Toro Co (TTC) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the Toro Company's full year and fourth quarter earnings conference call. My name is Carmen and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the presentation over to your host for today's conference, Heather Hille, Director of Investor Relations and External Communications for The Toro Company. Please proceed, Ms. Hille.

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; Rick Olson, President and Chief Operating 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 greetings to all of our listeners.

This morning, we are pleased to report that the Company delivered record-setting results for fiscal 2015, including records for revenues, operating earnings, and earnings per share. These records include net sales of $2.4 billion, operating earnings of $299 million, and earnings per share of $3.55. Furthermore, our growth in 2015 was well-balanced with strong contributions from our new BOSS snow and ice management business, our core residential and landscape contractor businesses and our newer rental and construction business. Our strong sales results were somewhat offset by unfavorable currency exchange rates. Currency changes cost the Company over 2 points of growth.

The Company's focus on both creating and returning value to our shareholders remains steadfast, as evidenced by our FY15 results, along with the increased quarterly dividend and additional repurchase authorization that our Board just approved. Following a brief commentary on our businesses, Renee will discuss our financial and operating results in more detail, followed by Rick, who will discuss our outlook for FY16.

We begin with our newest business featuring the high performance line of BOSS snow and ice management products. Robust preseason demand helped BOSS maintain their momentum and deliver another solid quarter. The snowy weather conditions experienced during the two preceding winters in North America, along with the successful launch of several innovative new products this year, helped fuel our very gratifying inaugural year with BOSS. Additionally, this new business is focused on lean manufacturing, further complemented BOSS' overall contributions.

Next, our landscape contractor business has benefited from increased demand for our full range of mowing, aerating, and new spreader sprayer equipment lines. Contractors are drawn to the increased productivity these machines provide. While in certain regions we did experience somewhat softer demand for mowers due to prolonged drought conditions, the worldwide business still generated overall growth.

Similarly, our newer rental and construction business enjoyed a good year. Our compact utility loader product line grew nicely, fueled in part by the introduction of our new award-winning TX 1000 that we have discussed during previous calls.

Positive construction trends continue to boost the rental industry, motivating an increased investment by rental operators which helped drive demand for our rental and construction product offerings. For example, our new ultra mix mortar mixer enjoyed very positive channel acceptance, as year-end demand for mixers proved to be very strong.

Retail demand for golf equipment also grew nicely for both the quarter and the year. The industry saw an improvement in golf rounds played, increased course revenues are leading to capital investments in course renovation projects and equipment acquisition. Our new Reel Master 5010-H Hybrid, the industry's first fairway mower with a true hybrid drive system, was extremely well-received and is now cutting fairways on many of the leading golf courses around the world, including the venerable birthplace of golf, Scotland St. Andrews links.

As expected, our golf irrigation business has had a good project year. The new INFINITY golf sprinkler head, along with our updated Lynx central control software, remain highly popular. Like golf operations, state and local governments are experiencing larger budgets, allowing them to replenish their equipment fleets. Our sports fields and grounds business continues to benefit from these increased expenditures. This, combined with our expanded presence on state and local governmental and other cooperative contracts, helped grow the business in F15.

The residential and commercial irrigation contractor industry faced a number of weather headwinds and a myriad of regionalized challenges from abnormally heavy rainfalls to severe drought. However, improved weather conditions in the fourth quarter helped promote new installations. Sales of our central control systems benefited from municipal and other large turf management entities, growing interest in tools to help them enhance their water management practices and to reduce water consumption.

Fortunately the weather challenges did not slow the continued growth of our contractor lighting business. More distributors and contractors are getting involved in the business. We are capitalizing on the increased awareness of LED offerings and the technology's advantages over traditional lighting. Innovative technologies also helped our residential business achieve higher sales for both the quarter and the year.

Increased placement and strong demand of our all-wheel drive and SmartStow walk power mowers and our latest Zero Turn riders helped grow our mower categories. Next, favorable fall weather and the introduction of our new UltraPlus Blower generated sales. Last, the launch of our new SnowMaster snow thrower and heightened preseason channel demand boosted our snow thrower category results.

Finally, unfavorable currency exchange rates turned what would have been a revenue increase of over 12% for the Company into the 10% we achieved. Within just our international business, increased demand for our professional golf, grounds, and landscape contractor and construction equipment lines was somewhat offset by lower demand for snow throwers, irrigation products, and walk power mowers. However, again, the primary drag across all of the international businesses was currency.

So I'll now turn the call over to Rene to detail some of our financial and operating results.

Thank you, Mike. And good morning, everyone.

Sales for FY15 grew to $2,390.9 million, compared to $2,172.7 million for FY14. We achieved net earnings for the year of $201.6 million, or $3.55 per share. This compares to FY14 earnings of $173.9 million, or $3.02 per share.

Net sales for the quarter were $480.8 million, compared to $414.1 million for the same period a year ago. We delivered net earnings of $23.6 million, or $0.42 per share, compared to $10.9 million, or $0.19 per share, in the fourth quarter of FY14.

For the year, we repurchased more than 1.5 million shares of Company stock, at an average price of about $68 per share, and a total cost of $107 million. This includes roughly 226,000 shares in the fourth quarter at about $16 million. At year end, we had approximately 1.2 million shares remaining on our authorization. However, the Board just increased the share repurchase authorization by an additional 4 million shares.

Moving to our business segment results, first, professional sales were up 11% to $1,639.7 million for the year. This includes 21% sales growth for the quarter to $325.2 million. Professional sales growth for both periods was fueled primarily by strong demand for our BOSS snow and ice management products, landscape contractor equipment, and rental and construction offerings, somewhat offset by unfavorable currency exchange rates.

Professional segment earnings were $308 million for the year, up 11.5% compared to FY14. Professional segment net earnings for the quarter totaled $49.3 million, a 55.8% increase compared to last year. Our residential segment sales for the year increased 7.9% to $725.7 million, due to new product introductions and enhanced placement.

The fourth quarter saw residential sales rise 6% from a year ago to $147.1 million. Snow thrower sales led the way, followed by Zero Turn riding products.

Like professional, our residential segment sales growth for both the quarter and the year was somewhat offset by unfavorable currency movements. For the year, residential segment net earnings were $85 million, up 10.5% from last year. Residential net earnings for the quarter totaled $15.8 million, down 2.7% from last year's fourth quarter.

Now to our key operating results. Gross margin for the year was down 60 basis points to 35%. For the quarter, gross margin improved 60 basis points to 35.1%. Once again, currency exchange rates drove the decline for the year, while favorable product mix and increased productivity drove the positive results in the quarter. We expect to achieve an improvement in gross margin of about 50 basis points for FY16.

SG&A expense as a percent of sales decreased by 100 basis points for the full year. SG&A decreased by 240 basis points for the quarter. The decreases for both the year and the quarter were primarily due to the leveraging of expenses over higher sales volume. Importantly, overall engineering spend was up $3.9 million, sustaining our commitment to investing more than 3% of sales in research and engineering.

For FY16, we expect SG&A to be slightly better as a percent of sales. Operating earnings as a percent of sales improved 40 basis points to 12.5% for the year, including a fourth quarter increase of 300 basis points to 7.7%. Interest expense increased for the year by 21.6% to $18.8 million. Interest expense for the quarter was up 7.4% from the same period a year ago to $4.7 million. The increase was due to additional long-term debt associated with the BOSS acquisition.

Our effective tax rate for the year was 30.7% compared to 32.2% last year. Due to the benefit received in the first quarter of FY15 from the retroactive reenactment of a domestic research tax credit, we expect our effective tax rate for FY16 to be about 31%.

Turning to the balance sheet, accounts receivable at the end of the year totaled $177 million, an increase of about 11.9% compared to FY14. Net inventories were up 21.8% to $334.5 million. This reflects incremental inventory from BOSS and snow and residential snow throwers to meet seasonal demand and prebuilds of residential Zero Turn mowers and landscape contractor equipment.

Trade payables increased 22.3% to $152 million. As you know, we strive to improve working capital by managing our inventory, accounts receivable, and trade payables. We did not make the progress we had hoped to in FY15. At the end of the year, the Company's 12-month average net working capital as a percent of sales rose to 16% compared to 15.1% a year ago. Clearly, we need to heighten our focus on our working capital goals and we will.

For FY16, our capital expenditures are projected to be about $70 million on additional investments in product research and development capabilities. We expect that depreciation and amortization will be approximately $65 million. As Mike noted, in light of our consistently strong performance, our Board increased the quarterly dividend by 20% to $0.30 per share from a previous rate of $0.25 per share. In FY15, the Company paid $56 million in dividends.

When added to the nearly 1.6 million shares of repurchased common stock, we returned over $160 million to our shareholders for the year. For FY16, we anticipate maintaining share repurchases at least at the same level as FY15. These actions are consistent with our focus on returning value to shareholders.

That said, our overall investment priorities remain the same. We will continue to look for opportunities to drive profitable growth through value-added acquisitions, like our investment in BOSS.

I'll now turn the call over to Rick for his comments regarding our outlook for 2016.

Thank you, Renee.

We are pleased to have delivered record revenues, operating earnings, and earnings per share in FY15, along with increasing our dividend. Looking ahead, we know that adverse weather or economic conditions could negatively impact demand throughout the year and that unfavorable movements in currency exchange rates could also present a challenge. As always, we will remain vigilant and we will focus on managing those things within our control. We are ready to respond across the enterprise to counter unfavorable developments. Furthermore, we are well-positioned with the latest innovative products and services to not only serve our customers, but to exceed their expectations.

Let's take a few minutes to consider the outlook for our various businesses. First, our BOSS business is well-positioned to continue to be a leader in the snow and ice management industry. While clearly subject to snowfall, particularly in North America, the strength of the industry-leading innovation and distributor and retailer relationships BOSS has developed through the years enhances prospects for BOSS to continue to gain market share. The BOSS team is effectively expanding their strong distribution network around the world and is busy developing and testing several new products for 2016.

Our landscape contractor businesses are also launching a number of product enhancements across categories, including exciting new equipment that attracted heavy traffic to our exhibits at the recent GIE Industry Expo in Louisville. From our earliest days in the equipment businesses, versatility or the ability to adapt a piece of equipment to perform multiple tasks has inspired our engineers to design a number of multifunctional products that have resonated with customers and generated significant sales gains.

The latest examples of such innovation are our all-new GrandStand Multi Force models, featuring a quick attach system that allows contractors to convert these stand-on mowers into multi-season work horses. In a matter of minutes, the mowing deck can be switched out for a BOSS plow for clearing snow-covered sidewalks. Now contractors will be able to add their GrandStand mower to their fleet of snow removal equipment and keep their investment on the job year round.

Additional attachments like a heavy duty blower and a power broom are also in the works for future introductions. Demonstrations of the Multi Force peaked Expo attendees' interests, leading some customers to predict that it will transform the stand-on mower industry. Ongoing innovation characterizes our 2016 rental and construction lineup as well. Demand remains strong for our TX 1000 compact utility loader, which recently earned an Editor's Choice award from Rental Magazine.

At the October Underground Equipment Industry Show, our new 4050 horizontal directional drill and the new Toro drill operating system were well-received. The 4050 provides increased rotary torque for optimal performance in challenging conditions such as drilling through hard rock. Our new drill operating system provides an extremely user-friendly operator experience. As construction activity and telecom infrastructure needs continue to proliferate, so should demand for our rental and construction solutions.

As Mike discussed in the opening, the solid retail activity we've enjoyed this past year reflects positive trends in the golf industry. Last month's issue of Golf Business, the official publication of the National Golf Course Owners Association, reports that capital investments in the game has returned with owners moving forward with projects ranging from minor course face lifts to major renovations. As one golf course architect noted, having difficulty getting contractors to bid on projects because they are too busy.

Early next year, we will be introducing a number of new innovations across product categories that we believe will be well-received by course operators around the world. These developments represent opportunities for ongoing equipment upgrades and irrigation projects.

Speaking of golf irrigation, Toro was featured in two segments of the Golf Channel's recent Water Week series. Toro's, Dana Lonn, managing director of our Center for Advanced Turf Technologies, served on a panel discussing golf's leadership role in water conservation. A second story told of one California golf course's drive to save water while ensuring consistent course playability for its customers, led them to partner with Toro because of our leadership in the field.

The ever-growing need for intelligent water management has golf course owners seeking the advanced solutions that our technologies provide. As the Golf Channel's Water Week emphasized, sustainability and water conservation issues transcend the game of golf and affect the residential and commercial contractor fields as well.

Consequently, we were pleased to have recently become the first large irrigation product manager to be named Water Sense Partner of the Year by the US Environmental Production Agency at their 2015 Innovation Conference. This noteworthy award recognized Toro for our significant contributions in product innovation to advance deficient water utilization and in promoting this special cause, evidence of why customers turn to Toro for real solutions for promoting healthy plants and turf with sustainability in mind.

Contractors are also turning to our unique lighting systems brass and copper and new aluminum product lines to capitalize on the growing professional lighting market. We are introducing our third generation LEDs, as well as a new 150-watt LED transformer. We anticipate continued growth in lighting sales in the coming year.

Next, while we have seen some snow in the Midwest, we remain cautiously optimistic, but watchful about the prospects for residential snow business. We are well-positioned with our comprehensive snow thrower lineup from our 12-inch electric power shovel to our heavy duty gas two-stage snow thrower to help customers manage whatever winter sends their way.

Our all-new first of its kind SnowMaster models, which were discussed in previous calls, have been particularly well-received. In fact, during the GIE Expo, the SnowMaster received a power equipment trade Dealers Choice award.

During the Expo, we also revealed three new residential TimeCutter Zero Turn riders designed with customer feedback in mind. Two new lever steer models are equipped with new commercial grade decks for more challenging terrain. A third new TimeCutter is a steering wheel model with a wider 54-inch deck and larger rear wheels.

Finally, our international business will continue to face a variety of unique challenges, including possible currency exchange rate headwinds, regional economic issues, and social and political unrest in troubled areas. However, we anticipate increased demand in most regions for golf equipment to replace aging fleets. We are prepared with multiple new products to serve their needs.

Golf renovation projects should also provide irrigation sales opportunities. For example, we recently won the irrigation system replacement project for Kasumigaseki Country club, the course that will host Tokyo's 2020 Olympic tournament. Our international team is also looking forward to addressing the growing municipal and landscape contractor needs for equipment that can handle rough cutting conditions with our new flail mower. We will continue, of course, to work closely with channel partners to take advantage of opportunities that do exist around the globe.

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

Thank you, Rick. A year ago during our 2014 fourth quarter call, I discussed the goals of our new three-year employee initiative destination prime. These goals include increasing organic net sales by at least 5% each year, achieving operating earnings of at least 13% and driving working capital down to 13% or better by the end of 2017.

Although our working capital progress slowed and then moved in the wrong direction, a situation we will remedy in FY16, we arguably made a good start on our destination prime program goals. For instance, if not for the two-point hit we took from unfavorable currency exchange issues during the year, we would have surpassed the annual organic sales goal. Also by finishing the year with operating earnings of 12.5% suggests we are on track to achieve the 13% or more goal by 2017. Our destination prime year one results reflect our performance in general.

While our 2015 sales and earnings performance was generally gratifying, we have more work to do. We must take decisive measures to better serve customers by becoming a more reliable supplier. Similarly, manufacturing variances must be addressed and improved. We have the team, the talent, and the spirit to get these jobs done.

In conclusion, we remain steadfast in our focus on innovation, productivity and profitable growth. For closing, I want to take this opportunity to thank our employees and channel partners around the world for their critical contributions to the success we achieved in FY15, as well as our continued efforts in the next year. The Company expects revenue growth of about 4% for FY16 and net earnings of about $3.80 to $3.90 per share. The Company also expects to report net earnings for the first quarter of about $0.58 to $0.60 per share.

So this concludes our formal remarks. We'll take your questions at this time. So, Carmen, back to you.

(Operator Instructions)

And our first question is from the line of Eric Bosshard from Cleveland Research. Your line is now open.

Good morning.

Good morning.

The first question, in terms of the revenue outlook for 2016, you got to your 5% revenue goal in 2015, I understand that the goal is 5% revenue growth 2015, 2016, 2017. Initial revenue target for 2016, up 4%. Considering the positive things you said about golf, the positive things going on in BOSS, certainly the new product efforts, just curious why that number starts at 4% and not better than that? What are the moving parts within that?

Well, the first thing I would say, Eric, is it is always the discussion between goals and guidance. And as we head into 2016 and we sit here today looking at the business, I guess I would say the snow business will, you know -- we're just getting into it. Last year we had probably a little better start. Some of that ties into the preseason fourth quarter, first quarter, but also to snow events.

It remains, the El Nino question remains a bit of a question on whether that will likely see more moisture, but that moisture may be in the form of, in some areas, rain rather than snow. So that's a factor in the consideration. Clearly, the employee goal remains, as it says in Destination PRIME at that 5%. And that's what we will target things against. But we think this is the prudent thing to do to start the year.

Within the business golf, it feels like improved through 2015. I guess is that the right way to think about it? Then as you think about golf in 2016, in terms of the market and your market share opportunity, how would you compare 2016 relative to 2015 on those two measures?

Golf is certainly was a solid business for us in 2015. Globally I would say the same thing. There's some markets that have more momentum than others. But as we talk about in the reviews, we look at golf as a lower single-digit category globally, right?

So we still will see some courses close in the US offset by courses opening around the world. I was just in Asia a couple weeks ago and was encouraged by what I saw in Southeast Asia. China remains a bit of a question. But China's kind of gotten to a new base and should grow off that base. So I think longer term, we're encouraged by that as well.

You know, our share position is very strong both domestically and globally. So we would look at golf as solid, not -- and we're always -- even with a high share position, we're always looking for the opportunity to grow that share. The best way for us to do that is bring about innovative new products.

An example I commented on just a minute ago was the new hybrid fairway mower. It's gotten a great acceptance in many markets around the world and it's a technology that, you know, maybe was born out of an emissions -- trying to meet emissions requirements, but ultimately delivers value to our customers by utilizing -- using a lot less fuel and still being able to accomplish a job and deliver the performance they want.

And then last, if I could, in terms of the working capital and specifically the inventory, where are you heavier than you would like to be and is there a notable financial impact of right-sizing that in 2016?

Well, looking at the inventory increase, probably where we have some prebuilts, and I mentioned it a little bit earlier, prebuilt inventory relates to residential riders and some landscape equipment. We did intentionally also build in anticipation of snow both from a residential standpoint and then incrementally we have the BOSS acquisition.

Year over year that wouldn't have been in the baseline for last year. As we go into the year, though, as I also commented, we will continue to focus on improving our working capital. We recognize that we need to be a good supplier, but also manage that as efficiently as we can from a working capital standpoint. And we'll be reducing our working capital rate sales and focus on doing that in FY16.

Eric, I would add one additional comment to that. It was said in the remarks, the interesting thing in 2015 was our working capital ended up ultimately higher. And what I would say is our performance in terms of being a good supplier to our customers was, comping against 2014 was lower. And so this is really about the power of [end].

We believe ultimately that inventory can be lower and our performance is -- serving the customers on a timely basis can be higher. That got a little out of sync in 2015, so we are addressing that. As Renee said, we will move that back in the right direction going forward.

Wonderful. Great. Thank you very much.

And our next question is from the line of Jim Barrett from CL King & Associates. Your line is open.

Good morning, everyone.

Good morning, Jim.

Mike, could you talk about BOSS? How accretive was it this year? I know the expectations were $0.20 per share. And then secondly, if snowfall does normalize, whether it be in 2016 or 2017, what kind of decline in sales and profits would you expect to see for that business versus what you just saw in the current FY15?

Obviously that's in play right now and we'll learn some of that as we go. So we won't get into breaking BOSS out specifically. I mean, we've talked about it in terms of revenues and an idea what it might contribute. And the fact is, as we kind of finished up the year, BOSS was a little -- when we started the year, we said BOSS would be about half the growth and about half the growth --

Yes.

-- would come from organic. BOSS was a little bit better than that and organic was a little bit less than that, but still healthy in both cases. Regarding your question on what kind of a change we could see, some of that depends, right? So back --

Right.

-- in the snow business, you're going to have more variability for the Company. It could cost us a couple of points. Some of that's factored, obviously, into our discussion and our guidance here, if things are really soft and the -- maybe the difference between BOSS and residential is BOSS is a more planned, somewhat more planned business by the contractors who are making capital investments. But we also have to use that product up, whereas the consumer is more reactionary to the snow event that's going to hit their city.

So we're -- we understand that. We certainly raised -- with the purchase of BOSS, we talked about that last year when we introduced it, that we raised that. The variability is one of the things we're just going to have to deal with, but that's -- like I say, that, at this point, is factored into our best guess for our guidance.

Okay. And then separately, on micro irrigation, how would you view the barriers to entry in that business for new companies who are contemplating entering the space for obvious reasons?

I think there's reasonable barriers to entry, everything from product technology to brand to channel relationships. So it is -- if you said, well, contrast that to some of your other businesses and you've been to a number of the trade shows over the years. So certain businesses that are categories that it would be harder.

We get to the -- it's interesting, you get to the landscape contractor industry and we occasionally see new manufacturers emerge. They don't necessarily have the strength of channel or brand or product innovation. But they try to get a little traction in a region.

I think Micro is much more significant than that, whether it's the capital investment, it's the channel investments, it's the brand investment. And for the customers, the farmers to take a chance on something, somebody new, right, they are betting their whole crop and field on that, I would say that's pretty high.

Now, it's not to say that someone couldn't come up with an innovative product and that's something we're always looking at. But just to say I like that industry and I'm going to go try to get into it with a kind of run-of-the-mill product line, I think it's difficult.

Okay. And then finally, you may have touched upon it or Rick may have touched upon it, but the line reviews at the home center looking into 2016, is it pretty much status quo? Do you feel better about your placements? Do you feel less better about the placements?

I'm sorry. Yes, Jim. We would say a solid. We're all -- the high performance SKUs remain in place. We work collectively, work in partnership with the accounts. If we have a low-performing SKU, then what can we do better there? We'll have some new products coming in that will take some of those places. But kind of across the portfolio it's very healthy, as it was in 2015.

Okay. Okay. Well, thank you very much.

Thank you, Jim.

Thanks, Jim.

And our next question is from the line of David McGregor from Longbow Research. Your line is now open.

Yes, good morning, everyone.

Good morning, David.

Good morning.

Just to go back to a previous question on inventory, is there any way you can sort of break out for us what the acquired inventory would have been versus all of the other things that were taking place there?

Ballpark, it's probably about one-third of the inventory increase that we saw year over year.

Was it related to the BOSS acquisition?

It was related to BOSS, yes, correct.

Thanks. That's helpful. And then secondly, with regard to the guidance, is there any way you can sort of provide some discussion and quant, if possible, about how you're thinking about Pro versus residential growth within that 4% number for next year?

Yes, I guess I would say the Pro is a larger part of the portfolio and we will look for probably somewhat more growth there. We had a very good residential year that was complimented certainly by the strength of the snow business in 2015.

That is one of the things I talked about earlier, being somewhat more variable, so that's got -- that's one of those it depends. Could comp similar to, if events happen over the next 90 days, but if they don't, that would be a little softer and we would expect to see somewhat more growth from Pro.

Is there any way you can help us -- you talked about the gross margins being 50 basis points better, expected to be 50 better next year. Can you just talk about the mix and the various puts and takes amongst the changes in the various businesses that are taking place within that assumption?

Well, just generally speaking, looking at it across the enterprise, some of the things that are driving that gross margin are going to be productivity. Our positive impact on our productivity efforts. We do expect commodities to be fairly neutral year over year. So that's a slight benefit for us. Then price as well. Those would be the main factors influencing our gross margin improvement.

And did you say neutral --

I guess I would add to that, David, that the manufacturing variance, I talked about it in 2015, we just hit some bumps in the road. Some of those were self-inflicted. Some of those were the result of the port strike and such and we will work hard to do a much better job there and not have that repeat.

Okay. I noticed that you said neutral on commodities. Seems like spot market prices are down substantially. Are there just contractual constraints that prevent any benefit there?

Well, there are some pluses and minuses for us within commodities. Generally it's not the biggest driver to our improvement, but it's a big commodity environment.

Okay. And last question, I realize it's still fairly early in the BOSS acquisition. But can you just talk about any successes you've had so far with selling BOSS to the landscape and municipalities that are using Toro and Exmark?

I unfortunately don't have a more specific story to tell you, but I would say that I had a chance to go to the BOSS dealer, distributor meetings earlier this year, the BOSS retail -- we're a Company very focused on retail. We believe you take care of retail, everything else takes care of itself. The movement of the BOSS products through their channel to retail has been very strong.

You raised a good question. We don't have a good answer, but that's something maybe we can follow up on, on the next call to look and say, okay, I mean, these are our customers. It's just have we seen, as a result of them knowing that Toro owns BOSS, I can't answer that specifically right now.

Okay. Thanks for all the help.

Thank you.

Thank you, David.

And our next question comes from the line of Joe Mondillo from Sidoti. Your line is now open.

Good morning, everyone.

Good morning.

Hi, Joe.

So in regard to snow, because that seems like sort of the wild card and why maybe you're sort of being a little cautious on the 4% number. How much does that typically make up of revenue in the first quarter of your FY?

So we don't typically break that out. We talk about the snow business in general. In the past with residential, it was about 5% of our business. Could be -- the variability, as I talked, associated with that. When we bought BOSS and it doubled it. And so we just had a very solid fourth quarter with both BOSS and with residential snow because of the strong preseason, because of the very solid snowfall we had in the previous season.

So we are now in the in-season portion of the snow business. And we've had a couple of events in Chicago and the Midwest here, but not much yet in the Northeast. And so whether that's a homeowner or a landscape contractor or even a municipality, they are not using those products as much.

And so that's -- yes, that's one of the reasons that's factored into that. We'll see how that develops. Like I say, over the next 90 days, but we don't break it out more specifically than that.

Okay, and so you said the total snow after BOSS is about 5% of total revenue, or that double the 10%?

Thank you. Yes. That's the answer.

Okay. And I would imagine it's safe to say that in the fourth and first quarter that it would be above 10%, just given the seasonality.

That's right.

Okay. So this is all regarding sort of this whole El Nino effect. Just hypothetically, if we get into February or March and the winter does become, at the end, when all is said and done, is a very warm winter and you start the spring very warm, in essence, you could actually -- your whole business could actually overall do much better even if the snow does take a hit from it, given the fact that the spring comes earlier, and that would probably be a benefit for your overall business. Is that correct?

As always, this is, this is a bit of a mix. So you certainly can go back, when you look at the Company's performance over the last several years and find a period in the 2011-2012 where we didn't have much snow, we had an early spring, we had a very strong spring-summer-fall, lawn and garden goods was very strong.

So there are some offsets there. I mean, I think one of the things we will try to be, I think we've done relatively a better job of that over the last several years, would be nimble, right? We prefer both. We prefer a good snow season followed by an early spring, but we don't control Mother Nature.

So it's -- you know, an early spring certainly can help that business. I think every point's a point. So we really hope for both.

Right, okay. And what happens if it does become an early spring in terms of temperatures, but above-average precipitation? Would that offset some of the warmth? What do you usually see if it's a little above precipitation in the spring?

As long as the temperatures are solid, then, you know, the grass is growing, then great. An excessively wet -- spring weather still is a little cooler, so excessively wet spring doesn't necessarily help. You have to go across the portfolio. So if it's too much rain, then that's affecting golf play and so on.

It's also affecting irrigation jobs where they want to get out and start the installation, whether that's a golf project or a commercial property or, you know, a homeowner's landscape. But I think we would say, in general, we would take somewhat more moisture than no moisture. You get moisture and any kind of temperature and Mother Nature keeps the grass growing.

Okay. And regarding the residential segment in the fourth quarter, the margins came down by about 90 basis points. It was weaker than I anticipated. The top line grew, however. What sort of weight on those margins there in the quarter?

Well, there was, Joe, certainly an impact of currency on our gross margin, as well as some impact on product mix driving the quarter.

Is it currency more than product mix?

It's really a combination of both.

Okay. And then I was wondering, I don't know if you have the numbers in front of you, but if you could provide how much acquisitions and currency contributed to the fourth quarter and for the year?

We talked about from a total-year standpoint related to foreign currency, it was about 2 points of sales growth, a little more than that for the year. And fourth quarter was a little more than on average. But we don't specifically break it out by quarter.

And what about acquisitions?

And acquisitions for the year, Mike talked about BOSS being roughly a little more than half of the sales growth rate. And we don't break out the profitability specifically related to BOSS.

Okay. And just going back to the residential segment, in terms of margin for this coming year and what you have sort of in your guidance, how much more of a headwind is there on foreign currency? And is there any sort of mix issues that we should be aware of going into the year? Overall, how are you thinking about operating margin at the residential segment for 2016?

We don't specifically break out or give guidance on residential versus professional margins, but --

Right, just directionally sort of.

Well, when we look at maybe, I guess just addressing FX and kind of mix at the enterprise level, looking at foreign currency, I mean, we've considered that in our guidance. So currency rates remain relatively where they are today, that's really the function that we've embedded in our guidance. If they improve, there will be some modest improvement. If they [roll], that will be a challenge for us.

However, Joe, we do hedge a portion of our foreign currency exposure. And the intent there is really to reduce some of that volatility as we go through the year. So we've tried to address that and included that in our guidance. And from an overall mix standpoint, as Mike talked about, kind of the thoughts around where we are expecting to see sales growth for the year, and we've included that basically type of mix included in our guidance.

Looking at gross margins generally improving, we said roughly about 50 basis points. And then SG&A, some improvement as well, looking at SG&A for the year.

Okay, and is there any reason to think that mix is going to be, you know, that much different compared to 2015?

No. I think we would -- not dramatically different. Again, it's one of those things, it depends.

Right.

Weather could play a role there. We're not expecting any kind of step change in the economic environment, but that has always -- any change there may influence one market differently than another market, right? But not, not any kind of significant difference from a mix standpoint.

Okay, okay. Good enough. Thanks a lot.

Thank you, Joe.

And our next question is from the line of Josh Wilson. Your line is now open.

Hi. Filling in for Sam Darkatsh today. Thanks for fitting me in.

Good morning, Josh.

Thanks, Josh.

You've mentioned in the press release that you expect your vitality index to improve next year. It sounds roughly like most of that improvement's coming in the professional side, but could you maybe clarify how much improvement in new product flow is on the professional side versus residential?

Yes, I would say we have new products being introduced across all the businesses in the portfolio. So it's not overweighted. And again, we saw nice improvement in FY15 over FY14 and this will be a slight improvement over that. But it's movement in the right direction.

And some of those products have already been introduced, like down at the GIE Expo, where we introduced new landscape products and consumer products and some of the construction products or the IQ show. Some of those products will be unveiled at the show that takes place the latest, which would be our golf industry show in February. It's a long list of new products.

As you know, when we talk about new products, our measurement for that vitality index is anything we introduce this year, plus introduced the prior two years, right? And so like the Reelmaster of hybrid fairway mower will continue to count in that new product portfolio.

We just came back from the Irrigation Association Show and, as was talked about, Rick talked about in his remarks, introduced a number of new products in the residential/commercial irrigation for that market, as well as the lighting market. It's a really healthy portfolio.

And you beat your guidance. Could you talk about what the variances were versus your prior expectations?

Well, I think, again, you got to remember and look at this as a small quarter. And as we always encourage you guys to look at the Company for the year. So for the quarter, we had solid performance. Certainly the addition of BOSS contributed. The residential snow business was positive.

I think Rene talked about some of the leverage we got in margins and year over year, what was up for the business. SG&A was leveraged. And so we ended up just being a little bit better than where we thought we would be.

And do you have a dollar target you could talk about for where inventory will be this time next year?

We don't have a specific dollar target, but as we talked about earlier, we are very focused on improving our working capital rate. We have our internal goal of achieving 13% or less by 2017. We do expect -- and inventory's a big component of that. We do expect inventory to be lower at the end of the year.

And in particular, our free cash flow we expect to be about $200 million for the year. So I think that's -- the inventory level and overall working capital is part of the way that we'll get to that free cash flow number.

Got it. Congratulations on the quarter. Good luck with next year.

Thank you, Josh.

Thank you.

And this concludes the question-and-answer session. I would like to turn the call to Miss Hille. Please proceed with closing remarks.

Thank you for your questions and interest in Toro. We wish everyone a pleasant and safe holiday season and look forward to talking with you again in February to discuss our first-quarter results. Thank you.

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