Good day, ladies and gentlemen, and welcome to the Toro Company's First Quarter Earnings Conference Call. My name is Jonathan and I will be your coordinator 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 Global Tax and Investor Relations. Please proceed, Ms. Kerekes.

Julie Kerekes - Treasurer and Senior Managing Director of Global Tax and Investor Relations

Thank you and good morning, everyone.

Our earnings release was issued this morning and a copy can be found in the Investor Information section of our corporate website: thetorocompany.com. We have also posted a first-quarter earnings presentation to supplement our earnings release and general investor presentation.

On our call today are Rick Olson, Chairman and Chief Executive Officer; Renee Peterson, Vice President and Chief Financial Officer; Angie Drake, Vice President, Finance; and Jeremy Stefan, Director, Investor Relations.

We begin with our customary forward-looking statement policy. During this call, we will make forward-looking statements regarding our plans and projections for the future. This includes estimates and assumptions regarding financial and operating results as well as economic, technological, weather, market acceptance, acquisition-related, and other factors that may impact our business and customers.

You are all 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 and on our website in our Investor Presentation as well as in our applicable SEC filings. We believe these measures may be useful in performing meaningful comparisons of past and present operating results and cash flows to understand the performance of our ongoing operations and how management views the business. Non-GAAP financial measures should not be considered superior to or a substitute for the GAAP financial measures presented in our earnings release and in this call.

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

Rick Olson - Chairman and Chief Executive Officer

Thanks, Julie, and good morning, everyone.

We began fiscal 2023 by delivering another record quarter with net sales up 23% and adjusted diluted earnings per share up 49% over last year. We reported top-line growth in both segments and continue to see strong demand for our innovative products, especially in key professional markets. Importantly, the supply chain continued to improve, which combined with our disciplined operational execution drove manufacturing efficiencies and professional segment volume growth.

We achieved these results even with below-average snowfall in many key regions, a testament to our innovative product lineup and diversified portfolio. We also performed well on the bottom line, posting a 200-basis point improvement in adjusted operating earnings as a percentage of net sales year-over-year. This was driven by net price realization and productivity gains. Our team and channel partners continue to operate with their hallmark dedication, creativity and resiliency. These characteristics are serving us well now and we expect will serve us well in the future.

With a strong start to the year, we are reiterating our full-year net sales and adjusted diluted earnings per share guidance. In addition to delivering record results in the quarter, we kept our focus on positioning the company to capitalize on long-term growth opportunities. This includes our foundational strategy of investing in the key technology areas of alternative power, smart connected and autonomous solutions. We believe our ability to leverage these investments across our broad portfolio will provide a competitive advantage and position us to drive accelerated profitable growth. For example, our HyperCell battery system is powering a growing suite of electric and hybrid solutions geared to professionals. This system was first introduced with the launch of our Toro branded Revolution Series mowers and is now electrifying products across our professional portfolio. This includes Exmark branded turf equipment, especially construction solutions and many golf applications. This proprietary system provides reliable all-day run-time on a single charge with no compromise on performance.

We also leveraged our 60-volt platform beyond our lineup of products geared to homeowners. Our new Revolution Series line of commercial-grade handheld tools runs on the Flex Force platform and expands our addressable market in the professional space. These tools provide comfortable and quiet operation for contractors while allowing increased productivity. These are just a few of the ways our prioritized focus on developing technology solutions is enabling accelerated new product development across our business.

We also remained engaged with our communities, including our long-standing commitment to further education and advance diversity in our industries. A few recent examples highlight this commitment. First, we announced a five-year partnership with the Atlanta University Center consortium to fund scholarships for Black engineering students. We will also provide paid internship opportunities to further enhance students' academic and professional development. We believe initiatives like these will help shape the future of our workforce.

Second, we extended our 25-year commitment of supporting First Tee, a nonprofit that helps young people develop character and life skills through the game of golf. The extension will include grants and equipment donations to support chapter initiatives and diversity efforts across the First Tee network.

Fiscal 2023 is off to a great start. We expect to carry this momentum throughout the year as we execute against our enterprise strategic priorities of accelerating profitable growth, driving productivity and operational excellence, and empowering people. I'll discuss our outlook further following Renee and Angie's more detailed review of our financial results and guidance.

But before I hand the call over, I'd like to congratulate Renee on her upcoming retirement, and Angie, on her promotion to Chief Financial Officer. Renee will transfer her CFO responsibilities to Angie after the filing of our first-quarter Form 10-Q. She will continue as Vice President, Finance, until her retirement in July. During this time, Renee will support the transition and provide ongoing leadership for key enterprise and finance initiatives.

Throughout her tenure as CFO, Renee skillfully managed the profitable growth of the company and kept a focus on driving outstanding value for all stakeholders. During her leadership, the company's net sales grew from $1.9 billion in fiscal 2011 to $4.5 billion in fiscal 2022, with an impressive average return on invested capital of nearly 25%. On a personal note, I have deeply appreciated Renee's steadfast support and trusted partnership. I wish her all the best on her well-deserved retirement. Thank you, Renee.

Moving forward, I'm excited to partner with Angie, as we build our momentum and advance our strategic priorities. Angie is a proven and highly respected leader with a deep understanding of our culture and values. She has consistently demonstrated her ability to deliver results including during her time as Chief Financial Officer of Charles Machine Works, and more recently as Vice President of our construction business. I have every confidence that Angie's leadership will continue to drive our business forward, supported by a foundation of financial acumen, discipline and excellence. Congratulations, Angie.

With that, I'll turn the call over to Renee.

Renee Peterson - Vice President and Chief Financial Officer

Good morning, everyone, and thank you, Rick. I appreciate the kind words. It's been an honor to be part of this incredible company and team for the past 12 years. I'd like to congratulate Angie on her promotion and echo Rick's confidence in our leadership. It gives me great pride to leave the CFO position in such qualified hands. I would also like to thank our investors and analysts for your support and engagement during my tenure as CFO.

Now turning to our results. As Rick said, we delivered strong performance in the first quarter, achieving record net sales and adjusted diluted EPS in what remains a dynamic operating environment. We grew overall consolidated net sales to $1.15 billion, an increase of 23.2% compared to the first quarter of last year. Reported and adjusted EPS were $1.01 and $0.98 per diluted share, respectively, up from $0.66 for both in the first quarter a year ago.

Professional segment net sales for the quarter were $880.7 million, up nearly 31% year-over-year. This increase was driven by higher shipments of products broadly across the segment, primarily due to strong demand and improvement in the supply chain. Net price realization and incremental revenue from our first quarter fiscal 2022 acquisition of the Intimidator Group. Professional segment earnings for the first quarter were up 54% to $144.1 million, and when expressed as a percentage of net sales, 16.4%. This was up from 13.9% in the first quarter last year. The year-over-year increase was primarily due to net price realization, net sales leverage and productivity improvements. This was partially offset by higher material, freight and manufacturing costs, and the addition of the Intimidator Group at a lower initial margin relative to the segment average.

Residential segment net sales for the first quarter were $264.6 million, up 3.6% over last year. The growth was primarily driven by net price realization and higher shipments of zero turn riding mowers, partially offset by lower shipments of snow products. Residential segment earnings for the quarter were up 19% to $37.8 million, and when expressed as a percentage of net sales, 14.3%. This was up from 12.4% in the first quarter last year. The year-over-year increase was primarily driven by net price realization and productivity improvements, partially offset by higher material, freight and manufacturing costs and higher SG&A expense.

With that, I'll turn the call over to Angie to continue outlining our operating results and to discuss our fiscal 2023 guidance.

Angie Drake - Vice President, Finance

Thank you, Renee, and hello, everyone.

Before I begin, I would also like to congratulate Renee on her retirement and thank her for her support as I transition to my new role. I'm looking forward to building on the strong foundation Renee has built and working more closely with Rick and the investment community.

Turning to our operating results, our reported and adjusted gross margin were both 34.5% for the quarter, up from 32.2% for both in the same period last year. The year-over-year improvement was primarily due to net price realization and productivity improvements, partially offset by higher material, freight and manufacturing costs and the addition of the Intimidator Group at a lower initial gross margin relative to the company average.

SG&A expense as a percentage of net sales for the quarter was 22.6% compared to 22.4% in the same period last year. This increase was primarily driven by higher warranty expense, partially offset by net sales leverage. Operating earnings as a percentage of net sales for the first quarter were 11.9% on a reported and adjusted basis. This compares to 9.8% and 9.9%, respectively, in the same period last year.

Interest expense for the quarter was $14.1 million, up $7.1 million from the same period last year. This increase was primarily due to incremental borrowings to fund the Intimidator Group acquisition and higher average interest rate. The reported and adjusted effective tax rate for the first quarter were 18.6% and 21.4%, respectively, compared to 20.2% and 20.9% in the same period a year ago.

Turning to our balance sheet and cash flows. Accounts receivable were $377 million, up 3% from a year ago, primarily driven by organic net sales growth. Inventory was $1.1 billion, up 36% compared to last year. This increase was driven by higher finished goods work in process and service parts. In addition, this includes the impacts of inflation. Accounts payable were $475 million, essentially the same as last year.

Free cash flow in the quarter was $91 million use of cash. This was primarily driven by additional working capital needs heading into the spring selling season. This also reflects higher work in process and service parts levels as we continue to navigate current supply-chain dynamics. With the return to a more normalized quarterly net sales cadence, we expect the majority of our operating cash flow to be generated in the second half of the fiscal year. This expectation aligned with typical patterns pre-pandemic.

We remain well within our 1 time to 2 times target gross debt to EBITDA leverage ratio. This supports our strong balance sheet, which in turn provides the financial flexibility to fund investments that drive long-term sustainable growth. Our disciplined approach to capital allocation remains unchanged with priorities that include making strategic investments in our business both organically and through acquisitions, returning cash to shareholders through dividends and share repurchases, and maintaining our leverage goals. These priorities are highlighted by our actions, including our plan to deploy $150 million to $175 million in capital expenditures this year to fund new product investment, advanced manufacturing technologies, and capacity for growth, and our regular dividend payout increase of 13% compared to last year.

As we look ahead to the remainder of the fiscal year, we expect continued strong demand for our innovative products, especially in key professional markets. While we expect the supply chain situation to remain dynamic, we are encouraged by the incremental improvements that are enabling increased production.

With this backdrop and based on our current visibility, we are reaffirming our full-year fiscal 2023 net sales and adjusted diluted earnings per share guidance. For fiscal 2023, we continue to expect net sales growth in the range of 7% to 10%. We also continue to expect professional net sales to grow at a rate higher than the total company average. For the residential segment, we now expect fiscal 2023 net sales to be relatively flat to slightly down compared to fiscal 2022 as a result of the below-average snowfall totals this season. In addition, we anticipate a more typical quarterly sales cadence with Q2 and Q3 being our larger quarters.

Looking at profitability, we remain focused on improving our margin profile. With that focus, we continue to expect gross margin improvement in fiscal 2023, with margins in the second half of the year expected to be higher than the first half of the year. Additionally, we continue to expect improvement in overall adjusted operating earnings as a percentage of net sales compared to last year, with higher earnings margins expected for both segments on a year-over-year basis. We expect these margin improvements to be driven by net price realization, productivity improvements, and favorable mix.

We maintain our expectations for full-year adjusted EPS in the range of $4.70 to $4.90 per diluted share. This adjusted EPS estimate excludes the benefit of the excess tax deduction for share based compensation. Additionally, for the full year, we continue to expect depreciation and amortization of about $130 million, interest expense of about $55 million, and adjusted effective tax rate of about 21%, and free cash flow conversion of approximately 100% of reported net earnings.

Turning to the second quarter of fiscal 2023, we expect total company net sales to grow at a rate higher than the full-year estimate. For the professional segment, we expect a Q2 net sales growth rate meaningfully higher than the total company full-year growth estimate, but lower than the Q1 growth rate, given a full year has now lapsed since the Intimidator acquisition.

For the residential segment, we expect a Q2 net sales growth rate slightly lower than the total company full-year growth estimate. From a profitability perspective, for the second quarter, we expect year-over-year improvement in gross margin and adjusted operating earnings margin on a total company basis. For the professional segment, we expect the second quarter earnings margin to be higher year-over-year, as well as higher sequentially from the first quarter of fiscal 2023. For the residential segment, we expect the second quarter earnings margins to be higher year-over-year, but down sequentially from the first quarter of fiscal 2023.

We continue to build our business for long-term profitable growth as we execute on our strategic priorities and focus on driving value for all stakeholders. With that, I will turn the call back to Rick.

Rick Olson - Chairman and Chief Executive Officer

Thank you, Angie.

Fiscal 2023 is off to a strong start and we are well-positioned with innovative products, trusted brands, and extensive distribution and service networks. We expect continued benefits from our well-established market leadership, along with the essential nature and regular replacement cycle of our products. In addition, we expect to benefit from our substantial order backlog. Our team continues to operate with incredible agility to optimize output in the current environment. With this, we saw higher volumes across our professional segment during the first quarter.

At the same time, the exceptional demand, we continue to see in key professional markets drove a slight increase in our backlog, over and above the $2.3 billion balance at the beginning of the year. Turning to the broader economy, we are keeping an eye on monetary policy actions, the geopolitical environment, and inflation. We are also watching overall business and consumer confidence and spending patterns. We believe we are well-prepared to deliver positive results in this environment.

I'll now comment on the macro factors we are seeing in our end markets, which could impact future results, starting with our professional segment. For underground and specialty construction, we expect the current robust demand to continue supported by a multi-year tailwind from public and private infrastructure investment. The need and support for broadband and alternative power build-out along with the aging infrastructure is driving exceptional demand in utility, construction and rental markets. We believe we are prepared to capitalize on this demand with the most comprehensive product lineup in the industry. Additionally, we are encouraged by the supply-chain improvements that enabled increased production for this business in the first quarter.

For golf, we expect healthy course budgets will continue to fuel strong demand. In 2022, on-course [Phonetic] participation was up for the fifth straight year with a net increase of 0.5 million golfers domestically. At the same time, the number of rounds played remained well above pre-pandemic levels. We are extremely well-positioned in this attractive market as the only company to offer both equipment and irrigation solutions, and as the longstanding market leader in both.

This market leadership was on display at the Golf Industry Show in February. We highlighted our autonomous fairway mower and a number of fully electric versions of our proven and popular machines. This included new battery-powered Groundsmaster and Greensmaster models, and the workman MDX Lithium. We also showcased our new IntelliDash Golf Course management platform. This platform provides superintendents with vital course and equipment data to simplify operations, increase productivity and allocate resources more efficiently and effectively.

For municipalities and grounds, we expect to see continued prioritization of green spaces and interest in zero exhaust emission products supported by healthy budgets. We are well-positioned to serve this market with our deep relationships and growing suite of no-compromise sustainable solutions.

For snow and ice management, we will be watching to see how the late season snowfalls impact channel inventory levels. We continue to see customer demand exceed expectations for our new liquid deicing products. These products enable increased productivity while also significantly reducing the amount of salt required. For landscape contractors, we expect to see a more normalized seasonal cadence and we'll be watching how spring weather patterns unfold. Landscape contractor budgets remain healthy in this large and growing end market. We are positioned well with our extensive channel and market leadership, including our three brands Exmark, Toro, and Spartan.

For residential and commercial irrigation and lighting, demand for commercial projects remains strong. We expect this will help offset any potential change in residential demand, depending on how consumer spending patterns and housing markets trend. For agricultural micro-irrigation, we expect recent precipitation to improve drought conditions in key regions.

Moving to the residential segment, we are expecting demand to follow a more typical seasonal trend. With this, we will be watching weather patterns, including the timing of spring, as well as moisture levels. We are also keeping an eye on consumer confidence. Importantly for us, we benefit from regular replacement cycles and the non-discretionary nature of our products. We offer an innovative product lineup with an ever-increasing number of battery-electric options. This includes our recently introduced robotic mower with wire-free navigation and a state-of-the-art vision-based localization system. On top of that, we believe our extensive distribution network for residential products provides a competitive advantage. This network includes mass retailers, over 4,000 independent dealers and online platforms.

It's an exciting time to be part of the Toro Company. We are leveraging prioritized technology investments across our product lines, which we believe will drive value down and into the future for all stakeholders. These transformational investments along with our outstanding team of employees and channel partners position us well to build on our market leadership across our broad portfolio. On that note, I would like to thank our employees and channel partners for going above and beyond every day to support our customers and deliver great results. You are the key to the Toro Company's success. I would also like to extend my gratitude to our customers and shareholders for your continued support.

With that, we will open up the call for questions.

Question & Answers

Operator

Certainly. [Operator Instructions] And our first question comes from the line of Sam Darkatsh from Raymond James. Your question, please.

Sam Darkatsh - Raymond James - Analyst

Good morning, everyone. How are you?

Rick Olson - Chairman and Chief Executive Officer

Good morning, Sam.

Renee Peterson - Vice President and Chief Financial Officer

Good morning.

Rick Olson - Chairman and Chief Executive Officer

Congratulations [Speech Overlap] conference.

Sam Darkatsh - Raymond James - Analyst

Thank you. And speaking of congratulations, I'd like to echo Rick's sentiments, Renee. It's been wonderful working with you over the years. Best wishes with your next chapter. And Angie, well-deserved promotion. I'd look forward to working with you going forward as well.

Angie Drake - Vice President, Finance

Yes, thank you.

Renee Peterson - Vice President and Chief Financial Officer

Thanks, Sam.

Sam Darkatsh - Raymond James - Analyst

Just a couple of I guess general topics, If I could. I think in your prepared remarks, Rick, you mentioned that there was a slight increase in your backlog sequentially from the $2.3 billion. If we could unpack that a little bit more, what are you seeing specifically with order cancellation rates, new order trends, lead times, that sort of thing, to give us a sense of what's happening a little bit behind the scenes?

Rick Olson - Chairman and Chief Executive Officer

If you start just overall looking at the backlog - we did - we actually had a really nice volume increase. It was actually a little bit better than we expected in the first quarter. So we were on our plan from that regard. The biggest factor was just the demand continues to be very, very strong, especially coming from our residential side, most of it coming from underground specialty construction part of our business and then followed by golf and grounds.

And with regard to cancellation rates, extremely low, very, very small piece of loss of backlog at this point. So, we are - we expect those lines to converge out in the future or we'd start to make ground on the demand. But at this point, even though we had better outputs, demand was greater than expected as well.

Sam Darkatsh - Raymond James - Analyst

And then your supply-chain constraints that are continuing to improve, is that with both electronics and hydraulics or mostly hydraulics at this point? What sorts of components or - trends in component suppliers you're seeing, Rick?

Rick Olson - Chairman and Chief Executive Officer

On a broader base, the random issues have become better. But the several that we've talked about, which you referred to, specifically the wiring harnesses, I think there is a worldwide issue of supply of those, but we're working very closely, and believe me, very intensively with our suppliers there to improve that situation. We do see some improvement there. Hydraulics also improving more down to kind of the random misses in terms of shipments. Anything to do with electronics regarding chips, still a bit of an issue, but we are seeing some improvement there as well. I think, generally, the chip industry is seeing some improvements overall. So, it's the same type of characters, right, as it was probably in our last discussion, but we're seeing steady improvement. And as we gain more confidence in the supply from the suppliers of those component parts, we are positioning ourselves to be able to take advantage of that improved supply with greater volume. Our - we don't believe our facilities will be the constraints in the near term, we'll be able to take advantage of that as it becomes available.

Sam Darkatsh - Raymond James - Analyst

And then my last question, if I could sneak it in? The resi segment surprised me and perhaps others in terms of in the quarter but it was better than expected. I think it might have been better than you were originally anticipating also where you thought it was going to be flat, both from a sales and a margin perspective despite the fact that snow was soft. So, what was happening there? And then also, reconcile that with, it sounds like you're taking down your expectations a little bit going forward for resi in the year? If you could just help unpack what you're seeing in that segment from a trend standpoint.

Rick Olson - Chairman and Chief Executive Officer

Just from a context standpoint, residential has just been extraordinarily strong throughout the pandemic and through last year. I think roughly 60% up from 2019, so it's been a real performer. We have a lot of momentum with the things that we've done with the product line with the addition of key channel partners, etc., the things that we've talked about before. So there's really solid momentum. We've talked about coming into what we would call more normal type of cycle. And for that, we really mean subject to the start of spring, some of those factors that are normally factors that we talk about, come back into the equation to a greater degree.

Specifically this year with regard to our expectations, snow was not as strong as we had planned due to the lighter snowfall, especially in populated areas of the US on the East, specifically, the Eastern United States. But we had strong shipments of the Zs, a nice incremental shipment of walk-powered [Phonetic] mowers. So across the board, the net was very positive for residential.

And it's going to be subject to, again, the normal year factors that are out there, but we're in good shape as we enter the spring season, especially with much better inventory position than we've had for the last several years. So that business is in good shape at this point.

Sam Darkatsh - Raymond James - Analyst

[Speech Overlap] Thank you much. I'll get back in line.

Renee Peterson - Vice President and Chief Financial Officer

Sorry, Sam. I would just add to that on the profitability side, that the past few years, we've seen both volume increases and margin increases that have helped our residential profitability. And Q1 is historically higher from a profitability standpoint for res. But we did have a really nice mix as Rick talked about. We are seeing also some influence year-over-year in the quarter due to price and productivity improvements. So for the full year, we expect to continue to see residential profitability improve.

Sam Darkatsh - Raymond James - Analyst

Very helpful. Thank you.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Tim Wojs from RW Baird. Your question, please.

Tim Wojs - Robert W. Baird and Company - Analyst

Hey, everybody. Good - good morning.

Rick Olson - Chairman and Chief Executive Officer

Good morning.

Tim Wojs - Robert W. Baird and Company - Analyst

And I'd like to also echo the same sentiments to Renee. It's been great working with you and we appreciate all the help, and - congrats on new roles. [Phonetic]

Renee Peterson - Vice President and Chief Financial Officer

Thank you.

Tim Wojs - Robert W. Baird and Company - Analyst

Maybe just to - put a finer point, on - on one of Sam's questions, just on the lead times by business, I mean, I guess generally, over the last three months to six months, how have lead times trended maybe specifically in the underground and the golf business? Has it been pretty consistent? Or are you actually starting to see some of those lead times actually kind of get better?

Rick Olson - Chairman and Chief Executive Officer

Yeah, I would say if you look across the spectrum of products, obviously the residential into the landscape contractor area, those lead times have gotten better substantially over the last probably 18 months. As you get into the larger areas of backlog which are underground, specialty construction, and golf and grounds, we're seeing some improvements, but still substantially greater lead time than we would normally like to quote to our customers. And that's - fundamentally, that's our primary concern is making sure that we can serve our customers which is a commitment that we have to them.

Tim Wojs - Robert W. Baird and Company - Analyst

Okay, okay. And then, I guess from a cost perspective, I mean it's one input, but I mean steel kind of perked up here recently. How do you - just given the industry has taken a lot of price, [Phonetic] I mean, what type of, I guess, level of inflation or re-inflation would you need to see to maybe kind of consider additional price increases?

Rick Olson - Chairman and Chief Executive Officer

From a price perspective, we look at necessary price increases every year. First of all, market-based, and then fundamentally, we've had to be more cognizant of the commodity cost. Steel is one that has - that came down fairly substantially in 2022. But we do see it more at somewhat of a plateau, so there's a little bit of catch-up with some of our suppliers to take advantage of that. But it's steel, we don't see as much probably movements in steel as we go forward.

And pricing - from a pricing standpoint, we're still elevated above where we would normally be when we talk about normal realized price. Angie or Renee, any other comments on –?

Angie Drake - Vice President, Finance

Yeah, yeah. I would just add to that by saying that we are beginning to see some of that inflation slowing a bit. But we are also looking for every opportunity to offset that inflation by our pricing actions or productivity We have done our best to include these inflationary items in our guidance going forward.

Tim Wojs - Robert W. Baird and Company - Analyst

Okay, okay. And then just the last one, just a kind of nitpicky modeling question. The other income line picked up pretty substantially year-over-year and sequentially. I guess, what drove that and how do you think about that line as you think about fiscal '23?

Renee Peterson - Vice President and Chief Financial Officer

Yeah, Tim. This is Renee. So, as we look at other income, two of the biggest factors that drove that variation year-over-year would be, really, the biggest one is the improvement that we're seeing in the Red Iron JV income. As we return to a more normal level of field inventory, that does drive more activity through the Red Iron JV, and as a 45% owner, we participate in that. So that's one factor.

And then there was a recovery associated with the Intimidator Group acquisition that was several million dollars, that also impacted that variance within the quarter.

Tim Wojs - Robert W. Baird and Company - Analyst

Okay. Okay, great. Thanks, guys. Good luck on rest of the year.

Rick Olson - Chairman and Chief Executive Officer

Thank you.

Angie Drake - Vice President, Finance

Thank you.

Operator

Thank you. [Operator Instructions] And our next question comes from the line of David MacGregor from Longbow Research. Your question, please.

David S. MacGregor - Longbow Research - Analyst

Yes, good morning, everyone. And Renee -

Rick Olson - Chairman and Chief Executive Officer

Good morning, David.

David S. MacGregor - Longbow Research - Analyst

Yeah. Renee, thanks for all your help and your patience over the years. It's really truly been a pleasure working with you. Angie, congratulations and best wishes for success.

Angie Drake - Vice President, Finance

Thanks, David.

David S. MacGregor - Longbow Research - Analyst

I wanted to just talk about the inventories and the impact it had on margins. You talked last quarter about excess raw materials in WIP inventory, and those inventories worked your way through the P&L in 1Q, obviously. So how much of a margin headwind did that represent and what is the expectation for 2Q? It sounds like maybe raw material's not so much of an issue, but it may still be. If you could just talk about that for us? Thanks.

Renee Peterson - Vice President and Chief Financial Officer

Yeah, as it really, David, our sales cadence normalizes, what we're seeing is we're getting back into more of that normal pattern with inventory, really building inventory as we go into the spring and then seeing that depleted as we go through the season. If you look at it sequentially from Q4, our inventory was relatively flat up a little bit, but we were encouraged because WIP was relatively flat. And just, I guess, stepping back and looking at it when we look at the mix of inventory, to your point, we still see a higher level of WIP inventory versus finished goods than we would ideally like. We do think as we work through the remainder of the year with the supply chain improving, that - we'll see that improvement and we'll see that mix normalize. And our backlog is strong, so we see strong demand, and the pricing associated with that backlog is current.

And when we look from a overall free cash flow conversion standpoint, we've embedded our thoughts around working capital and maintained our guidance around 100% conversion. So, you're correct that you were seeing some of that higher-cost inventory as we go through the year that will work its way through the - through the system and we'll see the benefit of some hopefully lower commodities as well included in our guidance.

David S. MacGregor - Longbow Research - Analyst

So let me just - on that point, it seems as though your guidance probably reflects improving price-cost sequentially, with each quarter, as you move through the year, is that a fair takeaway?

Renee Peterson - Vice President and Chief Financial Officer

Yeah, I think it is. We do think when we look specifically at gross margin that what our guidance included was that gross margin will be higher in the second half of the year versus the first half. And we do expect when we look at operating margins that we'll see improvement within the company as well as within both of the segments.

David S. MacGregor - Longbow Research - Analyst

Okay. And second question, just on golf, given the price increases, what are you seeing in demand elasticity from smaller- and medium-sized golf courses? I guess your large course customers are fine but talk a little bit about what the small customers - how they're responding to the pricing?

Rick Olson - Chairman and Chief Executive Officer

We're seeing, honestly, very strong demand across our customer base. Oftentimes, the smaller golf courses could be municipal courses, for example. And many of them have - they've not been in the revenue situation that they're in today in a long time. So, their budgets are very healthy. Oftentimes, I mean, there is a secondary market for our products as well. So for the very small golf courses, that tends to be something that they're interested in? That market is actually very tight as well. There is a shortage of used equipment out there. So, we're not seeing anything other than very strong demand at this point across our customer base.

David S. MacGregor - Longbow Research - Analyst

Okay. Thanks for that, Rick. And last question for me, just on landscape contractor, you talked about the return to more typical seasonal patterns. You're running your spring sales event, right now, could you just talk a little bit about how the market is responding to that spring sales event, or how would you characterize the market response to that promotion? And are you seeing any price elasticity there?

Rick Olson - Chairman and Chief Executive Officer

Yeah, I mean, I just spoke with some of the people directly involved with that yesterday, they've been very pleased at the response so far. There are very willing buyers out there in those markets. I think the - there is a portion of that market that would be more cautious about the economy, but they know that they have equipment that needs to be replaced on the landscape contractor professional side of the business. So, it's just a matter of timing. And in this case, a small incentive had a significant impact as well.

David S. MacGregor - Longbow Research - Analyst

[Speech Overlap] And Rick, historically [Speech Overlap] have you historically seen a correlation between weaker snowfall and these guys just having less plowing revenue to spend on equipment come to spring? Is there a correlation there we should be mindful of?

Rick Olson - Chairman and Chief Executive Officer

We have. And I think that what we see this year is - if they are in parts of the country where they have not had as much snow revenue, first of all, a lot of the snow revenue, snow business is a mixture on contracts so they still have revenue, whether they plow the snow or not. And so in those cases where they've got lower revenue, they will probably make their purchases for the spring as they start to get into the revenue into the spring. So it could mean just a slightly delayed purchase cycle. And those are some of the things that we can have an impact on with some of the promotions that you mentioned.

David S. MacGregor - Longbow Research - Analyst

Great. Thanks very much, and congratulations on the quarter.

Rick Olson - Chairman and Chief Executive Officer

Thank you.

Renee Peterson - Vice President and Chief Financial Officer

Thank you.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Eric Bosshard from Cleveland Research. Your question, please.

Eric Bosshard - Cleveland Research - Analyst

Hi, thanks. Two things. First of all, Rick, on the pro side, it sounds like the quarter was better and the full year sounds like it's a little bit better now than what was prior. Within this, what is leading that, what piece of the business is leading that?

Rick Olson - Chairman and Chief Executive Officer

From a pro standpoint, it's really the demand coming from those key areas which correlate to where our backlogs are so the underground, especially construction golf and grounds, but also strengthen the landscape contract area. And so, I would say across our pro business, I can't really identify an area that's significantly looking like a down here at this point as we are projecting forward. Irrigation may be a little bit different mix of very strong golf and professional projects offset with a little bit lighter res. The ag irrigation business looks very strong going forward. The snowpack in the zeros is approaching 200% of normal at this time with much better reservoir. So that, I mean, they've essentially got the moisture that they need for the growing season, so some of those factors are looking positive.

Eric Bosshard - Cleveland Research - Analyst

Okay. And then in terms of just some context on backlog, is this - this provides visibility into '24, like at what point does - do you start to work down backlog or through what period of time does this backlog give you visibility and conviction in the revenues of the pro business?

Rick Olson - Chairman and Chief Executive Officer

We have high confidence in our back order position and it's going to be a function of the rate at which we can improve the supply of components. As I mentioned before, we don't believe our internal capabilities are constraints at this point, they've made tremendous progress and have been extremely agile to be able to take advantage of increased volume. We do expect some areas to extend in past '23 before we get those backlogs down.

But as you can imagine, we're working exceptionally intensely with our customers and with our channel partners to make sure we cover and support our customers to [Phonetic] the best way that we can.

Eric Bosshard - Cleveland Research - Analyst

And then on the residential side, it sounds like pro a little bit better perhaps for the year, residential little softer, and you talked about snow. I guess, first of all within this, is this exclusively snow? And then related to this in terms of the spring consumer selling season, there has been obviously quite a bit of inflation in the last few years. I'm just curious how you're positioning the residential mower business from a price standpoint and if there's any elasticity that you're either considering or experiencing.

Rick Olson - Chairman and Chief Executive Officer

First of all, I'll say that we're going into the spring selling season in the best position that we've been for several years with regard to better healthier field inventory as we head into that spring season. The - as I think we've talked about before, normal to us also means that promotions coming back into play to get - motivate people to go out and shop for new products. So those are pretty much normal for us. And that's the extent to which price would be affected, is that the normal promotions would be coming back in. And all of that's concluded within our guidance. Snow - if we've reflected slightly down, it really reflects that it's been a lighter snow season so far. So, we know that that has some impact on the fall stocking.

Eric Bosshard - Cleveland Research - Analyst

Okay. Thank you very much.

Rick Olson - Chairman and Chief Executive Officer

Okay. Thank you.

Operator

Thank you. This concludes the question-and-answer session. Ms. Kerekes, please proceed with closing remarks.

Julie Kerekes - Treasurer and Senior Managing Director of Global Tax and Investor Relations

Thank you, Jonathan, [Phonetic] and thank you all for your questions and interest in the Toro Company. We look forward to talking with everyone again in June to discuss our fiscal 2023 second-quarter results.

Operator

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TORO CO

Q1 2023

Earnings Transcript

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