Toro Co (TTC) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to The Toro Company's second-quarter earnings conference call. (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, Amy Dahl, Managing Director of Corporate Communications and Investor Relations for The Toro Company. Please proceed, Ms. Dahl.

Thank you and good morning. Our earnings release was issued this morning by Business Wire and a copy can be found in the Investor Information section of our corporate website, TheToroCompany.com.

Joining me for this call are Mike Hoffman, Chairman and Chief Executive Officer; Renee Peterson, Vice President, Treasurer and Chief Financial Officer; and Tom Larson, Vice President and Corporate Controller.

We begin with our customary forward-looking statement policy. During this call we will make forward-looking statements regarding our business and future financial and operating results.

You all are aware of the inherent difficulties, risks, and uncertainties in making predictive statements. Our earnings release, as well as our SEC filings, detail some of the important risk factors that may cause our actual results to differ from those in our predictions.

Please note that we do not have any duty to update our forward-looking statements. With that I will now turn the call over to Mike.

Thank you, Amy, and good morning to all our listeners. Although we faced unfavorable spring weather conditions for a second year in a row, the Company achieved record sales and earnings for the quarter. Net sales increased 5.8% and net earnings per share grew 14.4%. Both our Professional and Residential segments posted sales gains for the quarter with strong demand for Professional products leading the way.

Sales for the first six months of the year grew by 3.6%. Professional sales for the first half of the year were flat due to the unusually strong domestic channel demand for commercial equipment in the first quarter of last year, plus lower Professional segment sales to our international markets. As we have previously indicated, last year's strong first-quarter demand for commercial equipment was related to the Tier 4 transition.

Residential segment sales posted an 11% gain year-to-date as a result of the robust snow thrower sales, strong domestic demand for zero-turn riders, and increased sales of electric products. Following a brief commentary on the state of our businesses through the first half of the fiscal year, Renee will discuss our financial and operating results in more detail.

Our landscape contractor businesses had a particularly strong quarter benefiting from contractors' optimistic outlook and willingness to invest as a result of the strong revenues their robust snowplowing season generated. Early-season retail movement of both our zero-turn riding and stand-on product lines has been brisk in spite of an engine supplier issue that delayed production of some of our popular zero-turn models. As the mowing season kicks into high gear, the momentum our landscape contractor businesses have enjoyed in recent years hopefully will continue to gain steam.

Our golf equipment business, while posting gains over its fiscal 2013 second-quarter results, felt the effects of weather-related delays of the opening of the golf season in certain regions of North America. Conditions ranged from excessively wet, cold weather in northern states and parts of Canada to extreme drought in sections of the West and Southwest, which presented both agronomic and water use restriction challenges.

The slow start to the season affected both the number of rounds played and course revenues. As they manage their budgets some courses experiencing below average revenue have pushed out equipment purchases until their business picks up. We have marketing efforts in place to help stimulate purchases as weather and course conditions improve.

Our innovative product offerings continue to appeal to discerning golf course owners looking to maximize performance and operational productivity. The Toro Multipro 1750 sprayer, which we released last fall, has gotten off to a good start and customers are raving about its performance.

We also released two new products during the quarter: the Workman HDX, the industry's first heavy duty utility vehicle with an automatic transmission. This eliminates the need for additional staff training for those who are unable to operate manual transmissions. Similarly, our new GreensPro roller is also being well received.

While the late spring delayed courses' annual irrigation system start-ups, golf irrigation prospects remain positive due to the growth in planned capital projects and the innovative solutions we provide. Our new INFINITY premium golf sprinkler series with SMART ACCESS has raised the bar in sprinkler design. INFINITY's dual trajectory nozzle delivers exceptional performance and excels in windy conditions. Such technological advances help courses efficiently manage water without compromising the health and beauty of their turf.

Residential and commercial contractor irrigation sales dipped a bit in the second quarter following a strong first-quarter showing. The sluggishness was mostly attributable to the weather.

The Toro EVOLUTION Series controller, winner of the Irrigation Association's New Product of the Year award, is gaining traction. Shipments of EVOLUTION and our new T5 Rapid Set rotor have gone well. This past quarter we also introduced a new feature, Smart Connect, which enables EVOLUTION controllers to simultaneously communicate with moisture sensors, weather sensors, handheld remote controls, and even auxiliary systems like landscape lighting. Another smart solution from Toro that promotes sustainability and owner satisfaction.

Our low voltage lighting continues to track well. The late spring hindered both demonstrations and installs resulting in flat sales for the quarter. Now that spring is here in earnest demonstrations and installation projects have begun.

The professional rental and construction businesses achieved solid second-quarter gains. Sales, especially of our underground and professional contractor lines, grew during the quarter. Rental sales growth was somewhat more modest as a result of a particularly strong purchase cycle last year and unfavorable weather.

Our micro irrigation business also grew sales for the quarter, continuing the momentum we reported during our last call, based mainly on increased demand for Aqua-Traxx products. Our residential equipment segment experienced mixed, yet positive, overall results for the quarter.

The late spring in northern markets plus unplanned supply-based issues impeded our efforts. In regions that endured winter-like conditions well into March, homeowners delayed shopping for many seasonally-sensitive lawn and garden products like walk power mowers. However, we did see positive retail movement in those parts of the country where more normal weather patterns prevailed.

Our Lawn-Boy walk power mowers sold particularly well, benefiting from a completely new product line and increased store placement. Importantly the more planned higher ticket purchases of products like our new line of Titan zero-turn mowers proceeded in spite of the weather. Their strong sales also reflect the ongoing shift in consumer preference from traditional tractors to more productive zero-turn equipment.

Finally, international sales for the quarter decreased due to exchange rates and unfavorable weather in Australia. However, residential sales posted gains based on the broader introduction of the TimeMaster walk power mower and increased sales of Hayter equipment.

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 earlier this morning, net sales for the quarter were a record $745 million compared to $704.5 million for the same period a year ago. We also delivered net earnings of $87.1 million, or $1.51 per share, compared to $1.32 in the second quarter of fiscal 2013.

Year-to-date net sales were up 3.6% to $1.191 billion. We achieved net earnings of $113 million for the first six months, or $1.95 per share, compared to $1.85 per share a year ago.

Professional segment sales were up 6.5% for the quarter to $528.6 million. Landscape contractor sales were up due to retail demand fueled by contractors' income from a busy snow season. Increased sales of new construction equipment, golf irrigation, and micro irrigation systems also drove growth in the quarter.

Year-to-date Professional sales were flat at $824 million due to strong demand for pre-Tier 4 compliant products last year in the first quarter. Professional net earnings for the quarter totaled $122.4 million, a 9% increase over last year. For the first six months, Professional segment earnings were $169.8 million, down 1.8% compared to the same period last year.

Second-quarter residential sales increased 4.5% to $210.4 million. Year-to-date residential sales were up 11% to $357.9 million. The quarter and year-to-date growth is attributable to domestic retail demand for snow throwers, zero-turn riding equipment, and electric products, along with increased international sales of walk power mowers and Hayter products.

Net earnings in the Residential segment for the quarter totaled $23.8 million, down 3.5% from last year. Year-to-date earnings were $42 million, a 13.9% increase compared to the first six months of fiscal 2013. Earnings for the quarter were somewhat negatively impacted by a supplier-related rework issue.

Our gross margin for the second quarter was 35.5%, a decrease of 30 basis points due to commodity costs. Gross margin declined year-to-date by 50 basis points to 35.9%, which is attributable to segment mix, higher commodity costs, and unfavorable exchange rates. We now expect gross margin to improve by approximately 30 basis points for the year.

SG&A expense as a percentage of sales decreased 120 basis points for the quarter to 17.9% and by 50 basis points to 21.5% year-to-date. Lower administrative expense, including healthcare costs, was primarily responsible for the improvement. We continue to expect total year SG&A to improve over last year.

Operating earnings as a percent of sales for the quarter increased by 90 basis points to 17.6% and by 10 basis points to 14.4% year-to-date. Our productivity efforts continue to have a positive impact. Interest expense for the quarter was down 11.2% from a year ago, due to an increase in capitalized interest from large capital projects. Year-to-date interest expense was down 11.5%.

Our effective tax rate for the quarter was 32.6%, the same as a year ago. For the first six months the tax rate increased to 32.7% compared to 31.3% in 2013. The change reflects the expiration of the Federal Research and Engineering Tax credit on December 31, 2013, the retroactive reinstatement of which we benefited from during the first quarter of fiscal 2013. We continue to expect our tax rate for fiscal 2014 to be about 33%.

Capital expenditures are expected to be about $65 million to $70 million for fiscal 2014 and a similar amount next year. The Company also continues to expect free cash flow to be about $150 million for the year.

Turning to the balance sheet, accounts receivable for the quarter totaled $313.5 million, up 1.9% on a sales increase of 5.8%. Net inventories for the quarter were down 2.5% -- 2.4%, excuse me, to $302.5 million. The change reflects increased sales of residential products, landscape contractor products, and a reduction of Tier 4 inventory, somewhat offset by additional underground product to meet anticipated market demand.

Second-quarter trade payables increased 15.8% to $236 million, due to recent purchases of components and commodities in preparation for anticipated product build for the remainder of the year.

Turning to our net working capital as a percent of sales, the improvement we saw in the first quarter continued into our second quarter, coming in at 15.5% compared to 16.3% a year ago. Our continued inventory accounts receivable and trade payable management efforts are yielding positive results.

The Company continues to return value to shareholders through dividends and share repurchases. On Tuesday the Board approved a dividend of $0.20 per share, which is the 121st consecutive quarterly dividend the Company has paid. We repurchased 618,000 shares of common stock during the quarter and have approximately 3 million shares remaining in our purchase authorization as of quarter end.

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

Thank you, Renee. Despite the unfavorable weather this spring our end-markets are sound, our product offerings are aligned to our customers' needs, and we continue to compete effectively in the marketplace.

Our landscape contractor business outlook remains bullish. With anticipated favorable weather and arguably our best product lineup for both contractors and acreage customers ever, we are well-positioned to extend the sales momentum of the first six months.

We are launching additional products including extensions of our popular zero-turn line featuring rear discharge decks, direct collection systems, and smart technologies and a brand-new line of 21-inch heavy-duty mowers with added durability and improved bagging performance. These products continue our tradition of delivering superior value to our contractor customers. With our strong product lineup backed by an aggressive promotional calendar, we believe we are in excellent position to help our channel partners drive retail sales for the remainder of 2014.

Our Professional grounds business should benefit as improved weather conditions boost sports activity and revenue for local sports associations. A new 100-inch deck option for our Groundsmaster 360 was released earlier this month. The significant enhancement to the productivity of the 360 should appeal to local sports and municipal agencies alike.

With temperatures on the rise, so are the prospects for golf equipment business. As grounds played rebound, greens fees and course revenues follow, which should lead to additional equipment purchases. Our golf course customers remain optimistic and our open order banks are strong.

Furthermore, we anticipate golf irrigation sales to remain strong as the exceptional innovations, like our INFINITY sprinkler series, set us apart and help us win new projects around the world. We remain cautiously optimistic about the residential and commercial contractor irrigation field. Water use restrictions in drought stricken regions will pose some hurdles. However, contractors have projects in hand and our strong product portfolio will help them take advantage as business heats up.

Our low voltage lighting contractor business should see an uptick in sales now that the improved weather conditions are affording contractors the opportunity to demonstrate and install lighting systems. We also will launch an exciting new product offering this quarter, a line of professional grade aluminum alloy lighting products called Elements, which extends the scope and price range of our lighting portfolio. The Elements launch, along with the continued strength of our core product line, offer real opportunities for continued growth.

The outlook for our Professional rental and construction businesses suggest continued growth over the prior year. New home construction estimates indicating a more gradual growth throughout 2014 may be offset by increasing commercial construction.

Improved weather and commercial construction forecasts are offering encouraging news for both equipment rental and purchase prospects. New products will be making it to the field for the first time in the third quarter. The initial build of the RT1200, our 125 horsepower riding trencher, is underway. The Pro Sneak 365, a new Tier 4 compliant unit, will also launch later this quarter.

While second quarter sales for our Residential equipment business experienced some delays, we are well-positioned for late spring and early summer sales. Our innovative new Toro walk power mowers featuring SmartStow have received strong support from retailers, as has our new 42-inch TimeCutter zero-turn rider that delivers exceptional value at a strong retail price point.

Our refreshed line of Titan zero-turn mowers for large acreage owners and an expanded electric products line featuring new 24 and 48 volt cordless models further bolstered the appeal of our residential offerings. We believe these new products can help drive significant retail growth.

Our international businesses' year-to-date results were softened by currency fluctuations. However, steady regional recovery of golf tourism, along with the need to replace aging golf and grounds fleets, presents encouraging signals. Golf irrigation sales are expected to benefit in the third and fourth quarters from a number of planned new installation as well as renovation projects.

Overall, we believe the stage is set for another successful season. As always, favorable temperatures and precipitation are needed to assist the extension of the growing season and help drive retail in both our residential and professional segments. We recognize that unfavorable shift in the economy or weather could pose challenges to our plans. As always, we are prepared to respond to changing conditions.

The Company continues to expect revenue growth of about 5% to 6% for fiscal 2014 with net earnings of about $2.90 to $2.95 per share. The Company expects to report net earnings of about $0.82 per share for the third quarter.

Seven weeks from today marks the 100th anniversary of the founding of our company. Many channel partners from around the world will gather here at our corporate headquarters in Minnesota for an intensive week-long business planning and training regimen, as well as to celebrate this very special occasion with our employees and retirees.

Such times engender reflection upon how a given enterprise reaches such a rare milestone, as well as how it can continue to grow and prosper. We believe the answer lies in part in the simple formula outlined in 1933 by our third president, Kenneth Goit, when he said quote -- the success of this company is no secret. It has been due to two simple things: building a good product and treating customers honestly and fairly. The only way to success is by fair and honest treatment of customers. End of quote.

While times, demographics, technology, and customer needs continually change, whether it is a farmer back in 1914 who was considering buying a tractor powered by a Toro engine or a customer who years or even decades from today hopefully will be considering purchasing our company's latest innovation, we believe these fundamental truths abide. Both customers would want to obtain a good product and be treated honestly and fairly.

As we prepare to embark on our second century, the Company remains committed to the core principles that we believe have both served our various stakeholders well and hold the keys to our future success: a relentless commitment to building long-term, trusting relationships by delivering cutting-edge innovations that make customers' lives easier and better.

This concludes our formal remarks. We will take your questions at this time. So, Brittany, back to you.

(Operator Instructions) Robert Kosowsky, Sidoti.

Good morning, everyone. I had a quick question on the Other segment. That seemed to be down pretty significantly year-over-year and I am wondering -- I know it is a catch-all segment for a lot of different items so I am wondering what some of the drivers were that drove that decline in the quarter.

Rob, you are correct that there were a lot of moving pieces within the Other segment. This includes some of our corporate-level expenses as well as the results of our company-owned distributors.

As you know, we continue to focus on productivity and fixed cost leverage across the organization and some of the improvement that you saw within the quarter is SG&A related. And that would be driven by some of the favorable healthcare claims experience -- we are self-insured -- and also some favorable product claims experience.

Okay.

Year-to-date there is also an impact that we had mentioned in the first quarter's release related to our company-owned distributors and intercompany profit elimination.

Okay, that is helpful. Then otherwise, the golf equipment sales, it seems like some of that has pushed out. Mike, it seems like this is a reflection of rounds played being weak last year and a slow start to this year.

Is that kind of the take away from here? We just need to weather to cooperate to get rounds played up and that is going to lead to kind of a release of equipment sales demand; is that the right way of thinking about it?

Yes, Rob, I think that is the right way to look at it. So while the courses will have capital budgets and plans, they are also no different than we saw back in the downturn. They are going to be a little bit cautious.

We expected actually spring to be more favorable than it has been. What I can say is when we look at our year-to-date results and open orders we are actually in a very good position, but we are playing a bit of catch up there. Now the weather is improving and rounds played will improve as well.

Okay. Are these orders that could be pushed off indefinitely?

No, these are -- when I mentioned orders, these are orders that will be delivered this quarter.

Okay. Then finally (multiple speakers)

I am talking retail sales, not our shipments.

Okay. Then, finally, on the stock buyback pace. It seemed like it was very elevated in first half of this year, at least versus what it was last year. Should we expect this to continue at this pace or was it just kind of front-end loaded for whatever reason?

Rob, this is Tom. As Renee indicated, we bought about $40 million worth of stock in the quarter so that brings us to about $80 million for the year. Coming into the year we said we expected to spend roughly similar amount as we did last year, which was around $100 million.

Granted, we are ahead of that pace but our thinking around this really hasn't changed, and spending in the back half will depend on both price movements, as well as our other needs and opportunities for use of our cash. But, again, our thinking around this really hasn't changed. We are just ahead of pace.

Okay, that is helpful. Congratulations on the 100 years, guys.

Thank you, Rob.

Jim Barrett, CLK.

This is Jim Barrett with C.L. King. Good morning, everyone. Mike, I know it is still very early, but any sell-through indications yet for the SmartStow lawnmower?

Yes, I think too early. Clearly the channel excitement around that product at both people and dealers has been very, very positive. My guess is we will see more of these kind of things because it is a great feature, freeing up space in the homeowner's garage.

Then in addition to that, with the SmartStow kind of momentum, we brought out a whole new line of Lawn-Boy motors this year that have also gotten very good acceptance and created some excitement.

Okay. Then separately, I may have missed it, but is there an opportunity in lawnmowers to provide a quieter engine in terms of a gasoline-powered lawnmower? I noticed one of your vendors is touting that technology.

I am not sure I follow, Jim.

Well, I noticed Briggs & Stratton has a Quiet Power Technology engine. Is that an opportunity to implement in the lawnmower?

Yes, I guess that is a question I am sure our guys have -- I am sure they have talked with Briggs about that. That is something we are always looking at, making our product better. In this case, better and quieter no doubt is better. Maybe all the way someday to more electric powered products that are really quiet.

So whether it is SmartStow or Quiet Power or different features that drive cutting performance, we are focused on all of those.

Okay. Then more broadly, given some deals that have been in the space in the last six months, would there be antitrust issues for Toro if there was an interest and an inclination to expand into the commercial landscaping mower market, given your two leading brands that you currently have?

I mean we have certainly a very strong share in the landscape contractor arena with the Toro and Exmark brands. I will leave that to the general counsel, but I think, given our relative share, there is nothing that would prevent us from continuing to grow that.

Okay. Thank you very much.

Thank you, Jim.

Sam Darkatsh, Raymond James.

This is [Josh] filling in for Sam. Thanks for taking my questions.

I wanted to dig into the gross margin a little more. Could you quantify the commodity impacts on gross margin in the quarter and maybe spell out specific commodities or components in which you saw the most inflation?

What we saw within the quarter I would characterize as modest commodity increases. We expect commodity prices to stay about where they are today versus continuing to escalate. Most significant increases were in the areas of steel and resin.

Okay. Then could you talk about the pricing realization that you had?

What we have stated previously is that we expect to realize about 1% net price realization and we are on track from that perspective. Quite a bit of that would have already been recognized based on our pricing action.

Got it. Are there any concerns you have with channel inventories or have those started to get on the right path now that we are through April and into May?

Well, I would say that -- and we had a similar discussion last year that overall our inventories are okay. Now, they are a little higher than we would have liked because we had another really cold spring.

With that said, we have good retail momentum across the business as we talked about earlier, particularly in the riding products and landscape products and so on. We will expect strong retail when it comes to snow products as we get into the back half of the year.

Mother Nature, let's face it, as we had this conversation a year ago the probability was, we thought, high that we would have gotten, call it, a normal spring and you know the story there. So it has impacted many industries, particularly here in the US.

We have had a relatively good spring in Europe, so that has been the positive side of the ledger, but 70% of our revenues are here in the US. And so the late spring has impacted that, but retail momentum right now is very strong. In fact, we are just finishing up Toro Days in May and that has been a plus. So we think that will, like it did the last time around, take care of itself.

And other than weather and the commodity inflation, where there any other notable either positive or negative variances versus your prior plan?

No, I think things are playing out similarly to what we expected I guess. We have dealt with the weather issue; The economy inching along, not a major step change either way.

Certainly we will have a benefit of snow. As we look at our portfolio, snow has ranged as little as 3% of our revenues in the past and as much as 6% over the last five years, and certainly it's going to move to the higher side as a result of this last winter.

Thank you. Good luck with the rest of the year.

Thank you, Jeff.

Mark Herbek, Cleveland Research.

Good morning, everyone. In terms of your full-year sales guidance still 5% to 6%, has anything changed over the last 90 days? Specifically, have your snow forecasts moved higher and has there been anything that might have moved lower in terms of you holding your 5% to 6% revenue growth for the full year?

We have kind of asked and answered to some degree. Certainly the snow goes on the positive side of the ledger and the late spring, when we talked last in February we would have expected a better spring environment. It has not been that.

So will that cost us a bit in terms of revenue? Probably. All-in we are holding the position, but some of that will play out over the next three months -- May, June, July -- in terms of what happens with our particularly Residential business in this coming quarter.

And I guess on that subject, 20 days into May what have you seen in terms of retail demand on the consumer side? How much better is it?

Again, it is similar to last year. Again, backing up to 2012, we had just an extraordinarily good spring. It was -- people were playing golf here in Minnesota in March. Last year was just the other bookend.

And while it hasn't snowed -- I will use Minnesota -- while it hasn't snowed here in May, it has certainly been cold and impacted, whether that is a residential homeowner's intent to get out use or purchase products, as well as all the way to the other bookend, the golf rounds played. So I think that again, back to what I said earlier, we will see how this plays out over the next 90 days.

We see strong signs from our landscape business, both that is influenced by the good season they had with snow for the northern contractors, but more than that; really strong product portfolio. So that business is good and that is a bit more planned.

Golf is probably the most planned. And the residential business is the one that -- well, riders in the residential arena are more planned than a walk power motor. That is probably the most variable in terms of going to be influenced by Mother Nature.

So that is kind of a long-winded answer; I hope that got to your question.

In terms of the non-US guidance, I think I heard you mention you expect it to improve from here versus what was a softer second quarter. Specifically, what are you seeing in the non-US business in terms of golf equipment, golf irrigation? Are you seeing improvements and any quick update on the China moratoriums?

Not a dramatic change outside the US. Again, that is a portfolio of lots of countries and places around the world.

We would look at it broadly and say Europe is sound. Europe, as I mentioned earlier, had a good spring. Golf is sound. We are not going to see a step change either way there we don't think.

Asia and China, a smaller part of our portfolio. Golf is a really important part of that business. Got a chance to go to the Beijing golf show a couple of months ago and that business continues to improve.

You used the term moratorium; certainly there was a slow down, but that is moving back in the right direction and there will be golf courses built in China. We have a really excellent position there and outside of China in other parts of Asia. So that is good.

Probably the most significant headwind has come from Australia. It has been really challenging weather and record drought issues. Our winter here is their summer there. They had record drought. We have had major currency headwinds. And that is about 25% of our international sales all-in so that has been -- when you put that in that has been the most negative.

Thank you.

Thanks, Mark.

Joshua Borstein, Longbow Research.

Good morning, everyone. Thank you for taking my questions. Just to go back to a question that Josh asked on the inventories, were you speaking about your own inventories or about channel inventories?

I was speaking about channel inventories. Ours obviously you can see.

Okay, thanks for that. Then just I was hoping you could address the DIY segment, whether that is for irrigation or rental equipment or another segment. Just trying to get a sense if you are seeing any slowdown there with some of the housing data points that have come out lately.

Our rental team would say actually business has been good. Now we are not as big a player there as some, but a growing one. We came off a very good year in the rental side last year.

I think their feedback would be, well, there may be a little bit of slowing on the residential side. On the other hand, the commercial side seems to be picking up and we have an even stronger product offerings; certainly helps our position and share. So that will be the biggest part of that DIY. As we work with our -- the rental companies, the channel partners we sell to them and they rent.

Irrigation DIY business that is a much smaller part of the portfolio and I don't have a good answer for it right now.

Okay. Then on to the golf irrigation. Could you talk about the opportunity for that piece of the business, maybe this year and next? Do you have a sense for where in the replacement cycle courses are; if you expect any tailwinds from aging systems?

Yes, I think we do. That should extend a number of years forward, but part of this is based on -- when you think about it, many of these course installations, or I should say the new course development here in the US that took place back in the late 1980s and 1990s. And those courses, those systems are aging out right now and so that should provide a bit of an annuity long into the future.

We have very high share in that space; work very hard to make sure we have got the right kind of offerings. And so the US market is more of a replacement market there, but it's a significant one.

We will still see new golf growth outside the US long into the future. Those are new installation so we track those very carefully. We are going to have a good year there this year and we would expect that to continue into the future.

Great, thank you. Then just for modeling purposes, can you remind us how 3Q of last year played out, if there were any particular weather events from last year that we should take into consideration?

The 3Q weather last year was good, and as I mentioned earlier in the remarks, we hope that in fact plays out similarly this year with the temperature and moisture. And then some of that feeds into Q4, and so the snow part of that as we get to the last part of Q3 and into Q4 will be clearly better.

Okay. Then just finally, on the rework issue that you had mentioned. Can you tell us what segment that was in and what kind of impact that might have had to the gross margin?

Yes, it was in the Residential segment and so it impacted of the Residential gross margin. I think what we would say is without having that as a supplier issue, without having that our residential earnings would have been similar to the prior year.

And so we will work through that, those things happen. We do our best to try to make sure they don't, but we have got it behind us and worked with our channel partners to make sure that we don't let inventory get out to our end users. So it has been corrected within the quarter from getting our hands on the product.

So that was just a 2Q event and there is no spillover into 3Q?

There will be a small part that will spillover as we make a couple of fixes on the product that we brought back, but it is not material.

Okay, great. Thank you and good luck on the rest of the year.

Thank you, Josh.

Robert Kosowsky, Sidoti.

Just a quick follow-up question on the dealer side of the business. It seems like Briggs and Husquvarna are making a bigger push into the higher end retail mower and landscaper channel. And I am just wondering if there has been any difference in how your dealers are reacting to you or maybe pricing expectations because of that.

Yes, I don't think that has been a, what I will call a, material change. Actually that has been through -- been similar for quite a while. And so this is as much about as we compete in the marketplace do we bring the kind of innovation our customers want, do we have the (inaudible) channel, and end-user relationships that differentiate us. We will keep doing -- following that MO.

Okay. Thank you very much.

Thanks, Rob.

This concludes the question-and-answer session. Ms. Dahl, please proceed to closing remarks.

Thank you for your questions and continued interest in Toro. There are a couple of upcoming events of which we would like to make you aware.

On Wednesday of next week, May 28, we will visit the New York Stock Exchange and ring the closing bell to commemorate our upcoming 100th anniversary. Then later this summer we encourage you to tune into Major League Baseball's All-Star game to be held in Minneapolis on July 15, just after our centennial celebration. We know that Larry DiVito, head groundskeepers for the Minnesota Twins, and his crew will have the playing field in pristine condition for this event. And we are proud to help in that effort by being the exclusive provider of turf maintenance equipment and irrigation systems to Target Field.

After that we look forward to talking with you in August to discuss our third-quarter results. Thank you and have a great day.

Ladies and gentlemen, that concludes the presentation for today's conference. You may now all disconnect and have a wonderful day.