Toro Co (TTC) 2015 Q2 法說會逐字稿

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. On our call today 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 a duty to update our forward-looking statements. With that, I will now turn the call over to Mike.

Thank you, Heather, and good morning to all of our listeners again. As you notice, we have a new leader of our investor relations team with us this morning, Heather Hille. Heather joins us from our legal team where she has served with distinction for a number of years. I want to welcome Heather and congratulate her on her recent promotion to Director, Investor Relations and External Communications. I am certain you will enjoy working with Heather in her new role and I also want to take a moment to recognize and thank her predecessor, Amy Dahl, for her contributions to our investor relations efforts. Amy is taking on important new duties as Vice President, Human Resources. I want to congratulate Amy on her promotion as well.

Now let's take a look at our second-quarter results. Although we faced challenging currency and segment mix conditions, the Company achieved record sales and earnings for the quarter. Net sales increased 10.9% and net earnings per share grew 8.6%. Retail demand for both our residential and professional products delivered solid gains across our businesses with the residential segment enjoying particularly robust results growing almost 30% due to new products and increased placements.

Sales for the six months of the year grew 9.2%. Residential segment sales posted a 12.5% gain year to date as a result of strong retail and channel demand for our innovative zero-turn riders and walk-power mowers, as well as late-season demand for snow throwers. Professional segment sales for the first half of the year grew 8.3% due to the addition of the BOSS snow and ice management line and strong demand for landscape contractor, golf and grounds equipment. Results in both our professional and residential segments were impacted by unfavorable currency exchange rates.

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.

Residential equipment sales rebounded from their slow start at the beginning of the year. As we said at the time, the slow start was caused by supply inefficiencies, production ramp-up issues with the new riding products and additional snow production runs that displaced riders. We managed through these issues and zero-turn riding equipment shipments accelerated in the second quarter as a result of strong open order position. The momentum our walk power mowers sales enjoyed during the first quarter carried on through the second. Sales once again increased due to continued demand for new products, most notably our all-wheel-drive recycler walk power mower.

Recently, both our new steering wheel zero-turn tractor and our all-wheel-drive recycler received very positive reviews in a leading consumer testing publication. The zero-turn tractor was praised for its ease of operation, quality of cut and other safety and convenience features. The article on our all-wheel-drive walk power mowers stated that when compared to competitors' units, overall, the Toro performed the best. Such timely unbiased positive reviews will likely spark additional consumer interest and help extend the sales momentum.

Turning to our professional businesses, the BOSS line of snow and ice management products delivered solid sales results for the quarter. Our BOSS teammates and the innovative products and services they provide have proven to be a good match with the Company's culture and growth goals. The BOSS integration is progressing well and we are pleased by the ongoing contributions of this new business.

Next, our landscape contractor businesses continue to increase sales for the year due to strong demand for zero-turn riding equipment, our stand on spreader/sprayer units and our new side-by-side off-road utility vehicles. Contractors continue to invest in our ever-expanding offerings of innovative solutions to enhance productivity and customer satisfaction.

The professional golf and grounds equipment businesses were up for the quarter based on strong retail and channel demand, especially for our utility vehicles and new sprayer products. Our Sand Pro product line greens rollers and fairway mowers also made nice contributions year to date.

The latest industry reports offer positive signals as golf rounds played, days open for play and golf revenues are all up year to date. We are also pleased by the successful launch of our new Reelmaster 5010-H hybrid fairway mower. Sales of our residential and commercial irrigation products mirrored industry results as unfavorable weather patterns slowed demand. We did, however, continue to benefit from strong retail demand of our new Elements lighting line.

Finally, as sales in our international businesses, as well as micro-irrigation sales outside the US, decreased for the quarter due to primarily unfavorable currency rates, we did experience heightened demand for our new zero-turn residential riders, as well as good sales of our golf and grounds equipment in certain regions. Were it not for the currency impact, our international sales would have posted slight gains. Now I will 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 $826.2 million compared to $745 million for the same period a year ago. We also delivered net earnings of $93.8 million or $1.64 per share compared to $1.51 in the second quarter of fiscal 2014. Year-to-date net sales were up 9.2% to $1.3 billion. We achieved net earnings of $124.7 million for the first six months or $2.18 per share compared to $1.95 per share a year ago.

Professional segment sales were up 4.6% for the quarter to $552.8 million. The addition of BOSS to our professional portfolio, along with strong sales of landscape contractor, golf and grounds equipment also drove growth in the quarter. Year-to-date professional sales were up 8.3% to $892.5 million due to the same reasons as the results for the quarter. Unfavorable currency exchange rates had a negative impact on professional sales results for both the quarter and year to date.

Professional net earnings for the quarter totaled $120.8 million, down 1.3% from $122.4 million in the same period last year. Please note there was a slight error in our earnings release, which referenced first quarter. This statement should have noted second quarter. For the first six months, professional segment earnings were $176.5 million, a 3.9% increase compared to the same period last year. Second-quarter residential segment sales increased 27.3% to $267.9 million. Year-to-date residential sales were up 12.5% to $402.6 million. The growth for both periods is due to the domestic retail demand for zero-turn riders and walk power mowers.

Year-to-date, residential results also benefited from the demand for snow throwers. Residential sales growth during the period, during both periods, was somewhat impacted by unfavorable currency exchange rates. Net earnings in the residential segment for the quarter totaled $34.8 million, up 46.2% from last year. Year-to-date earnings were $48.6 million, a 15.8% increase compared to the first six months of fiscal 2014.

Now to our key operating results. Second-quarter gross margin was 34.1%, a decrease of 140 basis points. Half of this decrease was due to unfavorable exchange rates and the other half due to the mix impact of stronger sales in our residential segment. Gross margin declined year to date by 120 basis points to 34.7%, which is primarily due to unfavorable exchange rates. We now anticipate a decrease in gross margin for the year of about 60 to 70 basis points due to unfavorable currency exchange rates.

SG&A expense as a percent of sales decreased by 60 basis points for the quarter to 17.3% and by 90 basis points to 20.6% year to date. The quarter and year-to-date improvements were due to the leveraging of expenses over higher sales volume. Operating earnings as a percent of sales for the quarter were 16.8%, a decrease of 80 basis points and 14.1% year to date, a decrease of 30 basis points.

Interest expense for the quarter was up $1.1 million from a year ago. Year-to-date, interest expense was up $2 million. The quarter and year-to-date changes were due to increased debt, mainly related to the BOSS acquisition. Our effective tax rate for the quarter was 31.1% compared to 32.6% a year ago. For the first six months, the tax rate decreased to 30% compared to 32.7% for the same period in 2014. The change reflects the benefit realized in our first quarter from the retroactive reenactment of the domestic research tax credit for calendar year 2014. We continue to expect our tax rate for fiscal 2015 to be about 31.5%.

Turning to the balance sheet, accounts receivable for the quarter totaled $351.6 million, an increase of 12.2% over the same period a year ago, which is in line with the sales increase. Net inventories for the quarter increased 12.9% to $341.4 million. The increase was primarily due to the BOSS acquisition. Second-quarter trade payables increased 8.7% to $256.4 million due to increased purchases for anticipated product demand for the remainder of the year.

As you know, we remain focused on inventory, accounts receivable and trade payables management. At the end of the second quarter, the Company's 12-month average net working capital as a percent of sales was 15.6% compared to 15.5% a year ago. The Company continues to return value to shareholders through dividend and share repurchases. On Tuesday, the Board approved a regular quarterly dividend of $0.25 per share. We repurchased over 500 shares of common stock during the quarter and have approximately 2 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 and thanks to Mother Nature for the favorable spring weather we have enjoyed in most markets. That along with customer enthusiasm for our latest innovations and the hard work of our team members around the world enabled us to deliver record results for the quarter. While we cannot control currency exchange rates or demand patterns between business segments, we remain focused on taking appropriate measures to adjust to whatever headwinds we encounter while controlling what we can control. And so we will stay the course on creating innovative new products that deliver real distinctive value, forging strong, lasting customer relationships and on executing with excellence. We believe we are well-positioned to capitalize on both existing high demand for our products and the prospects for growth across businesses for the remainder of 2015.

The outlook for our residential business for the year is promising. As I said during our last call, increased placements and strong market demand for our spring products presented meaningful opportunities. Once we move beyond the early supply inefficiencies and ramped up production, our new zero-turn riding equipment and walk power mowers line generated solid sales as evidenced in our second-quarter results.

As long as favorable weather prevails, we believe our residential turf maintenance products will finish the season strong. Prospects for the upcoming snow preseason also look encouraging as the late snows earlier this year helped clean the pipeline and set the stage for good preseason demand. Our channel is excited by our new Snow Master snow throwers with in-line two-stage augur technology that readily handles wet, heavy snow. These innovative machines are true crossover units. They incorporate features like our well-known Quick Stick and easy turn chute controls and for the first time, our innovative personal pace drive system of walk power mower fame. The result is a product that performs like its two stage with the maneuverability and ease of a single stage. The Snow Master has helped generate strong preseason bookings.

Likewise, our strong line of BOSS snow and ice management products is poised for a successful preseason, building upon the ongoing demand that has been evident year to date. Customers are responding favorably to the new offerings BOSS unveiled for the upcoming winter. These include the industry's first 100% LED headlight system known as the SL3 that delivers twice the traditional lighting capacity for greater visibility. The new HDX half ton straight blade plow for half ton and smaller trucks and the new BTX 9000 spreader featuring a massive 3 cubic foot hopper for mid-duty trucks. BOSS and its customers will be ready for the worst winter can deliver.

For those of you who joined us in San Antonio for the golf industry show in February, you witnessed firsthand the attention our exciting new hybrid fairway mower, the Reelmaster 5010-H commanded from golf customers. The 5010-H, which is the industry's first and only mower with a true hybrid drive system, offers the ultimate in precision operation and cutting performance. As anticipated, customers around the world have enthusiastically welcomed this significant advancement in hybrid design. In fact, the 5010-H recently won a gold medal for innovation in Germany in connection with one of the most important global exhibitions promoting innovations in the green sector. The 5010-H will be featured at the 2015 exhibition next month in Eisenach, Germany.

Innovations like the new Reelmaster help us strengthen our existing customer relationships and develop new ones. You are familiar with some of the prestigious courses we are proud to call customers like St. Andrews in Scotland, the birthplace of golf that in July will host the 144th Open Championship. Toro irrigation and equipment will be there.

The site of next month's 2015 U.S. Open at Chambers Bay in Washington state will likewise be cared for using Toro equipment and irrigation systems. We are pleased that, Le Golf National, a course 20 miles west of Paris, recently decided to use Toro irrigation products as part of a major system renovation. The course is already preparing to host the 2018 Ryder Cup. Innovative equipment and irrigation products backed by exceptional customer service enable us to continue our legacy of leadership in the golf market.

Similar to our residential business, if the favorable weather continues, our landscape contractor zero-turn riding equipment and spreader/sprayer units momentum will likely continue. The coming mid-season launch of the new zero-turn riding equipment featuring an exciting new suspension system should also help our landscape contractor businesses finish the year strong.

Our professional grounds business continues to benefit from our focus on working with state and local government agencies to supply their turf maintenance needs. Our team proudly serves all levels of sports facilities around the world. Our equipment and irrigation systems will once again help prepare center court and all others at the All England Club for the June opening of the 2015 Wimbledon Championships.

Another game-changing innovation for the professional grounds, sports field and golf markets is the new Toro GeoLink system for our Multi Pro sprayer. It uses GPS technology to track the sprayer's application path to ensure accurate and consistent coverage and avoid overspraying. This innovative design reduces chemical use, which is better for the environment and saves money. Turf managers who have tested the GeoLink are impressed and ready to buy when it hits the market later this summer.

Next, our rental and specialty construction businesses have benefited from commercial and residential construction activity. Our much awaited Dingo TX 1000 compact utility loader will be released this quarter. Its 1000 pound plus capacity and industry-leading 81-inch vertical lift capability enables it to field commercial dumpsters and the beds of 1 ton trucks with ease. The TX 1000 enhances productivity and makes it an attractive addition to both rental and contractor fleets.

Finally, our international businesses faced currency exchange rate challenges; however, in certain regions, we have enjoyed solid demand across our residential and most of our professional portfolios. Much like domestic markets, many overseas customers are anticipating the arrival of our latest innovations. As mentioned earlier, irrespective of the currency headwinds, we continue to win new business at such places as Le Golf National. We will explore means of mitigating the impact of currency issues through productivity, price and cost containment.

In conclusion, we believe the stage is set for another successful year. We recognize that unfavorable shifts in the economy or weather could pose challenges to our plans. As always, we are prepared to respond. The Company continues to expect revenue growth of about 8% to 10% for fiscal 2015 and net earnings of about $3.35 to $3.45 per share. For the third quarter, the Company expects net earnings per share of about $0.85 to $0.90. This concludes our formal remarks. We will take your questions at this time. Tony, back to you.

I would like to offer one clarification as we go to Q&A related to share repurchases. I want to clarify that we purchased over 500,000 shares of common stock during the quarter.

(Operator Instructions). Sam Darkatsh, Raymond James.

Good morning, Mike, Renee, Tom. A couple of housekeeping questions, if I could start there. First off, Renee, what were BOSS sales in the quarter?

BOSS sales in the quarter were about 20% of our overall sales growth rate.

And what was the FX impact on sales on a by-segment basis if you could help?

At a company level, the FX impact for the quarter was about 2 points of sales growth. Overall, what we are seeing year-to-date, Sam, is about 1.5 points of sales growth, which is up a little bit from what we said before at about 1 point of sales growth. So as we look at the total year, who knows what will happen with currency exchange rates, but we are anticipating about 1.5 point sales impact and a little bit less than half of that falls to the bottom line.

You are expecting 1.5 for the year, is that what you just said? I am sorry.

Yes, assuming exchange rates remain about the same as they are right now.

Got you. Two more questions and I will defer to others. You mentioned that you wanted to keep a careful eye on both retail demand and field inventories. Obviously you always want to do that, but it was interesting you called it out specifically. Are you particularly concerned about where field inventories are right now, Mike? Can you give some color around that?

Actually, at this point, field inventories are up a little. The fact is retail demand across the portfolio from commercial to landscape to residential is very strong. So part of that keeping an eye on it is making sure we are there in a timely basis for replenishment. We are in one of the big months of our year from a retail demand standpoint across both residential and for the professional side of the business. And so you are right, we are always keeping an eye on it. There is much to be encouraged about with the retail demand year to date. We obviously want that to continue, but that is something we monitor week by week, day by day.

So to follow up on that, so, in May, you didn't see any meaningful change versus what you saw earlier on in the season?

No, it continues to be very strong.

Okay, and then last question if I could. Even if it is just directionally, can you help us, the 27% growth in residential obviously is really heady. Any way to figure out how much of that is from the placements and how much of that is just real good retail activity?

It is both. Clearly, the expanded placement, it helps drive increased retail. Some of that is even catchup from the first quarter where we didn't ship some of that product that was in demand, but the demand for our riding products in the residential side of the business has been very strong. We have got a new platform out there, we have some new control mechanisms on the riders that is creating a lot of interest. The new all-wheel drive walk power mower is creating a lot of interest. And so it is a combination of new product innovation, good partnerships with our channel partners, retailers and dealers and just good consumer acceptance of those products. It has been a bit of a challenge keeping up with some of that retail demand and we just want to make sure we are there on the shelves when the customers come in to buy that product.

So more than half, less than half of the growth maybe coming from the placements? How should we think of it?

I don't have that number. I guess if I had to pick one thing, it would be the new products and the expanded offerings with the features that are on them. It would be followed -- probably second would be the expanded placement and then third, Mother Nature certainly has played a role in that as well.

Very helpful. Thank you very much.

Thank you, Sam. Thanks for your patience too with what went on this morning.

(Operator Instructions). Jim Barrett, CL King & Associates.

Good morning, everyone. Mike, sort of it feels like the business is gaining marketshare. Could you go through your various segments and comment on that to the extent that you have a sense of being able to measure marketshare?

Yes, good question, Jim. At this point, we would probably characterize that just as you said a sense of it. We will get more specific results as we wrap up the season and are able to look back at some industry results and so on. With that said, I think it is our sense given the retail demand that I talked about just a minute ago that our marketshare is moving in the right direction with categories like walk power mowers and residential riders. We think our marketshare will move in the right direction this fall with our new snow thrower offerings that I mentioned earlier.

We have a very strong position in the landscape contractor arena and marketshare is certainly very sound in the larger categories like the zero-turn riders. Newer offerings in the spreader/sprayers clearly we are taking share there, but that is largely because we are entering a new category, but there is a lot to be excited about there as well. And as I mentioned in the formal remarks earlier, we have some new features coming on that large category of the zero-turn riders in the third quarter that will be very exciting for our customers and for the channel.

Our sense is that is positive moving in the right direction and the same thing on the commercial side. That is made up of different productlines, if you will. We think the new hybrid fairway mower is certainly helping us in that category. The new sprayer systems that we are bringing on are helping us in those categories. And then last, I would just say with the acquisition of BOSS, and BOSS is a terrific company, it is a terrific addition to the portfolio, some of the new products they introduced at the truck show last quarter have been very, very well received. So the combination of expecting a good preseason demand from the channel and end users will be accelerated by the new product offerings they have. So I think all in, Jim, there is a lot to be encouraged about. We will have more precision around that later in the season.

And I know you have commented previously on micro-irrigation and some of the programs being implemented among homeowners for example in the state of California. Within the US, and I am thinking the Western states, if the drought continues for the next few years and these states start charging agricultural users a higher level of rate to use water, do you foresee a meaningful opportunity for micro-irrigation in those locales?

Well, first off, I would say that micro-irrigation is already an important part of those locales. With that said, there is still a lot of acreage that is not micro-irrigated and is using other systems from probably to flood being the most inefficient. So clearly, that as the regulatory environment changes, that will create opportunity. If you are a farmer there and are only going to get so many acre feet of water then the ability to use that more precisely to maximize your productivity is going to matter. I don't if it will be slow, but it is clearly moving in the right direction and as we have said before on the micro-irrigation side of the business, it is the right end of the continuum to be on. We just need to manage water more precisely and these products do it better than any other.

And then finally does your marketshare in the USA in micro-irrigation, does it mirror your worldwide share?

I would say actually our marketshare in North America is somewhat higher than our worldwide share. There are certain markets where we just don't have a strong presence; we continue to work on that. We have -- North America would be one of our stronger markets; Western Europe, we opened the Romanian plant a few years back to give us a stronger presence in Eastern Europe. We have talked about China in the past. But the US actually would be, of the group, probably the strongest.

Thank you very much.

Josh Borstein, Longbow Research.

Good morning, everyone. This is actually Evan Barry here on for Josh this morning. I just wanted to get a feel for the third-quarter earnings you guys had released. I guess it kind of implies that the Street was modeling a little light in 3Q and a little heavy here -- or a little light in 4Q and a little heavy in the third quarter. I guess I was just kind of looking to see what the discrepancy between the Street was and how you guys are kind of seeing the business unfold for the rest of the year?

Well, I guess I would start off with, obviously, we understand what the Street does. That is ultimately up to the Street, if you will. I think the starting point for me would be we always ask our investors to look at the Toro Company kind of on an annual basis just because of the nature of larger quarters and smaller quarters and that kind of variability. Things move back and forth. To what degree will snow demand be earlier or later, we have the new factor of the BOSS snow products in the portfolio and managing channel demand and all of that. So I think it is really saying right now at this point we will see what happens in the quarter, but we have sustained our annual number and we believe we are on track to do that and we expect a pretty good, as evidenced by that, a pretty good fourth quarter with the addition of BOSS now.

Okay, great. And then just on the contribution margin, I guess that came in a little bit lower than I guess I was modeling. Is there any particular reason you think that that might have been the case and maybe just how we should kind of think about contribution margins going forward?

Probably the biggest impact to our gross margin overall is FX and what you are going to see is that is more heavily weighted toward the professional side of our business than the residential side. I think that is probably the item that you need to factor into. As I said earlier, it has turned out to be a more significant headwind than we had originally anticipated.

Okay. Thanks for the color on that. I guess last one from me here, I know you kind of had mentioned some of the early traction you are seeing on the Reelmaster. Was wondering if you could just talk about a little more color on how the early sales have been going and maybe if they were kind of meeting or exceeding your expectations so far?

I think we would say they clearly are meeting, maybe exceeding our expectations. When you bring something that is a newer technology, you are never quite sure. Obviously, you do a lot of market research and voice of the customer, but you are still never quite sure. This is a great platform that leverages less than 25 horsepower diesel with a hybrid technology and it is a combination of its fuel efficiency, coupled with that true hybrid drive system that I think customers are liking. Some customers are more focused on the green aspects. I think we are seeing that in Europe and that may be stronger than anticipated demand. You always have the question when we bring out new products will they wait a while before they try it, see how it is, see how it performs. That hasn't happened here; customers embrace this wholeheartedly. So there is a lot to be excited about with this new product.

Okay, great. Thanks a lot and good luck.

Thank you for your questions. We will now conclude the Q&A session and hear closing remarks from Ms. Heather Hille. Please proceed.

Thank you for your questions and continued interest in Toro. I look forward to meeting and working with you in the months ahead. We will talk with you again in August to discuss our third-quarter results. Thank you and have a good day.