Toro Co (TTC) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Toro Company second quarter earnings conference call. My name is Heather and I'll 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 towards the end of today's conference. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes.

I would like to turn the presentation over to your host for today's conference, Mr. Michael J Hoffman, Chairman and CEO of the Toro Company. Please proceed, Mr. Hoffmann.

Thank you, Heather, and good morning, ladies and gentlemen, and thank you for joining us for our second quarter earnings conference call. Here with me this morning are Steve Wolfe, our Chief Financial Officer; Tom Larson, Treasurer; and John Wright, Director of Investor Relations. Let's begin with our forward-looking statement policy. Please keep in mind that during the call, we'll make certain forward-looking statements which are intended to assist you in understanding the company's results. You're all aware of the inherent difficulties, risks and uncertainties in making predictive statements. So the Safe Harbor portion of the company's earnings 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 and can also be found in the investor information section of our corporate website, TheToroCompany.com.

Before we get to the results for our second quarter ended May 2, 2008, we would like to take a few minutes to discuss some of the external market conditions and challenges we faced in the first half of our fiscal year. When we first started talking about fiscal 2008 on last year's fourth quarter earnings call, we anticipated that it would be a challenging year. At the end of the first quarter, the economic outlook had worsened considerably, and while our first quarter results were positive, it is one of our smaller quarters and the time of year where we're getting ready for the upcoming spring retail selling season. From our first quarter call until now, we have seen significant external changes. Unfortunately in the wrong direction, as we gained additional visibility on the retail activity and shipments that have impacted our business and the entire industry.

The economic environment is worse than it was three months ago, and we're certainly feeling the effects, particularly in our residential segment, where consumer confidence is at its lowest level since June of 1980. Rising food and fuel prices also have altered how consumers and businesses spend money in a number of areas, and our industry is no exception. In challenging times, customers can choose to buy a lower price alternative or delay a purchase. In fact, industry forecast project shipments of mowers to be down nearly 10% for 2008. While we're fortunate to have a professional business that accounts for nearly 70% of our total revenues, that side of our business is not immune to the current economic situation. Just as consumers adjust their spending, so do professional customers, as irrigation contractors deal with a difficult housing market, landscape contractors experience rising fuel costs, and municipalities face tighter budgets.

Another challenge has been the adverse weather conditions in many parts of the U.S. It's been a cooler and wetter spring in several markets around the country, places like the Northeast and the Midwest. For example, at our board meeting yesterday, one of our board members from New England said he had mowed his lawn once this year versus a number of times last year at this point. And here in Minnesota, I cut my lawn for the first time just this last Saturday. All in, the spring season is three to four weeks behind the early warm spring we experienced last year. As a result of both the both weakening economy and late spring weather, we have experienced soft residential retail activity, as well as cautious ordering for both our residential and professional products. While we're pleased that retail activity in some of our key professional businesses is ahead of last year, we see some of our channel partners wanting to use this environment as an opportunity to lower their inventory risk and they are placing orders closer to retail demand. The benefit here is that our field inventory is significantly lower than this time last year, and that will be a positive for us as we go forward.

So on a number of fronts, fiscal 2008 is proving to be a difficult year. The challenges are real and we're dealing with them appropriately. This is not the kind of performance we're known for, especially if you look at our financial track record over the last 10 years. We're disappointed in our performance for the quarter, but our financial condition is sound and we remain confident in our strategic direction and in the actions we're taking to weather the current storm. In the end, we will be stronger and more competitive than ever before.

Now let's turn to the results for the second quarter and year to date. Net sales declined 7% for the quarter to $638.5 million. As I've commented, this was due in large part to poor economic and weather conditions, which impacted domestic shipments. Net earnings for the company in the second quarter were $62.8 million, or $1.60 per share, a decrease of 9.6% on a per share basis from the same period last year. For the first six months, net sales were $1,044.3 million, down 2% versus the previous year. Our international business is up nearly 11% over last year, due to favorable currency and solid global demand for professional products. For the year to date, we have posted net earnings of $81.4 million, or $2.07 per share. That's the overview for the second quarter and the first six months.

Now let's review the segment results. In a professional segment, worldwide sales for the second quarter were down 4% to $429.9 million. Lower shipments of professionally installed irrigation products and landscape contractor equipment more than offset higher international sales. Within the residential commercial irrigation business, sales were down significantly, due to economic and housing issues and the decline in end user demand for new irrigation systems. Meanwhile, the landscape contractor product shipments were also down as a result of cautious channel ordering. In addition, we implemented a new channel strategy in several markets to create greater operating efficiencies. While this effort supports our long-term working capital initiative to reduce field inventory, it did reduce shipments for the quarter and year to date, but retail sales for our landscape contractor products are ahead of last year, which is encouraging. On another positive note, our golf business is sound, especially across international markets where new golf course construction remains strong and our products continue to generate interest and drive purchases from golf customers. For the year to date, net sales for our professional business were essentially flat at $723.1 million.

Earnings in the professional segment for the second quarter were $96.6 million, down 10.9% from the previous year. For the year to date, professional segment earnings totaled $149.1 million, a decrease of 4.9%. Even with the current market challenges, we will continue to invest in new product development and brand building to strengthen our position in these markets for the long-term. In the residential segment, worldwide sales were down 11.8% to $201.3 million. For the quarter, we experienced softer sales volumes as a result of the weakening economy and late spring season. While our extensive line of power mowers continues to be a leader, our share has been impacted by increased competition and lower priced alternatives and we're taking steps to address these issues.

Somewhat offsetting these declines, our electric blower business was up nicely for the quarter, was residential revenue outside the U.S. was up slightly due to increased shipments for riding products in Australia and Canada. For the year to date, residential segment net sales declined 6.2% to 309.5 million. Second quarter net earnings in the residential segment were $21.1 million, down 23.2% from the previous year. And for the year to date, residential segment earnings totaled $23.9 million, down 24.9%, again, we are taking the necessary actions and will continue to focus on improving the performance of our residential business.

Now let's talk about the key operating results. Gross margin improved 10 basis points for the quarter as a result of favorable segment mix and currency, as well as our ongoing efforts to improve productivity as part of our grow lean initiative. That helped to offset higher commodity costs and fuel costs compared to last year. For the year to date, our gross margin is flat compared to last year. SG&A expense for the quarter declined in dollars, but increased to 19.6% of net sales due to the lower sales base. Year to date, our SG&A expenses were 23.2% of net sales compared with 22.3% in the prior year's first half. For the quarter and year to date, the increase was primarily due to fixed SG&A costs over lower volumes, as well as continued investments in brand building and engineering projects needed for the long-term success of our business. These increases were somewhat offset by lower incentive expense.

Interest expense was down 6.4% for the quarter, due mainly to lower levels of average short-term debt and a decline in interest rates. For the year to date, interest expense was up slightly over last year, due to higher average debt levels, somewhat offset by lower interest rates. Our effective tax rate for the quarter was 35% compared to 34.6% in the second quarter of last year. You'll remember we experienced a negative impact on our tax rate this year, due to the expiration of the federal research and engineering tax credit on December 31 of 2007. Our balance sheet remains strong, with accounts receivable down $30 million, or 5.2% for the quarter, on a sales decrease of 7%. Meanwhile, net inventories are up $17.5 million, or 7.1% for the quarter. As we have seen the decline in shipments, we have made changes to ensure our inventory levels remain manageable.

Finally, our strong cash flow from operations continued to enable us to return value to shareholders through stock repurchases and dividends. As we noted in the earnings release, our board of directors yesterday authorized the purchase of up to 4 million additional shares and declared a regular quarterly cash dividend of $0.15 per share. Consistent with what we've done in the past years, our priorities for using cash from operations are to pursue strategic acquisitions to grow our business, followed by dividend payments and share repurchases. That's all for the second quarter and year to date results.

Before we discuss our outlook for the remainder of the year, let me touch on a few strategies that will help us weather the current environment, as well as build for the future. The first point is I want to assure you we're taking actions to deal with the external challenges we are facing. We have adjusted production schedules and are focusing on controlling expenses. We're also working closely with our suppliers and channel partners to control input costs and better anticipate and build to customer demand. Across the organization, employees are actively engaged in the lean philosophy to identify improvements that delivered greater cost efficiency and manufacturing flexibility. The actions we have taken this year are consistent with the lean journey we started in 2001.

The second point here is that we are a company rooted in innovation. We have continue to increase investments in research and development, to provide our customers with cutting edge technologies to beautify their landscapes, help them conserve water, and do so in the most productive way possible. Whether it's our productivity saving ProCore Aeration system, our water saving precision irrigation system, or our time-saving Toro Time-Cutter zero-turn radius mowers, our extensive line of innovative products position us well to increase market share and meet the evolving needs of our customers. In fact, as we've mentioned before, our current level of new product sales is the highest it's been in the past decade, and that will continue to serve us well in the years ahead.

Third, we're focused intensely on growing the international portion of our portfolio. Over the years, we've expanded our global reach through our loyal customer relationships, a diverse product mix and strong brands to strengthen our presence in more than 140 countries. As many countries around the world continue to build their infrastructure, the addition of public green spaces and the development of golf courses create real opportunities for us to grow our international business. And the last point, our leadership in precision irrigation water management positions us well to take advantage of several macro trends. Water is no longer viewed as a commodity, but as a precious resource. Customers around the world are facing watering restrictions or taking proactive measures to more efficiently use water. Our complete offering of precision irrigation solutions help both professional and residential customers apply water where and when it's needed.

Also, the agricultural market accounts for the vast majority of the world's water usage and our agricultural drip irrigation systems are helping customers around the world more precisely irrigate row crops, orchards, and vineyards. By applying water directly to the root zone, customers can improve crop yields and the quality of produce, which helps them increase their profit. All in, with our focus on lean, working capital, new product development, and our international business, we believe we are on track to strengthen the company for the long-term. Now let's turn to our outlook for the remainder of the year. We expect the external challenge we have faced to remain through the end of 2008, likely beyond. Additionally, we anticipate increased commodity pressure going forward. We will closely monitor the situation and take appropriate measures to minimize the impact of increased commodity costs on our business. As mentioned before, we will continue to take prudent actions to adjust production levels, control costs, and work with our channel partners to manage our field inventory. The same time, we'll stay focused on driving retail demand for our innovative products for the remainder of the year. We expect fiscal 2008 net sales to be roughly equal to fiscal 2007 net sales, with net earnings per share to be flat to down 5% from the $3.40 per share reported for fiscal 2007.

Also, we anticipate our third quarter earnings to be less than they were in fiscal 2007, while we expect our fourth quarter earnings to be up over last year for the following reasons. First, we will introduce a new product platform in one of our businesses that will move some shipments from the third quarter to the fourth quarter. Second, we experienced significant snowfall this past season and expect higher sell-in of snow products in the fourth quarter. And last, we incurred expenses -- fourth quarter last year that won't repeat this year. Let me finish by saying we are encouraged by the tremendous efforts of all our employees and channel partners to manage through these difficult -- through this difficult environment. Our strategic direction is sound. Our cash flow remains strong, and we are focused on key initiatives to grow our business for the long-term and deliver strong returns to our shareholders. That concludes the summary of the Toro Company's fiscal 2008 second quarter. Now let's open it up for your questions. Heather, back to you.

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

Thanks, good morning, guys.

Good morning, Jim.

Couple of questions here. First, I want to go back to a couple of things in your prepared remarks, Mike. Number one, on the landscape contractor business, you talk about a new channel strategy, and within the residential business, you talked about steps to address some of the share that you've lost. Could you touch on those two topics, please?

Okay. Jim, regarding the channel strategy, we -- on the landscape contractors side, the business has been two-step, selling to distributors, distributors selling to the landscape contractor dealers and last year in some of our markets, this is on the mid-Atlantic and southern part of the southeast, excluding Florida, we have gone to a different model where we sell directly to the dealers. We -- selling force, but that is on a more commission basis now than on a traditional two-step model. So that change was put in place at the end of last year.

And what prompted that change?

Well, I think as I commented in the prepared remarks, you know, we are looking to, you know, get a more efficient channel strategy in place. Certainly we looked trying to create win-win-wins from our customer, end user customer back to the dealer to the distributor, and for Toro. And when we think about channel strategy, it's, you know, do we have the right structure, how efficient is it, how effective is it. We kind of measure all those things. And so moving away from the traditional two-step we thought was the right step to take in those markets and we'll continue to evaluate that for the kind of the rest of the markets over time. That was your first question. The second one was? I'm sorry?

Within residential, the steps you're taking to address the lost share?

Well, the -- we've seen that, the share -- let me just take a step back and say overall we think our share is, you know, from a company standpoint across all of our business is flat to up in many cases, but in the case of power mowers, we did see some aggressive competitive actions at price points that are underneath Toro's price point and, you know, you couple that with the kind of current economic environment, where customers are shifting down, created a challenging environment there and we believe we, more than believe, we know we've lost some share in the power mowers. So in the short run, you can only do so much to correct that. In the long run, obviously we have to look at our offering and working with our channel partners to make sure we, you know, stop that and get moving back in the right direction.

Okay. Can you -- is there any specific color you can add at this point?

Well, I'm not sure exactly what you mean, color. The -- if I look at our major retailer, we believe we lost share to another brand underneath us.

Right.

That had, you know, a good set of features and it was a good brand and was priced very aggressively and we'll have to deal with that going forward.

So it's more about a redesign, is that how you combat it versus -- on price?

We look across the board. I mean that's one of the full marketing mix questions, to what degree product, to what degree promotion, efficient channels, all of that. So we'll be talking about that as we get into our '09 discussion.

Okay, and on the irrigation side of the portfolio, you talked about lower demand in the the -- new product portfolio positions potentially recapture some share and not just specifically to recent com, but across the entire irrigation portfolio. How is the rest of the irrigation business looking, whether golf, ag, new golf versus retro fit golf?

I, you know, our micro irrigation business is strong and up. The golf business is sound around the world, particularly outside the U.S., project business as you know. That business is very healthy and our share is very strong. The -- when you talk about residential commercial, we group those two business. The commercial part of that business has remained sound. That beings the question, about you know, what's going to happen with commercial development over time, particularly here in the U.S. That hasn't seen the kind of reduction we've seen in, you know, domestic housing. And so you really get to the domestic housing issue and what that, the impact that's had on the residential, professionally installed irrigation systems. And it's significant. I would come back to your first comment. We believe our share of that business is growing, continues to grow with all the new products we've got out there. It's just a, the market is, you know, significantly smaller.

Okay, and finally, Steve, we want you to be involved with the call. On the share repurchase, you guys were busy in the first quarter. You've got the authorization increased and now that we're through the seasonal working capital build and cash flow, likely to accelerate in the second half, where do you guys stand on your share repurchase activity for the full year?

Well, thanks for including me, Jim. I appreciate that. If you look back historically, second quarter's been probably our lowest quarter in terms of share repurchase because it's when we're utilizing more of our working capital. So we've tended to scale back in the second quarter, if you look back over the last three, four years. That was true again this year. Particularly given the equity markets and the liquidity markets the way they were. We wanted to make sure we had enough money and banking support that we were comfortable without doing a lot of share repurchase. We're now in a blackout period, as you would expect, until for a couple more days, till we get through the call time. But we did buy 120,000 shares in the quarter and we will go back to a more traditional purchasing pattern once we get out of the blackout period here at the end of the month.

So for the year, you can look at a similar reduction in diluted -- average diluted share number that you have seen the last couple years and maybe even a little on the high side of that, depending on the timing. You know, it's not only what you buy. It's the timing of these purchases. So based on the timing, you may see the average, maybe even just a little higher than the last couple years. But for a general rule, look for the same type of reduction as you've seen in the last two, three years. And we did get a new authorization. The board is very much behind a share program. Having said that, I would have to say we're constantly looking at the best use of our cash. You know, we're still looking for acquisitions and as we've said all along, if we would end up with a sizable acquisition, it may require us to scale back or maybe suspend share purchases for a period of time. But in terms of order of using cash, certainly acquisitions is up there at the top and, you know, dividends and share repurchase would be right after it.

Okay, great. Thank you very much.

Your next question comes from the line of Mark Herbek with Cleveland Research. Please proceed.

Good morning, guys.

Good morning, Mark.

First off, international growth rate a little bit softer versus the prior four-quarter run rate, up 5 roughly. Can you talk about why the slowing versus prior trend, where maybe some of the softness is? And then can you break out how much FX contributed to that top line growth?

Mark, I'll take the first part and I'll let Steve comment to the FX. You know, our first quarter international sales were up significantly, up 20%, but still well in double digits after FX. And international, I guess I would say there's a lot of project work going on in international. So it's not -- you can't draw a straight line. And so you really need to look at the kind of six months and when you do that, then, the business is still obviously favorable. As we look across the whole international portfolio, obviously golf continues to be strong. Some of the other businesses are strong. The residential business is a little softer. They face some of the weather challenges we've seen here, and while we haven't seen, the economic conditions particularly in Europe that we've seen in the U.S., that's one of the things we're very -- we're watching and we're very mindful of. And so all in, we think looking forward the international business is going to continue to be, an important growth driver for us.

I would say to you that, kind of ties back to this earlier project comment, that, the golf business is a good example, as we had some international business, we didn't get out in the quarter as we work with these golf courses around the world that will go out in the third quarter. One of the largest orders we've ever had in the history of the company, would have been nice to have that in the second quarter. Didn't happen. It will happen in the third and it will obviously still meet the project requirements from the customer standpoint. So it's a little bit lumpy. You have to look at it. You have to look at it year to date and, again, going forward we think that's still going to be a strong growth driver. Steve?

Yeah, I just -- the other thing I would support, or -- the fact that the international business is getting to be a more and more complicated business in terms of how you get things out the door. You've all read about the container issues that is going on worldwide because of all the exporting that we're seeing out of the U.S., and those things make that business much more difficult to run and more less predictable in terms of what you can get out the door and what you can't. So to Mike's point, the timing over a quarter in one or the other, like this big order that he talked about happening is something we manage as best we can, but it's very difficult. So it makes it more difficult to predict that. The currency side of the international business, when you look at it, and we tend to look at it at the six-months basis -- overall up 10%. You take currency out, about half of that is currency. So once you adjust for currency, you end up just a little under 5%, up in organic growth. So that business is still strong, still a lot of golf, like Mike said, going on around the world. And we don't see any reason at this point that that should change in the back half. So we're still very, very bullish on the international business.

Okay, and then second question, on the professional segment, math would suggest that domestic pro was down close to double digits. Saw some pressure on the margin line due to that. Can you talk about how we should think about that business going forward? Maybe how much of the sales contraction was due to your lean initiatives, how much is due to the industry? You talked about golf being okay. So that would suggest landscape contractor and grounds were down meaningfully. Just trying to, I guess, come to a conclusion on the pro. Both sales and margin pressure in the quarter.

Mark, this is Mike. Let me make the first comment, then Steve can add to it. The one thing that was in the release that we've said, if inventory -- field inventory is down significantly, the retail -- the professional business, a number of them particularly golf and the landscape contractors is positive. And so much of what you're seeing in our financials is that reduction of field inventories. All things being equal to last year, field inventory wise, our revenues would have been positive. So that, I think that's what your -- that's what you're seeing first and foremost, that inventory reduction.

Have you seen anything different from your peers, which is a reason why operating margin contracted quite a bit year-over-year? I mean have you had to get more price competitive to make the sale?

Operating margin drop, what you're looking at pretax margin drop, is it's a matter of overall we experience pressure on gross margins because of all the things you're reading about, commodities, everything that's -- freight, diesel, all the things that you see in the news, we're feeling the impacts of that, as well as a smaller sales base to spread your SG&A numbers over. So when you look at it, it's pretty simple math, when you look at the P&L, where the pressure is coming from. It's trying to offset those increased costs on lower sales. We've done some of that with the cost reductions and we're -- the good news is we've been out ahead of this probably earlier than we typically would be. We're watching the head count in terms of what we're replacing. We have frozen a number of new head counts that we had in the plans. We're looking at the things that, are more like-to-dos or kind-of-like-to-dos rather than the must-dos and we're trying to stick to the things that we absolutely must have.

There's some things we're still going to do, Mark. When you look at engineering and you look at marketing for the brand, we're going to continue to invest in those areas. So it's probably not unusual to see some deleveraging on the bottom line as your sales drop as much as ours did here in the second quarter. But we're looking at that from every angle to see how we can minimize the impact. But you're going to see some bottom line impact.

And then gross margin basically flat year to date, you talked about some commodity pressure going forward. What's your outlook for gross margin full year now?

Well, it's probably the same as we gave you six months ago. Gross margin's going to be flat to maybe some pressure on the downside and you've really got to dig into that and say, you know, what's driving all of that. And we're pleased that our margins have held flat, given the fact that our sales have been down. And it's due to four or five different areas that have an impact on that. One is the exchange that we talked about. There's obviously impact, positive pickup on exchange, with the residential business being down as much as it is, you had a stronger mix on the professional side and the margin is there and the profitability is better, so that's helping your gross margin. This dealer-direct initiative that Mike talked about, you're now billing at dealer net versus distributor net, so you've got a pickup in margin there.

We got some price and we continue our lean and efforts in the plant to reduce costs. So you look at all of those things that help you on the down side and that helps you offset the resins and the diesel costs and the things that we're seeing on the upside. So we've been pretty pleased with where it's all worked out and we think for the balance of the year we see the commodities going up, just like you do. We know steel is going to go up, we know resins are going to continue to go up, we factored those in to the extent we could into our planning here, but steel is really kind of a wild card right now. It's -- in fact, some of our sourcing people said you're out of a volatile steel market. You're in kind of a totally unpredictable steel market. So that, we're planning as best we can based on what we know, but the steel, things you read about steel could get really crazy the last half if that comes true. But time will tell on that.

Thanks, guys.

Thank you, Mark.

(OPERATOR INSTRUCTIONS) And your next question comes from the line of Sam Darkatsh with Raymond James. Please go ahead.

Good morning, Mike, good morning, Steve, how are you?

Good, Sam.

Steve, you just talked about commodity inflation as it relates to fiscal year '08. I was curious as to if we -- at least an initial look at '09, if spot prices of steel and aluminum and oil and plastics remain where they are right now, what does that mean looking out to '09 for input inflation? How does that step up versus '08? And what are your thoughts in terms of the ability to raise pricing in this sort of environment where you might have some elasticity of demand?

Yeah, well, the obvious answer is higher price. I mean we think steel's not going to be down. It's going to be up. Whether it will get as high as people are predicting, who knows, but we're going to have to look at what we do in the marketplace, based on what the market bears. We know costs are going up. How that ends up correlating with what the market will bear, and as we can bring more innovation, bring more labor savings products to the market, as we've said all along, we can get better price on that. We'll have to get some base price in '09. I don't think there's any doubt about it, just like we have the last couple of years. We've picked up a point or two, mostly on the professional side of the business. We'll have to look at that and see where that gets us for '09. But there's no doubt, you know, we're going to have the same type of challenges. If you look back at the '04-05 timeframe, when steel first took off, we were under the same type of circumstances, where you got kind of unprecedented levels.

So we'll have to look at all of that to say where our pricing goes. You're already seeing some competitors in the marketplace going up price wise. We saw a couple this week, over the last month or so. So people are even doing mid, mid season increases. We've typically not done that, but things continue to go up. That's one of the things that would be on our list. I can't get specific in terms of dollars with you, but I can tell you that we know the pricing pressures are going to be as great as they probably were in '05 and we figured out how to solve them and we'll figure out how to solve this.

But '05 you had a little bit of a different demand environment, though, than you do now. I mean, Mike, is there something you're seeing, or the, the result of what you're seeing change your thoughts in terms of your, your earnings growth expectations over the next two or three years from the teams down to a more modest level, do you think?

Well, I think Steve just summed up the situation. When it comes to what pressure there's going to be on our margins and earnings growth as a result of our cost changing, if we were alone there, that would be a concern about the ability to drive future earnings growth. The fact is this is effecting everybody in the industry and so, you know, we will, we will expect to continue to drive our improvements, our improvements in revenues, our improvements in bottom line performance, our improvements in working capital. Now, certainly we know we're off-track when you think about our grow lean initiative. We didn't necessarily anticipate a, you know, a, an economic environment like we're dealing with right now and we know that's going to, as I said earlier, that's going to continue for a while. But just getting back to the the pricing and the our ability to drive improvements, we, we have some pricing -- we have more room on the professional side of our business to drive price. We're always sensitive on what impact that has on our customers, but as Steve said, we've already seen others start to do that. We don't price to cost. We price to what, what the market will bear, but this is affecting everybody in the industry and so expectation is going to be that there will be increases. I think for us, as we look at the back half of the year, we're coming off of our peak, unlike when we faced this last in '04 and '05. And so we're just going to be taking a hard look at that sand saying where can we drive costs out, where does it make sense to price in and how do we drive kind of long-term growth in revenue and profits. So can't give you much more of a solid answer beyond that right now.

But do you think that your ability to grow earnings 10% plus has been impaired over the next two or three years, best you can tell right now?

I guess I'm -- at this point, I'm not going to answer. We have work to do. if the economic environment continues to be as we're seeing it today, probably, but if the expectation is that will start to improve and our performance will improve with that.

Okay. Next question, Mike, in your prepared remarks, you talked about with respect to your inventories, not the field inventories per se, but the field inventories, how you were looking to keep them, I think the word you used was "manageable." Are they a little bloated in your view? Inventories were up year on year with sales down. Was production rates higher than shipments, or how should we look at inventories and is that a concern?

Inventories, as we said, they are up at this point in time. Our expectation is that we will correct that all in, so when you look at our inventories coupled with field inventories, we're down. And that we look at kind of the whole system. If we would have pushed out the, our level of inventory that's higher over the prior year, we would -- the whole system would still be down. So I think we have been very proactive about managing inventory. We have a little more of it here, less of it out in the field and overall, we're managing the inventory I think appropriately.

Another question would be I want to make sure I understand the dynamic of this, how the snow season works, and particularly in Q4. Your guidance is for sales to be flat year on year this year. So far, year to date, you're down 2%. So that implies that you're going to have an up and sales growth in the second half of the fiscal year. How much of that is snow and how much of that is simply working down the field inventories to this point where the point of sale trends have been better than what your sales trends have been showing? I mean I'm trying to get a sense of what is driving the improvement in year on year growth in the second half.

I don't know if we have a specific answer there for you, Sam. Snow will be up significantly. It's a small part of our business, but it will be up significantly. We have, you know, we've been driving down some of the landscape contractor products, but we have a whole new platform coming that will, as I mentioned, will be going into production in the fourth quarter. And so that will have, as we rebuild field inventories appropriately and put that new product out there, that will have an impact. And then I think I mentioned the third point, where we had a distribution change, and that was a one-time thing that I'm not going to repeat. Those are the three main factors that will cause the fourth quarter to be up significantly.

So in the -- what do you think taking the field inventories -- what was the difference between point of sale and your sales if you adjust for the -- I'm just trying to get a sense of how much rationalizing this total inventory in the channel impacted your sales to this point. Any sense of that?

I think Mike said had field been the same this year as last year, that our sales would have been slightly positive for the six months.

I got you. I'm sorry. I missed that. I apologize. Okay. Thank you, gentlemen.

Thanks, Sam.

And there are no further questions in the queue at this time. I would like to turn the call back over to Mr. Hoffman for closing remarks.

Thank you, Heather. Thank you, all, for your questions and interest in Toro. We appreciate your confidence and trust in our brand and our team here, and we'll look forward to talking with you again in August with our third quarter results. Thanks, and have a good day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.