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Toro Co (NYSE:TTC)
Q1 2020 Earnings Call
Mar 5, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen. And welcome to The Toro Company's First Quarter Earnings Conference Call. My name is Sarah, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session toward the end of today's conference. [Operator Instructions]

I would now like to turn the presentation over to your host for today's conference, Nicholas Rhoads, Managing Director of Investor Relations for The Toro Company. Please proceed, Mr. Rhoads.

Nicholas Rhoads -- Managing Director-Investor Relations

Thank you and good morning. Our earnings release was issued this morning by Business Wire 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, Treasurer, 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 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 adjusted non-GAAP financial measures and metrics. Reconciliations of historical adjusted non-GAAP financial measures and metrics to reported GAAP financial measures and metrics can be found in our earnings release or on our website. The Company believes these measures and metrics may be useful in performing meaningful comparisons of past and present operating results to understand the performance of its ongoing operations and how management views the business. Such adjusted non-GAAP financial measures and metrics should not be considered superior to as a substitute for or as an alternative to and should be considered in conjunction with the GAAP financial measures and metrics 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 & Chief Executive Officer

Thanks, and good morning. Fiscal 2020 is off to a positive start, and we're encouraged about the season ahead. The team's focus on our strategic priorities of profitable growth, productivity and empowering people was key to our sales and margin momentum in Q1. We also announced a strategic acquisition to complement our organic growth.

Looking at our financial results, although the first quarter is typically a smaller quarter, thanks to the efforts of Toro's dedicated employees, we achieved record net sales and earnings. We generated net sales of $767 million, up 27% over the prior year, and we delivered adjusted diluted earnings per share of $0.64, up 21%. Results were primarily driven in the Professional segment by the addition of Charles Machine Works, continued demand for our BOSS snow and ice management equipment and net price realization, and on the Residential -- in the Residential segment, by the initial delivery of zero turn riding mowers to the Tractor Supply Company.

During the first quarter, we announced the acquisition of Venture Products, and I'm happy to report that we closed on Monday. Venture Products, which manufacturers under the Ventrac brand, is a respected provider of turf, landscape, and snow and ice management equipment. Ventrac machines are valued for their versatility, multi-season attachments and hillside capabilities. Our people share a similar value-based culture with strong commitments to innovation, quality and customer service. I want to formally welcome Ventrac team to The Toro Company.

Turning to our operating performance for the quarter. Our Professional segment net sales grew 31%, reflecting incremental contributions from the Charles Machine Works acquisition and positive contributions from the BOSS, golf and grounds, and irrigation businesses. Charles Machine Works through its family of businesses with iconic brands such as Ditch Witch, American Augers, Trencor, Subsite, HammerHead and Radius generated strong incremental revenue for the quarter. We drove solid retail demand with our new products, including the Ditch Witch JT24 directional drill and Sk3000 mini skid steer, and the recently launched Bluelight LED Cured-In-Place lining system gained traction in the marketplace. Nearly one year after the Charles Machine Works team joined The Toro Company, the integration is exceeding expectations, and we are on track to deliver our synergy target.

BOSS turned in another good quarter, due to healthy demand for snow and ice management equipment. This resulted from early winter snowfall in key regions and sales of undercarriage mounts and plows for new truck models. We also saw continued strong retail demand for the Snow Raider, which turns a multi-person job of plowing and treating sidewalks into a one person operation. Our worldwide golf and grounds business benefited from solid golf equipment demand in Europe and Asia. Interest in our new all-electric Greensmaster eTriFlex riding greens mower was high. Customers appreciate its reduction in noise, maintenance and fuel costs. Additionally, we saw increased activity in previously deferred golf projects in the US and across our international markets.

Our ag irrigation business posted positive results for the quarter, due to increased product demand in the Eastern United States and Mexico. This was partially driven by the introduction of the new Aqua-Traxx Azul, precision irrigation tape that offers enhanced clog resistance technology. Irrigation business growth in the quarter was driven by favorable weather in key domestic regions that helped drive early demand for [Indecipherable] products used in residential and commercial applications.

Turning to our Residential segment. We achieved over 14% net sales growth for the quarter, largely driven by initial shipments of zero-turn riding mowers to Tractor Supply stores. We also recorded positive results from our Pope-branded DIY irrigation business in Australia.

In summary, we delivered strong performance for the quarter, expanded our mass retail channel with the addition of the Tractor Supply Company and completed another strategic acquisition to complement our organic growth.

I will now turn the call over to Renee for a more detailed discussion of our financial results.

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

Thank you, Rick. And good morning everyone. The Toro Company is comprised of a balanced portfolio of products to enhance our customers' productivity across the season. Charles Machine Works has incremental revenue and is less seasonal, due to the use of these products in multi-year infrastructure and telecom projects such as 5G and the focus on underground installation and maintenance. Our ongoing focus on operational excellence and synergy capture should yield improved margins across the portfolio over time. This enables the Company to allocate capital across a variety of alternatives, including acquisitions, dividends, debt paydown and share repurchases.

While certain factors do lie out of our control, the portfolio of businesses allows us to adjust to shifting weather situations and changes in customer demand to provide consistent long-term growth and generate healthy free cash flow. Q1 was no exception. Even though Q1 is a smaller quarter, we were able to exceed the expectations we set for ourselves based on our ability to adjust to changes in channel demand and product mix, while maintaining our focus on our strategic initiatives of growth, productivity and people.

We reported net sales of $767 million in the quarter, a 27.3% increase from the first quarter of fiscal 2019. Diluted EPS was $0.65 for the quarter, compared to $0.55 last year. Adjusted diluted EPS increased 20.8% to $0.64.

For the first quarter, Professional segment net sales increased 30.7% to $594.7 million. The revenue growth was primarily driven by the Charles Machine Works acquisition, which added incremental sales of $161 million. Excluding Charles Machine Works, Professional segment sales were lower as compared to a strong Q1 of 2019. During Q1 2020, we realized lower shipments of landscape contractor products as we focused on managing field inventory. This was partially offset by sales across most of our Professional businesses, including BOSS snow and ice management, golf and grounds, and irrigation businesses. Professional segment earnings for the first quarter increased 16.5% to $102.5 million.

Residential segment net sales for the first quarter were up 14.3% to $165.8 million, mainly driven by shipments of zero-turn riding mowers to Tractor Supply. Residential segment earnings were up 65% to $21.6 million, reflecting a 400 basis point year-over-year improvement in segment margins. This margin improvement was largely driven by favorable sales mix, productivity and synergy initiatives, lower commodity and tariff costs, and reduction in freight costs. In the quarter, good operating fundamentals translated to strong segment margin due to a combination of factors. We anticipate second quarter segment margin to be comparable with the first quarter and then, to moderate in the second half of the year. As a result, we anticipate full-year Residential segment margins to be in the low-teens.

Moving to our operating results. Reported gross margin for the first quarter was 37.5%, an increase of 170 basis points over the prior year period. Excluding acquisition-related impacts and other non-recurring items, adjusted gross margin increased 180 basis points to 37.6%. These increases were primarily driven by productivity improvements and synergy initiatives, increased net price realization and lower freight, commodity and tariff costs.

SG&A expense, as a percent of sales, increased 140 basis points for the quarter, primarily due to higher -- the higher costs with addition of Charles Machine Works and increased marketing support for the mass retail channel. Operating earnings, as a percent of net sales, increased 30 basis points to 11.9%. Adjusted operating earnings, as a percent of net sales, increased 20 basis points to 12.1%.

Interest expense increased by $3.4 million for the quarter. This increase was due to additional debt to fund the Charles Machine Works acquisition. For the full year, we anticipate interest expense of about $33 million, as a result of additional debt to fund the Charles Machine Works and Venture Products acquisitions. The reported effective tax rate was 18.6% for the first quarter, and the adjusted effective tax rate was 21%. For the full year, we continue to anticipate an adjusted effective tax rate of about 20.5%.

Turning to the balance sheet and cash flow. Accounts receivable totaled $321.2 million. This was up 42.4% from a year ago as a result of Charles Machine Works and higher sales into the mass retail channel. Net inventories were up 77.4% to $739 million, primarily due to incremental inventories from Charles Machine Works and higher inventory balances in our landscape contractor business in the Professional segment, and higher inventories to support our expanded mass retail channel and new product introductions in the Residential segment. Accounts payable increased 23.6% to $348 million, largely driven by our acquisition of Charles Machine Works.

We expect depreciation and amortization for fiscal 2020 of about $95 million, and capital expenditures of about $100 million. As I mentioned, we built inventory in preparation for our key selling season. While free cash flow conversion was negative for the quarter, our projection remains the same. We continue to anticipate free cash flow conversion to be about 100% for fiscal 2020. Delivering high demand products aligned with the varying seasons as well as solutions for multi-year infrastructure projects drives more consistent levels of profitability and increases our ability to allocate capital to fund future growth. Our disciplined capital allocation strategy allows for investment in organic and M&A growth opportunities and the return of cash to shareholders through dividends, share repurchases and debt paydown. We continue to invest in innovation and new product development, which fuels our organic growth. And we are maintaining a disciplined approach to acquisitions. Venture Products is a recent example of our focus on profitable growth as we broadened our offering to customers through this acquisition.

I will now turn the call back to Rick.

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

Thanks, Renee. Our record performance in the first quarter, customer response to our innovative new products and the outlook for our key markets give us reason for optimism in 2020. For the full year, we continue to expect revenue of about $3.6 billion and adjusted diluted earnings per share of $3.33 to $3.40, inclusive of the Venture Products acquisition. For the second quarter, we expect adjusted diluted earnings per share of $1.28 to $1.33. As always, we have a watchful eye on factors that could pose challenges to our performance, such as unfavorable weather, trade policy and regulatory actions, and the impact of coronavirus.

Given the focus on coronavirus, I'd like to spend a moment providing our current thinking on its potential effect on Toro. First and foremost, we are focused on the health and safety of our employees and other stakeholders. We are monitoring the situation and taking appropriate precautions, including those recommended by government agencies. In addition, we have a number of internal planning groups that are helping us to prepare for various scenarios. In terms of our supply chain, we are closely observing the evolving situation in real time and taking appropriate steps to minimize disruption. Our team, including those on the ground in China, is working diligently with our suppliers to maintain a steady flow of components. We currently expect a modest financial effect from supply chain disruptions in fiscal 2020.

From a revenue standpoint, at this time, we do not expect a material impact in 2020. We have minimal sales from geographies that have been most affected by coronavirus so far. While the situation is evolving quickly, our guidance reflects our best estimates of how these factors may affect our second quarter and full-year performance.

Let's review prospects for our businesses going forward. Starting with the Professional segment, in golf, despite the second wettest year on record in the US, annual rounds played were up 1.5% in 2019. At the recent Golf Industry Show in Orlando, we unveiled a record number of turf and irrigation products for the upcoming season, such as the all-new Groundsmaster out-front rotary mower and the latest Lynx Central Control System.

Additionally, we unveiled IntelliDash, a smart connected technology concept for golf superintendents. IntelliDash is a golf course management platform that integrates data from Toro products and other sources to provide real-time information, such as agronomic conditions, labor, asset location and equipment health from energy of managers to better run their operations. We also introduced a new suite of autonomous technologies called GeoLink Solutions. These include a Multi-Pro Sprayer with auto steer capabilities and fully autonomous Reelmaster and Greensmaster concept machines. Our customers are seeking solutions to alleviate labor challenges and drive productivity, and these products can help them achieve their goals in the future.

Turning to our underground business, the outlook continues to be encouraging with strong market growth opportunities such as the 5G wireless buildout. Our new product introductions such as the JT24 directional drill are showing strong early retail demand. We have the right products to support the full lifecycle of pipe and cable from installation to repair and rehab. We'll showcase our brands and products at the upcoming ConExpo trade show with representation from Ditch Witch, American Augers, Trencor and Subsite. As some of you recently observed in Orlando during the American Rental Association Trade Show, the outlook for our rental and specialty construction business is strong. The American Rental Association expects US rental equipment revenues to grow approximately 4% in 2020 and projects continued growth in each of the following three years.

Industry fundamentals support ongoing construction spending, which should create demand for our new products. The battery -powered Toro e-Dingo compact utility loader garnered a lot of attention and good preseason orders at The ARA Show. Additionally, the recently launched Toro TRX walk-behind trencher received three industry awards for the innovative Intelli-Trench smart trenching technology. Ditch Witch also exhibited at ARA, and excitement remains high for the SK3000 mini-skid steer. We're also excited by anticipated demand for recently introduced products for landscape contractors. These include the Z Turf spreaders, sprayers and aerators, and Exmark Lazer and Toro TITAN zero-turn riding mowers. Additionally, the GrandStand multi-force is building momentum with contractors, due to the addition of attachments for multi-season use.

We had a strong start to Q1 last year, followed by unusually wet selling season, resulting in higher-than-anticipated field inventory at year-end. Assuming more normalized weather, we anticipate retail demand will reduce our landscape contractor field inventory this selling season.

For Residential, We're excited to expand product placement with the Tractor Supply Company. All of our channel partners will benefit from a refreshed brand positioning and product marketing. In addition, we expect innovative new products will contribute to our results this year. These include the redesign TimeCutter zero-turn riding mower and the expansion of our line of 60 Volt Flex-Force lithium-ion products, including a 21-inch steel deck walk power mower and a hedge trimmer.

In summary, we expect to drive strong results through a focus on our key strategic priorities. These include profitable growth, productivity and operational excellence and empowering people. Once again, thank you to our employees and channel partners for your contributions to the success we achieved in the first quarter. We appreciate your dedication and focus as we work together to deliver another successful year.

We now like to take your questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Mike Shlisky with Dougherty & Company. Your line is now open.

Michael Shlisky -- Dougherty & Company LLC -- Analyst

Good morning, everybody.

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

Good morning.

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

Good morning.

Michael Shlisky -- Dougherty & Company LLC -- Analyst

Maybe, I can start off with the inventories the -- that are on your balance sheet, not the ones that are in the channel, but on your own balance sheet. Those were a little bit elevated in the quarter versus previous quarters. I know you have some of the Charles team work stuff in there. But is there any way you can give us a sense as to whether you've got a plan to bring that number down from a dollar perspective to the next couple of quarters there?

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

Yes. So the biggest factor, Mike, is the Charles Machine Works inventory year-over-year as far as that increase as well as we had indicated our intent to, kind of, build a little bit ahead of the season given the introduction of a new mass retail channel partner and then, some inventory from landscape contractors, given the weather situation that we had in 2019. As we look throughout the year, we do intend to bring down that inventory level and that's included in our free cash flow conversion estimate of about 100% for the year. So the biggest driver that we will see is that inventory level coming down as we go through the year.

Michael Shlisky -- Dougherty & Company LLC -- Analyst

Okay, great. I also want to ask about your gross margin in the quarter. Those were some of the best we've seen in a couple of years. You had mentioned a couple of tailwinds, like, the cost of freight, maybe some material cost, etc., how sustainable are those items for the rest of the year do you think? You've clearly [Phonetic] got some of that locked in here or is it an uncertain environment for the pricing there?

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

Yeah, we really did feel good about our gross margins in Q1 and I commend the team for their continued focus on productivity and synergies. We did see more favorable commodities, and the price realization more heavily focused on the Pro business segment than Residential. As we look for the year, Mike, we do expect to see some gross margin improvement for the year, but not at that same rate year-over-year. So we just don't expect -- part of it was also favorable product mix in Q1, especially in the Residential segment.

Michael Shlisky -- Dougherty & Company LLC -- Analyst

Okay. Got it. I wanted to touch on Ventrac as well. You closed it just this past, I think, it was Monday you said.

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

Right.

Michael Shlisky -- Dougherty & Company LLC -- Analyst

But I didn't see any change to the guidance or anything. And I was curious is it just too small kind of move the needle. Are there are a lot of one-time items to kind of watch for this year or is that going to be a long-term accretive deal for you?

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

Yes, I'll start just a little bit about Ventrac. So it's about $100 million in revenue based on the prior-year on revenue. We're only going to see a partial year, this year. So it's a little bit smaller from that perspective. It is immediately accretive from an EPS standpoint excluding one-time items. So we would adjust out any acquisition or integration-related costs. The profitability is within the range of the Pro segment. So we feel really good about it. It's just relatively on the scale of Toro. It's relatively small and just early in the year for it to be additive to our guidance.

Michael Shlisky -- Dougherty & Company LLC -- Analyst

Okay. And then, maybe one more from me. I don't want to ask you for guidance beyond what you already put out there for Q2, but just on a very broad basis, do you think that Q2 here could be your first quarter that you have a full $1 billion on your top line or higher?

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

Yeah, I mean, we will see how it unfolds. We don't give specific guidance on revenue for the quarter, but we will see. I mean, part of it is depending on the type of spring that we have, but we feel good about it. And as we've talked about before, Charles Machine Works is less impacted by the weather. So that is a real plus for us as well.

Michael Shlisky -- Dougherty & Company LLC -- Analyst

Okay. Thanks. Congrats [Phonetic] in advance that hopefully. Appreciate it.

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

Thank you.

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

Thank you.

Operator

Thank you. Our next question comes from the line of David MacGregor with Longbow Research. Your line is now open.

David MacGregor -- Longbow Research, LLC -- Analyst

Yeah. Good morning everyone. Thanks for taking the question.

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

David?

David MacGregor -- Longbow Research, LLC -- Analyst

I guess, just to start on the virus disruption, you noted that for 2020, there's no revenue impact expected. But in the press release with regard to the guidance, you characterize the disruption is nominal. Is there any way you can talk about the impact to that $1.28 to $1.33 for the 2Q from, I guess, it's supply channel disruptions or just whatever that might be, if you're thinking early question?

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

Right. There are several elements to the coronavirus considerations as you can imagine. First and foremost, as we talked about the safety of our employees, so I was making sure that we are keeping logical travel guidance in place and so forth, but then you look at both supply side and the demand side. On the supply side, from the first moment that coronavirus was mentioned, we've been working with our suppliers. There are a handful of key suppliers, for example, in China that especially matter. And we have good confidence that we go through the next 30 days with no disruptions and then, they're working on plans to bridge any possible disruptions after that I think it's fallen to mid-summer. We get into mid-summer, that's kind of a normal shutdown period for us. So we really see the key right now is bridging through the spring period.

On the demand side, again the exposure in the countries that have been especially affected is, they are important to us, but they would not be significant to the outcome from a revenue standpoint and we could likely to make up for those in other areas. I think the commentary about Ventrac is one thing on the positive side that helps us balance out some of those risks as well.

David MacGregor -- Longbow Research, LLC -- Analyst

Right. Thanks for covering that. Charles Machine Works, I mean, you're approaching the anniversary of that transaction by all accounts, it seems to be very successful. You talk in the press release about you're running ahead of your original expectations. My recollection was it was originally about $30 million of cost synergies over three years. Can you just give us a sense of where you are on the synergy curve and just how much ahead of expectations you might be and as a consequence, does that $30 million become a bigger number or is this just a timing issue where you're pulling forward and you're still on track to do $30 million?

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

Yeah. The $30 million was $30 million over three years, and we have high confidence that we will get to that number. We do see opportunities to do more. I think we mentioned on our last call that we are optimistic that there are more opportunities and it kind of opens the lens as we look at the rest of the Company as well. We have taken a very disciplined approach to our score keeping in that area, so we're not counting those synergies. And so, we can be absolutely confident that they will be realized. But we certainly see visibility to exceeding the $30 million as we have previously talked about. And that's the synergy side. But another element is really the broader element, which is the integration process itself. And that is going well ahead of schedule in terms of the restructuring that took place that was immediately in place and all of the actions that we took from a strategic standpoint. With the various businesses, we are right on track or well ahead of being on track.

David MacGregor -- Longbow Research, LLC -- Analyst

Right. And then, just to be clear, the $30 million was cost synergies and then, there were incremental revenue synergies anticipated above that, right?

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

$30 million was cost synergies, and we didn't get specific about revenue opportunities, but there is also working capital benefit that we see as we work more closely with the organization relative to the team here at Toro.

David MacGregor -- Longbow Research, LLC -- Analyst

Right, and then certainly for me is just this professional landscape contractor issue where you've got -- I guess it wasn't -- there is an inventory issue last quarter as well as I recall. Again, it's something we're talking about here this quarter. Could you just unpack that for us a little bit, give us a little more granularity around what exactly is happening there and why this surplus is continuing on? Is it something that is going to resolve by the end of this quarter, or do you have some -- maybe, some obsolete inventory there that is -- require any some kind of a write-off? Just a lot more detail there would be really helpful.

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

Yeah. First, going backwards, there's no obsolete inventory that has to be written off. It really is -- the story really starts last year at this time. If you remember Professional segment in general was up almost 13% last year. So comp is pretty difficult in the first quarter. All of our Professional businesses are actually growing. The exception is the landscape contractor business. And last year at this time, there was tremendous excitement with the combination of new products and the prospects of a strong spring.

So we shipped products that ultimately did not move as quickly at retail because it was a horrendous year from weather, as I mentioned I think in the prepared remarks, the wettest -- second wettest at least season in US history. So, that just did not move as quickly at retail and we expect to have that corrected through the second quarter, and you will see growth across all the Professional business we expect in the second -- through the year-end. All of this is reflected in our guidance and really for the first quarter, the quarter went precisely as we had planned. So this was a planned adjustment to our inventory that we put into the year.

David MacGregor -- Longbow Research, LLC -- Analyst

Okay, thanks very much.

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

Yeah.

Operator

Thank you. Our next question comes from the line of Tom Hayes with Northcoast Research. Your line is now open.

Tom Hayes -- Northcoast Research -- Analyst

Hi, good morning. Thank you for taking my question.

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

Good morning, Tom.

Tom Hayes -- Northcoast Research -- Analyst

Hey, Rick. I was wondering maybe just provide a little bit more detail on the rollout of Tractor Supply, maybe your thoughts on, does that apply -- does the initial loading apply to all locations or you kind of thoughts on how that's playing out so far?

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

Yeah, the -- our association and our projects with Tractor Supply is going extremely well. The relationship is growing stronger everyday with them and we've -- we're right on track with where we expect to be. We actually shipped more product to Tractor Supply in the first quarter than we expected. That's really agreed upon shipment rate based on the initial steps at the stores and what the initial response has been from a customer standpoint. So the bottom line is it's going exactly as planned.

And the good thing really for the entire Residential business is that it provides additional critical mass for us to invest in products and the brand and marketing that really strengthens the business for all of our partners. So other mass -- very important mass retailers plus our dealer network. And that -- yeah, the bulk of the shipments will still take place in the second quarter. So, that's true. We just -- we did ship a few more of units in the first quarter.

Tom Hayes -- Northcoast Research -- Analyst

Great. I appreciate the color. And then I guess just secondly, circling back to, excuse me, Michael's earlier question on inventory levels, I was wondering the channel inventory levels has been kind of a slow snow season last month or so, maybe just your thoughts on channel inventory on the snow side of the business.

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

Yeah, we are generally in good shape on snow inventory. The market in the Northeast was a little slower because of less snow. So it's a little bit higher there, but on average our snow inventory is in solid shape. We had a very, very strong start to the season, and we have -- at the same time, our share in the Midwest is very strong and that's where a lot of the snow events took place early in the year. So we're in good shape from a field inventory both on the Residential side and exceptionally good position on the BOSS side.

Tom Hayes -- Northcoast Research -- Analyst

Thank you. I appreciate the color.

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

Thank you.

Operator

Thank you. Our next question comes from the line of Sam Darkatsh with Raymond James. Your line is now open.

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

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

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

Good morning, Sam. Good.

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

A few questions. Most of mine have been asked and answered. If we could return back to the unfortunate coronavirus topic, give us a sense, generally speaking, what percentage of your overall SKUs have Chinese-based components and are they overweight in any particular product vertical? I'm trying to get a sense of margin wise, if this becomes an issue or where would we see it mostly transpire?

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

Yeah, we wouldn't have the exact percentage of content that we have that information and we don't have it right in front of us here. It would be a bit higher exposure more on the residential side of things, just in general, than it would be on the commercial side. That's not to say that there wouldn't be key components. That would be part of commercial products. But in terms of the volume of cards, it would be more on the residential, again residential through probably homeowner type of products.

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

And then you mentioned, I think you have some critical vendors in the area that you are in very close contact with and for 30 days, you envision no disruptions. I don't remember the exact verbiage when you said, you had plans with them -- contingency plans post for 30 days. Can you do a little bit more on packing in terms of what specifically those plans might look like and what assumptions are included there in terms of how quickly the vendors might have to get up and running or what the utilization rates might look like as opposed to now?

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

Sure. And we are -- we have those plans in place across our global supply chain. So I'll probably talk a little bit about China, but the same holds true whether it's Italy, South Korea, Japan or any secondary suppliers that might be supplying top core supplier somewhere else. So we have -- our team specifically looks at every part number and when it needs to be in our plants, what's on the water. As if you think about, if there are six weeks of shipping time, there is actually a continuous flow of product still coming by water, even if they extend the Lunar New Year as we did.

And just in terms of the status of our key suppliers in China, they are approaching 100% at this point. So they are well above 75%, expect to be at 100% within two weeks. We have a small plant in China, that also is up and operating. So what we would build in all the way through the period that I talked about March and beyond, we do not expect the effect to be material for us. We have a plan in place. What we would expect to see is some premium in freight because some of those products we would not put on a boat, we would use air shipping, and the challenge that we're looking at right now is, availability of freight carriers. So that's the one of the areas that we're working right now to make sure that we've got carriers that can fill those gaps.

We might see some random short-term sorts of disruptions on our lines, but we don't expect that to be significant. And keep in mind, we are kind of tapering into -- we will be tapering into the summer months where we frequently have shutdowns in our plants just as a normal seasonal exercise, so that will play into our benefit, plus as we mentioned, we're in good shape from an inventory standpoint, finished goods.

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

And then, my last question is more of a high-level question, if my math holds and it doesn't always, but if my math holds, it looks like guidance for the year kind of suggests organic sales growth in the low-single-digit range or thereabouts. I'm trying to figure out why that might be though, I would think just looking at easy professional comparisons next three quarters, the Tractor Supply effects underpinning resi, I'm trying to understand why organic wouldn't be higher than that, like mid-to-high single-digit. I know you are naturally conservative, but you mentioned the channel inventory is essentially in good shape, and/or getting repaired near term both in landscape and snow and then coronavirus, you're not anticipating any material sales impact. So I'm trying to understand why the extra-conservative, say, as it relates to the season and the organic sales expectations.

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

Yeah, I would just say that as we look forward, it's still early in the year. And so, projecting greater growth until we see how the season unfolds and what the year has just isn't normally how we would provide guidance. We just...

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

We will be in a much better position in the second quarter having the experience of spring will be well along. By that point, we'll be in a better position to offer more guidance on the year. In the context of our coronavirus discussion and some of the other factors that we talked about, we're staying with our guidance for the year. If the season plays out well, there may be opportunities beyond that.

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

Got it. Thank you both. Very much appreciate it.

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

Thank you.

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

Thank you.

Operator

Thank you. Our next question comes from the line of Joe Mondillo with Sidoti & Company. Your line is now open.

Joseph Mondillo -- Sidoti & Company, LLC -- Analyst

Hi, good morning everyone.

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

Good morning.

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

Good morning.

Joseph Mondillo -- Sidoti & Company, LLC -- Analyst

Just a sort of follow-up on that prior question related to weather, could you update us at this point in time in the season, how you're thinking about weather especially relative to the context of what you saw last year.

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

Yeah. So weather last year was, it was among the worst spring at least in my memory of my association with Toro. So it was -- in the Midwest, we had some of the most significant snowfalls of the season in April and that pushed out some of normal spring activities and excitement about the spring well into the mid-summer. So what we've built into our plan this year is what we would call a normal weather pattern, which means normal breaking in the spring. At this point, we know that the warm-up has started in the South, particularly, and we're seeing a normal pattern at this point. So that's what we've -- and that is what we've built into our plan at this point.

Joseph Mondillo -- Sidoti & Company, LLC -- Analyst

And so, if we do see a normal weather pattern, I guess maybe again to sort of follow-up to the prior question. When we see pretty good growth just -- even if it's normal and I'm here in the Northeast and it's supposed to be 50 degrees last yesterday, it's supposed to be in the 50s today. It could be better than normal, but even in a normal scenario when you see considerable growth compared to last year.

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

Yeah. I think if we see a fantastic early start to spring and it flows directly into decent summer. There is opportunity for us to do better. We've built kind of a nominal level at this point. And we were coming off a couple of years where we were excited about the spring and then April turned out to be a surprise. So we've built in what we think is the right forecast for the weather at this point, but it's back to a more normal situation.

Joseph Mondillo -- Sidoti & Company, LLC -- Analyst

Okay. Regarding the Professional segment, it looks like if I'm doing the math correctly, your organic revenues were off year-over-year, 5% in the quarter itself. And you mentioned landscape, they return and you stated that the inventories now are sort of right-size. So number one, going forward, you think growth returns. And number two, in terms of the margins, it looked like even on those organic rev declines, your organic margins expanding quite a bit. Could you walk us through what the main driving factor to the margins -- the organic margin expansion was?

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

Maybe, could I take the margin piece and then we can come back to the revenue growth. Well, if we look at the margin expansion was good across the business and we really did see the benefit from our focus on productivity and synergies. We were in a better commodity environment from a commodity and tariff standpoint and then, net price realization helped as well, but more biased toward the Pro versus the Residential. So we do expect to see benefits from a gross margin standpoint continue probably not at that same rate year-over-year of an improvement, Joe, but we do continue to expect to see improvement for the year as we go through the remainder of the year.

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

And regarding the timing of growth, we would expect that to -- we will need to get through the first part of the spring that happens largely in the second quarter, but into the third quarter and the second half of the year, that's where LCE or landscape contractor business starts to show growth as well.

Joseph Mondillo -- Sidoti & Company, LLC -- Analyst

Okay. And I guess the last question, just I know one person already asked, but in terms of the snow equipment sales, we saw a minimal snow up here in the Northeast, but I know BOSS is more so in the Midwest. How would you characterize the snowfall in the Midwest this year and just to sort of clarify, looking at the back half of this fiscal year, you're sort of characterizing inventories sort of normal. So based on what we saw in the Northeast, I guess minimal snowfall, you're not anticipating a big effect related to channel inventories in the back half of the year.

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

No, we're not. And the way from a Midwest perspective, we had a very strong start to the snow season this year. So on average with a probably below average performance and starting in January, February, so it averaged out probably to an average year, but it was a tale of two extreme. So it was pretty extreme November, December time frame, created a lot of demand all the way through retail. That's helped us to be in good shape from a field inventory. The Northeast though is that exception. So that was not the case there, but that's been kind of the second year in a row for that situation. So it did not drive a lot of incremental shipments last year.

Joseph Mondillo -- Sidoti & Company, LLC -- Analyst

Okay, great. And just lastly Renee, could you just repeat what your sort of expectations were for products or Residential margins margins?

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

Margins. Yeah. What I had mentioned is we did expect residential margins would be similar in Q2 to what we saw in Q1, because as Rick mentioned, the bulk of the Tractor Supply shipments will occur in Q2. So we're going to see higher growth than we would normally see in Residential in the quarter. We expect the second half to moderate for Q3 and Q4 at a lower level. And from a full year standpoint, we would expect Residential margins in the low-teens.

Joseph Mondillo -- Sidoti & Company, LLC -- Analyst

Okay, great. Thanks a lot. Have a great day, everyone.

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

Thank you.

Operator

Thank you. Our next question comes from the line of Tim Wojs with Robert W Baird. Your line is now open.

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

Hey, everybody. Good morning.

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

Good morning.

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

Good morning.

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

Just -- I have two questions. So the first just on Ventrac, could you just talk about what the overlap between that business and your current Toro distribution businesses today? And then, I guess, how fast would or could you kind of fold that business into Toro distribution and I guess, can you just talk about any plans to kind of mitigate any of those types of disruptions?

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

Right. Well, first of all on the overlap, the -- one of the reasons why we have been so interested in those product categories and specifically Ventrac and Venture Products, Inc. is, they are to a great expense complementary to our existing product lines. So the strength in multipurpose articulated tractor feeds into our landscape contractor business. For contractors, it feeds into our acreage owners and they really appreciate the multipurpose capabilities, including switching from snow to summer products and just a host of versatility that comes with that product. We've also seen a lot of application for the products on -- in manicured turf areas and also golf courses for rough areas for slow mowing and so forth. Those are all areas that are complementary to our existing product lines.

In terms of the plans for the channels, they have two primary channels through the dealer network, which does have some overlap with our existing dealers and some that are in competitive dealers and then the turf side of things, which is through distribution similar to our commercial golf and grounds distributors today. And in all of these cases, we will -- we have a plan going forward. We're in the process of executing that now. And it's too early to talk about those before we get into the specific execution of those, but the expectation is we would be picking the strong partners from a dealer standpoint and making the best decisions for the turf business going forward.

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

Okay. That's helpful. And then, one of your customers is -- on the residential side is resetting their outdoor power aisle to really emphasize more of the -- with the lithium ion on and kind of battery technology and I'm just kind of curious how Toro fits there in terms of maybe new placement versus prior placement, if you can maybe talk about that kind of reset for you guys.

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

Yeah. We are extremely excited about the transition that's taking place to electric, specifically lithium ion and have been very pleased with what we're doing with our channel partners. For me personally, it has opened up magazine, I think of Popular Mechanics or something and the Toro walk power, steel deck mower listed the top rated product. And I think what we are seeing is something that we talked about, which is it's not a novelty to be a battery-powered products at this point. It's really coming back to features and benefits and performance and with alternative energy power options. And we feel very positive about our ability to compete there, and the response on the products that we've introduced so far has been very positive. So from -- for us from a product standpoint and partnering with our key channel partners, we feel very good about where that can go.

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

Great. Thanks for the time. Good luck on the rest of the year.

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

Yeah. Thank you.

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

Thank you.

Operator

Thank you. Our next question comes from the line of Eric Bosshard with Cleveland Research. Your line is now open.

Eric Bosshard -- Cleveland Research Company -- Analyst

Two things. First of all, I was not totally clear on where you see channel inventory now, especially in the landscape contractor business. I understand what happened over the last 12 months, but can you just summarize where you think channel inventories are now relative to where those customers would like them to be?

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

Yeah. We finished the year -- last year with a higher inventory level to some extent internally plus field inventory. So it's not out an extraordinary level that's out of the range of things that we've seen, but we would expect to work through the inventory through the first and second quarters. I don't -- specifically, I don't have, for example, a number.

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

Yeah, but Q1 is in a strong retail quarter. So it's not as though there is a lot of retail that occurs within that quarter, so it's fairly similar to where we would have ended in Q4.

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

And that's really the reason why it extends into the second quarter is, the first quarter is a lot about shipments, but not so much about retail except for snow.

Eric Bosshard -- Cleveland Research Company -- Analyst

All right. Related to that underlying demand that and I understand it's a harder quarter to read, but obviously, you've spent time with your customers at the shows over the last 90 days or so. The underlying landscape contractor demand, how does that feel now and through the year?

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

Yeah. I just spoke with some of the representatives from our businesses in the landscape contractor area and they feel very positive about it, and particularly in the Midwest, there has been good snow revenue and that has not always been the case in the past and they're optimistic about the spring. Past couple of years have been tough from the delayed project standpoint. And if we get a more normal season this year, they're ready to go.

Eric Bosshard -- Cleveland Research Company -- Analyst

And then lastly, I think Renee, you may have commented that there were areas of the business that were better than expected or the business in total was better than expected in the quarter, can you just more narrowly define where you performed ahead of expectations in the quarter, specifically interested on the revenue line?

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

Yeah. In particular, we had mentioned that the shipments to Tractor Supply originally, we would have anticipated, those to be in Q2. And based on -- as Rick had mentioned, based on mutual discussions and how the stores were being set for the initial rollout, some of those shipments came into Q1. And so, that drove some of the residential growth and also part of our beat for the quarter as well.

Eric Bosshard -- Cleveland Research Company -- Analyst

Okay. Thank you.

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

Thank you.

Operator

Thank you. We do have a follow-up question from the line of David MacGregor with Longbow Research. Your line is now open.

David MacGregor -- Longbow Research, LLC -- Analyst

Yeah, thanks for taking the follow-up. I guess, a lot of progress here just year-over-year in terms of the presence and the visibility of the Toro brand in alternative energy and the earlier question was asked about The Home Depot reset. And I guess, I would just like to maybe in the last couple of minutes of the call here just Rick, if you could just help us understand kind of that market, how you think about secular growth rates? It's still kind of in the early innings of that category and how that might differ from Pro versus Residential and just kind of bigger thoughts in terms of the growth opportunity in alternative energy?

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

Right. If you look at the electric portion, the battery portion of walk power mowers for example, it's growing, it's still relatively the smaller portion of the power that's provided for those products. Engines are going to be around for a long time. So they're not going to be obsolete anytime soon, but we are extremely excited and we had prioritized alternative energy a number of years ago along with smart connected products and autonomous. And for us, it's fulfilling to see now the products being introduced and to see the response in the marketplace. So we think there is good opportunity to grow. In many cases, it's displacing the gas-powered products. So it's not all incremental for us, but our experience so far has been very positive and the response to the products has been very strong.

Just last thing, I'd mention is we do have the ability to leverage across our businesses. So there may be -- that's moving faster in some areas like the Residential walk power mower area and we can leverage that experience into other areas and vice versa, like the commercial side of things. So we're excited about the growth and we expect that to continue.

David MacGregor -- Longbow Research, LLC -- Analyst

You say, how much of the current offering is manufactured by you versus sourced?

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

With regard specifically to battery?

David MacGregor -- Longbow Research, LLC -- Analyst

Yeah. Just the entire battery-powered product offering and you talked about the e-Dingo and the TriFlex and the Flex-Force, and just as you think, across the entire line structure of alternative energy, how much of that's manufactured versus sort of...

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

With the exception of some cases in the residential area, it's manufactured by us. Technology is coming from us.

David MacGregor -- Longbow Research, LLC -- Analyst

Okay. And you don't want to give us a growth rate or you don't want to quantify how you're thinking about the growth opportunity?

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

I wouldn't have that right now to be able to quote that to you.

David MacGregor -- Longbow Research, LLC -- Analyst

Okay. Thanks very much.

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

Thank you.

Operator

Thank you. This concludes the question-and-answer session. Mr. Rhoads, please proceed the closing remarks.

Nicholas Rhoads -- Managing Director-Investor Relations

Great. Thanks for your questions and interest in the Toro Company. Look forward to talking with you again in June to discuss our second quarter results. Thank you.

Operator

[Operator Closing Remarks]

Duration: 60 minutes

Call participants:

Nicholas Rhoads -- Managing Director-Investor Relations

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

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

Michael Shlisky -- Dougherty & Company LLC -- Analyst

David MacGregor -- Longbow Research, LLC -- Analyst

Tom Hayes -- Northcoast Research -- Analyst

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

Joseph Mondillo -- Sidoti & Company, LLC -- Analyst

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

Eric Bosshard -- Cleveland Research Company -- Analyst

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