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 facilitator for today. [Operator Instructions]

I would now like to turn the presentation over to your host for today's conference, Julie Kerekes, Treasurer and Senior Managing Director of Investor Relations for The Toro Company. Please go ahead, Ms. Kerekes.

Julie Kerekes - Treasurer and Senior Managing Director of Investor Relations

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 release and this call.

With that, I will now turn the call over to Rick.

Richard M. Olson - Chairman of the Board, President and Chief Executive Officer

Thanks, Julie, and good morning.

The Toro Company delivered very strong results for the second quarter of fiscal 2021, driven by robust broad-based demand across our Professional and Residential segments. 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 second 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 second quarter were up 20% year-over-year, setting another record. This growth was led by a strong demand for zero-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 three prevailing themes.

First, demand has been exceptionally strong. We see this continuing for the foreseeable future, albeit with year-over-year growth rate comparisons 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 channel, and a strong balance sheet that provides the financial flexibility to invest in the future.

Second, along with the exceptionally strong demand, we've seen escalating supply chain and inflation challenges. These challenges are not unique to The Toro Company and are having a global impact. Our teams have worked effectively to keep up with increased demand while navigating the current supply chain environment. 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'll continue to prioritize important investments to support growth.

Third, 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 TURFLYNX 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 two-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 million of debt, invested $107 million in share repurchases, and paid out $57 million in dividends.

While we work to capitalize on this period of great growth, we remain committed to our employees and channel partners, and continued 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. Through the SoWeCan [Phonetic] 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 review of our financial results.

With that I will turn the call over to Renee.

Renee J. Peterson - Vice President, Treasurer and Chief Financial Officer

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% to $1.15 billion. Reported EPS was $1.31 per diluted share, 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% to $828.4 million. This increase was primarily due to strong demand for golf, landscape contractor, irrigation, and rental and specialty construction products, slightly offset by lower sales of underground construction equipment driven by supply chain disruptions that impacted product availability, and continued softness in oil and gas market.

Professional segment earnings were up 57.3% to $167.1 million; 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 second quarter 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 million. This increase was primarily driven by strong retail demand for zero-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% to $46 million; 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 second quarter 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 second quarter. We reported gross margin of 35.1%, 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&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 expenses, partially offset by higher incentives due to improved performance and the reinstatement of certain costs that had 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%. And adjusted operating earnings as a percent of net sales increased 170 basis points, also to 15.7%.

Interest expense was down $1.5 million to $7.1 million, 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 $1.1 billion. This included cash and cash equivalents of $500 million and full availability under our $600 million revolving credit facility. We have no significant debt maturities until April of 2022. Accounts receivable totaled $391.2 million, down 2.3% from a year ago, primarily driven by channel mix. Inventory was down 12% from a year ago to $628.8 million, primarily as a result of increased demand. Accounts payable increased 28.8% from last year to $421.7 million. This was primarily due to increased purchases of components, as well as more normalized expenses. Year-to-date free cash flow was $292.4 million, with the 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&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 suppliers 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 inefficiencies 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 segments net sales growth rates to be similar to the overall 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 a 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 million, up from $115 million. 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 impact of these pressures to be the most pronounced in the third quarter before our mitigating actions are more fully realized. We expect adjusted EPS per diluted share in the fourth 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.

Richard M. Olson - Chairman of the Board, President and Chief Executive Officer

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 out, 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 ease. 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 on this demand opportunity.

We're also well positioned to capitalize on the 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-volt Personal Pace Recycler Mower was named Editor's Choice by Popular Mechanics in its evaluation of electric lawn mowers; build quality and cut quality were cited as the two reasons. Toro mowers 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 Greens Mowers 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 into our 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. One of our European channel partners, Jean Heybroek of Reesink group, was awarded a four-year preferred supplier agreement and fleet management partnership with the City of Amsterdam. The city has an objective of zero emissions by 2030, 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 long-time partner Troon, the world's largest golf management company. Involvement in this project exemplifies who The Toro Company is, a team focused on long-term carrying relationships, our communities and the environment.

In closing, we are optimistic as we begin the 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. As always, our extended team is the key to The Toro Company's long-term success. Thank you to our employees for your dedication and resilience, and to our channel partners, customers and shareholders for your continued support.

With that, Renee and I will take your questions.

Question & Answers

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Sam Darkatsh from Raymond James. Your question please.

Samuel Darkatsh - Raymond James & Associates, Inc. - Analyst

Good morning, Rick. Good morning, Renee. How are you?

Richard M. Olson - Chairman of the Board, President and Chief Executive Officer

Good morning, Sam. Doing well.

Renee J. Peterson - Vice President, Treasurer and Chief Financial Officer

Doing well. Thank you.

Samuel Darkatsh - Raymond James & Associates, Inc. - Analyst

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 raws 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 it is behind you?

Renee J. Peterson - Vice President, Treasurer and Chief Financial Officer

Yeah. 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 component of 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 to 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 is different points of view on inflation, some see it as more of a temporary, a blip, other see it as a 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 of our ability 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 pricing actions, and look at also promotions and other marketing programs, as well. So we'll have to see how next year unfolds. What we also see is demand is remaining very strong and the business fundamentals look encouraging going forward as well.

Samuel Darkatsh - Raymond James & Associates, Inc. - Analyst

To that last point, could you help us with respect to what volume growth was versus price in the second quarter? And then, prospectively, within your 12% to 15% sales growth guidance for the year, Renee?

Renee J. Peterson - Vice President, Treasurer and Chief Financial Officer

Yeah. As we look at, we did take market-based pricing actions within the year, and we'll look at also if there're 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 the inflation becomes clear to us, what type of actions 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.

Samuel Darkatsh - Raymond James & Associates, Inc. - Analyst

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?

Renee J. Peterson - Vice President, Treasurer and Chief Financial Officer

Yeah. We don't break it out specifically, but - I mean when we're looking at growth as double digit, I mean, that's - it's more volume based than price based.

Samuel Darkatsh - Raymond James & Associates, Inc. - Analyst

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?

Richard M. Olson - Chairman of the Board, President and Chief Executive Officer

Yeah. 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 at all of 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 brand and the messaging have been very effective from our perspective.

Samuel Darkatsh - Raymond James & Associates, Inc. - Analyst

Thank you, both. Doing well. Thank you.

Renee J. Peterson - Vice President, Treasurer and Chief Financial Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Tom Mahoney from Cleveland Research. Your question please.

Thomas Mahoney - Cleveland Research Company - Analyst

Hi, good morning. I have two questions. First, is there a way to characterize the production speeds you guys are able to achieve now relative to pre-COVID levels?

Richard M. Olson - Chairman of the Board, President and Chief Executive Officer

I would say, without a specific percentage, we're still largely in the COVID operation mode. So, our manufacturing operations have actually improved efficiency and productivity relative to where we were, let's say, nine months ago. But we're still in a position where we've got social distancing on our assembly lines, we stretched those out. There're certain practices that we have to continue to follow from a safety standpoint, that just result in, ultimately, some inefficiencies. 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.

Renee J. Peterson - Vice President, Treasurer and Chief Financial Officer

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 caused us some additional disruption, maybe it's COVID related, but…

Richard M. Olson - Chairman of the Board, President and Chief Executive Officer

It's the stopping and starting of the assembly lines and so forth, it just builds in additional inefficiencies.

Renee J. Peterson - Vice President, Treasurer and Chief Financial Officer

And as that improves, we should also expect to see improved manufacturing because of that as well.

Thomas Mahoney - Cleveland Research Company - Analyst

Okay. And then just a follow-up on the Residential mower 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?

Richard M. Olson - Chairman of the Board, President and Chief Executive Officer

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 was 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 entire - the entirety of fiscal '20. So, we continue to build on top of what seemed like a very high base, and the effects of 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 impact at this point.

Thomas Mahoney - Cleveland Research Company - Analyst

Great. Thank you very much.

Richard M. Olson - Chairman of the Board, President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Timo Wojs from Baird. Your question please.

Timothy Wojs - Robert W. Baird & Co. - Analyst

Hey, good morning, everybody.

Richard M. Olson - Chairman of the Board, President and Chief Executive Officer

Hi, Tim.

Timothy Wojs - Robert W. Baird & Co. - Analyst

Maybe just kind of dovetailing on the last question, Rick. I'm not sure if you can quantify or not, or provide any numbers, but I guess, how would you kind of characterize broader inventory or your 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?

Richard M. Olson - Chairman of the Board, President and Chief Executive Officer

As you would expect with very strong demand over the last several periods and with some of the supply constraints, our inventory - field inventory is lower than we would like to see it at this point. So, that's - 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 inventory, and that's another capacity or opportunity that's out there for us.

Timothy Wojs - Robert W. Baird & Co. - Analyst

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 '22 than this year?

Richard M. Olson - Chairman of the Board, President and Chief Executive Officer

Realistically, as we forecast forward that's something that perhaps starts to happen at the end of fiscal '21, but certainly into the first portion of '22.

Timothy Wojs - Robert W. Baird & Co. - Analyst

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 suppliers?

Richard M. Olson - Chairman of the Board, President and Chief Executive Officer

Yeah. I mean, our ops team is doing just a miraculous job of working really off on the base of the way that we do business with our suppliers to look at long-term relationships. It so 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 from - 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 cost or 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 of the supply chain resources there, the facilities that make the resin. So, that's something that is being fixed, but it's just taken a while to get everything back online and then catch up with the shortage. So, we - 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 environments and responding to demand that's come back very quickly.

Timothy Wojs - Robert W. Baird & Co. - Analyst

Okay. Great. Good luck on the rest of the year, guys. Thanks for the questions.

Richard M. Olson - Chairman of the Board, President and Chief Executive Officer

Thank you.

Renee J. Peterson - Vice President, Treasurer and Chief Financial Officer

Thank you.

Operator

Thank you. Our next question comes from the line of David MacGregor from Longbow Research. Your question please.

David MacGregor - Longbow Research, LLC - Analyst

Yes. Good morning, everyone. My first question is on the supply channel…

Richard M. Olson - Chairman of the Board, President and Chief Executive Officer

Good morning.

David MacGregor - Longbow Research, LLC - Analyst

And - yeah. Good morning, Rick. First question 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?

Richard M. Olson - Chairman of the Board, President and Chief Executive Officer

Yeah. I don't think we can give you that number exactly. What we do see is that probably the strongest effects in the second half, we're going to see the full effects in the third quarter. Particularly, the net effects - some of the mitigation actions that we're taking will not be seen completely until the fourth quarter. So, we'll probably see the peak effects of the inflationary factors in the third quarter 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.

Renee J. Peterson - Vice President, Treasurer and Chief Financial Officer

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 in Residential, to be similar or down. So, we're encouraged when we look at the total year. And we also expect, as our guidance reflects, that EPS will be up year-over-year as well.

David MacGregor - Longbow Research, LLC - Analyst

Okay. And I guess - sorry for drilling you with model questions here, but I guess similarly on SG&A, you noted the reinstatement of certain costs that been 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?

Renee J. Peterson - Vice President, Treasurer and Chief Financial Officer

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&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 fiscal '20, we were adjusting down, our incentives based on performance expectations, and for '21, 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&A is more variable based on volume, so with volume being up. It is all included in our guidance, but I know that it's difficult to break that out.

David MacGregor - Longbow Research, LLC - Analyst

All right. I guess, I wanted to ask a question, you called out the increase in capex, and I guess I just wanted to tie that back to market share question here. 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?

Richard M. Olson - Chairman of the Board, President and Chief Executive Officer

We do - excuse me. 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 advance work that was done with our supply chain to 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, 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 start of the pandemic, there was a huge opportunity with 5G. The recognition in the pandemic that there is a broadband gap that needs to be closed. And then all of the infrastructure investment that's coming for underground utilities for telecommunications and repair rejuvenation are strong.

And then, we didn't really talked a whole lot about golf. But golf has seen a tremendous surge through the pandemic, and there is good evidence that that's going to be sustained at a higher level. I think the year-to-date numbers for golf were something like 44%. I know it's against the pandemic base. But even if you look back to like the '17 through '19 period, it's up about 20% year-to-date. So those drivers of the game itself have our golf courses in very good financial shape and the investment that they want to make is to make sure the golf course is in good shape, that means equipment and irrigation system.

David MacGregor - Longbow Research, LLC - Analyst

So, I just want to make sure I'm clear on this, you're saying that you're gaining share in the golf business?

Richard M. Olson - Chairman of the Board, President and Chief Executive Officer

The golf business, in general, has been a low single-digit type of growth business over time. So, we have steadily taken share, and that trend continues, but it's not the dramatic kind of moves that it would be a faster growing market.

David MacGregor - Longbow Research, LLC - Analyst

Great. Okay. And then last from me, it's just on the underground construction. You reported sales declined in the second quarter. 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 expect to see stronger underground in the second half, and in consequent, supporting that growth in revenue? Thanks.

Richard M. Olson - Chairman of the Board, President and Chief Executive Officer

Sure. Obviously, just in summary, is absolutely incredible demand for the underground business. And we've talked for the last several quarters a little bit about the downside of oil and gas, but it's really all about the supply side. So, it's really about producing the products to meet the demand, and had we've been able to do that in totality over the last quarter, you would now have seen the impact that you just talked about. So, very, very strong long-term - I mean in long-term - significantly stronger demand and most of the drivers for that business.

Renee J. Peterson - Vice President, Treasurer and Chief Financial Officer

And that really…

David MacGregor - Longbow Research, LLC - Analyst

Is that improving?

Renee J. Peterson - Vice President, Treasurer and Chief Financial Officer

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 production capacity to be more productive with some capital to put into place. And we have a really strong balance sheet and that offers us that opportunity to continue to invest. Our top priority is always going to be profitable growth, both organic and M&A. And we feel it's a good investment for us to make for the future, because we think the demand is going to remain strong for some period of time.

David MacGregor - Longbow Research, LLC - Analyst

All right. Okay. Well, thanks very much, Rick. Thanks, Renee. Good luck for this quarter.

Richard M. Olson - Chairman of the Board, President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Ross Gilardi from Bank of America. Your question please.

Ross Gilardi - Bank of America - Analyst

Good morning, guys.

Renee J. Peterson - Vice President, Treasurer and Chief Financial Officer

Good morning.

Richard M. Olson - Chairman of the Board, President and Chief Executive Officer

Good morning, Ross.

Ross Gilardi - Bank of America - Analyst

Hey, Rick, may - 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 LTM basis or however you would choose to break it out?

Richard M. Olson - Chairman of the Board, President and Chief Executive Officer

Yeah. The - we called out, I think, three categories. Zs [Phonetic] 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 commitment that it's a no compromise choice of gas to battery, and that message has been very well received. So, battery electric still relatively small portion of their overall business, and even in this quarter, but one of the fastest growing areas. But, particularly, the Z category was very strong.

Ross Gilardi - Bank of America - Analyst

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 on. The retailers seem to grow faster. Some of your competitors seem to have grown a lot faster, at least in the first quarter, the comp is a little bit different, and the product mix is different, specifically within outdoor. And I'm just wondering if some of the lagging relative to some of those things I just cited is tied to just gas-powered equipment losing share of the overall pie?

Richard M. Olson - Chairman of the Board, President and Chief Executive Officer

Yeah. I would say, absolutely not. I left out, snow was 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, in particular, great demands on our battery-powered products for snow. We are just going to be introducing a two-stage battery-powered snow products. I'm slated to have one at my house. And I can't wait, because I have 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 had replacements with our key partners over this last season, and we feel very excited about it going forward, and we know that we're taking share.

Ross Gilardi - Bank of America - Analyst

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?

Richard M. Olson - Chairman of the Board, President and Chief Executive Officer

Well, you have to keep in mind that gas is still by far the dominant power source for power equipment beyond trimmers and handheld products, by far gas is still the largest component. So, as we expand our channel, as we expanded our product offerings, means we can continue to take share within gas at the same time we build out our electric offerings.

Ross Gilardi - Bank of America - Analyst

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 to, you've got this raw material inflation. You're saying that you can continue to manage our cost 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&A inflation over the next six 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 can have that some personnel and so forth, you're traveling again, going to trade shows, just all the things that you'd normally be doing, just can you really hold back SG&A like in this type of economic acceleration right now to offset some of the cost inflation?

Renee J. Peterson - Vice President, Treasurer and Chief Financial Officer

Yeah. I don't know that we will necessarily offset all of the cost inflation with SG&A. So, just to clarify that point. I think, we will make sure, first and foremost, within SG&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&A, but we are seeing - if you look at the SG&A, we're seeing a slight benefit from SG&A, but I mean all of the things that you're saying are happening. We need to - we do have some volume related SG&A that will happen as volume increases. We 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 decisions as well. But all of those would help us to offset not just the SG&A piece.

Ross Gilardi - Bank of America - Analyst

Okay. And then just lastly, on this underground construction business, just - it's clearly it's a supply side issue, the demand is there. But is this just you don't have enough capacity? 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 as the 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?

Richard M. Olson - Chairman of the Board, President and Chief Executive Officer

Yeah. So for the first part of your question, it's really the forces that are affecting the entire industry. So, is the key components that - 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. Lot's of common components from engines, hydraulics, even fasteners, those types of things that are the roots of the constraints at this point.

And in terms of significance of oil and gas, it's small portion of our underground business, low single-digits in total to The Toro Company. And…

Ross Gilardi - Bank of America - Analyst

Okay. Thank you very much.

Richard M. Olson - Chairman of the Board, President and Chief Executive Officer

And you asked about pipeline, 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.

Ross Gilardi - Bank of America - Analyst

Got you. Thank you very much.

Operator

Thank you. Our next question comes from the line of Mike Shlisky from Colliers Securities. Your question please.

Michael Shlisky - Colliers Securities - Analyst

Hey, good morning, guys, and congrats on what I think is your first billion dollar sales quarter.

Richard M. Olson - Chairman of the Board, President and Chief Executive Officer

Thank you, Mike.

Michael Shlisky - Colliers Securities - Analyst

I guess I wanted to follow up on questions that were asked earlier, maybe in a different way. Can you maybe share in either of 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?

Richard M. Olson - Chairman of the Board, President and Chief Executive Officer

No, Mike. In fact, it's probably just the opposite. So, in the cases, we're not be 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 pilling on of orders. So even if we sort that out, which we do, we have strong demand into the future, and there is no pull forward element.

Michael Shlisky - Colliers Securities - Analyst

Okay. Got it. I also wanted 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 billion in sales, and you've got a great outlook, but the inventories are kind of flat year-over-year, pretty much and - I'm sorry, it was actually flat from two years ago, from the pre-pandemic second quarter. So I'm kind of - could you maybe 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?

Renee J. Peterson - Vice President, Treasurer and Chief Financial Officer

Yeah. No, we would have built inventory up, I mean, given the volume demand that we're seeing if we could have. And I guess within the inventory, just so an additional clarifying comment, what we're seeing is maybe it's the same level as two years ago, but our finished goods is down quite significantly, and [Indecipherable] this up. And it really goes to the supply chain challenges that Rick commented on, is - we are trying to do our best, and we will invest in and want to help to mitigate some of that to the extent that we can, but 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 then 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.

Michael Shlisky - Colliers Securities - Analyst

Okay. Got it. And then 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, supply whatever they can. And the private courses are seemingly having a little more trouble with their cash flow, because they still can't do based on so recently, weddings or larger events or a major food and beverage, given some of the corporate restrictions. Can you tell us if you're golf business has seen any bifurcation in the trends from muni to a private recently?

Richard M. Olson - Chairman of the Board, President and Chief Executive Officer

We have not, and I just reviewed the feedback from our sales team recently, and I would say there is no differentiation factor, probably more emphasis on the private course interest in investing in their golf course itself. And keep in mind, 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 is a recession or a pandemic 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 investments at that point - at some point, because the equivalents will be ultimately consumed overtime. And that's what we saw coming out of the Great Recession in 2010, and '11 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're more based dependent on fees. And the biggest factor [Phonetic] is the great interest in using the golf courses was 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 is - what it has meant to them over the last year.

Michael Shlisky - Colliers Securities - Analyst

Okay. That's great color, Rick. Thanks so much. I'll pass it along.

Richard M. Olson - Chairman of the Board, President and Chief Executive Officer

Thank you.

Renee J. Peterson - Vice President, Treasurer and Chief Financial Officer

Thank you.

Operator

Thank you. And our final question today, could say, follow-up from the line of David MacGregor from Longbow Research. Your question please.

David MacGregor - Longbow Research, LLC - Analyst

Yeah. 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 second quarter. 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 2017, 2018 levels of total spending? Or could your repurchases actually exceed those levels this year?

Renee J. Peterson - Vice President, Treasurer and Chief Financial Officer

Yeah. 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 medium to long-term profitable growth. And we'll look at that both organically, that's probably our highest return, as well as any M&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'll feel more comfortable having a little less cash balance as well. So, I would say, if 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.

David MacGregor - Longbow Research, LLC - Analyst

I'm just wondering how you're thinking about M&A in that context then? Because on the one hand, you're acquiring a business, it'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&A right now as a priority within capital allocation just based on what you're seeing in the funnel and what people showing up at your door with?

Richard M. Olson - Chairman of the Board, President and Chief Executive Officer

Yeah. 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 with acquisition always [Phonetic].

David MacGregor - Longbow Research, LLC - Analyst

Okay. All right. Thank you very much.

Renee J. Peterson - Vice President, Treasurer and Chief Financial Officer

Thank you.

Operator

Thank you. This does conclude the question-and-answer session of today's program. I would like to hand the program back to Julie Kerekes for any further remarks.

Julie Kerekes - Treasurer and Senior Managing Director of Investor Relations

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 third quarter of fiscal 2021.

Operator

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Q2 2021

Earnings Transcript

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