Toro Co (TTC) 2013 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 Kirstie and I will be your operator for today.

At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

I would now like to turn the call over to Kurt Svendsen, Managing Director of Corporate Communications and Investor Relations for The Toro Company. Please proceed.

Thank you and good morning. Joining me for our second-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 Information 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. Despite challenging weather, including a very late start to spring, we delivered record sales and earnings in our second quarter. Net sales increased 2% for the quarter and net earnings per share grew 17%.

We believe these results are noteworthy when compared to last year's second quarter, when we enjoyed ideal weather conditions due to an earlier-than-normal start to spring. Highlights for the quarter also included positive sales developments in Europe and Asia, along with continued improvement in profitability. Following a brief commentary on the state of our business during the first half of the fiscal year, Renee will discuss our financial and operating results in more detail.

Sales results for the first six months of the year were primarily fueled by demand for our large professional turf equipment as well as our irrigation offerings, most notably our golf and micro irrigation systems. Many of our professional customers are better off today than a year ago. Their enhanced positions have given rise to optimism in the channel that in turn helped to generate demand for our products.

The late start to spring delayed retail in some markets, which along with the transition to Tier 4 led to increased field inventory.

The residential business, which is always more immediately impacted by weather, was held back by adverse conditions throughout most of our first six months. The lack of timely snowfall impeded the residential segment's first-quarter results, while spring's very late debut through much of North America and Europe decreased shipments of residential products during the second quarter. In fact, the first week of May saw significant snowfall through the Plains and upper Midwest.

The good news is we have enjoyed a recent warming trend in both temperatures and residential shipments that has created strong, positive momentum resulting in some very favorable comparisons to May of 2012. The combined effects of the early spring weather this year and the Tier 4 transition that began last year have created an unusual business flow. Timing and weather aside, the fundamentals of our business remains strong.

As we reported during our first-quarter call, our golf equipment business achieved brisk early retail activity. The momentum slowed a little in the quarter due in part to unfavorable weather in most of the United States and Canada. A year ago we experienced some of the earliest golf course openings on record, but 2013 has seen some of the latest.

As we also noted in our first-quarter call, distributor inventory is higher than normal due to distributors decided to buy pre-Tier 4 products and hold them in inventory to meet ongoing customer demand. And customer demand is up. Year-to-date golf retail is tracking well ahead of last year's results. The Tier 4 transition and the optimism generated by the increased revenues golf courses earned in 2012 have motivated customers to increase purchases.

These positive trends are also helping in the golf irrigation business. Older system renovations, course redesigns, along with routine system upgrades and replacements are driving sales.

Our landscape contractor businesses continue to benefit from a healthy appetite for our latest high-performance machinery, including a full range of zero-turn riding and stand on moving and aeration equipment. In addition, customers are being drawn by the high productivity and ease of operation of our new 30-inch commercial mowers.

Customer demand for increased productivity is also paying off for our sports, field, and professional ground business. The need to replace aging fleets and maximize the output of their workforce is motivating buyers to take a close look at our latest technological advancements.

The professional rental and construction business has made steady progress during the first six months in the integration of our new rental construction and underground product lines. Many of our new rental and construction products, including mortar and cement mixers, compaction equipment, and debris handlers, are now in production, are shipping, and are already being rented and retailed through our business partners.

Preparations are on track for our national launch of our underground business at the International Construction and Utility Equipment Exposition in Louisville in early October of this year. Compact utility loader retail is also tracking ahead of last year's pace, and we recently won a significant bid for walk trenchers and stump grinders from a leading rental partner.

Overall, the rental and construction categories continue on a steady growth path. We are well-positioned to capitalize on the opportunities presented by this favorable trend.

The residential and commercial contractor irrigation businesses have not gained as much traction due to the late season. However, the resurgence in homebuilding should increase the demand for system installations. We are prepared for the anticipated uptick with comprehensive offerings of innovative products. For example, our new EVOLUTION smart controller, which features an intuitive customer interface and advanced contractor capabilities, has been well received by contractors.

Our low-voltage lighting sales continue to grow at a healthy pace in the United States. We are releasing our new [Light Logic] remote control system this month and our flex LED products continue to gain acceptance from customers.

Our residential segment is also well-positioned with exciting new products and aggressive promotional programs. We are very encouraged by the strong surge in retail activity we are experiencing now that spring has finally arrived. Last week's retail reports showed an unprecedented level of walk power mower sales.

Our new handheld lithium-ion battery-powered product line, which allows consumers to perform multiple tasks with a single power source, has increased placement at the Home Depot and is gaining retail velocity. The line currently includes blowers, string trimmers, and hedge trimmers.

Overall, international sales for the quarter were somewhat better than anticipated. The results vary widely by country and product category due to economic conditions and weather patterns. Commercial equipment sales worldwide are gaining momentum, driven by golf equipment sales.

Replacement purchases that many customers postponed in recent years due to the economic downturn are once again occurring. We have also seen strength in some markets for golf irrigation. Finally, in micro irrigation, our previously announced plan to acquire a small company in China is still in process. We currently expect the acquisition to close just before the end of our fiscal year.

I will now turn the call over to Renee for a more detailed discussion of our financial results.

Thank you, Mike, and good morning, everyone. As we reported this morning, net sales for the quarter were a record $704.5 million compared to $691.5 million for the same period a year ago. We also delivered net earnings of $78.4 million, or $1.32 per share, compared to $1.13 in the second quarter of fiscal 2012.

Year-to-date net sales were up 3% to $1.149 billion. We achieved net earnings of $109.8 million for the first six months, or $1.85 per share, compared to $1.46 per share a year ago.

Professional segment sales were up 8.9% for the quarter to $496.4 million. Landscape contractor equipment sales were up on channel demand in anticipation of a strong selling season. Increased sales of our new rental and construction equipment, golf irrigation, and micro irrigation systems also drove growth in the quarter. Year-to-date, our professional sales were up 11.6% to $825.6 million.

Professional net earnings for the quarter totaled $112.3 million, a 13.8% increase over last year. For the first six months, professional segment earnings were $173 million, up 22.9% compared to the same period last year.

Second-quarter residential segment sales declined 13.2% to $201.4 million. Year-to-date residential sales were down 12.8% to $322.3 million. Net earnings in the residential segment for the quarter totaled $24.7 million, down 13.5% from last year. Year-to-date earnings were $36.8 million, a 10.4% decrease compared to the first six months of fiscal 2012.

The second-quarter residential sales and earnings results were primarily due to the previously discussed unfavorable spring weather conditions in North America and Europe. The year-to-date results were largely attributable to the challenging winter conditions that affected first quarter and the late spring's impact on the second quarter.

Our gross margin for the second quarter improved 180 basis points to 35.8%. Gross margin is up year-to-date by 210 basis points to 36.4%. The increase is attributable to a number of factors including segment and product mix, our ongoing productivity efforts, positive commodity trends, and selected price increases. While we anticipate that mix and lower manufacturing utilization will negatively impact margins in the second half, we are raising our gross margin expectations for the year by about 60 basis points from our previously stated 40 basis point improvement.

SG&A expense as a percent of sales increased by 50 basis points for the quarter to 19.1% and by 40 basis points to 22.1% year-to-date. The SG&A increase was the result of higher warehousing expense, incremental costs from acquisitions, increased engineering spend, and higher health insurance costs. For the full year we expect our SG&A rate to be higher than last year by a similar percentage as we've seen year-to-date.

Operating earnings as a percent of sales for the quarter increased 130 basis points to 16.7% and by 170 basis points to 14.3% year-to-date. Our productivity initiative continued to have a positive impact.

Interest expense for the quarter was $4.1 million, down slightly from a year ago. Year-to-date interest expense was down 2.3%.

Our effective tax rate for the quarter was 32.6% compared to 34% last year. For the first six months, the tax rate was 31.3% compared to 34% in 2012. The retroactive reinstatement of the federal research and engineering tax credit drove this improvement. We expect the tax rate for fiscal 2013 to be about 32%.

Turning to the balance sheet, accounts receivable for the quarter totaled $307.8 million, up 12.8% on a sales increase of 1.9%. The change was caused by a higher proportion of sales that are not financed with Red Iron Acceptance.

Net inventories for the quarter were up 23.6% to $310 million. The inventory growth includes product to support the transition to Tier 4, inventory from the recent addition of the rental and construction equipment businesses, snow products, and residential inventory related to the late start to spring. Second-quarter trade payables increased 3.7% to $203.7 million.

Finally, our net working capital as a percent of sales was above the prior-year level, coming in at 16.3%. The difference is due to higher inventory levels which we believe will be sharply reduced by year-end.

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

Thank you, Renee. While unfavorable weather impeded some of our efforts for the quarter, the outlook for our business remains positive. Our end markets are sound, our product offerings are aligned to customer needs, and we continue to compete effectively in the marketplace.

For example, the retail outlook for the golf business this season remains solid. We will have good availability in both pre-Tier 4 and Tier 4-compliant products, as well as an outstanding lineup of innovative new equipment in golf irrigation solutions to serve our customer needs through the season. That being said, we do anticipate golf shipments to moderate in the coming months.

We will continue to distinguish ourselves from the competition through a relentless focus on game-changing innovation. For instance, we just recently began shipping our exciting new lightweight, highly productive fairway mower, the Reelmaster 3550, the lightest and fastest mower in its class. Rated under 25 horsepower, the mower's diesel engine also avoids the higher cost of the Tier 4 requirements. Through the years, cutting edge innovation like this has and will continue to enable Toro to grow and lead.

Our landscape contractor businesses are also well-positioned to capitalize on the growing retail demand. We have an excellent product and compelling promotional plans to drive retail sales.

The Toro sports field and professional grounds product portfolio is similarly well-suited for today's market requirements. We have already retailed Tier 4-compliant products to cities and park boards that are more focused on eco-friendly solutions. While significant investments were made to meet the stringent Tier 4 requirements, these research and development efforts yielded additional benefits such as our new, patent-pending Smart Power traction technology.

Used in our large rotary mowing line, Smart Power percent another significant step forward in productivity. In more demanding mowing conditions, Smart Power automatically adjusts the unit's ground speed to route more power to the mower blade so that it can run at optimum cutting speed, thus, maximizing the mower's performance. We expect the grounds markets to remain strong through the remainder of the year.

The outlook for the balance of the year for our professional rental and construction businesses also offers reasons for optimism. Residential and commercial construction forecasts are positive. Growth in the underground product market continues to be fueled by robust installation of fiber optics cable and the replacement of underground infrastructure. Production and shipments of our new Toro-branded underground and construction products will take place during the third quarter.

While second-quarter sales for our residential business fell short of our plans, the drop was not surprising in light of the winter that just would not end. The recent surge in demand ignited by warmer temperatures is driving strong retail activity in May. Several Midwestern markets have also received welcome relief from the extreme drought conditions they suffered in 2012.

The economic challenge in Europe remains. The rate of recovery will be a significant external influence on our international business. We will likely continue to see varied results by country and region. We are closely monitoring inventory levels and will respond appropriately.

Much of our retail needs for the year still lie ahead due to the delayed start of the primary retail season. We need a strong growing season with favorable temperatures and precipitation to help drive retail at both our residential products and professional equipment in our distribution channel. These factors are causing us to temper our growth excitations for the year. We now expect sales growth for fiscal 2013 to be about 3% to 4%.

Despite the lower sales expectations, we are maintaining our earnings outlook for the year at about $2.40 to $2.45 based on the strong operating performance to date. The unusual sales mix bias towards residential product in the second half will pressure earnings in the remainder of the year.

While the year certainly has not played out according to plan, our guidance suggests new record levels of sales and net earnings. As always, we will remain flexible and prepared to respond to market conditions.

As our results to date attest, the ingenuity, commitment, and hard work of our employees and channel partners around the world continue to deliver solid performance. Their teamwork and keen focus enables the Company to quickly and effectively respond to changing conditions and find ways to succeed. Their exemplary attitude brings the spirit of our Destination 2014 initiative to life, propelling our company towards our second century and beyond.

This concludes our formal remarks. We will now take some questions, so, Kirstie, back to you.

(Operator Instructions) Sam Darkatsh, Raymond James.

Morning, Mike, Renee. How are you? A few questions here. First off, you mentioned your own inventories, where they were a little bit higher certainly on a year-on-year basis.

Can you talk more about the channel inventories, where you see them being a little bit more flush than perhaps you'd like to see? And specifically where that is, whether it's pro versus resi, or domestic versus international, certain product lines, what have you.

Sure. Some of this is planned; some of it is impacted, certainly, by the recent weather. But the first one would be the commercial products and the impact of Tier 4 and kind of the distributors pulling those things into their inventories.

That has been considered in our guidance as we look through the rest of the year and it is certainly contemplated as we talk about a little softer in the second half. But as you know we always do, we look at the year and deal with it that way. So that would be at the top of the list.

The second would be the landscape contractor business. There's still --- landscape contractors, the business was ahead, if you will, until we hit the March/April skid, largely due to weather, but there's still optimism. We have some really strong new products out there.

And so the channel has a bit more inventory than it did last year, but what's going on in May that's quickly correcting and we believe that will correct through the year as well. Then the last one, a bit of snow and walkers, but this is again through the end of April. The velocity or momentum right now at retail for residential, and for landscape too, is very, very strong.

Two more very quick inventory questions and I have another follow-up then. So do you still expect your own inventories by year-end to be down on a year-on-year basis, or have you revised that based on how the season is playing out?

Sam, we do expect that inventory will decline sharply in the second half and have incorporated that again into our sales guidance.

Sharply versus today, but year-on-year would it be down also by the end of the fiscal year?

Yes, Sam, it would be down year-over-year.

Okay, next question. John Deere and it's comparable business twice now this year has taken their own industry expectations lower, and it looks like only now you are starting to see it or at least recognize it publicly. That might suggest that perhaps your field inventories might be a little bit more flush then there's, if their dealers perhaps acted a little bit quicker to right-size their inventories.

Is that a fair assessment, or is it just not really all that comparable to be looking at it in that respect?

I think I would say it's not that comparable and so, obviously, we are focused on our business. The fact is that if ours were a little more flush it would actually, I think, go the other way. But the bottom line is we don't really know what's going on there, the numbers are pretty limited, and so our numbers are pretty clear.

Last question, then I will defer to others. Your residential business being down, what, 13%, it looks like the walks and mowers at retail are down maybe mid-single digits in the industry. If that's the case, do you think you lost share or is there some mix issues there?

Can you help reconcile the delta between what you saw in residential versus perhaps what the industry was doing?

I don't think we are losing any share as we look at kind of our business and working with our channel partners, in this case Depot and dealers. This was largely what happened in March and April compared to last year.

The industry might be down a little bit. That will really, in many respects, depend on what happens this summer. So it's down to date; it was actually ahead and it's down now to date because of the March/April impact, but it's coming back very strong in May.

And if the precipitation patterns continue -- and there's some forecasting the says yes they will, but we are really careful on commenting on the weather -- but if that does in fact happen, we will have very strong comp come June, July, August when we comped against --- we are comping against a drought last year.

The bottom line is when there's moisture in the ground and the grass is growing, it tends to use up the mowers, residential mowers, landscape mowers, even golf course mowers, somewhat more than when it's very dry. It just makes the products work much harder. So I guess that's one where we will say, we will see.

But as you know, we are very focused on share and competing in the market. At this point our lineup, our placement is good, is sound, and our price points are good and we think we are okay there.

Thank you both very much.

Mark Herbek, Cleveland Research.

Good morning, everyone. Renee, first question for you just so that I understand the gross margin. You now expect it to be up 60, or up 60 on top of 40 for 100 for the full year?

The latter, 60 on top of 40 for 100.

Okay. Then in terms of the sales, when you look at your second-half implied sales growth, it looks like you are expecting your sales growth to be stronger in the back half than it was in the first half. But throughout the call you talked about a little bit softer golf.

Can you just help us reconcile why the second-half sales growth will be better than the first half, given some of the more cautious pro comments that you had specifically as it relates to golf?

Well, I think you got to put --- again, our growth is all-in, so it's golf, it's landscape contractors, it's residential, and a significant part of that as we see the retail velocity going on right now will be, hopefully, picking that up. And so as we talk to the impact of mix on the second half as it moves more towards residential, which is going on right now. May shipments are up significantly in residential because last year we were shipping a lot of that product in March and April.

So golf will moderate somewhat, but, again, that's our shipments and we set inventories a little higher out there, but golf retail has been and continues to be strong. And so you put all those pieces together, because certainly we have a very strong focus here on retail. Retail what is going on in the golf equipment, golf irrigation, landscape contractor, res (inaudible) -- all the way through the portfolio. And so we have moderated ours a bit, but we expect some stronger retail in the second half across all these businesses which will bring inventories nicely into line.

The 1 point cut to sales guidance, is that all due to consumer or is some of that due to pro as well?

I would guess largely residential, even though we expect still some residential catch-up, but I don't have I guess that detail out in front of me here.

Last question, non-US; strong quarter non-US. What's driving that? I know you mentioned both Europe and Asia were positive.

Is one region stronger than the other? Should we expect 5% to 10% growth in the back half in this market, in the non-US market as well? Just kind of walk me through your thoughts on the non-US business from this point.

Well, if you look at our back half growth, I don't think it's going to be disproportionate to the rest of the Company, if you will, or the US. I guess I would start with when we started the year we said Europe was kind of muddling along, if you will.

We didn't expect a step change up or down and so we are on the relative positive side of that. It's improving very slowly and that's driving some retail. It did slow down a little bit because they have had some of the similar weather challenges, but that seems to be picking up a bit.

Asia was --- continues to be much about the recovery from the tsunami; that wasn't just a one-year phenomenon. We are seeing some --- that is the largest market; Japan is the largest market for golf there. Some of the other markets are doing okay, but they are --- China remains kind of a work in progress, but I would say more of it is Japan.

Australia is --- we are in counter season for Australia, so they've got some, I think, heat and drought challenges. But all-in we would not expect international to be a strong driver of sales disproportionate, if you will, in the second half.

Do you have an expectation for snow shipments in the fourth quarter, given the strong sell-through toward the end of the year? Have you revised your expectations for snow?

Snow will be up in the fourth quarter year-over-year. As we have talked in the past, the snow business is really the tale of two seasons, the predictable preseason and the unpredictable in-season. So, again, if we look at the comp opportunity, last year's predictable preseason was very low because we were coming off of no snow and it was a very soft preseason.

Now the fact is the snows that we received this last season, kind of through 2012, late 2012 and early 2013, more of them came in 2013. So they came too late, in many respects, to drive as much retail as we would have liked in that season, but it sets the stage very nicely going into the 2013 preseason. So we would expect snow comparisons to be favorable, very favorable as we head into the fourth quarter and hopefully the first quarter.

And is it fair to assume that the snow load-in is going to be stronger than you would have expected 90 days ago?

Yes.

And that's in their guidance as well?

Yes, it is. Yes, and it is because we've gotten most of that snow in the last 90 days, unfortunately. We had too much snow in March and April and even May. But it does --- on a serious note, it does help drive behavior as we head into next year's September or the next season's September/October/November.

Thank you.

Robert Kosowsky, Sidoti.

Good morning, Mike, Renee, Tom, and Kurt. How are you guys doing? I just wanted to confirm, so the gross margin should be up about 100 basis points and SG&A should be up more than 40 basis points. Is that the right -- did I get that right?

Yes, you've got the right direction.

Okay, so that gets us to pushing, like, 11% operating margin for the year. How are you thinking about the path to get to the 12% for 2014?

We will continue to focus on growing our sales. Our internal goal is looking at that $100 million organic sales growth and continue to look at productivity and innovation as ways that we do that.

Okay. Then I guess, secondly, if precipitation goes as planned, do you think the residential mower industry is going to be growing this year? Or do you think it's just such a big headwind given what we saw with the weak spring that we had?

It will be very difficult all-in to exceed last year, and it really boils down to, on a comparative basis, the spring season is worth relatively more than the summer season. Now, again, that's one of those it depends to what degree you comp more favorably.

So, obviously, in March and April we comped very poorly but we are comping very strongly in May. We will see how long that continues; it's a fair amount of ground to make up. But then in June/July/August, if the moisture continues and that's puts mowers and other products under heavy load and use, then that will drive strong performance year-over-year.

Can we get all the way back? That remains a question.

Okay. And that is not just for Toro, that's for basically the entire industry as well, right?

It is.

Okay. Then just as far as the back half of the year on the growth standpoint, you're going to have a very good comp on the residential side. Do you see it being a difficult environment to get revenue growth on professional?

Again, as we have talked, we are --- this is always a combination of our shipments and what's going on at retail. So we expect retail to be very solid, to continue to be solid in golf, in the landscape arena, and some of our newer business, but we are going to adjust some of this for field inventory. And so, as a result, that is reflected in our numbers.

Okay. And is there any breakdown you have between mix and underproduction? What the headwind can be in the second half of the year on the gross margin?

The mix is probably the larger factor, but they both will be significant, their drivers.

Okay, cool. That's good.

One last question, how do we stand on the integration of the Aztec business into your own manufacturing plants? Kind of any update on what you see of the market opportunity and the pace of new product launches. Is next year going to be a bigger year for new product launches? Just kind of add a bigger summary of what's going on in that business.

Steady progress. Obviously, strategically important. The integration of the product into our Tomah, Wisconsin, operation has continued to go very well. The team is doing a really excellent job down there bringing the products from Tennessee into their operation.

They have moved a couple of them, two or three of them already, of the major projects through the system. And so as we said, in the comments earlier, we will be shipping Red product in the third quarter in terms of underground products, talking about particularly the horizontal drills and some of the trenchers. And so it's going well.

Lots of work to be done both on the operations side as well as on the channel side in building our --- starting to build our Toro reputation, if you will, out in the marketplace. But the team is doing a good job and so we would expect in 2014, back to kind of the earlier comment on how do we get to Destination 2014, that will be a key part. The investments this year will pay off in 2014.

Then just one last question and then I will go. Is any --- do you have any comments on the dealer network getting a little bit more competitive on the residential side? Just because some of your competitors have mentioned kind of a bigger push into the higher-margin dealer network, and I know that you are already big there. I'm just wondering if it's getting to be crowded or you see that potentially being a headwind.

Competition is competition. We expect our competition -- is it more intense versus in the past? I'm not sure. It's materially different there.

Our focus is always on being an innovator with product and having close relationships with our channel partners, dealers, and Depot. That model has worked pretty well to date and we expect it will continue to work well in the future.

Cool. Thanks a lot and good luck with the back half of the year.

Jim Barrett, CL King & Associates.

Good morning, everyone. Mike, when you look at your professional market for the first half, can you discuss whether any particular end markets are growing faster than the average or they are all growing just about the same?

Well, we have talked about this in the past more strategically. And so golf, while it's relatively slow from a market context in the US, we continue to see golf grow outside the US, but it will still be a smaller percentage mid to low-single digits.

And landscape, the landscape contract arena is growing somewhat more than that. The residential commercial irrigation market is growing more than that because you see the structural recovery on housing and commercial building, and so that we will grow in the mid to upper single digits.

Then as we have commented in the past probably the market that's growing the most, a smaller part of our portfolio but a significant market and we are making significant investments in it, and that's the micro irrigation business. That will grow double digits. As the world puts more and more --- the need for more and more focus on food and better management of water as a precious resource that will continue, and we will continue to make the appropriate investments there.

So one bookend is probably micro irrigation from a market growth standpoint. The other bookend is all-in probably golf. Residential maybe in the same way. These are GDP-like numbers.

Now on the residential irrigation, if new housing starts get back to 1.5 million, 1.6 million starts, wouldn't off a very depressed base that business -- would the new homebuilders grow much faster than mid to upper single digits?

That's a good question. I don't have a precise answer for you.

I think we believe that we will perform better there than we have in the past, so it's really a combination of the market growth coupled with kind of our performance from a share standpoint. So that probably makes more of an argument for what you are saying there.

And some of it is -- depends on where the homes are, right? So if home construction is weighted more north, then maybe somewhat less --- gives us a longer-term opportunity for systems, but not all those get installed on the build. But the bottom line is it's a favorable business for us. It's coming off of a lower base and our performance within the area is improving. So both moving in the right direction.

Okay. Then within the professional market, both in golf and commercial landscaping, the inventories and the trade aside, do you have a sense as to what your market share performance has been this year? Do you believe you are holding share or growing share in those businesses?

For golf and probably for landscape contract -- in the landscape contractor arena, based on the numbers we have, I think in golf we have a very high share and our sense is we are holding. There's certainly some strong competitors and they would like to have that share, too. We will fight appropriately and try to hold and build that.

The landscape contractor and all of these will be influenced by who's driving the new products in innovation and customer solutions. One of the things that our team does very well is in the kind of total cost of ownership. So we tend to be on the premium side of pricing, but the value is there when you look at the total cost over kind of the lifecycle of the product and residual values and all of those things.

So long-winded answer to your question. Probably in the holding zone more than --- we are always trying to move it, it doesn't matter where it is, incrementally up.

Okay, thank you very much. That's helpful.

David MacGregor, Longbow Research.

This is [Zorn Mehling] in for David MacGregor. Congratulations on the quarter and thanks for taking my questions.

I guess just first off can you maybe discuss what sort of price increases you've been able to realize, both on the pre-T 4 equipment and then on your other products more generally? I think your prior guidance assumes net pricing of about 2%, so does that still hold true or are we maybe trending above that level?

Overall, when we look across the business that net 2% realized price increase remains on track for the year.

Good, thank you. Then I guess just to build off that. As we look at your raw materials and your outlook there, just with regard to steel engines and hydraulics, I realize you kind of lock-in pricing on the engine side, but have you seen any benefit from the lower steel costs at all?

Our commodities overall are trending similar to what you would see from a peer standpoint. Some modest improvement in commodities, not a major driver; but we haven't reflected that in our gross margin guidance for the year as well.

Got it. Then just lastly, if you could maybe talk briefly about the M&A pipeline. Maybe what markets you're focusing on and whether there's potential for further acquisitions here in the second half this year, the first half of next year, or whether you will continue to focus on just share repurchases for the time being?

Well, it will start with our long-stated objectives and priority would be, first, to find more opportunities from an M&A standpoint. That's been a consistent message and we have found a number of smaller ones along the way. We haven't found as many of the larger ones as we would like.

It isn't as though many of them are happening and we are just not participating. It's just more a case where we haven't seen them. So the strategy remains intact there, that remains our priority.

To your question on what and where, as we have said, we would lean more professional than residential. We would lean -- certainly seeing the potential for international growth over time, so we would lean more international than domestic. But we would look at all the opportunities.

We are making investments in the micro irrigation business. Some of those are investments that we are making internally with expansion of a plant in Romania, for example. But we are also looking for opportunities outside of that and China is a good example. While small, it gives us some added presence in the micro irrigation business in China when we get that done.

Great, thank you so much for that. That's all I had.

Thank you. We have no further questions for you; therefore, I would like to turn the call over to Mike Hoffman for closing remarks.

Thank you, Kirstie, and thank you to all of our listeners and those who have asked questions. We appreciate that and we look forward to talking with you again in August to discuss our third-quarter results. Thank you and have a great day.

Thank you for your participation in today's conference. This does conclude the presentation. You may now disconnect. Good day.