Toro Co (TTC) 2010 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 Ann and I will be your coordinator for today.

(Operator Instructions)

We will be facilitating a question-and-answer session towards the end of the conference. I would now like to turn the presentation over to your host for today's conference, Mr. Steve Wolfe, Chief Financial Officer of The Toro Company. Please proceed, sir.

Thank you, Ann. And good morning, everyone. Joining me this morning for our second quarter earnings call are Mike Hoffman, Chairman and Chief Executive Officer, Tom Larson, Vice President and Treasurer, and John Wright, Director of Investor Relations.

Let me begin with our customary 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 the corporate website, www.thetorocompany.com. I will now turn the call over to Mike.

Thank you, Steve and good morning to our listeners. First, for the record, I want to acknowledge that today is Steve's 25th anniversary with Toro and to thank him for his many contributions over the years. He has been and continues to be a great partner. So, Steve, on behave of all stake holders, thank you.

Well, our primary selling season is well underway and Toro's off to a solid start. I know this may seem obvious, but the mood today is more upbeat than a year ago and we're particularly encouraged with seeing balanced growth across both segments with continued strength in our residential business and renewed demand and optimism in our professional businesses. With the season shaping up better than expected, we released preliminary results earlier last week and revised our guidance upward to more accurately reflect our strong performance for the quarter and what we now believe our revenues and profits will be for the balance of the year.

The pre-release covers the highlights of what was driving our performance. Today, we'll provide some additional detail, so let me start with a summary of our financial results as reported earlier this morning. Net sales for our second quarter grew 12.6% from the previous year to $562.8 million, with double-digit revenue growth in both our professional and residential segments. On the earnings front, we posted net income of $45.7 million for the quarter, or $1.34 per share compared to $1.00 in the same period last year.

For the first six months, net sales were up 6.4% to $894.2 million, net income was $56.6 million or $1.65 per share, from $1.18 in the same period last year. Impacting net earnings in the first half of fiscal 2009 was a pretax charge of $2.1 million or $0.04 per share on an after-tax basis to account for workforce adjustments.

If you recall, back in February on our first quarter call, we stated that our continued investment in innovation, tighter cost controls and a focus on asset management would put us in a solid position to benefit from a recovery when our markets started to improve. What we didn't know at the time was whether Mother Nature would cooperate and at what pace the economy would recover. Well, favorable spring weather in March and April, particularly in the midwest and northeast regions, caused our customers to begin buying sooner this season. As for the economy, we are experiencing the early stages of a recovery that has translated into renewed optimism among our channel partners and end user customers. These external factors combined with the strong offering of innovative new products drove increased demand, as we ramped up for the spring selling season.

Looking specifically at our markets, it was another great quarter for our residential business. Customers responded well to the favorable weather, which helped jump start retail activity for the entire industry. Riding products saw healthy gains due to additional product placement for Toro TimeCutter zero turn mowers and continuing demand for our TITAN Zs. Sales of walk-powered mowers were also up on a year over year basis and benefited nicely from the introduction of the new Toro e-Cycler cordless electric mower.

With our residential products, allow me to take the opportunity to illustrate another example of our passion for customer valued innovation. Recently, we received high marks from a leading consumer magazine for our Toro and Lawn-Boy product line-ups. In its initial selling season, the new eCycler walk-power mower took top honors in the electric mower category, beating out competitive products that have been in the space for years. Lawn-Boy held its number one position for the second consecutive year among gas powered push mowers and Toro's base model of the popular TimeCutter was the new top pick for zero turn mowers. This was in addition to several other products being highly rated in their respective categories. I would like to personally congratulate each product team for their truly outstanding results that speaks volumes to our ability to deliver customer valued features at competitive prices.

Moving to the landscape contractor market, our business is making a solid comeback with sales up significantly for the quarter. Strong snowfall throughout much of the US provided contractors with revenue and profit producing opportunities to invest back into their businesses. Although many external factors have contributed to the growth in this market, our success can also be tied directly to the launch of several new products. Demand is being driven by our entry-level professional zero turn mowers and new category stand-on units, the Toro GrandStand and the Exmark Vantage, both of which have generated excitement in the channel and strong fleet sales.

In the rental industry, demand appears to be slowly returning with many national rental companies expected to step up their purchases as they replace aging fleets. To capitalize on future growth in this important market, we have expanded our rental relationships in the US and Canada to increase our penetration in key regions. Additionally, we recently acquired a dedicated line of stump grinders, log splitters and wood chippers from USPraxis to further strengthen our offering to rental and landscape customers. With this latest acquisition, a rapid brand conversion strategy is underway to allow supply of these newly branded Toro products to enter the market by July of this year.

Turning to the golf market, cool weather impacted rounds and revenues during February in southern states, but an early warm spring in the northern climates during March and April turned the market back in the right direction. Golf customers are more optimistic than they were a year ago and demand is starting to come back. While golf courses will be cautious in their equipment and irrigation purchases, they ultimately know that course conditioning is what helps them maintain their competitive advantage and attract new members and player rounds. As a result, we have seen renewed purchase activity for our core golf maintenance products, as courses once again reinvest in their fleets and our precision irrigation systems to reduce costs and improve water management practices.

In the sports field and grounds arena, tax supported municipalities remain challenged with budget deficits while other markets in the portfolio such as sports venues have been more resilient to the economic downturn. Despite demand being down, we have been able to extend our relationships to make solid intervals through increased exposure of our new products on existing government contracts. Recent wins include our Groundsmaster rotaries, ProCore deep-tine aerators acquired through Southern Green and top dressers acquired through TYCROP.

Closer to home, as mentioned previously, we were extremely pleased to have been selected as the exclusive provider of turf maintenance equipment and precision irrigation systems for Target Field and the Minnesota Twins and we are now helping Larry DiVito, the head groundskeeper, keep that beautiful new field in pristine shape. Larry has a lot to be proud of.

On the international front, China continues to experience strong growth in the real estate market with a direct impact on golf development. Korea, India, and Singapore also continue to add new courses. On the other hand, the golf market in Japan remains somewhat soft and golf projects in Europe have been slow to start this year.

I might add that Toro recently attended the inaugural World Golf Forum of Architects at St. Andrews in Scotland. This first-ever world summit attracted golf architects from more than 22 countries and provided a great venue to heighten the awareness around the critical issue of water and the environment and the importance of golf as a benefit to the worldwide economy. These discussions proved extremely valuable in furthering our leadership in the area of precision irrigation and to better understand how technologies are part of the global water solution.

In another area of precision irrigation, our micro business is up double digits for the quarter. Demand for our innovative Aqua-Traxx tape product continues to be robust. And this is true not only for the US, but throughout many other parts of the world.

As we look across our various markets, the increase in demand has not come without challenges. Availability has been tight on some models. However, we are working diligently so as not to impact our end user customers. Our supply partners also have been challenged to ramp up and we are partnering closely with them to increase output and shorten lead times. As a result of this focus, we believe we have been able to manage the flow of product so as to not lose market share due to product availability.

And lastly, before I turn it back to Steve, I want to take the opportunity to highlight a major accomplishment. As you saw in this morning's release, we officially reached our multiyear goal of driving our 12-month average networking capital as a percent of sales into the teens with the actual number now at 19%. When we announced this initiative back in early 2007, that number was almost 30%.

At the time, we indicated we would achieve this goal by the end of fiscal 2010 at the soonest. Reaching this transformational goal in the recent economic environment speaks volumes for our dedicated team of employees and the substantial improvement they made across all three elements of working capital. Those being accounts receivable, inventory, and trade payables.

This significant achievement has helped us generate additional cash flow and has freed up resources for other use in more strategic purposes. This is a great accomplishment for our entire team and I'm confident our discipline in this area will continue. With that, I'll turn it over to Steve to review our segment and operating results.

Well thank you, Mike. Looking at our segments starting with professional, worldwide sales for the quarter grew 12.6% to $349.6 million. For the year to date, sales were up 4.2% to $562.4 million. Improvement in both periods was a result of higher sales across most categories, led by significant increase in shipments of landscape contractor equipment on strong customer acceptance for new products. Orders for golf maintenance equipment were slightly up, driven by healthy demand in international markets.

On another positive note, sales from micro irrigation products were up worldwide, along with golf irrigation systems in Asia and Res/Com Irrigation products in Australia and Europe. Net earnings in the professional segment for the quarter totaled $67.6 million, up $10.7 million from the same period last year. The increase was largely driven by higher sales volumes. For the year to date, professional segment earnings were $93.4 million, up $6.4 million from the first half of fiscal 2009.

Turning to our residential business, worldwide sales for the quarter were up 14.5% to $210.1 million with sales year-to-date increasing 12.5% to $326.9 million. The increase was primarily due to strong demand for zero turn riders and walk-power mowers and even some additional shipments of snow products early in the quarter from the large snowfalls out east.

Net earnings in the residential segment for the quarter were $25.1 million, up $8.5 million from the same period last year. The increase was largely due to improved sales volumes and favorable product mix. For the year to date, residential segment earnings were $38.5 million, up $17.1 million from the first half of fiscal 2009.

Now to our key operating results, starting with gross margin, where we had solid improvement for the quarter and year-to-date. Margins for the quarter were up by 100 basis points to 33.3%, due to lower commodity costs in the second quarter of fiscal 2010 compared to the same period last year, better utilization of our plants, and the benefit of ongoing cost reduction initiatives. Year-to-date, margins have improved 70 basis points to 34%. While commodity costs compared to last year have been favorable on a year-to-date basis, we do expect some upward pressure on commodities for the balance of the year.

Moving to SG&A, expenses for the quarter increased 12.8% to $115.3 million and were flat with last year as a percent of net sales. For the first six months, SG&A is up 2.5% to $211.9 million, but has decreased as a percent of sales to 23.7% from 24.6% in the same period last year. The decline reflects the structural cost reductions put in place during fiscal 2009, somewhat offset by higher employee incentive expenses which were largely absent from our cost structure last year.

Interest expense for the quarter was $4.3 million, down 3.4% from last year. Year to date, our interest expense totaled $8.5 million, a decline of 3% over the same period last year.

Our effective tax rate for the quarter was 33.6% compared to 34.2% last year. The decline was due to a valuation allowance last year for a foreign subsidiary, somewhat offset by the expiration of the Federal Research and Engineering tax credit. For the full year of fiscal 2010, we continue to expect our tax rate to be between 34% and 35%.

Now let's look at the balance sheet, where a good story continues to get better. Once again, our execution to reduce working capital produced significant results for the quarter. Accounts receivable for the quarter was down $147 million, or 36% from the prior period, mostly attributable to the sale of receivables to Red Iron Acceptance.

Taking advantage of increased demand and lean production changes, net inventories in the quarter decreased $41.4 million, or 19.2% from the same period last year. And as a result of our supply chain initiatives and increased production volumes, trade payables increased by $72.7 million from last year's second quarter. The resulting cash flow benefits of all three elements of working capital, including our strong earnings performance, generated cash flow from operations of $80.8 million in the first half of fiscal 2010 compared to a use of cash of $72.9 million in the same period last year. Together, this represents a favorable change of $153.7 million.

This is the first time over -- in over two decades, and maybe in the Company's history, where we have moved from using cash to generating cash in the first half of the year, and we do expect this trend to continue in the future. With this strong focus on cash flow, we continue to pursue the right strategic opportunities to grow our business and return value to shareholders. During the first half of fiscal 2010, the Company repurchased $54.1 million of company stock compared to $4.8 billion in the prior year period.

That wraps up the results for the second quarter and year to date. I will now turn the call back over to Mike for some concluding comments.

Thank you, Steve. So, all in, we are encouraged with how we performed in the second quarter, as we entered the primary selling season. Our residential business has been especially positive and most of our professional businesses are starting to recover. We built some momentum, however Mother Nature has been somewhat more challenging the last few weeks.

With that said, conditions today still feel much better than a year ago when we were dealing with a very different set of issues. Then, our focus was on liquidity, the customer, and managing through the short-term without materially impacting the long-term health of the business. I'm proud to say our team responded well, and because of their efforts, we are a much stronger organization today, better positioned to capitalize on the unfolding recovery in our markets. This year, we can take advantage of our leaner cost structure and focus our attention on driving end user demand and renewing our strategic focus on future growth.

One of the major reasons we're doing well this year is because of the tough decisions that were made last year. Despite the difficult economic times, we preserved our engineering spending as a percent of sales and those investments are producing results this year and will continue to do so in future years. For homeowners, our new Toro eCycler electric power mower has been particularly popular and is starting to gain market share in this growing category.

Moreover, the two new TimeCutter zero turn models are experiencing excellent success early in the season. With our largest retail sales event now underway, we expect these products and others to generate strong demand at dealers and with key retailers. In precision irrigation, which is one of our strategic focus areas, several new products are gaining significant acceptance in the marketplace. Our new Precision Series Spray Nozzles are now being rebated by many water districts in California for their improved efficiency over traditional spray heads. And the much anticipated Precision Series rotating nozzles will be released this coming quarter.

Finally, our new Lynx Central Control System is proving to be a powerful technology for golf courses in its ability to integrate critical irrigation system components. Since being released in February, this product has exceeded our expectations and, as a related benefit, it should be a key driver of incremental sales of all golf irrigation products, including our Turf Guard Wireless Soil Monitoring System.

Finally, I want to express my appreciation to our talented team of employees and the many business partners who joined with us to serve our customers. I'm proud of their performance during the first half of the year. The season is far from over, and there is much hard work ahead of us. I'm confident we will remain focused on driving revenues and exercise continued discipline in the areas of spending and asset management. As previously announced on May 10, we expect earnings for fiscal 2010 to be about $2.40 per share on a revenue increase of about 7%.

This concludes our formal remarks. Now let's open it up for your questions. So, back to you, Ann.

Thank you.

(Operator Instructions)

And our first question comes from the line of Jim Lucas with Janney Montgomery Scott. Please proceed.

Thanks, good morning. And congratulations, Steve. That's a heck of a run.

Thank you, Jim.

First, housekeeping question. That $54 million of share repurchase, how many shares is that?

Hang on, we got it right here.

$1.1 million.

$1.13 million.

Okay, thank you on that. And wanted to delve a little bit into working capital, which has clearly been just a phenomenal story. You guys have done a great job and as someone who's been somewhat of a critic longer-term, I want to acknowledge that. Wanted to start first on the receivables side. When you look at the Red Iron Acceptance, where does that show up on the cash flow statements?

The receivables show up in the -- your operating cash at the top, top section.

Right, but are you actually selling off receivables? Just trying to understand.

Yes. They go off our balance sheet into Red Iron.

And so that's going under operating cash flow.

Yes.

Okay, great.

The receivables portion of it. The profit piece goes through the P&L through the other income section.

Right, I was just trying to understand the cash flow implication there.

Cash flow goes through the operating earnings.

Okay, and then on payables, that's probably the All-Star here. Could you break down to the extent you can of the improvement of how much of that is just better, the fact that you're producing once again versus the new supplier initiatives that you introduced a year ago?

Yes, it's, it's about half volume, and to your point, the fact that production's picked up and we're buying more, you obviously have more payables to defer. And it's probably half extended longer-terms through the Trade Finance Program as a piece of that and just extending terms, we've had a goal of 60 days, as you know, getting our terms out to that length. So it's about half and half.

Okay. And FX in the quarter, what was the revenue impact?

It was a little over $4 million for the quarter and $14 million for the six months.

All right, and that was a tail wind, correct?

That increased sales by those numbers.

Okay, I got you. And specifically with Europe, since that is what's dominating the headlines these days. Can you talk about what you expect from a currency impact in the second half of the year, but more important, what you're seeing just from an overall demand standpoint in Europe?

Yes, first, the whole issue of the Euro is -- has turned into a hot topic, as you know with what's going on there. Let me start with sizing what our exposure is. We talk about 30% of our sales being international, which is true.

Half of that goes to Europe. So, it's half the international number and half of that number is actually billed in Euro. And part of that is offset by our in-house operations, where we're making purchases and having expenses that we can use to offset some of that. So, this isn't a huge area out where we've got a gigantic exposure in the Euro.

Our hedging process, as we've talked about in the past, is we hedge it in, if you will, over time. We don't do it all at one point in time and we're actually starting to look at 2011 right now. I think I said on the first quarter call that we were halfway through, 50% hedged for F 2010, so we kind of watch to see where it's going to see how soon and how much we should hedge with the idea of never getting to 100% hedged. We're maybe 80% hedged because you can't predict that last 20% of cash flow that closely.

So, my point is, one, it's not all our international business that's exposed to the Euro, it's a smaller dollar amount. For F 2010, we're pretty well set, hedgewise, and we don't expect any major change in currency impact for the back half because we got a lot of that in place. 2011, we're going to have to look at and see what do we do here. Now, part of the issue here is most of the competition -- all of the competition are exporters just like we are, so everyone's going to face the same issue and can we get some of this in pricing, do we have to put some of this in our plans as we start looking now at our F 2011 plan, we'll be looking to see how we best cover the costs of the Euro if it stays down where it is.

The other currency we have exposure is the Aussie dollar, which hasn't dropped as much. It's dropped a little more this week, but that actually gave us some favorability. So, you've got to look at the whole thing. The point, is we're looking at 2011 to see what we need to do there. And will things turn around and the Euro come back and then you start hedging as you start seeing it come back.

Where are we on the hedging cycle, because we're really in a different position this year, particularly with the Euro being at a low versus at a high, as we started last year. So your strategies may change as a result of that. Long winded answer. Sorry about that.

No, no, very helpful. Then just from demand standpoint in what you're seeing in Europe?

So, Jim, this is Mike. Let me just color demand a little bit and say that the -- Europe is more heavily weighted to commercial than -- or professional than residential. And demand was improving year-over-year.

A little color there. We, just a couple weeks ago had our Spanish distributor in for a visit here in Minnesota and he was seeing Spain was particularly hit early into the recession and probably could take a little longer to get out, but nonetheless, was seeing some positive signs, things moving back in the right direction. And I would say that was largely true throughout Europe on the commercial side.

Now, with that said, with what's been going on here more recently, we'll see whether that takes a bit of the bloom off the rose. But so far, professional demand in Europe has been improving versus last year.

Okay, great. Thank you.

And our next question comes from the line of Eric Bosshard with Cleveland Research group. Please proceed.

Good morning.

Good morning.

A couple things, first of all, the incremental margin in the quarter looks to have been around 20%. And it appears that on SG&A that it grew in line with sales, which is an accelerated pace from what we've seen. And it appears there's probably some catchup there, but rather than guess, can you just talk about what drove the incremental SG&A growth relative to prior quarters and how that should look as we move forward?

Yes, it's -- when you start talking incremental margins, you've got to kind of look through what you're doing. From a top line standpoint, that makes a lot of sense. And when you look at first half of 2010 versus back half of 2010, the sales are pretty well split 50/50. So that's pretty straightforward. When you start looking at where the expenses fall underneath that year over year, then you get a little different picture. And if you think about it, first half of 2009, we still had a normal spending number in our plans, because we didn't realize how bad the recession was going to be.

And in that first half, we started to cut costs, took the P&L hits for adjusting for work force and the things that we had to do. So, our expenses were high, along with commodity costs were still going up. So first half of 2009, you had kind of high costs, high commodities.

As you got into the second half of 2009, that starts to go the other way. We were getting the benefit of some of the cost reductions we had made. Commodity prices started coming down, so you really had lower costs, lower commodities.

You now are comparing that, when you do your incremental margin work, you're comparing that to F 2010. And what happened in F 2010 was just the opposite. The first half was low cost, low commodities, and now as we go into the second half, we're seeing commodity costs starting to go up and some catchup on expenses that are going into the second half. So, you've got them going back the other way.

So, you've got the double whammy of them both going opposite directions, which tends to take, have 2009's incremental margin first half look greater -- I'm sorry, 2010's look greater and the back half looks smaller. So, you really got to look at what you're comparing them to year-over-year.

So within that, is the take-away from that, the incremental margin in 2Q may get a little bit worse than the second half because of the factors you talked about? Is that the way that we should think about it?

Yes, that's what we're saying exactly.

On a longer-term, over the next 24-month basis, do you think about how the incremental margin should behave in this business?

I think, Eric, I may have put it in the context of, rather than incremental margin over the longer-term, one of the goals is you start talking about where's it coming from, gross margin, or SG&A costs. And so our gross margin's still significantly below where it was, where we wanted it to be. Some of that is the environment and some of that is mix and so on and so forth.

So, the goal will be to drive that up and then certainly below that. We've talked about our SG&A is still too high. It was obviously too high in 2009 and we're in a recovery year. Our goal is to, if we end the year somewhat under 26%, our goal would be to drive that down to 25% and 24%. And when we do that, obviously you can do the math. It will drive that incremental margin.

And just lastly, to close the loop on SG&A, are there areas of significant incremental SG&A investment that you have to replenish or refill or catch up on? Are there any areas in that, that are going to be what take on or require this stepped up spending that we saw in Q2? Sounds like it continues in the second half.

I wouldn't say significant. There are people costs obviously. We took a lot of people costs out, so you've got an extreme on one end.

You've got to replace that, as business comes back to keep your employees motivated. So, that's a problem. That's a piece of it. But there aren't any huge ones other than that I can think of off the top of my head.

The second question relates to inventory share. I understand the receivables situation with Red Iron, but in terms of inventories being down pretty materially and the sales up in this more optimistic outlook for sales, is the business now where you can run it with that much less inventory? Or do you have not enough inventory to supply the demand? Just help us understand how that inventory number should track as we move forward.

Well, Eric, this is Mike. I would say we continue to learn there, as was said in the earlier comments. We don't believe we have lost market share as a result of availability. That's something we are talking with our customers and listening carefully, and so that would suggest that if we can manage the inventory supply better, if we can -- if our plans are more flexible, we can make products more quickly, we have the whole lean enterprise philosophy, then we can take inventory out of the system.

And there was -- we would look across the business and say there's clearly too much in inventory in some of the areas and we've continued to take that [outlance] contractor business is a good example. And so that's something we are constantly testing and measuring. Now, we certainly have seen this year with the swing -- upward swing in revenues, put some pressure on that and so -- but it is not our intention today to push inventories back up, it is to try to see if we can try to manage them at lower levels, not to the point obviously where we compromise our customers and lose market share.

And then lastly, on Europe, I know that you framed the business earlier, but based on what's going on with currency alone, not extending that to what might happen with demand, but is there any ability for you to frame what the financial impact on the company might be in 2010, 2011 based on the 20% devalue we've seen in the Euro?

Well I think, let's start with, as Steve said, most of Europe, the competitive environment is tied to, I'll say US suppliers, and so we had seen things moving in the right direction and revenue is creeping up there on the commercial side. Not so much anything that has to do with construction, but more of the maintenance of the properties, whether that was golf courses or large grounds areas, and sitting here today, how -- what's going to happen to Europe, is Europe going to see a continuation, albeit slower recovery or is Europe going to take a step the other way? That's the wild card here.

If it continues to try to solve those problems and incrementally recovers, then I think we'll be fine even with the currency issue of the lower value of the Euro and we will certainly be talking with customers. And certainly, the product all has to get shipped to Europe for golf equipment and golf irrigation, for example. Customers may not not able to spend quite as much. And that's something we're going to have to look at, probably more for 2011 than for 2010. I would guess less impact in 2010. But a good question.

You said half of the business over there is -- half of the Europe revenues -- that's Heider is made in Europe, sold in Europe. The other half is made in Europe and shipped over there, is that accurate?

No, no, half the revenues in Europe are denominated in Euros. The other half we sell in US dollars. Most of the product, almost all of the product with the exception of Heider and a small part of it in micro irrigation comes out of the US.

Okay. Thank you.

Thanks, Eric.

And our next question comes from the line of Sam Darkatsh with Raymond James. Please proceed.

Good morning, Mike, good morning, Steve.

Good morning, Sam.

Couple of questions for you. Regarding channel inventories or field inventories, was there a fair amount of restock that you were able to measure in the quarter? And does your guidance going forward for the next couple of quarters assume any restocking?

The guidance -- actually inventories are down, so there was -- there was -- through the first half, there was a year over year basis, there was no restocking. And, and as we just talked earlier, we would like to work hard to try to manage inventories at lower levels, which has positive benefits for the whole system for the channel for us. And -- but that's something we've got to closely measure, monitor, make sure that we're not going to do it to the point where we compromise our retail sales.

So, there's a strong focus there across all the businesses. The golf customers, landscape customers, the homeowner customers, think the risk is higher from a channel standpoint. The risk is always higher on the residential side, because if it's not on the shelf and a customer comes in, you've lost it.

On the commercial side, go to the other book end, we're selling $50,000, $100,000 piece of large capital equipment, a customer is going to be a little more planful and probably going to wait a little longer. And we don't want to take -- want to be careful about that, not abuse that. So, we look across the full customer spectrum and say, okay, what do we have to do to make sure we can be timely in supplying the customer, but not have too much.

And I think what you've seen over the last two years is we've been able to continue to take inventory out, continue to drive market share and high customer satisfaction. That's the good formula.

And while we're on the working capital subject, your payables are approaching, if not exceeding your inventories, which is certainly remarkable. Is that sustainable? Is that of a seasonal nature? Is that a goal that you have? And speaking of goals, what would be the goal of working capital to sales over the next few years or so?

It's probably not sustainable you're seeing some of the seasonality. Part of what you're seeing is the selling and the manufacturing cycle has gotten compressed. So you have maybe a higher spike than you normally would have. So can you continue at that level? Probably not. That's an abnormally high.

Part -- when you look forward with working capital and what should be done, we've gone from a transformational goal that Mike talked about, and that was getting in the teens. And now we would see that being more of a continuous improvement type of thing and we'll get a couple more points out of that, probably just through annualizing the Red Iron impact. We've not been through the full cycle of the Red Iron impact. So, as we go through that, we'll get a couple more points lowering and then we'll continue to work that so that its improvement year over year.

Your share repurchase activity, accelerated pretty meaningfully in the quarter. I think you went from $4 million last quarter to $50 million this quarter. Was it something strategic that you were looking at in terms of business was getting better, so you got a little more aggressive on it? Or is this a level that you would have somewhat sustained? And where all free cash goes to share repurchase? How should we look at incremental share repurchase activity going forward?

Well, Sam, this is Mike. We'll start with the usual positioning. First and at the top of the list for us, strategically, is to find opportunities to grow the enterprise and continue to work that, as we said on so many calls, we don't have total control on that. It takes two.

And so we'll continue to work that process. But then that gets to the share repurchase. I think it would be fair to say as we went through 2009, more weight was put on liquidity, period. And companies were just being more careful there. Not say liquidity -- liquidity continues to be very important, but we have a significant amount of cash, and so share repurchases have always been an area of focus for us and will continue to be second on the list after pursuing acquisitions.

Last question, if you could talk about what you're seeing in May in terms of trends, your guidance suggests for the second half a little bit more of a moderate growth rate, despite the fact that your year over year comparisons really don't get that much more difficult. So, is that based on something you're seeing currently out in the field, or just being conservative, or how should we look at the more moderating growth rates in the next six months?

Well, when you think about where we've come from, from expecting this year to be virtually flat to now be up 7% and do we all hope for more? We do. Is this going to be a sustained recovery? We'll see.

I would say to you that even as we've started off now in the third quarter, some of that momentum really strong momentum we had in the first half has slowed some. Part of that is Mother Nature's been a little less cooperative and we think that's not -- that's an industry impact, not a Toro or share impact. So, I think -- we think at this point our guidance is reasonable.

There's still some question marks out there. What's going on in Europe, and that continues. When you think back four weeks ago, things feel a little different now. We hope that's not a, that's not a huge setback to the whole, call it the whole global economy, but there are some questions there. So that's what leads to our 7% top line growth for the year.

And that's equally seen in both pro and resi, or is that more in one than the other, in terms of the moderation in Q3?

Not surprisingly, I think you tend see the real time impact faster in residential, right, so the customer's reacting -- purchase decisions are made more realtime. Things tend to be more planful on the professional side. So when they are planful and it's trending up, then if things start to slow down, it may take a little longer.

So that's one of the questions, questions that was asked earlier. Europe was trending in the right direction as a result of what's happened over the last few weeks, what's going to happen in Europe and what's it's -- what's the consequence, and what's its impact back on the rest of the markets, the rest of the world. So, fair to say now here at the end of May, a little softer than 30 days ago. Something we could manage through at this point. We'll see if it turns around and starts moving -- that momentum building back.

Thank you both. And again, congratulations, Steve.

Thank you, Sam.

Thanks, Sam.

And our next question comes from the line of Jim Barrett with CL King & Associates. Please proceed.

Good morning, everyone.

Good morning, Jim.

Mike, given your current outlook for acquisitions, are European deals starting to look more attractive if the Euro were to stay depressed or to decline further versus the US dollar? And then more generally, are multiples trending up, down, or sideways when you look at prospective companies to purchase?

That's a very good question. So, as we've said, we have a real appetite for looking at acquisitions outside the US, and one of the things we had felt last year, as we faced the tough economic environment, multiples didn't contract as much as we would have hoped. And if they did, it still takes a willing seller and buyer, if you will.

So, I'm not going to be able to give you a very precise answer to your question. We look -- when we look at the acquisition arena, we look at Europe, we look at Asia, we look around the world, we look -- probably weight professional, as we've said, more heavily than residential. Have not -- could not answer specifically if we've seen anything materially change in the expectation, European deals, but we're working them.

And then on a separate subject, within golf, could you -- has there been any divergence between the performance of your irrigation products versus your course maintenance products? And could you give us some sense as to how international markets are performing within golf versus the US markets?

Sure. The -- contrasting it to last year, equipment tends to be more in the category of maintenance products and irrigation tends to be more tied to construction, if you will. So when you look at it that way, we saw the maintenance products last year in particular -- well, I guess around the world. Lifecycles start to get stretched out. New golf was virtually nonexistent in the US. But was more significant -- well, was growing outside the US.

So as we sit here today, new golf outside the US continues to be a solid part of the business, an important growth-driver and we've got a very strong position there. We have seen some -- we're seeing some pickup in the US on golf irrigation more in the renovation. Golf courses renovating, replacing an old system.

The good news for us, for those of you that were at the show in San Diego, we just introduced a new central control system. It's just an outstanding product, as we said in the earlier remarks, that goes beyond just a timer for turning on and off irrigation, but it starts to incorporate sensing technology and flow management and better ways to help the golf course manage both the cost of water and the cost of power. And so that gives us something to go into those existing US courses and say, hey, time for a change, whether that's a whole new system or an upgrade.

And so we'll see, I believe in 2010, we'll see an uptick on golf irrigation there and golf maintenance equipment, we have started to see that returning. As we've said in the past, you could only extend the lifecycle of equipment so far before the cost of repair and maintenance starts to get to be too high. So, from a pure growth standpoint, you know, clearly international. From a recovery and getting some of the business back, the US is coming back.

Thanks, Mike. And then my final question really referred to input costs. And I'm thinking of steel, specifically. Will the industry need to take pricing going into 2011 if these input costs stay where they are and if they do stay where they are, and if the industry does need to take pricing, any sense as to what the magnitude of that pricing broadly speaking is likely to be?

Yes, good question, and the best answer is we'll see. I think the fact is, you know, 2010, we've said, felt virtually no price realization, not surprising for the times in the environment, and that ties back to, again, we price to market, not to costs, but costs clearly have to be a part of that. And how do we, how do we look vis-a-vis competition.

So we feel okay about that as we're moving through 2010. We're managing through that. We expect commodities are going to become a bit more of a headwind. We'll watch that carefully. It's one of those it depends, right?

So oil and resins, well, looks like it's going to creep up and get what's going on in Europe and it goes the other way. So 2010, we can manage through that, and as we wrap that up, we'll start the annual planning now, get through this season, start looking at 2011, and price is very much a part of the annual planning process and part of trying to anticipate what's going to happen in the marketplace, what's going to happen with your costs and so on. So, I don't think we would even try and foreshadow 2011 at this point.

Thank you very much.

Thank you, Jim.

And our next question comes from the line of Mark Rupe with Longbow Research. Please proceed.

Good morning, guys. You had mentioned that the residential segment margins benefited from favorable product mix. Curious to see if there was any margin implications from mix on the professional side.

I don't, I don't think so. As the mix went -- as we saw the mix move from the larger commercial kind of products to the, if you will, the landscape products last year, that put some pressure on as we talked, the landscape products are up nicely. So, just on that basis, not so much. We're clearly putting more product through our operations, and so that -- we get that benefit. That's not mix related.

Okay, okay, and then secondly, as it relates to the rental channel, you cited that it was an important market. Could you remind us how big that is and whether or not that continues to grow, what kind of implications that might have on margins as well.

Yes, we would characterize it today as a new market for us, relatively new market, embryonic, so, not material. Want it to be in time.

Okay. Thank you.

And our next question comes from the line of Seaver Wang with HFP Capital Markets. These proceed.

Just had a question on residential, the margins in particular. Very strong, 12% for the first half of the year, which is trending well above where -- you guys in the previous cycles have been more in the 10% range or peaked around the 10% range. Is that mainly because just weather -- everything kind of aligned and you were -- you had good weather basically, good spring, and maybe some residual business from snow or is that sustainable?

Yes, well, I think you summed it up there. We did have a number of good things happen. Weather was positive acceleration of the revenues, the -- even the snow piece in the second quarter was helpful in terms of the margins.

We've -- regarding the question of sustainability, As we've talked with you in the past, our goal has been to get this business performing better, relatively better. We're seeing some of that now. I think that the residential team is doing a really good job dealing with that issue around profitability and moving it in the right direction, and that starts with providing, you know, products, the right products, innovative products that can command better gross margins and overall better profitability. And as I talked earlier in the call, they have had a number of those come about. So, we will work very hard to keep the residential profitability at that level, which it was at a number of years ago.

Is there a number that you guys are striving for?

Well, we had talked in the past about at its peak, that goes back to the middle part of the decade, we were roughly at 12%, and we're close to that now. And so we would try to continue to say incrementally improve it over time, recognizing that it will go through some ups and downs, too.

Okay, thank you.

Thanks, Seaver.

Ladies and gentlemen, with no further questions, this concludes today's question and answer session. I would now like to turn the call back over to Mr. Mike Hoffman for closing remarks.

Thank you, Ann, and thank you all for your interest in the Toro Company and for the questions today. We appreciate your confidence and trust, and we will look forward to talking with you again in August to discuss our third quarter results. Thank you, and have a great day.

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