Toro Co (TTC) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the second quarter 2007 Toro earnings conference call. My name is Tanya and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS)

I would now like to turn the presentation over to your host for today's call, Mr. Michael J. Hoffman, Chairman and Chief Executive Officer. Please proceed, sir.

Thank you, Tanya. Good morning, ladies and gentlemen and thank you for joining us for our second quarter earnings conference call. Here with me are Steve Wolfe, our Chief Financial Officer, Tom Larson, Treasurer and John Wright, Director of Investor Relations. They add their welcome, as well.

Let's begin with our Safe Harbor policy. Please keep in mind that during the call we'll make certain forward-looking statements to assist you in understanding the Company's results. You're all aware of the inherent difficulties of making predictive statements. So the Safe Harbor portion of the Company's press release, as well as SEC filings, detail some of the important risk factors that may cause actual results to differ from those in our predictions. Our earnings release was issued this morning by Business Wire, can also be found in the investor information section of our corporate website, thetorocompany.com.

With that, let's turn to the results for our second quarter ended May 4th, 2007. The prime selling season is underway and it appears that the broad range of new products we introduced this year for professionals and homeowners is generating strong results. Despite industry forecasts that predicted a contraction in 2007, Toro grew and turned in another quarter of record sales. We earned our customer's business through a portfolio of trusted brands and a wide array of innovative products they need and value. Before we look closely at our segment and operational results, I'd like to highlight three particular points that influenced our quarter results. First, Toro continues to benefit from the momentum generated by several years of focused efforts on lean and continuous improvement. Beginning in earnest during our previous three-year initiatives and now in GrowLean, our current initiative, we continue to deliver record net earnings in an environment of slower revenue growth.

Net earnings for the second quarter were up $75 million, up 7% over the same period last year. Earnings per diluted share were $1.77, an increase of 13.5%. At the same time, second quarter net sales were $686.7 million, compared to $659 million the previous year, a gain of 4.2%. For the 6 months, as you can see from the earnings release, net earnings rose 10.7% and net sales were up 3.6%. The momentum I referenced earlier, which is supported by a dedicated family of Toro employees and partners around the world, enabled us to improve our leverage and financial performance in several areas. One area is gross profit, which was 35.6% for the second quarter, compared to 34.9% last year.

While we continue to see some increased costs for raw materials and freight during the second quarter, project teams across the Company used value stream maps and Kaizen's to increase efficiency and productivity in our manufacturing processes. I personally had the opportunity to participate in a week long Kaizen event in our Wyndham, Minnesota plant during the second quarter, where a team of us worked on Line 8 that makes one of our Z Mower products. It was a real opportunity for me to see first hand how the Kaizen process works and I can report that we met our productivity goals. All in all, it was a great team effort. In addition to Kaizen events, we are beginning to work with suppliers and customers to implement pilot Lean pull systems to help reduce inventory, improve cycle time and increase flexibility. I know it's early in the pull process, we're pleased with our progress and look forward to applying what we've learned across the enterprise in the months and years ahead.

The second aspect I want to highlight is the ongoing strong performance from our international team. In contrast to the company's overall increase of 4.2% for the quarter, international revenues were up 12.2% to $188.9 million. Part of this was due to the benefit of favorable effects from currency movements. Nonetheless, more than half was non-currency growth, mainly from stronger sales of new golf equipment and increased demand for micro-irrigation products for the agricultural market.

Our micro-irrigation Aqua-Traxx PC product, is our exclusive pressure compensating drip tape and is increasingly used to irrigate crops in areas with uneven elevations. In many regions of the world where water is a critically scarce resource, this and other micro-irrigation products can make a tremendous difference in crop yield while preserving water for future needs. Also this quarter, we saw an increase in residential sales throughout Europe. This was driven primarily by gaining customer acceptance of our new Toro 48-centimeter steel deck walk power mower and the time cutter direct collect zero turn riding mower, a product that combines Z technology with integrated bagging, a European requirement.

The third and final point I want to highlight before we move on is Toro's focus on asset management. As we announced last quarter, this is one of three areas of focus in our GrowLean initiative with a long-term goal of driving average net working capital below 20% (or in the teens, as we've coined it). For this initiative, net working capital is defined as accounts receivable plus inventory minus trade payables, divided by net sales. In the landscape contractor market for example, as I mentioned earlier, we've begun to test a Lean pull system that will enable Toro and its channel partners to work down field inventory and meet retail customer demand. Early results from this and other efforts influenced the lower preseason shipments in the first half, where we saw significant reduction in field inventory compared to the previous year. The pull system approach will continue to be an important ongoing endeavor to better serve customers across our businesses.

Now let's turn to our segment results. In our professional segment, worldwide sales for the second quarter rose 2% to $447.9 million. Higher sales of golf and sports fields and grounds equipment were driven by the introduction of several new products. We mentioned some of these in our last call, including the Groundsmaster 7200, the Reelmaster fairway mowers, the new Sand Pros and our Greensmaster Flex 18 greens mower, a product that follows the turf without scalping even on severely undulating greens. Moreover, we had a strong showing from micro-irrigation products around the world. We also gained significant momentum with our new Dingo diesel compact utility loaders and our Dingo trench filler attachment for that product was recently named Pro Magazine's 2006 top product for innovation within the compact loader category.

Somewhat offsetting the gains was a decline in shipments of zero turn products for the landscape contractors. However, retail demand to date is positive. Earnings before taxes in the professional segment for the second quarter were $108.5 million, up 4.1% from the previous year. In the residential segment, I'm pleased to report that worldwide sales rose 8.5% to $228.2 million. The second quarter gain was driven by our ongoing strategy to increase show floor presence at dealers in the Home Depot with a stronger mix of new products. This strategy is supported by one of the Home Depot's stated priorities for 2007 and beyond to keep the right quantities of merchandise on the store shelves and improve its in-stock position. Overall, we benefited from placement of several new products, including our new line of Toro branded steel deck walk power motors. These feature an innovative and convenient new bagging system.

Additionally, riding product sales were up significantly during the quarter and the first half with the introduction of a new generation of Toro TimeCutter Zs for our dealers in the Home Depot. As we mentioned before, these innovative products are important to the Z growth initiative, a category that continues to outpace traditional riding tractors. Outside the U.S., the new Toro 48-centimeter steel deck walk power mower I mentioned earlier is helping us make inroads with our brand among the European consumers. And like the electric Euro cycler we introduced last year, it's been designed and is being built in Europe. And finally for the residential segment, earnings before taxes were at $27.4 million, up significantly from $18.1 million in the same period of last year.

Now let's turn to the key operating results. Over time, we have noted the positive impact on gross margins from our ongoing Lean efforts across the enterprise. For the quarter, we continued to see improvements, particularly in margins for large professional products, as those products comprised a greater portion of the sales mix within the professional segment. That helped offset the impact of growth in the residential products. SG&A expense as a percent of net sales declined to 18.3%, compared to 18.9% last year. Marketing and warranty expenses were down for the quarter. At the same time, we increased investments in engineering and information systems.

Our effective tax rate was 34.6% compared to 32.1% for the same period for 2006. Last year's second quarter tax rate was unusually low due to a one-time tax refund. We expect our full-year effective tax rate to be 33.75%.

Accounts receivable at the end of the quarter totaled $577.2 million, up 5.6% on the 4.2% increase in net sales. This increase was again attributed to a higher proportion of international sales and the later timing of shipments. Net inventories at the end of the second quarter were essentially flat in comparison to the previous year and interest expense for the quarter was up just slightly from the previous year as average borrowing levels were somewhat higher. As part of our capital structure plan in late April, we announced the issuance of $125 million in unsecured 30-year bonds. These proceeds will be used to retire higher interest rate bonds that mature in June and for general corporate purposes. And finally, as we noted in the earnings release, our Board of Directors authorized the purchase of up to 3 million additional shares of common stock. This is a continuation of the approach we have been following for some time. In fact over the past three years, Toro has returned more than a $0.5 billion dollars to shareholders in the form of share repurchases and dividends and our dividend rate per equivalent share has increased by a factor of 4.

Well, that sums it up for the second quarter, a time in our fiscal year when we look ahead with the understanding that the majority of the retail selling season still remains. As such, we factor into our projections the ever-present challenges of weather, rising oil and commodity prices and general economic conditions. So far this year, retail activity is generally positive, due in part to an abundance of innovative customer-driven new products in both our professional and residential segments. Looking forward, we will continue to increase investments in engineering and new product development in response to a changing marketplace. For example, with water management and scarcity becoming a critical global issue, Toro is applying its expertise in agronomy and broadening its portfolio with engineered products that promote precise and efficient watering practices.

In the area of powering our products, we have worked closely with the EPA on their proposed emission standards and see the national ruling as an extension of changes we've already made. These changes include installing low permeation fuel lines to reduce evaporative emissions by 90% and complying with the 2007 California regulations that reduce exhaust emissions by approximately 40%. This just reinforces our commitment as an environmentally responsible manufacturer to meeting or exceeding all global regulations. That is not all. February 2007, Toro announced that all diesel-powered commercial golf and grounds products will be biodiesel ready by 2008. Moreover, we formed a partnership with the New York Parks department to provide three Toro Workman utility vehicles powered by hydrogen fuel cells to help many maintain their grounds and provide us a test site for our own research efforts.

Finally, we are building momentum to improve growth, profitability and asset management as the new GrowLean initiative gains traction. As I review the list of enterprise-wide projects and the skilled and creative employees who have been tapped to lead them, I am confident we'll see measurable benefits, not just this year but in the years to come. Our goal to reduce average working capital to the teens over time is real and achievable. We're focused on taking inventory out of the system and helping Toro and our customers by shipping closer to retail.

As we work through this and continue making incremental improvements, we'll balance the short- and long-term impacts on our business. With all of these things in place, we believe we are well positioned for a solid year, with the major of the second-half growth in revenue and profits expected to occur in the fourth quarter. This will be driven by a shift in timing of snow shipments from the third to the fourth quarter, several one-time benefits that occurred in the third quarter of 2006 that won't repeat this year, and our GrowLean and working capital management efforts.

As a result, we now expect net earnings per diluted share to be in the range of 11 to 14% for the fiscal year, while affirming our expectations for net sales growth at 5 to 6%. With that, let's open it up for your questions. Tanya?

Thank you. (OPERATOR INSTRUCTIONS) Your first question comes from the line of Jim Lucas with Janney. Please proceed.

Good morning, guys.

Good morning, Jim.

It's -- so much for the spring season not playing out too well this year. Very good quarter. A couple of things. First, we could start on the new products side. You know, you've highlighted a lot what was happening on the professional side, within the residential, were there any one or two products in particular that stood out that really helped drive the demand this year? Or is it really broad-based?

Jim, this is Mike and I would say it's fairly broad-based. Obviously there are core products, like our walk power mowers and our Z mowers that are up significantly and the new line-up of steel deck walk power mowers with the features we put on them, the better bagging system, the washout ports, have been well-received. And we think that is driving the results there.

The new Z line of products that is at both dealers and the Home Depot, the TimeCutter Z line-up is new. And if you remember last year, when we talked about the product that we had, we were -- we didn't really have exactly the right product for the market, which resulted in us having to, I'm going to say, somewhat subsidize that as we worked toward launching this new line-up that came out this year. And that product lineup has been very well received. It's the right product with the right features at the right price point.

So we're pleased with that. But it goes beyond that into the area of DIY and the area of our electric blower business and more. So, and I think as we have talked, we have new snow products coming as well. So I think we mentioned at the last call that our new products as a percent of sales and the way we measure that, again, is current year new products and those introduced in the last two years, are at the highest level they've been the last several years. Our goal is to keep that over 35% of revenues and we're over 40% in 2007, and it's (best) both the combinations of the professional products and also the residential products.

Okay. That is helpful. And then two unrelated questions. First, from a capital deployment standpoint, with the new share repurchase program, I guess, if the past is any indicator, would imply there is not anything imminent on the acquisition front. I was wondering if you could just talk about what the environment looks like out there for you on the acquisition standpoint. And, secondly, from a big-picture standpoint, very interesting in your commentary what you're attempting to do in the landscape contracting business that, the holy grail is developing that pull system in terms of being able to manufacture on a more timely basis as opposed to building the inventory and if you could maybe expand a little bit more about where you see yourself right now and is that a 2008, '09, '10, talk a little bit about that, please.

Jim, this is Steve. I will take the first acquisition/capital deployment question and I will let Mike talk to your second question. As you all know, we've hired a resource within the last six months to focus on getting our process for acquisitions in shape. We have always done acquisitions kind of two or three of us doing them part time. We now have an acquisition person in that's focused on that full time, has been on board, like I said, six, seven months and there are some things going out there. We talked about enterprise shaping activities, great big activities that might change the -- kind of the complexion of the company and the likelihood of those being slim. We're not likely to do something that large.

So we're looking more at the division extending type of acquisitions and I would tell you at this point, we probably have more things we're looking at, seriously, as we get our process in place than we have in the past. So we're encouraged about that, we're not getting away from the discipline of making sure we're doing the right strategic things and that we're paying the right prices. And as you all know, the prices our there are go up with all the money in the network, but we feel good about where we're at and we have some things that we're look at and we'll keep you posted as we go forward there.

Regarding your second question, Jim, this is Mike. I guess I'd sum it up, like we have talked about, our Lean journey and we used the baseball analogy. We're in the early innings. Well, clearly that's true on the pull side as well. So we are learning, we have pilot programs in place in -- whether that's the landscape business or starting to look at it for the other businesses, working with our channel partners, as I said, and with our suppliers. But if you summed up our, kind of our pull journey, we're just getting started and so we'll make some progress on that in 2007, clearly, or fiscal 2007. We will continue to focus on that as we move into 2008 and beyond. And it will be essential if we're going to, not if -- as we accomplish our goals around the working capital management. So there is many pieces to that, as you know.

It's not doing one thing, it's doing many things and it's getting all the value stream mapping done as we look at our, our -- from point of forecast to all the way back to supply, there's -- we find there's a lot of time in that process that we need to take out. As we think about making the pull system really work to our benefit, it gets back to engineering and new products and product platforming. It's kind of one size serves many and you know all this stuff. It's doing many things much better. We have a pilot in place and we're learning a lot from that on just the pull system itself, and we think that will be an important part of, again, of our Lean journey and getting us to that working capital goal.

Okay, and just to follow up on that, the one thing that you talked a lot about internally, the process. But from the information systems' standpoint, do you have the systems in place in terms of getting the proper data from the dealers to be able to match up with the demand?

That is, again, we have some systems in place. I think there's -- if you look at our business today, there's certain areas where we have fairly precise information what happens at retail. A good example is working with the Home Depot, right? As you would expect.

Right.

We have -- you get all the way to the other end of our business on the professional side. We have precise information on what is being retailed in the professional arena. When you get to the area that involves the independent dealer, that clearly is an opportunity and an area that we are working on, to basically make sure that the whole channel is linked, so we can have earlier information on what is moving, what isn't and be able to use that to take the right actions.

Okay. Thank you.

Your next question comes from the line of Eric Bosshard with Cleveland Research Company. Please proceed.

Good morning.

Good morning, Eric.

A few things I wanted to talk about, first of all, the industry growth numbers, the industry association, I think, recently cut their growth target for '07 pretty materially and it doesn't seem to be having much of an impact on you. Do you believe that the industry is growing that much slower this year? And why, why do you think that is? And I guess the third piece of that is why do you think you doing so much better?

Well some of that industry data is hard numbers and so do we believe it? Trusting that all the reporting is accurate, then, yes we do believe it and so we're, obviously, doing better than that, which would suggest we're -- we're gaining some share.

And to your question why, I think it gets back to the strength of the brand, strength of our retailers and what I just talked about a minute ago with getting new products out that are more on target with what our customers want and bringing some innovation and some new thinking there as well. So I -- in some ways, we were a little surprised that the new industry would contract, if you will, as it's been represented, given kind of our results to date. There's a lot of the season still left in front of us, so we're going to continue to watch that.

Secondly, the margins in the residential business were very strong, borderline exceptional, relative to what you have seen over the last year or two. I understand the dynamics of the cost structure of some of the products last year that you've improved this year. But can you talk about the sustainability of the improvement in 2Q and if you -- where you believe these residential margins can work their way -- can they work their way back to the 8, 10% or 10% plus range that they were during some portions of the history of your company?

Well, if you look -- you don't have to go that far back to find where our residential margins were fairly solid strong, if you go back to the 2003-2004 timeframe. And, if you remember, the last two years, 2005-2006, we've had -- we've talked about it during the calls, the particular challenges with the residential business associated with the weather, things being down, some of the economic issues last year, that really put a damper on that business. So we see some of that coming back, as I just talked a minute ago.

Obviously we've gotten some momentum from having the right products at the right price points relative to the market and gaining some position there and -- so a good example is our -- the Z mower product that is -- that this year is a totally new line, several models at dealers, two models at Home Depot. You contrast that to last year, where we had one model at Home Depot and it wasn't necessarily the right product. It was just kind of a bridge strategy and we had to use -- if you don't necessarily have the right product at the right price point with the right features, you end up propping that up financially and whereas with the new products, it's better for the retailer in terms of the sales and profitability and, obviously, it's better for us as well.

So it is -- if you really want to -- on the residential side, it is really a combination of that, the new products, the mix, the volume, the innovation that we have brought to bear there.

And it sounds like from that description and even considering the Chinese -- growing Chinese influence in the category, that you think that the last two years will end up looking like the anomaly and not what you accomplished in the second quarter. In other words, that we can start to think about returning to the profitability levels of '02, '03, '04 and not look at 2Q as sort of a one-time performance. Is that accurate?

Well, I think it's fair to say, Eric, that's our goal. As you know, with this business, things -- maybe unlike the professional business, the variability that -- the change velocity can happen fairly quickly, and so as you mentioned, you know, Chinese engines and -- those are things we're constantly looking at to really test are we -- from a competitive standpoint, are we, are our costs where they need to be? It's something we're always working on. Is someone changing the game out there competitively?

Again, one of the things we, our organization takes a lot of pride in doing well is trying to figure out how do we innovate and do something better. That in itself is important, it's necessary, it's not sufficient. We have be looking at the cost side as well. So I guess that's a long-winded answer to you question in saying that's our goal to make sure that that residential business stays healthy. It's an important business to us.

You would not look at 2Q as an anomaly or an outlier, that it's sort of a sustainable goal of performance?

That's our -- yes, that's our goal.

Okay. And then lastly, Steve you bought back maybe $10 million less stock year-to-date and I understand how the receivables have inflated due to how the mix of business behaved in the first half, but can you just give some guidance in terms of the repurchase strategy for the year? Do you think you will spend as much this year as you did the prior two years on repurchase?

Sure. That's really two questions. On the receivables side -- let me talk about that a minute. You saw that receivables were up a little over 5% on a smaller sales growth. If you remember last quarter, we had an even bigger gap. As we looked into that, I think we were over $40 million higher. This year we're at 30. And as you look into that, it's a mix of where those receivables are coming from. They tend to come the last couple of months from higher international, which you have seen, our international business has grown 11, 12%. So that a lot of those receivables come from international that have longer terms. And our -- to customers where we tend to hold that receivable on our own books rather than selling it off to a third party.

So the two of those combined have caused that to go up. I would expect by year end that you'll see that to be more in line with what it's been the last couple years. So that -- the message I want to leave is that's not a credit quality problem that that the number has gone up, it's just -- it's more of a timing issue (than) who the end seller -- or who the end buyer is.

With respect to share repurchase, we went into this year, if you remember, with about 1.4 million, 1.5 million left on our repurchase from the prior-year, authorization from the prior year '06. Through six months, we had used 886,000 of those shares, so that left us with just a little under 600,000 at the end of the second quarter. We have gone back to the Board this week, as you saw, and got an authorization for another 3 million shares.

Now, I've said in the past that our strategy on share repurchase is to continue to repurchase shares equal to or less than our annual cash flow. We kind of look at it, look at our free cash flow and say kind of the upper limit is one year's free cash flow, and that's been in the $130 to $150 million range.

Then as we add the acquisition card, we say if we would add a significant acquisition or something that would take an amount of cash that might alter that stock repurchase, we might lower it. It depends on what the acquisition would be. But the idea would be, with the size acquisitions we're talking about, we'll continue to be able to do stock repurchase as well as reasonable sized acquisitions, as long as the two don't exceed our free cash flow number.

So you should see us using this additional 3 million over the -- that's about a year's worth if you look at free cash. So if nothing else would change, that would last us for another year and we would buy it pretty much equally across the next four quarters.

Okay. Perfect. Thank you, Steve. Thanks, guys.

You're welcome.

Thank you, Eric.

Your next question comes from the line of Seaver Wang with Utendahl Capital Partners. Please proceed.

Hi. Good morning, just a couple of quick questions. If you could give kind of an -- give me a kind of an idea of kind of the dynamics of landscape contractor segment right now. Obviously -- obviously, these last couple of quarters have been kind of soft. Is it higher fuel prices that's really hurting it?

And then the second question is just on the -- there's been a slight uptick in the -- in Cap Ex year-over-year. Just wondering what -- if you could break that out in terms of what the usage on this.

Good morning, Seaver this is Mike. I'll answer the first question and I'll let Steve answer the second one. As we've talked about the landscape contractor business, and the good news we believe is that retail there is positive and -- unlike last year, where I think we kind of got ahead of ourselves in inventory getting a little higher in the field than we would like as retail slowed down.

This year it's just the reverse. We worked very hard to -- within the last six months, to -- we ended the year in good shape, that is, contrasted to last year within the first six months to manage that and make sure that we're kind of kind of tracking shipments with retail. And so the bottom line there is that the landscape contractor products, whether those are the Exmark brand products or the Toro brand products are both tracking well at retail and our inventory's in very good position. So I think it's -- the business is sound, unlike, say, a year ago, we had more worries.

Okay.

On the CapEx side, it's -- there isn't any change from the guidance we gave you at the beginning of the year. We think full CapEx will be in the $45 million range, with depreciation and amortization about the same number. There may be some timing differences with what you're looking at on when they hit, but for the full year, we haven't changed our projection there.

Okay. And then actually one more quick question on -- you said that some sales would be shifting from third quarter to fourth quarter, is that --

Right.

That's due to the new pull system kind of for --

Well, as I said, there are a couple, three things going on there. The first one is -- we talked about the snow season in 2007. The snowfall this last year was somewhat marginal. And so as a result, from a demand standpoint, it will shift our -- some of that snow product from the third quarter that was in last year to the fourth quarter in our current fiscal year. So that's just a shift. The other thing I mentioned is last year in the third quarter, there were a couple of one-time things that won't repeat this year. And Steve maybe can talk to that, and then the -- the last point is around the whole process. Well, we don't necessarily -- that's kind of a -- we're just getting started, we're not sure what the magnitude of that will be. But there's just a philosophy of working to shift our shipments closer to retail. And that -- we know that will ebb and flow somewhat over time, but we'll get better at it and so that potentially could be a little bit of this shift.

Is there any way to kind of quantify in kind of ballpark figures kind of the number in sales, I guess, in the shift?

We're not doing that. Again, we just don't get into the third quarter. At this point in time, we're really talking about the year.

Okay. Thank you.

Thank you, Seaver.

Your next question comes from the line of James Bank with Sidoti & Co. Please -- please preside.

Good morning.

Good morning, James.

Just looking at a macro perspective, I would kind of look at the this year as not necessarily a barn burner for top-line growth. I was certainly surprised with the residential sales performance and I am sure everyone else was, albeit on softer comps from the year before. But if the lawn and garden season returns in '08, as I think Eric referenced earlier, the outdoor power products industry referenced shipments being down this year, they're actually looking for them to be up next year, and if landscape contracting also returns next year, and given the GrowLean margin expansion you've had thus far, I'm wondering if can you give us more of an outlook into the future in terms of what we would be looking at in growth for Toro?

We would love nothing better than to see the scenario you just painted and it would go back to, you've heard me say before, the '04 timeframe, we had all of our businesses kind of running on all cylinders. And what you described, if everything we have today continued and the landscape business came back, then we'd be back in one of those scenarios and that would be great.

We will give you more guidance on what is exactly that means in terms of dollars and cents when we talk about '08 later in the year. But suffice it to say, that you've painted kind of the best picture, everything that is doing well today continues and we get our -- kind of our laggards, if you will, this year, back on track, and that would be a great scenario and keep the margin improvements coming. We'll be looking at that between now and building our plans for '08.

Okay, thanks, Steve. Now, the international growth, Mike, I think you referenced, was up 12.2% overall. What point -- or excuse me, what is international sales contributing overall at this point?

I think if you do the math on a year-to-date basis, it's at that 30%. That's been our goal -- long-standing goal. It means we'll have to rethink our new -- a new goal. Now, that's, that -- again, that's through six months and if you remember last year we closed the year out at 27%. Now it is clearly growing faster than domestic business is and as we said to that team and to our domestic teams, we don't want to drive the ratio just by the domestic businesses not growing and so there are challenges with those teams as well. But I think we're continuing to make good progress against that goal and one of the things we will be thinking about is okay, where do we -- when we get there, where do we go from here?

Okay. And new products? I think I heard earlier, you mentioned that they contributed 40% of the growth thus far?

Over 40%.

Okay.

And so that's a significant change from -- even last year when we had -- the last two years, when we had our planned or new products, just because of the kind of years they were in '05 and '06 in terms of the sales being relatively softer, that those numbers fell off a bit because we didn't sell as many of the new products as we had kind of hoped to in our plan. This year we're tracking better and so it will be a fairly significant delta between the new products from last year and our -- the results from this year, based on how we're tracking to date.

And undoubtedly, we can expect new products next year, as well, as you normally do.

You can. I mean that's one of the things we continue to do, we have for the last few years, is raise our engineering spend, not just in pure dollar terms but as a percent of our overall sales. They grow as well and our intention is to continue to do that again this year. And so, just have to make sure that money is spent wisely and we get good results. We've got a great team back here that works hard to figure out the what the customer wants and then make sure they do the how process in terms of getting it to the customer right. That's -- you want a really high batting average like kind of the reverse of the major leagues, maybe even higher than that.

Okay. Two last questions. In terms of Home Depot, are you able to break down what they contributed to your top line?

I don't have that here in front of me. We do -- we do that -- at the year and they have been in that --

In that 13 to 15 range?

Yeah, they've been in that mid-teens as a percent of total revenues.

Okay. And the margin expansion we see here in the second quarter, how much of that is attributable to the GrowLean initiative and how much is attributable to the product volume?

It's a matter, we don't break that out specifically. But a good share of that was certainly GrowLean and we're, to say the least, pleased with where that whole effort is coming and what that is contributing to the line. When you look at the margins for -- particularly for the overall Company, with some of the new products Mike talked about, and as you heard us say in the past, new products always command higher margins than old products till the competition catches up. So we had a lot of new products. We had a higher mix even within our professional business, some of our larger equipment that have higher margins on them. So you add that together with the cost reductions and we were very pleased with where the margins ended up.

Okay, to say the least. Thank you, that's all I have. Thank you.

Thank you, James.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Sam Darkatsh with Raymond James & Associates. Please proceed.

Good morning, Mike. Good morning, Steve. How are you?

Good morning, Sam.

Morning as well.

Couple -- couple questions. Currency impact in the quarter, Steve, do you have a sense of that, did I miss that in the --

No, it was $8 million for the first quarter -- or second quarter on the sales line and it was about $14 million for the year-to-date. So it's still more than half of the growth was non-currency.

And pricing -- pricing and/or mix. I don't know how you care to categorize that, but I'm trying to get a sense of pricing versus unit growth.

Yeah, pricing overall, I think we told you at beginning of the year, would be somewhere in the 1 to 2 range for the whole company. And that's probably about where we're going to end up here. So that's still a good assumption.

1 to 2% and this quarter was similar to that?

Yes.

Okay and then would that be, as is typical, may be 2 points from the pro side -- 2, 3 points from the pro side and 0 on the resi side or how would we look at on a --

The bulk of that would have come from the pro side, as it has the last couple years. You've heard us say, the -- getting price on the residential side is a lot more difficult, so most of that would end up out of the professional side.

Got you.

Sam, this is Mike. Just to add on to that. One of that things that makes that comparison a little trickier, is the -- when you bring new products to market, you're comparing differently and so, for example, our new Z mowers are more competitively priced, but they're brand new platforms from the ground up. So you really don't get a pricing change off that.

Right. Yes. That's why I'm saying, pricing and mix, because the pricing would suggest the pricing on like-for-like SKUs.

Right.

The second question I would have, you had terrific leverage on the SG&A side -- what with 60 basis points on a year-on-year basis. And as I recall, you normally don't look for a lot of leverage because you have some discretionary items that -- that you tend to dial up when sales growth is going well. You're -- what was the, on that 60 basis points, Steve, of leverage year-on-year, how much of that was the lower marketing spend in the quarter?

We don't break all that out, Sam. We look at the expense side of it as a total and, as you know, we just report the pretax number. But you had a number of things in there that went into that calculation. So it wasn't just spend. There was spend, there was warranty, there were a number of things that went in that made that number up.

Was the marketing spend the largest of the contributors?

Don't have that in front of me and we don't typically break that out. We just break out the total SG&A numbers.

Okay, well then how should we look at SG&A leverage on a go-forward? Should it still be roughly flattish year-on-year?

For year-end, I would look flat to maybe down 20 basis points, depending -- there will be higher in terms of expense, when I say down. It won't be as much of an improvement. You're going to see anywhere from 20 basis points to flat over where we are today -- 20 basis points up, which is higher.

Year-on-year for the year.

Year-over-year. Yeah, and that -- a lot of that is just where things come in the last half. We had talked about some of these one-timers over this year versus the last year, credits that we had coming in. So we don't think -- if you look back, you'll remember, we've taken a point out of SG&A the last couple of years. We don't see that same type of leverage happening at the end of this year. In fact, we think it will go a little bit the other way because of these one-timers.

So then, as we look -- and I'm not going pin you down on guidance for the out years, but just looking broadly, would you suspect that you'd get maybe that 10 or 20 basis points of leverage on an annual basis on the SG&A line in the out years?

Yeah, we would -- as we have told you all along, we focus on improving gross and reducing SG&As to drive our operating margins. So, rather than going backwards, like we're going to do a little bit this year, in terms of having -- losing a little leverage, we would like to see SG&As anywhere from 0 to 20 points, 30 points during the year and gross margins doing the same, if not a little more.

Got you. And then final question and I will defer to others. You took your guidance up less than the, than the level you beat your -- the midpoint of your second quarter guidance, you beat by $0.10. It's a terrific quarter. You beat by $0.10 and you took your guidance up by $0.03 to $0.06. Is that being conservative? Is that being the fact that you -- you're trying to get a little leaner in the channel. What are your -- how should we view that?

Yeah, you're right on the right path there. Part of it is our working capital initiative, where there are some things we want to do that may affect that flow. The other is retail needs to continue. You know, we've been pleased with where retail is the first half. We still have a half the season to go here. So, if things dropped off the table tomorrow, we'd be looking at a little different picture.

And then lastly, it's the whole working capital piece. This may give us an opportunity to try some things and really get that organized. We're just getting that going. And as you know, that's a long-term type of thing. So in that calculation and in that guidance is we would like to be able to do some small things the rest of the year to get that really going. So it's a combination of all of those.

Very good, thank you much.

Thank you, Sam.

There are no further questions at this time. I would now like to turn the call back over to Management for closing remarks.

Thank you, Tanya. Once again, thank you, again, ladies and gentlemen, for your questions. We will look forward to talking with you again in August to review the results of our third quarter. We do appreciate your time and wish you all a very good day. Goodbye.

This concludes the presentation, you may now disconnect and have a great day.