Toro Co (TTC) 2005 Q2 法說會逐字稿

Welcome to the Toro Company second quarterly results conference call. During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being accorded Tuesday, May 24, 2005.

I would now like to turn the conference over to Ken Melrose, Executive Chairman. Please go ahead, sir.

Thank you, Pamela, and good morning, ladies and gentlemen. Greetings from our Minneapolis headquarters. As I think you all know, I stepped down from my role as Chief Executive Officer on March 15 and I am now serving his Toro's Executive Chairman of the Board. Our new President and Chief Executive Officer, Mike Hoffman, and I will be working together over the next few months to execute a smooth and seamless transition to help sustain our financial performance and protect the interests of our shareholders.

Once again, Mike has joined me this morning to review the results of Toro's second quarter and he will be happy to answer your questions following my comments. In addition, we also have on hand Steve Wolfe, our Chief Financial Officer; Tom Larson, Assistant Treasurer; and John Wright, who is our Director of Investor Relations.

Of course before we begin I need to review with you our Safe Harbor policy. Please keep in mind that during the call we will make certain predictive statements to assist you in understanding the Company's results. You are all aware of the difficulties in making predictive statements in a highly seasonal and cyclical business. The Safe Harbor portion of the Company's (technical difficulty) SEC filing detail some of the important risk factors that may cause actual results to differ from those in our predictions.

Our press release was issued this morning by PR Newswire and can also be found in the investor information section of our corporate website at thetorocompany.com.

Well, with that, let's begin first with a brief overview. I'm very pleased report that Toro continues the strong momentum begun in the first quarter for this fiscal year. For our second quarter, as you can see by our press release, we turned in a very strong performance beginning with double-digit topline growth, both in the United States and in countries and regions throughout the world. We have now reached the midpoint of our hopefully well-known, three-year "6+8" initiative and fully expect to meet our "6+" profitability and "8+" growth goals for fiscal 2005.

As you know, our second quarter is traditionally our strongest and it is indeed gratifying to note that Toro delivered record sales and earnings for this key period. I encourage you to follow along with your copy of this morning's press release as I review the highlights for the second quarter ended April 29, 2005.

Sales rose 14.7% over last year's quarter to $628.4 million. Net earnings were $62 million, an increased 18.7% over the same period last year. Earnings per diluted share rose 33% to $1.33 after adjusting for the two-for-one stock split that was effective March 28. And for the first six months, net sales were $975.4 million, which compared to $861.6 million, and that is an increase of 13.2%.

Moreover net earnings came in at 18.9% higher than last year's comparable period at $73.1 million or $1.55 per diluted share. This compares with the $1.18 per diluted share on a post-split basis that we reported to you a year ago.

The improved discipline that has resulted from our lean manufacturing initiatives which partly offset the increases in commodity costs and from our office "No Waste" efforts has driven positive results to the bottom line. This is further exhibited by our increased ability to grow the topline without investing in a more infrastructure as we experienced an abnormal reduction in SG&A expense as a percent of sales during the second quarter.

Our SG&A expenses are down 2.4 percentage points in the quarter and 2.1 percentage points for the whole six months. That is in part due to lower performance incentive expense but in addition the six months benefited from improved warranty and warehouse expenses as well as timing of spending in areas such as sales and marketing and administrative costs. Our greater-than-expected sales volume also provided additional leverage.

In addition, we continued to utilize some of the savings from "6+8" projects for new investments and things like innovative products and services in branding and acquisitions such as Hayter Ltd. in the United Kingdom which you'll recall we announced February 9. Hayter has a very strong reputation in the UK for high-quality, consumer rear-rolling lawn mowers and commercial grounds maintenance equipment, with annual sales of approximately $50 (ph) million, 200 employees, and a solid management team.

The integration of this acquisition is going very well to this point and the acquisition itself is an excellent strategic fit for us. It supports our aggressive international growth goals and it strengthens our design and manufacturing presence in Europe.

Growth in our international markets, as we mentioned, is a key component in our long-term portfolio balancing strategy. For the second quarter, revenues climbed 41.1% and Hayter contributed slightly more than one-third to this growth. Other parts of our overall growth international were due to the relative weakness of the U.S. dollar and increased visibility as well as customer acceptance of the Toro brand in both the residential and professional markets.

Now let's take a closer look at our segment results. In the professional segment, as we anticipated from the optimism we observed at the industry's trade shows earlier this year, second quarter sales were strong in nearly all product categories, increasing 14.9% to $389.1 million. Toro's ability to build long-standing relationships, combined with its strong portfolio of innovative products and services helped drive up share in the golf, landscape contractor and grounds markets. Here the United States, golf course renovations and fleet upgrades created healthy demand for reliable products such as the Toro Greens Master, the ProCore 648 aerator and our relatively new 835S/855S sprinklers with the unique true trajectory feature.

In addition, landscape contractors and customers who maintain large turf areas invested in new equipment such as the news Toro Z 400, Exmark's new Navigator out front Z mower, and our compact utility loaders, all of which increased productivity for the operator.

International sales to professional customers rose significantly, primarily from new golf course construction and renovation, demand for Hayter's popular city maintenance products, and improved performance by our agricultural irrigation division.

Second-quarter operating earnings for the professional segment rose nearly 18% to $84.6 million compared with the previous years. As we have mentioned in earlier conference calls, we continue to manage the impact from increased raw material costs through a combination of lean manufacturing practices and selective price increases that we were able to implement early in the season.

In our residential segment, sales rose 16.9% for the quarter to $227.7 million. Much of the increase came from which strong shipments of our Walk Power Mowers which more than offset a decline in retail irrigation and riding mower sales. As we discussed in our first-quarter conference call, pairing the Toro and Lawn-Boy brands at dealers in the Home Depot has enabled us to appeal simultaneously to two distinct customer profiles. While both product families offer dependability and reliability, the revitalized Lawn-Boy brand represents comfort and ease-of-use while the Toro brand has a stronger appeal for power and performance.

International sales to residential customers were also up sharply for the second quarter due in part to the Hayter acquisition. In addition, as Europe began to recover from a two-year drought, demand ramped up for the Toro branded 50 centimeter Walk Power Mower and the innovative Power Shovel Plus. We are fortunate that the weather in the rest of the world seems to be better than the weather that we are experiencing here this spring in the United States.

Second-quarter operating earnings for the residential segment were $29 million, an increase of 8.4% over last year but less than expected due to rising commodity costs and our limited ability to implement price increases in this segment.

Now let's turn our attention from our business segments to operations and in particular, our improved ability to leverage the benefits from our "6+8" initiative. Our gross margin for the second quarter was 34.5%, which compared with 36.3% last year. Purchase accounting adjustments due to the Hayter acquisition were responsible for nearly one-fourth of the 1.8 percentage point decline.

Other factors were of course increased costs for steel and fuel and petroleum-based resins. Most of the rising steel costs were anticipated and planned and our cost management and lean disciplines combined with selective price increases enabled us to offset a portion of the cost impact. On the other hand, as I mentioned earlier, SG&A expense as a percent of sales dipped to 19% compared to 21.4% for the same period last year. The diligent pursuit by all employees to achieve this year's "6+8" goal added leveraging power to the control of these expenses.

Interest expense for the second quarter was $4.9 million, compared to the previous year's 3.9 million due to higher short-term borrowing costs related to our ongoing stock buyback program. And our balance sheet remains strong, with net receivables at the quarter end of $544.9 million. That is up 12.4% against a sales increase of 14.7%.

Quarter-ending inventory totaled $256.9 million. That is up 7.7% compared with the end of the fiscal 2004 second quarter. This increase was due primarily to higher foreign exchange rates and the additional inventories we assumed as a result of the Hayter acquisition.

Let me now conclude with our view of the business going out for the next six months. Our favorable six month's results better-than-expected product shipments to our professional and international customers and an enviable portfolio of innovative products give us confidence that Toro will turn in another record year.

As our leadership transitions to Company-veteran Mike Hoffman, Toro is well positioned to sustain financial success by driving for results with a resolve that is unraveled in the industry. Mike is supported by an experienced management team and together they will prove their ability to do what they say they will do.

As always, we are taking a conservative approach to the months ahead. We're keeping a close watch on field inventories and while our second quarter reflected strong shipments across both segments, residential retail sales in April and even in this current month of May fell short of expectations. Moreover we do not expect to make up most of those sales that were lost. As you know, the cool, wet weather that blanketed much of the country has yet to return to normal patterns to drive stronger retail traffic. If the weather does not turn around soon, reorder volumes for our products, especially in the residential segment will fall short of our own expectations and of course adversely affect our third quarter.

We have confidence in our long-term global business strategies and in our management philosophy that helped to minimize bottom-line volatility from uncontrollable external factors. Toro's combination of innovative products, loyal relationships, and our drive for continuous improvement will help us achieve record net earnings for fiscal 2005. Therefore based on the results from our first half of the year and a reasonable assumption that normal weather patterns will return, we expect net earnings per diluted share to increase 15 to 18% on sales growth of 9 to 11%.

This now concludes my prepared portion of the conference call. So let me now pause so we can respond to your questions and I will turn it back to Pamela.

(OPERATOR INSTRUCTIONS) Jim Lucas, Janney Montgomery Scott.

It's been so long since we've had to talk about weather on a conference call. If we can step away from there, and first on the new product side, if we step away from this year going into next year, one of the things that you talked about in the past is that Home Depot in particular -- it's been a few years since you had the big introduction there -- can you talk about potential new products that could lead to some good -- a selling season next year?

This is Mike Hoffman. Let me take a shot at answering that question. This year as you know we have launched the Lawn-Boy brand with the Home Depot with some -- I guess I would characterize it as award-winning new Walk Power Mowers and have been very well-received. We're obviously working through the weather challenges. Beyond that we are constantly working with the Home Depot on opportunities near term and long term. We've got an expanded presence this year with our new Ultra Blower, which is a top-of-the-line power blower vacuum with a metal impeller. It's the only one in the market I believe that has that.

We have a new controller, irrigation controller called the ET Extra that is really one of the products that Debo (ph) has featured not only on their website but in their -- throughout their organization as again, an innovative product, a product that connects the irrigation controller with your home PC and lets you manage the watering of your lawn through your PC. Again, another example of Toro's innovation.

And there are many things beyond that. As you know, our goal is to keep driving new product sales that exceed 35% of our revenues on a trailing three-year basis. And while F '05 was a little bit of a downtick, F '06 and F '07 look very strong for the Company.

Okay, and if we switch gears with the cash flow, it was encouraging to see the first acquisition in the couple years. Hayter sounds like it is off to a very good start and contributing in many ways. Could you talk about what you are seeing in the acquisition pipeline right now both domestically and abroad?

Jim, Steve Wolfe. We are still active in the acquisition market, as we have been telling you the last year or so. There seems to be more activity the last six to eight months in a lot of our space with a lot of the things going on. So we're not close on anything. I don't want to mislead you, but we do still have a lot of capability and capacity for acquisitions and we will continue to look at things like Hayter, which we think is a great addition to our lineup that makes sense strategically and obviously we can buy in a way that we can get a good return on.

So to answer your question, I think there's more going on than there has been for some time. We will continue to be active and look at opportunities and see if we can't find something that makes sense for us at a reasonable price and then keep you posted as that develops.

Okay. And how will you weigh your share repurchase in terms of whether to commit more of your cash flow there versus the acquisitions? Is there kind of a cutoff date that you look at or is it just you measure it quarterly?

No, we had, if you remember we bought about on a post-split basis, we bought quite a few shares in '04, a little over 5 million shares in '04. And we had an authorization available starting '05 of about 3.5 million shares. We purchased about 2.3 of that 5 in '05. So we've got a little over a million share authorization remaining and we will kind of watch that month-to-month based on where the price is and what we think we may have in terms of opportunities or alternate uses of the cash. But regardless of that, we still have a lot of balance sheet capacity outside of cash. So I don't see any constraints there. We're for the most -- if we find the right acquisition, we can either do it through cash or through stock currency.

Okay and final question and I'm sure this is on a lot of people's minds, the second half looks as if it's going to be essentially flat on a year-over-year basis and your comments on the weather notwithstanding, what would it take to get earnings above that 15 to 18% earnings growth that you're talking about? What do you need to come together for it to meet the upper end or even exceed that range?

Jim, this is Ken again. First of all, I would say our worry is focused mostly on the third quarter. The fourth quarter is driven not so much with spring and summer weather as you would expect. It’s snow throwers. We had a good snow thrower season last year. There's very little inventory in the field. We'll have good sell-in. And our first quarter even though its smaller, we don't see any dark clouds on the horizon at this point. So we expect to have a good fourth quarter.

The third quarter is really the focus of how much inventory built up in the second quarter and how much of that we'll sell through and allow for what we would hope to ship in the third quarter to sell in. That's what we signaled as -- that will probably less than we expected or less than -- I want to make clear our own target which was indicated in the press release, no one else's targets.

So what would it take? Obviously if we had terrific weather for the rest of the season, that would make up some of the shortfall that we expect in the third quarter. On the other hand, if the professional side of our business continues to be strong throughout the year, if the international continues to keep cranking, all of these things will help make the year move us perhaps beyond our guidance at this point. But you know Toro. We are conservative and we still have this third quarter to get through. So we are taking a conservative approach. We anticipate though that there will be other businesses and the rest of the world will continue as we planned and hopefully can be even better than plan.

Okay. Nothing wrong with a little conservatism. Thanks a lot.

Jim, this is Mike. I'm going to add just one comment to that and maybe it relates to the SG&A piece. As we look forward and given the challenges the weather has created for us, we're going to be very proactive, aggressive to go out and make sure we do what everything we can given the conditions to ensure we keep inventories in the right shape. As we look forward to the next season, it will happen after this one is done.

Okay, very good point. Thank you.

Sam Darkatsh, Raymond James.

A couple questions. First off, with all the new products I'm not sure who I would address this question to. With all the new products I would imagine that the dealers would have been fairly excited and perhaps there would have been an uptick in field inventory on the pro side. Did that occur and if so, what was the positive tailwind that you saw from that in the second quarter?

Sam, this is Mike. I think what you saw happen is there was strong optimism, not just in the professional channel but in the residential channel as well with all of the new products. That continued through February, March, April, even as the weather continued to be a bit challenging. And I would say some of that optimism is still there today. So while there was a strong demand from the channel for products and we shipped to that demand, we have not let field inventories get way out of whack. I think as Ken pointed out earlier, it is more -- what is more at risk is the reorder volume.

So the POS as you can tell approximated the 14, 15% or the POS would've been a couple points below that?

I'm not sure I understand your question.

Sell through -- I'm sorry -- POS, point-of-sale -- the sell from your customers to their customers, either at the dealer level or at the retailer level. Do you see that as being a few points below what your sell into the channel might have been, again, based on their excitement over the new products?

Yes. I think that's a fair way to characterize it. It is not unmanageable but the retail season slowed down a bit. The selling continues to be fairly strong but it has not created an unmanageable problem. And depending on if as we talked earlier, how the weather rolls out from here forward.

Okay, second question with respect to the weather, Jumbo wasn't going to ask it but I well. You mentioned residential irrigation first in terms of a headwind for the residential side. Is that where the cold and wet weather would have really impacted things would have been on the irrigation side? And then if you could talk about what you're seeing in the riding mowers just so we can get a sense of what's happening in those two particular issues on the res side?

On the residential irrigation side, which impacts both the residential segment as well as the residential part of the professional segment, the installed part, was impacted probably the most by the wet weather, the cold weather. But out on the West Coast and down through that area, which is the largest market for both DIY and for residential installation. So that was more, if you will, a Sunbelt issue. The cold, wet weather in the northern markets particularly have impacted the residential equipment side through Home Depot and dealers. So those are the two areas.

If you backed the irrigation part -- irrigation is what -- I'm guessing 10, 15% of your residential business? If you backed that out from the residential segment, do you have a sense of what growth might have been?

I don't.

We can come back later and answer that but we'd have to look at those figures because we haven't in front of us have that kind of breakdown.

Okay. I was just trying to get a sense of what a true run rate might be if you backed the weather out.

I forgot to address your tractor question -- just do you understand, we are not a major player in the tractor arena today. That is something that is always on our radar screen. But that is more of a planned purchase and for Toro that has certainly been an impact primarily in our Z area to date, not the tractor piece.

Okay, I'm confused now. I'm sorry, the downturn in tractors was as a result of a planned strategy or it was a result of Z CTR's not selling through as hard? Or I'm confused. I'm sorry.

I apologize, I didn't say that well. In our Z business, we serve both the residential and landscaper markets and the landscaper markets have continued to be fairly solid. With our Toro brand, there has been more impact on the residential. Some of those commercial Zs are sold to the residential market as well. There's been more impact there as well as our residential Zs. Whereas looking at our Walk Power Mowers, they have held up better if you will then the tractors.

So the Zs at residential are a little soft and the Zs in commercial are still pretty strong?

Yes.

Got you. Currency impacts on sales for the quarter, do you have a sense of that, Steve?

Yes, I do. Currency was about 1% for both the quarter and for six months, 1% of sales. Bottom line as we've mentioned a couple of times, not a big impact either way because we use our hedging strategy to try and protect our plan number at the beginning of the year. So we don't get big pickups or losses to the P&L at the bottom line, but it had about a 1% impact on sales on the top line.

Couple more questions and I'll defer to others. Lean savings in the quarter, can you help ballpark that or quantify that and then what you would expect for that for the year?

I don't have that specifically. It's probably in the 2 million range. If you want to call me back later, we'll get that for you. I don't have that in front of me.

For the year, still 10 million or so or what are you thinking for the year?

No. Lean is not quite that much. If you remember at the beginning of the year, we talked about trying to keep our margins even with last year and we set out a goal of covering costs both with what has happened with steel, which we are all hearing about in each one of these calls, and other commodities as well as other increases being offset by pricing in lean. The lean piece of that I think was about $6 million.

6 to 8 million, right. I got you.

Now you saw there has been some pressure on the margins here at six months and through the quarter and that is a result of we didn't quite get to that plan or goal of covering all of that through price and through lean. And what has happened is steel has gone up a little more than we had expected and in fact, the component parts of steel probably are higher than we had projected. And when you look at things like resins and there's a lot of our irrigation products are made from aluminum, rubber -- there are a lot of other commodities that went up more than we had anticipated.

So when you look at our margins, then you add the Hayter impact that Ken mentioned in his comments, so when you look at that, Hayter was about one-fourth of that. The rest is commodities pricing, which we think will pick some of that up in the back half because if you remember most of the price increases in '04 came in the back half of the year. So the comparison will get easier in the back half. We still think margins are going to be down probably a point from where they were last year.

And I think -- I don't know if you meant this, Steve, but I think we are getting from our initiatives in lean and sourcing, what we are expecting to get with the steel and uptick in resins and some other commodities are higher for the first six months in the quarter -- so the gap is a little bigger and as we've said several times, our price increases were pretty much focused on the professional area, not in the residential segment.

And so we are not making up enough through our price increases even though this is what we planned to do. And I would also add that as our comparison of the gross margins get better through the second half, our comparisons with SG&A will also reverse and we'll have an improved SG&A for the end of the year. But it won't be at the 2% gap area. So they will both roughly balance out just as they are doing at the moment. They will be closer to last year, both up and down.

That was my final question is on the SG&A side. Was there a delta or variance in discretionary SG&A in the quarter? Because there was terrific leverage what you were able to accomplish on the operating cost side of things. And then you went a step towards answering that, Ken, in terms of how to model that going forward. But was there a real change in discretionary or was it simply just leverage on the fixed costs with the top line growth?

It is a little of both. Steve. There are some unusual things in there. One, higher sales as you point out, gave us an opportunity to leverage our fixed. Part of our performance incentive was lower because we had a very strong year last year so it was a favorable comparison. And then you have a lot of timing issues, spending issues that were behind spending the first six months that will pick up the back six months. So that is why we're saying we won't be 2 points better in SG&A. We'll be about a point better at the end of the year.

And I would add that we used in the script the word abnormal SG&A reduction. Our goal for the year is to take -- we have a three-year goal. As part of our No Waste segment of the "6+8" continuous improvement initiative, where we set up an objective of taking at least 1% each year for the next three years out of SG&A as a percent of sales regardless of what the growth is. But again, on an 8 to 10 or 9 to 11% growth target, that's part of the "6+8" as well.

So 2% is more -- the difference between that and our goal is the abnormal or unusual part and that will come back into balance as we get to the year's end. But we do expect to make our "No Waste" target in SG&A for this year, just as we -- I think we took, a point out last year and we expect to do that in the future as well.

Thank you, gentlemen. Very helpful.

Seaver Wang, Utendahl Capital Partners.

Just wanted to get back to the retail irrigation again. In the past there were some problems with that particular productline. Did that have anything to do with the current decline? Were there any lingering effects or was that just purely weather-related?

Sever, this is Mike. I think the work that has been done to improve the quality and bring new products has been done well and that is behind us. This is really market conditions, not anything to do with the product.

Okay, and can you just quickly break out what the international, the organic international growth would have been excluding Hayter?

The international piece was up 41%. It would have been up 25, a little over 25%, 25.2% without Hayter.

And would you say that is mostly from just a rebound from the European market which has been very weak because of the droughts?

This is Mike. I will respond to that. If you were to talk to Dennis Himan, our General Manager, he opens each of the monthly management meetings with kind of a one-page matrix that shows all the businesses and all the markets and the bottom line is they are all green. So whether it's golf irrigation or golf equipment or residential products in Europe, that are coming back as you say because of the drought -- or you name it, every business area in that area is in the international market is strong.

We're trying to be very proactive in growing that. As you know, that's a strategic comparative but there's new products, there's investment and distribution. We're looking at ways to get our costs down. Hayter will give us a platform for stronger focus in the continental European market; give us an ability to design products for the European market with European designers, European manufacturers. So I think we have a comprehensive plan and it's taking some investment and I think this year we are really starting to see some of that come to play. So it is whether conditions are good but I would guess we are taking some market share in several areas.

Okay, and since acquisition, it seems like you have not -- it seems like you are learning more from Hayter and using their resources to better other Toro products that might go into the European market. Is that kind of accurate or is there some bigger plan with Hayter? In terms of reorganizing it in any way?

Today our plan is to keep Hayter independent. It is very strong brand, particularly in the UK and Ireland. Now we also have plans to leverage the relationship with Hayter to build the Toro brand as well both in that market and maybe the easier step to begin when is to take that some of those Hayter products under the Toro brand to the continent where Hayter doesn't have a strong presence today.

So it is a work in progress, but it gives us as Ken said, a great base of operations for engineering, for manufacturing, and the ability to pick and choose for the Hayter brand or the Toro brand what will be the best go-forward solution.

Okay, and last question just back on the price increases, the price increases that were put into place in this fourth quarter affecting this quarter, what was the effect to the top line in the second quarter? Was it a full 3% or 3 to 4%?

I think probably 2 to 3% range Seaver, for the price overall.

Okay and then actually I do have one more additional question. Briggs & Stratton had on their call basically said that they were going to raise prices on everybody. I realize that they are not a large provider of engines for you, but it seems like it might be more systemic in terms of all engine providers increasing prices and what is your response to that?

Well, we are starting our planning process as we look forward to F '06 and as Ken has shared with you in the past, some areas it's easier to make price adjustments, other areas it's more difficult on the residential side where we have key price points that we want to hold. And there we have to look at the product and essentially make the modifications, maybe changing the feature set. But we are looking very closely at how our costs are going to be impacted in F '06 and what pricing actions we will have to take. We will have to take pricing actions in all the businesses.

Okay, thank you.

Jeff Bork (ph), Robert W. Baird.

A couple more questions on residential. You mentioned that retail sales volumes were still soft through May. I am just wondering at what point are you now in the cycle? Have you make reductions to your production schedules at this point or are you still waiting to see the results in time to see if the weather will start to benefit and you won't have to do that?

We are constantly making adjustments to our production volumes and so where we had potentially some upside if you will for the year built in there, we have eliminated that and now we are managing the number more closely to what we expect the year to be.

Okay and then just a couple of questions. I want to get your perspective on some things that Home Depot had to say recently on their conference call. First, they mentioned and I think it may have had more to do with the tractors but they mentioned the consumers shifting away from traditional national brands. Have they had any discussions with you about that or do you have any insight into what they are addressing there?

The Toro brand and the Lawn-Boy brand are very strong brands with the Home Depot and brands that they want to build. I'm not quite sure the context of that, the shifting away. Toro is a very strong brand and Lawn-Boy as well and in the premium segment and in what I'll call the value segment and we expect that's something that is going to continue to grow. That, if you will, the no-name brands are not going to displace the well-known brands.

Okay, good to hear.

I would just at my two cents on that and Home Depot has lots of national brands. They had lots of store brands. When you look specifically at the lawnmower or lawn and garden segment, you have very strong brands with Honda and John Deere, Black & Decker, as well as Toro and Lawn-Boy. I think we are privileged to have a segment with our lawnmowers that is relatively exclusive and Home Depot really architected a focus on our brand exclusive of other brands in a very attractive segment.

So while we are competing with a lot of other brands, we are not competing in the price segment with the other brands. And I think Home Depot really feels strongly that our brands are invalant (ph) in long term as well as thinking that the value brands that are underneath us in price are important. But it is very segmented as Mike has said, and we have enjoyed very great success, as Home Depot has with this philosophy and the way of executing their own market segmentation by brands and price structure.

Very helpful. Final question, another issue that Home Depot talked about was pay by scan or what sounds like vendor-managed inventory. Have you had discussions with them about that?

I'm not aware that we have. We are constantly working with Depot, not only on the marketing side, but on the supply chain side and there's opportunities for both but I can't answer that question.

Great, thank you.

(OPERATOR INSTRUCTIONS) Mr. Melrose, I'm showing no further questions at this time. I'll turn the call back to you.

Thank you, Pamela. Let me just a wrap up and once again say thank you, ladies and gentlemen, for your thoughtful questions and your attention. As a lot of the call is focused on the third quarter is a critical quarter for us, at the end of this quarter that we are in now will be very telling for the year. We have taken our normal conservative approach but we don't want you to discount our cultural resolve to do what we say we're going to do. You should know that we are responding proactively with the weather situation, as Mike has eluded in some of his remarks.

And keep in mind that we are raising our estimates and we expect a record year in sales and profits. And we are still saying we're going to do better than we thought we were going to do when this fiscal year began. So we are conservative in the way we look at it, but we are optimistic for the year.

So I will close and we look forward to talking to you, all of you next quarter.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.