'd be interesting to get your updated price/cost expectations for this year. You talked about raw materials being a bad guy in the first quarter. Just how you think about the price/cost spread here through the balance of the year?

Angie Drake

Yeah. Our Q1 are slight -- we had slight price increase or so our price was up. Our cost was up more. And that was really due to higher manufacturing and freight costs and some inflation. There was also variability in timing. But productivity improvements did offset that some.
We didn't guide for Q2 on price costs. But for the full year, we do expect to return to a more normal 1% to 2% price based on those areas that is before tariffs I do want to say that. That's before those tariffs. But especially for the businesses where demand remains stronger, we believe we can get price.

Operator

Tim Wojs, Baird.

Timothy Wojs

Maybe just the first question on some of the moving pieces on tariffs. Could you just remind us kind of how much of your COGS are related to kind of Mexico manufacturing and China supply chain? And then is there -- how big is Canada and I guess do you produce in Canada or do you produce in the US?
Just if you could run through a couple of those kind of exposure related kind of items, I think that'd be helpful.

Richard Olson

Yeah. Sure, Tim. As you can fully understand, it's a very dynamic situation. We've had a task force in place since last fall with a scenario for every possibility that you could imagine. And it seems to be changing by on short notice.
So we're working that very closely. Just to give you some overall picture of tariff exposure. First of all, the vast majority of our products are made in the United States. The backlog products that we've talked a lot about over the last couple of years, the golf and grounds and underground businesses are virtually 100% built in the United States.
So very little exposure on the professional side. We do have operations in Mexico and they would be producing some of our residential products and irrigation products. So that's kind of the -- that's the Mexico exposure in the residential and irrigation areas.
But again, the vast majority of our overall products in the US. We do not produce products in Canada. We do have customers in Canada. From that perspective as we do part of our global business. And then back to I think the first part of the question for China exposure, we've talked about that that exposure has been significantly vastly reduced from what it was back in 2017 and 2018 when we last had these conversations.
And it's low single digits kind of percent of COGS. And we've built into our guidance the first round of the China tariffs that were implemented in February. We had a chance to process that. And we'll be offsetting those within our year. That's been included in our guidance.
So they're probably the major areas that gets more complicated when you start talking about any reciprocal tariffs, those kinds of things. Those are on the board, but we don't have information to be able to respond to those.

Timothy Wojs

And I get it, like if the current -- so if tariffs on China are 20% -- the incremental about 10% on China and then the 25% on Canada and Mexico, it does stay intact. Is there a ballpark figure in terms of what the gross impact would would be for Toro in those situations?

Richard Olson

Yeah. As I said, it's a moving target right now. So we're working through that process. But with regards specifically to China, we're currently determining what portion we could offset with through negotiation with our suppliers.
We have the option to strategically move products, sources and so forth. So that process is in process right now. But we go through the normal process of first of all try to minimize the impact of tariffs by making sure we're represented with our industry groups and we try to mitigate the tariffs with offsetting by changing locations of sources or manufacturing, offsetting with cost savings.
Negotiating with our suppliers and then ultimately the rest of that gets passed through in price. And all of those discussions are taking place. We just haven't been able to process that relative to incremental plan tariffs at this point.
But the key thing, for us, Tim, is that we want to as a market leader make sure we support our customers, at the same time, protect our own business at the same time.

Angie Drake

And just as a reminder, as we said in our prepared remarks, we have included those February enacted Chinese tariffs in our best estimates in the guidance.

Timothy Wojs

On the field channel inventory, just in kind of the pro kind of grounds business, landscape contractor business. Rick, like where are you relative to normal at this point in kind of the year? And I guess what's the sentiment like when you talk to your distributor and dealers just around expectations for sales and just how much kind of inventory they're kind of willing to kind of hold?

Richard Olson

I think the areas that we've talked about where we've been working down our inventory on the pro landscape contractor side, especially the products that go -- that typically get sold to homeowners in that category, we're pretty much where we left off when we started talking about this in the latter part of last year.
We're a little bit higher than we would like to be typically. But vastly improved over a year ago at this time. And it's really when you get into the key selling season where we'll have another opportunity to reset that even further as we get into the spring.
But we are in position to be able to do that. The great thing is I think we mentioned our Exmark Lazer Z introduction. New products really help to fuel demand that help us move that product faster. So we're a little bit higher than we'd like to be, much better than last year. And in position for the spring in that landscape contractor area.
The underground business, for example, still well under where we should be with our field inventory. We feel good about where we are with the golf products. So it's really kind of isolated to landscape contractor. As a result of a little bit less snow, we do have higher snow inventories.
But that's been built into our projection for the rest of the year as well. It just means a little bit less preseason shipping, but that's been built in now to our plan.

Timothy Wojs

And then just the last one. On underground, I mean it's been mentioned as a growth driver for the past several quarters. I guess it wasn't kind of mentioned as one in pro this quarter. So just given what you just said about the fact that field inventory could be higher there. And I assume there was still a backlog there.
Is it a timing issue there just trying to understand kind of what happened with the underground business in the quarter.

Richard Olson

Yes. But I think you pretty much outlined it. We continue to see very, very strong demand in the underground space and feel very positive about that business. It just didn't rise to some of the other categories that we talked about as we go through the process of our comments.
We also are introducing new products in that area. So there's a little bit of a ramp up taking place that's -- it's a timing factor strictly, still very positive, still strong driver of our future.

Operator

Ted Jackson, Northland.

Ted Jackson

Actually I had three questions to ask and two of them have been hit, but I do have a kind of a nuanced one on going back in the tariffs. With regards -- so I know it's your favorite topic, right.
But with regards to, going back, you said you didn't have anything with retaliatory tariffs, but is there -- how much -- two parts. One is, how -- is there any -- how much product do you actually make here in the states that actually is exported that could come at risk if there were retaliatory tariffs?
And then going back into kind of the Mexico and the products that you make there, how hard would it be for you to shift production and bring some of that stuff into the US? Is it something that you would think would be worthwhile to do or is it the kind of thing where you just have to deal with the tariffs and that's it?
That'd be basically my question for you.

Richard Olson

Sure. First of all, on the first part, it would really be the ratio that we're looking at is 80% of our sales either in the US and the vast majority of our products are produced in the US. So it would be the net difference that we sell -- the 20% that we sell internationally could be subject to whatever retaliatory measures might be there.
With regard to the residential products, we do have flexibility to move that product around. Some of it's easier to move than others. But it's really primarily focused on the kind of the cost competitive type of product.
So it's portfolio of our residential business, not 100% of our residential business that's in Mexico.

Ted Jackson

And then actually can I ask just quickly. Like what was -- what would have been like, how much was Pope in the last quarter just to kind of get a sense in terms of the dynamic with its impact on kind of the year over year for you? And then I'm done.

Angie Drake

Yeah. The Pope piece for Q1 was probably about $7.5 million last year.

Operator

And I'm not showing any further questions at this time. This concludes the question-and-answer session.
Ms. Kerekes, please proceed with closing remarks.

Julie Kerekes

Thank you, Kevin, and thank you everyone for your questions and interest in The Toro Company.
We look forward to talking with you again in June to discuss our fiscal 2025 second quarter results.

Operator

Thank you for your participation in today's conference. This includes the presentation. You may now disconnect. Good day.