Toro Co (TTC) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to The Toro Company third-quarter earnings conference call. My name is Jasmine and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's conference to Mr. Kurt D. Svendsen, Managing Director of Corporate Communications and Investor Relations for The Toro Company. Please proceed, Mr. Svendsen.

Thank you and good morning. Joining me for our third-quarter earnings call are Mike Hoffman, Chairman and Chief Executive Officer; Renee Peterson, Chief Financial Officer; Tom Larson, Vice President and Treasurer; and Blake Grams, Vice President and Controller.

We begin with our customary forward-looking statement policy. During this call, we will make certain forward-looking statements, which are intended to assist you in understanding the Company's results. You are all aware of the inherent difficulties, risks and uncertainties in making predictive statements. 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. A copy can be found in the Investor section of our corporate website, thetorocompany.com. I will now turn the call over to Mike.

Thank you, Kurt, and good morning to all our listeners. The favorable spring weather conditions we enjoyed across much of the United States during the first half of the year took a dramatic turn this summer with a record-setting heat wave and the worst drought the country has seen in over 50 years. The extreme lack of moisture across most of the country, coupled with the continuing global economic issues, slowed the robust sales momentum we generated during our first two quarters. However, our third-quarter results still outpaced fiscal 2011 and we delivered improved revenues, gross margin and earnings per share in spite of the weather and economic challenges.

While net sales for the quarter only grew 1%, earnings per share increased 22%. For the first nine months, net sales increased 6.8% while earnings per share rose 21%. While currency exchange for the international business was somewhat negative, it had very little impact on both the quarter and year-to-date results for the Company.

As reported in our earnings release earlier this morning, the slowdown we experienced during the quarter required an adjustment to our EPS guidance for the year to $2.10, which still represents a 14% improvement over last year, even with the $0.08 for investments we made for acquisitions this year. Renee will discuss our financial and operating results in more detail later in the call.

Several of our key businesses, most notably professional golf, landscape contractor and grounds, and micro irrigation, continued to perform well in North America. Our residential markets, which are more immediately impacted by swings in Mother Nature, saw industry-wide slowdowns due to the drought. Even with the drought, our overall year-to-date retail numbers remain favorable across most businesses.

International sales, however, had a tough quarter in virtually all areas. The European economic troubles, excessive moisture in key Australian and Asian markets, along with sluggish Asian golf development, reduced sales for most of our Toro and Pope products. On a positive note, Japan's continued post-Tsunami recovery and strong residential product activity in the U.K. helped somewhat to offset the international sales decline.

Moving on to our individual business segments, first, in golf, courses continued systematic capital investments in new equipment to replace their fleets, and we saw a continued benefit from delayed purchases during the recession. Confidence in the golf industry remains solid. The National Golf Foundation's monthly reports show that the number of golf rounds played continues to grow. The increased revenues courses are experiencing this year will positively impact their future capital budgets and our sales opportunities for fiscal 2013. As courses are watering their greens and fairways more to keep them healthy, the drought highlights the need for and the benefits of our water-saving golf irrigation solutions.

We continue to proudly serve many of the games' leading courses as they host premier events including The Olympic Club in San Francisco, site of this year's U.S. Open; South Carolina's Kiawah Ocean Course, home of the recent P.G.A. Championship; and stately Medinah Country Club located in the Chicago area where the Ryder Cup will be held late next month. Medinah is actually one of Toro's oldest accounts having purchased their very first Toro tractor back in 1925.

All three of these exceptional venues use both our course maintenance equipment and irrigation systems. Helping prepare a course for such major tournament events provides an important stage for our industry-leading products and services. For instance, at the U.S. Open, the greens of The Olympic Club were manicured with a walk greens mower fleet made entirely of our Toro e-Flex mowers, the industry's first lithium ion battery-powered greens mower. The exposure clearly generated enthusiasm and interest in this revolutionary, new Toro product.

It is show-stopping innovation, like that of the e-Flex, which allows Toro to consistently capture not only the attention, but also market share. Our golf retail sales are tracking nicely ahead of a year ago.

Moving to our landscape contractor businesses, our third-quarter sales results varied regionally in alignment with the drought patterns. Early spring activity in the Northeast and Midwest slowed when the rain dissipated. However, sales exceeded our expectations in the Mid-Atlantic and Southeastern states during the quarter as these particular markets enjoyed ample moisture. Reports from the field suggest we are gaining sales from large acreage owners who are replacing their aging lawn and garden tractors with our latest commercial grade zero turn equipment.

The Site Work Systems business benefitted from incremental sales of products from our recent Astec Underground and Stone Equipment acquisitions, which helped offset lower demand for other equipment. These results highlight the true potential of our decision to pursue diversification of our Site Works portfolio beyond compact utility products. Although earlier demand from the rental companies eased for the quarter, it remains ahead for the year.

Next, our professional grounds business is delivering somewhat modest year-to-date retail gains. Our large area rotaries are being well-received by municipalities seeking efficient mowing solutions for increasing their productivity as a result of their downsized staff.

On the residential front, while lower snow thrower shipments were anticipated in light of last winter's snowfall levels, an industry-wide slowdown in riding products triggered by the drought resulted in an even larger sales shortfall for the quarter. On the positive side, our walk power mower sales appear to have outperformed the industry on the strength of our exciting new TimeMaster 30 and our value-priced steel deck Recycler line.

Much like our landscape contractor business mentioned earlier, the strongest activity for the quarter came from the Mid-Atlantic and Southeastern sections of the country. Sales of our new lithium ion battery-powered string and hedge trimmers, along with early demand for electric blowers, helped our home solutions line exceed expectations for the quarter.

As I previously mentioned, we enjoyed an unexpectedly nice increase in sales of residential products in the U.K. due to favorable weather and, according to some observers, from the consumers' euphoric attitude related to the Queen's Diamond Jubilee celebration and the London Olympics, where many venues were cared for using our professional turf and irrigation equipment.

Increased sales of our Unique Lighting products in addition to healthy golf irrigation systems renovation activity delivered increased sales for our irrigation and lighting businesses for both the third quarter and year. The introduction of a number of new products like our LED drop-in lamps and the establishment of new distributors helped energize our lighting sales.

We are also proud to report that our new TS90 Sports Turf Rotor helped maintain a pristine playing surface for the Euro 2012 Finals, one of the premier soccer events in the world, that was held July 1 at the Ukraine's Olympic Stadium in Kiev. The TS90 is the most innovative and versatile irrigation rotor for long throw sports field applications. It helps sports organizations save water, time and money; all worthy goals, as we celebrate the 50th anniversary of our entry into the underground irrigation arena.

Finally, our micro irrigation business continued its solid growth path on strong demand for our Aqua Traxx tape and hose products in the United States and Mexico. The world's ever-increasing demand for food requires creative answers for maximizing crop yields like the high-efficiency performance of our micro irrigation solutions.

So now before I turn the call over to Renee, I want to take a moment to recognize an anniversary. Yesterday was the one-year anniversary of Renee joining The Toro Company as our CFO. Renee, of course, followed a very strong and highly respected Toro leader, Steve Wolfe, who, as CFO, was an invaluable partner to both Ken Melrose and me. This past year, Renee has demonstrated that she is clearly up to the charge of continuing our legacy of strong, effective CFOs and I value the partnership we are developing. I want to thank Renee for her first of what promises to be many rewarding years with Toro. Renee now will detail the financial results.

Well, thank you, Mike, for that special recognition and good morning, everyone. Net sales for the quarter grew to $504.1 million compared to $501 million for the same period a year ago. We delivered net earnings of $40.5 million, or $0.67 per share, compared to $0.55 in the third quarter of fiscal 2011.

Year-to-date net sales grew to $1.6194 billion compared to $1.5159 billion through the third quarter a year ago. We achieved net earnings of $129.3 million, or $2.13 per share. This compares to third-quarter fiscal 2011 earnings of $112.6 million or $1.76 per share.

Our professional segment sales were up 4.4% for the quarter to $361.1 million. Year to date, sales were up 7.7% to $1.1009 billion.

The professional segment net earnings for the quarter totaled $70.5 million, a 9.6% increase over last year. For the first nine months, professional segment earnings were $211.3 million, up 12.5% compared to the same period last year.

Our residential sales for the quarter were down 7.9% to $135.9 million, which is almost entirely attributable to the reduced shipment of snow throwers. Year-to-date residential sales grew 5.2% to $505.4 million.

Net earnings in the residential segment for the quarter totaled $10 million, up 116.6% from last year. Please keep in mind that last year we incurred a one-time $4.5 million pre-tax cost associated with a walk power mower rework issue that resulted in a decline in earnings. For the first nine months of this year, residential segment earnings were $51.2 million, up 20.3% from the same period a year ago.

Now to our key operating results, third-quarter gross margin improved 180 basis points to 35.3%. Price increases across most businesses, favorable segment and product mix, and reduced rework costs all helped offset lower margins from acquisitions and inflationary commodity costs. Year-to-date gross margin was up 40 basis points to 34.6%. For the full year, we are now expecting further modest expansion of gross margin from last year's level.

SG&A expense as a percent of sales increased by 60 basis points for the quarter due to higher healthcare costs and increased investment in acquisitions. For the first nine months, SG&A decreased by 50 basis points through leveraging expenses over a larger sales base. As sales slow in the fourth quarter, we anticipate SG&A to end the year slightly higher as a percent of sales than last year.

Operating earnings increased 120 basis points as a percent of sales for the quarter to 12.1% and by 90 basis points to 12.5% year to date. As we mentioned during our last call, our Destination 2014 initiative's focus on productivity as a means of achieving continual profit improvement is clearly having an impact.

Interest expense for the quarter was $4.2 million, down 2.2% from the same period a year ago. Year-to-date interest expense was up 1.5% due to slightly higher debt levels.

Our effective tax rate for the quarter was 31.8% compared to 32.9% last year. For the first nine months, the tax rate was 33.3% compared to 32.8% last year, due to the expiration of the domestic research tax credit. We expect our tax rate for the full year to be about 34%.

Turning to the balance sheet, accounts receivable at the end of the quarter totaled $197 million, a 1% drop compared to the same period a year ago. This change reflects the combined effects of exchange rates and the comparative quarter-end date.

Net inventories were up 1% to $234.8 million. The inventory growth was primarily driven by incremental inventory from acquisitions and to a lesser extent by the softening in sales momentum.

Finally, trade payables decreased 2% to $124.2 million.

You might recall that we were successful driving working capital as a percent of sales, down into the teens as part of a previous Company initiative. We continue to remain focused on inventory, accounts receivable and trade payables management. At the end of the third quarter, the Company's 12-month average net working capital as a percent of sales was above last year's levels, and we expect to end the year slightly above 15%. The increase in the year-end rate is partially due to higher inventory related to the Tier 4 transition.

I will now turn it back to Mike for his concluding comments.

Thank you, Renee. The drought that ravaged much of the United States slowed turf equipment sales throughout the industry. Sluggish retail sales particularly in our residential and landscape contractor businesses resulted in our finishing the quarter with higher field inventory than a year ago.

Right-sizing field inventory levels as we prepare for a successful 2013, along with weather conditions and ongoing economic issues, all contributed to our decision to adjust our fourth-quarter guidance.

The Company now expects revenue growth between 4% and 5% for the year, and fiscal 2012 net earnings to be about $2.10 per share, which includes an $0.08 expense associated with the investment in the integration of the Astec and Stone Equipment acquisitions.

The adjusted guidance also means our Destination 2014 employee engagement initiative has been negatively affected by the current market conditions. After a successful start in 2011, our revenue outlook in 2012 has us falling short of the organic growth goal of $100 million per year and the opportunity to exceed $2 billion for the first time in the Company's history. But given the shortfall in residential sales due to the drought and the shortfall in International sales due to the economic issues in Europe, the gap was too much for even strong performance in golf and micro irrigation to make up.

On a positive note, our focus on quality, cost and productivity is helping to deliver results on the other goal of our Destination 2014 initiative -- operating earnings improvement. Continued gross margin expansion and SG&A leverage have Toro positioned for another positive step in bringing operating earnings to 12% or above by 2014. And favorable commodity and cost trends, and the probability for better comparable winter and summer weather next year, offer signs that our external environment may be more conducive to progress on both revenue growth and operating earnings improvement in 2013.

While somewhat disappointing, considering the business and external environments 90 days ago, the guidance still implies full-year record levels of revenue and earnings per share for the Company. Thanks to our solid product portfolios and the hard work of our dedicated employees and channel partners, we look forward to a successful conclusion of fiscal 2012 and solid positioning for the coming year. This concludes our formal remarks. We will now take your questions, so Jasmine, back to you.

(Operator Instructions). Eric Bosshard, Cleveland Research Company.

Good morning. A question for you on the revenue outlook. In terms of the $100 million of organic growth a year, when you look at this year, it seems like weather and some other issues outside of your control limited that. I am curious as you think about that, the achievability of that number in 2013, I would love you to answer and put into context the feel at this point to the need to take field inventories down and how we should link that to how you think about 2013 revenue growth.

Okay. Well, to be clear, now we're not -- we will talk in more depth about 2013 on our call in December, so we are in the kind of planning process as we begin. I think the field inventory situation will start there. That is reflected in our current guidance. That is one of the reasons we made the change and so we will, I think, go into the year in a solid position there.

And then back to your question on the goal, the $100 million of organic growth, we will still be -- that will still be our goal. We are not immune to macroeconomic and Mother Nature's situation. We would look at the drought and hope that was more in kind of a near-term context and even we are already seeing some rains hopefully diminish that. We saw that same thing happen last year down in the Southwest in the Texas area and that recovered pretty nicely. But the drought was certainly more pervasive this year.

So on the weather side, the Mother Nature side, as we look at fiscal -- as we wrap up '12, it has really been the tale of a great preseason because of the snows a year ago last, followed by a pretty marginal in season because it didn't snow last year, followed by a great spring, followed by a pretty marginal summer. We will be looking at those same kind of things as we build the F'13 plan.

The other wildcard there obviously, Eric, is the economic situation on what is going on in Europe and how will that impact kind of the global economic environment. And so you know as much as we know that there today we are watching that. We aren't anticipating a stepchange, but that is something that we will be keeping a keen eye on and being prepared to be nimble and flexible depending on which way that trends.

That is very helpful. When you think about -- I guess if you could just give perhaps a little bit more color on the field inventory reduction. It seems like your dealers and distributors have had a great run for the last 24 months or 12 months or however you want to frame it. How should we read or how are you reading the need to pull some inventory out of the field after that run? What is driving that I guess is the question?

Yes, it's a good question. I've probably said that not quite right in talking in the last comment because that was in -- the inventory situation is really in a quarter context. And so when you look at our kind of outlook for the year, the current guidance for the year, that is much more about Mother Nature and the economic situation.

So we will adjust the field inventory, set the stage nicely for 2013 in this next quarter that is now reflected in our guidance. Obviously then that pulled our revenue growth down in the fourth quarter. But with that said, we will go into 2013 with field inventories in very good shape as we did this year.

And then just one other question, if I could. When you talk about essentially 2 points of margin growth between 2013 and 2014, are there any sort of large buckets of opportunity that you have in your mind that you see allowing you to get to that goal?

Well, we wish there was like one thing we could do that would solve the problem or make the difference. The answer is no, it is not one thing, it is many things and it is going throughout kind of the whole business looking from top to bottom on the P&L. We will need to drive gross margin improvements. That will be through better plant utilization, through hopefully buying our materials better with -- below that, continuing to look for opportunities to leverage SG&A, but leverage it in the right ways to continuing to kind of investments we want to make in engineering and R&D for the future and trying to look at other areas where we can be more efficient.

And then I would say that -- Renee can weigh in here if she would like -- that is one of the things Renee has really taken point on is, I will say, enterprise productivity from the top of the P&L to the bottom and we are making good progress there. But it is not one thing; it is many things.

I would agree with you, Mike. I think it is a journey that we are on and we made good progress this year, but continuing work ahead.

Thank you very much.

Michael Wherley, Janney Capital.

Good morning. I just wanted to get a little bit more of an update on the integration of the acquisitions. And specifically, I wanted to know how much of the $0.08 of the impact for the full year has already hit the first nine months and how much is left in the fourth quarter. But I would like to hear what you guys are doing with Astec and how that is progressing.

Well, I can comment first of all on the $0.08 of acquisition integration expenses. They are split in a pretty linear basis across the second half of this year. So about half of that in Q3, half of that in Q4, more heavily weighted towards SG&A.

Okay. And Mike, regarding where we are in the process, so both of these businesses, we think, created opportunities. They clearly are going to require some work, but put us into some new arenas or strengthened positions in arenas. And so Astec is certainly more of a change for us we think. Again, as we look to bring those products into some of our manufacturing operations, we can do that pretty straightforward. It is not a bridge too far, if you will.

The Stone products we are bringing into our operation down in Nebraska and all that is going well. I think we are just building some momentum there. We will see this come to fruition a bit or at least in the market as we get to the key tradeshows and that for fiscal 2013. So for example, the rental show, which will take place early in 2013. Back up five years, we had a pretty minimal presence there. You will go to the rental show this year and you will see The Toro Company as a major player and that is not just connecting to the rental industry, but out through the rental industry to the customers, the end users who use this stuff, the contractors and construction people. So we are actually very excited about that.

What can you say about the Tier 4 product development for Astec?

Yes, Astec will face the same as the others in the industry are facing. We are -- some combination as we look to the evolution. Long term, it will be -- well, we will meet all regulations along the way. We have a little more time in some cases depending on which product it is and whether it is 75 horsepower and under or 75 horsepower and higher. We are allowed to carry some engines forward. And so the good news for us on Tier 4, which is why the Astec fit in nicely, is we understand Tier 4 pretty comprehensively as we look at it and its impact on our commercial business. And so we have been able to take some of that learning and experience and apply it to the Astec side and everything is very much on track there.

Okay. And then just moving over to the residential, the walk power mowers being up I thought was kind of a surprise given the drought, even if a lot of that strength was in areas not hit by the drought. I was wondering is part of that -- part of the fact that that was up slightly because of this buildup of field inventories.

I would say -- again, we are an organization very focused on retail and we believe you take care of retail and everything else takes care of itself. So in the walk power mower side, I would answer that by saying we have outperformed the industry and that helped offset in that category the drought issue coupled with the new product we had in place, the TimeMaster 30. So that is a combination of those two. Whereas we talked about -- the largest impact in the quarter was snow last year's third quarter and fourth were great snow quarters for us because we were heading into a terrific preseason. This year, that is very much the other bookend. So we will manage through a much more limited preseason on snow and that certainly impacted the third quarter and that is reflected in the fourth-quarter guidance as well.

Okay. And then just a last bit on the drought. Do you think that that helped your professional sales in the residential and sort of municipal irrigation?

Not a lot, to some degree. One of the things that happens with that business -- the business is solid and performing, but when things get too a drought-like condition, it actually kind of goes the other way. So when things are dry, it can influence irrigation more positively. When things move all the way to a drought, what usually happens is water bands are put in place and it actually swings the other way a bit.

But with that said, our residential commercial irrigation business is solid, particularly in the US here. It is under more pressure as are all the other businesses in the international markets. I guess I am saying more specifically EMEA or Europe.

Okay, thanks very much.

Robert Kosowsky, Sidoti.

Hello, everybody. How are you doing?

Good morning, Rob. Well, thank you.

Yes, I just have, first off, a question on the margins on the professional and the residential segments. On the professional side, it looked like the operating leverage was very strong and on the residential side, operating income was actually up, even though sales were down relative to an adjusted third-quarter fiscal '11. And I am just wondering if you can talk about maybe how much of a benefit you saw from productivity improvements versus perhaps price and raw materials maybe weakening throughout the quarter and what is in the leverage to drive those kind of strong margin performance?

Well, if we look overall from a gross profit perspective, as we commented on in the formal remarks, we did see the impact of price. We believe from a total year perspective our price has offset higher commodity costs overall. Within residential, we did have the walk power mower screw issue last year, which is about $4.5 million in total, with the majority of that being recognized within cost of goods sold. But overall we are seeing the benefit of productivity across the organization.

As Mike mentioned, it is not one single project where we are seeing that benefit, but we do have a number of initiatives underway and are seeing results. You might remember also last year commodities ran up in the first half of the year and just based on our buying patterns, we didn't see that impact until the second half of the year. So it is also important to think about that from a comparable basis when you think year over year. But year to date, gross profit is up 40 basis points and we do expect to see continued modest improvement for the total year beyond that 40 basis points.

Okay. So more than 40 basis points of gross margin expansion for the year?

Correct. So good effort underway.

Okay. And then also looking at the -- I guess taking field inventories down, is this going to hit more of the residential segment or the professional segment and any kind of segment outlook you can give us for the fourth quarter regarding revenue declines and operating margin declines?

No, pretty much across the board.

Okay, so equal in both segments?

Yes. I mean I don't have the precise numbers here, but we would look to making some adjustments on the professional side, some adjustments on the residential side.

Okay, and then, Mike, it seemed like you were a little bit constructive on golf going into 2013. I was wondering if you could kind of give us some kind of industry data or industry perspective on what you saw for golf capital spending growth this year. How far you think we are from the '07 peak and what do you think we can see for next year?

That's a good question. As I said in the earlier remarks, so golf retail is certainly favorable in terms of the US. Obviously Europe is under somewhat more pressure, but if you look at the large spark at the US market, retail is favorable and up nicely and some of that connects back to the Mother Nature last year, the weather patterns. The cold, the wet kept people off golf courses in many areas. This year, the hot dry conditions, you are more likely to have people still playing. And so even in a drought, rounds played can go up and we saw that happen this year. So rounds are up nicely. That has positive economic consequences for the golf courses.

And as a result, as I said earlier, we would expect to see some of the benefit, a little bit of the benefit near term, but more of the benefit as they put their capital budgets in place for 2013. So when you think about our industries or the markets we serve, you get almost an immediate effect in residential because of Mother Nature, whether that is a snowstorm or lack of rain and not needing a lawnmower to cut as often or it's difficult to cut.

Landscape someplace in the middle and then you get over to the golf side and this certainly more delayed or latent impact as a result of the good weather for golf rounds that we are seeing this year. So that was kind of a long-winded answer, but we would expect that to have a positive impact on golf in 2013 in equipment and irrigation opportunities.

Okay. And do you have any idea of how far we are right now in 2012 versus the 2007 peak for like aggregate capital spending in the industry?

I don't have that here, but it is -- probably not for golf alone, it is probably not back and all the way there and there may be a bit of a new normal there. So I think we will continue to see, in many cases, equipment having been leveraged for longer periods of time and that certainly adds a bit of a tailwind for us even as we look forward.

Okay, thank you. And then finally, do you have any idea what revenue number you need to get to 12% operating margin?

Well, that is a good question. I think we would answer it as we certainly want to find ways to continue to grow the Company. Not that it's independent, but they are in some ways independent goals. So whatever the revenue number is we will work very hard to get to the 12%. I say that with the understanding that it depends on what happens. As we went through the recession in 2009, that would have been a really good trick, but it is not -- I would say the 12% is not fundamentally based on the revenue number. That will help.

All right. Thank you very much and good luck with the fourth quarter and 2013.

Thanks, Rob.

Sam Darkatsh, Raymond James.

Good morning. This is Josh filling in for Sam. I want to understand the change to guidance just a little bit better. Can you give us a sense of how much of the cut was due to the third quarter missing your prior expectations and any detail on what part of it might have missed versus how much is lower fourth-quarter expectations because of the channel inventories?

Well, again, the guidance number is for the year, so we are going to end with field inventories in good shape. So the implication to apply the guidance obviously is in the fourth quarter, but as we talked earlier, the 4% to 5% revenue growth with field inventories ending up in good shape is much more about the macro factors of economic issues in Europe and drought issues in the US and it was factored into some degree earlier, the expected pretty soft snow preseason.

So were there any major variances in the third quarter from your expectations when you last guided?

Well, yes, the third quarter was clearly impacted by the -- so when we sat here in May and we guided 7% to 8% for the year, we were -- I mean -- it almost couldn't have been better from a Mother Nature standpoint and it got materially worse obviously with the drought. And we would add to that that Europe has not gotten better. If anything, it has gotten slightly worse. So everything that happened in the third quarter was largely negative and then the field inventory -- because of some of those things, the field inventory built so much. So we will adjust for the year, but that is now reflected in our 4% to 5% guidance.

Following on the comment on Europe, how much -- or what -- can you quantify the currency effect on your international sales?

Again, as we said, it's -- I don't know, Renee, you can --.

Well, I can speak from an overall standpoint, Josh. Currency had a negative impact of about $3 million on revenue for the Company for the quarter. So fairly minimal overall, a little bit more negative from an international perspective. And year to date, it is also very minimal, about $1 million of favorable impact. So not a big impact year to date either.

Okay, that is what I was looking for. And then if I could sneak one more in on the cadence for '13. You talked in the past about building up some inventories because of some potential pull-forward from the Tier 4 standards and so on. Can you give us any sense of how '13 might depart from normal seasonality on the pro side because of the timing of the new standards?

Yes, that is very much a work in progress and to be clear on the inventories, those inventories are our inventories, not the field inventories. So it is not going to -- its revenue impact is really not about '12 to '13; it will be -- this will just be a balance sheet issue. Not issue, but it will be slightly higher at the end of 2012. So with that said, as we start to look to 2013, we are still kind of working through that and what will be the kind of flow of that product in the Tier 4 implications, we don't have kind of precise numbers around that yet.

Fair enough. Good luck with the next quarter.

Thank you, Josh.

Jim Barrett, CL King & Associates.

Good morning, everyone. Mike, could you give us an update on the state of the golf industry in China currently and what is the outlook there longer term?

I don't know that that has changed kind of materially since we last talked. It did slow down last year as a result of some central government actions. When we talked with the folks at the golf show that are doing business over there, they are saying they are starting to see that relax a little bit.

But remember it is a small market with huge potential and that is why we are very focused on not just China, but kind of throughout Asia. So it has been still a little bit sluggish in the China, Korean markets, but moving forward and the bright spot has clearly been Japan and remember, Japan has a couple thousand plus courses, whereas China has a few hundred. And so the tsunami, a much bigger much more mature market, the tsunami had a major impact on that last year and we are seeing that recover very nicely this year. So that kind of bodes well going forward.

Good. And then on a separate subject, considering that you have expanded your end markets with these recent acquisitions, how does the acquisition pipeline look? Should we expect additional small deals in '13?

Well, we wouldn't -- we would tell you that our philosophy and our position hasn't changed, that we have had good -- I'm going to back up a second. We have good cash flow, we have good capacity to do more. We are working very hard to integrate these ones that we have done here recently, not just Astec and Stone, but a couple that went before that. Good results from ones like the year before with Unique Lighting and Lawn Solutions.

So we have the capacity to do more and we will continue to look at that. Our primary focus on deploying capital would be to find ways -- beyond internal organic growth, would be to find the right kind of acquisition to bring into the Company and so we have got dedicated people working on that that are looking not just in the US, but around the globe. Beyond that I guess I wouldn't say any more.

Okay, that's helpful. And then just a question for you, Renee. Can you give us an update on what your outlook is for inflation or pricing of your key inputs going into next year?

Well, we are still working through the plan, and have not completed that effort at this point. We do, as you do, we do tend to see some of our key commodities tending to be a little bit down. Steel is down a little bit. Now we will see if that remains the same way or not. But we are seeing year over year in fiscal 2012 still higher commodity costs, but not the same pressure that we saw in the past. So steel down a little bit, engines and hydraulics pretty much flat and resins actually have seen some upward pressure.

Okay, that's helpful. Thank you both.

(Operator Instructions). David MacGregor, Longbow Research.

Yes, good morning, everyone. You had talked about walking mowers and the observation was made that you had outperformed the industry. And I wonder if I could just start by asking you to expand a little further on that?

You can, and I guess I would respond by saying there are certain areas where we have better industry data, other areas not as good and we have pretty good industry data for walk power mowers. And so we can see what is being shipped into the industry and how we are performing against that. And so whereas you might have expected year over year some decline, we have seen some improvement. So walk power mowers are trending favorable and like I say, it is based on good shipment data and additionally we have really, in certain cases, good bellwether data from major retailers on our retail and our position. And so I think that is -- between those two, we are able to say with confidence that our walk power mower results are solid.

Can you talk about where you think you may have gained that share? Were you picking up slots in large retail or maybe just a little more color there would be helpful.

Yes, it's a good question. I don't know that we had additional SKU expansion this year. I think it was similar -- some of the models changed a bit, which probably helped. I think we just got off to such a really strong start there at the beginning of the fiscal year. We captured a lot of that early. And while things have gotten a little softer, we have sustained that. So we have a partnership with a major retailer and over time, they continue to be, we would say, strategically the right choice and that partnership has worked really well. And it is a combination of us innovating around the product and some of those aspects and working with them on great merchandising and it has been a successful formula to date.

I guess within the context of your guidance, the expectation is that that will continue?

Well, our guidance -- to be clear now, our guidance is through the end of 2012, so that is 90 days and we are not in the large walk power mower arena. We will continue to sell some, but the inventories there are solid. Now we are moving into the fall products and snow, but certainly the expectation looking forward is we will work hard to sustain that partnership and bring them the right things for continuing that.

Okay. Gross margin, you have got 180 basis lift there. Can you just talk a little bit about the extent to which stronger pro versus res mix contributed to that lift?

Yes, that definitely is a factor. I would say kind of in order it is probably price is probably the biggest driver year over year and we price to market, not to what the commodities are doing. Then I would say the second factor is probably favorable pro versus residential mix and then within the segments also we had some favorable productline mix as well.

It is important to also remember that in the residential segment last year, we had that walk power mower screw issue that I mentioned earlier and that was about $4.5 million. So that is also a driver. Those are probably the three biggest drivers for the gross margin improvement.

Okay, good. A question on just the acquisitions. You had indicated $0.08 of negative impact associated with the integration of the acquisitions. I think last quarter you had been talking about $0.15 to $0.20 and the possibility maybe closer to $0.10 to $0.15 for next year. Do we sort of conclude from this change that things are moving a little better than you had anticipated or maybe just talk a little to that point?

Pre-split/post-split.

Yes, the biggest driver is the split, David. So if you consider that, that is a big driver. We are going to come in a little bit favorable from this year's standpoint to the overall acquisition. But the biggest driver is the stock split that is impacting that.

Okay, sorry about that. And then finally, just you had indicated $125 million of expected free cash flow for the year. How does that change given the revised guidance?

We are expecting that free cash flow will be down from that level, primarily based on the change in inventory, as well as just slightly lower operating income. So we would estimate that range to be between $100 million to $110 million.

$100 million to $110 million. Okay. Thanks very much.

Ladies and gentlemen, this concludes the question-and-answer session for today. I would like to turn the call over to Mr. Mike Hoffman for closing remarks.

Thank you, Jasmine and thank you all for your questions and interest in Toro. We look forward to talking with you again in December to discuss our fiscal 2012 year-end results. We wish you all a good fall and a good day. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.