Toro Co (TTC) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Toro Company's first-quarter earnings conference call. My name is Kaylie and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the present 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 good morning to all of our listeners.

Fiscal 2016 is off to a good start based on the strong retail and channel demand in both our residential and professional businesses most notably for our riding, landscape contractor and specialty construction products.

The heavy preseason demand for our residential snow throwers that we experienced late in fiscal 2015 tapered off early in the first quarter due to minimal snowfall. However as the snow finally began to fall with some regularity in mid-January, demand rebounded leading to modest retail gains for the quarter.

As we reported this morning, the Company delivered record sales and earnings for the quarter. For the record results, these include net sales of $486 million, an increase of 2.6% and net earnings growth of almost 27% to $39.3 million or $0.70 per share.

Additionally, our net sales would have increased by more than 5% if not for the impact of unfavorable currency exchange rates. These unfavorable rates primarily affected our professional segment contributing to its overall flat sales performance for the quarter. Following a brief commentary on our businesses, Renee will discuss our financial and operating results in more detail and Rick will share our outlook for the year.

First, channel concerns over last year's supply and production challenges that created availability issues along with the current momentum of riding products retail and the anticipation of an early spring, all helped fuel strong first-quarter shipments of our residential zero-turn riding mowers to meet channel demand. The resulting increased sales were the period were somewhat offset by lower in season snow thrower sales due to the unseasonably warm temperatures and below average snowfall through the first half of the quarter. Subsequent snow events generated a bump in retail that helped reduce field inventory to reasonable levels and set the stage for next fall's preseason.

The positive outlook for spring also prompted increased sales of professional landscape contractor equipment during the quarter including our stand-on and walk power mowers as well as our zero-turn riders. The business further benefited from continuing retail demand as a result of the weather related extended mowing season.

Next, our rental and specialty construction equipment business capitalized on the continued retail and channel demand fueled by the strength of the construction and fiber-optic markets. Our latest innovation and expanded product line-up are drawing customers to our brand. Although the American Rental Show does not take place until next week, we are generating strong preshow orders from the sales program launched in December.

Similarly, solid retail momentum carried our golf equipment business to a good close for the quarter. Ongoing growth in both golf rounds played and course revenues along with a warm fall and mild winter weather contributed to sound retail activity. This late-season movement brought field inventories to favorable levels creating an opportune situation for our latest innovation that some of you saw last week in San Diego during the Golf Industry Show. We will discuss the show and some of our new products later in the call.

Positive trends in golf created a favorable environment for golf irrigation projects as well leading to strong demand for our irrigation solutions. We continue to lead the industry with superior technologies that help course operators maintain healthy turf while reducing water consumption as well as system maintenance costs.

Like golf operations, ample budgets have enabled sports fields and ground professionals to maintain their steady investment in equipment replacements and upgrades. Our successful efforts to pursue governmental contracts have positioned us to help these customers leverage their equipment investments with our latest productivity enhancing advancements.

Just as the unseasonably warm early winter conditions impacted residential snow thrower sales, our BOSS snow and ice management business experienced similar challenges. While the momentum we enjoyed last year slowed late in the first quarter, BOSS continued to lead with such favorably received innovations as our new customer valued LED lighting package introduced in 2015.

Late winter storms in the key markets got snow removal contractors and their rugged BOSS equipment back in action.

Finally, while worldwide demand remained strong for many of our turf management products during the quarter, our international business results were somewhat offset by the unfavorable currency exchange rates mentioned earlier. Additionally, economic concerns and political issues in troubled regions also hampered sales.

We did see positive movement particularly for our residential and landscape contractor riding equipment along with micro irrigation products.

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 $486.4 million compared to $474.2 million for the same period a year ago. We delivered net earnings of $39.3 million or $0.70 per share compared to $0.54 in the first quarter of fiscal 2015.

Professional segment sales were flat for the quarter at $338.8 million primarily due to the impact of unfavorable currency exchange rates. Professional earnings for the quarter totaled $61.6 million, an increase of 11% compared to $55.7 million a year ago.

Our residential segment sales for the quarter increased 7% to $144.3 million due to stronger shipments of riding products somewhat offset by decreased shipments of snow throwers and walk power mowers. Earnings in the residential segment for the quarter totaled $16.7 million, up $3 million compared to last year.

Now to our key operating results. First-quarter gross margin increased 200 basis points to 37.6%. About half of the increase was due to nonrecurring items primarily the BOSS acquisition purchase accounting which negatively impacted the first quarter of fiscal 2015. Our ongoing focus on productivity as well as lower commodity costs also contributed to the margin improvement. These gains were somewhat offset by unfavorable currency exchange rates.

SG&A expense as a percent of sales increased 30 basis points for the quarter to 26.5%. This increase was due to slightly higher expense across various categories including advertising, warehousing and employee incentives.

Interest expense for the quarter finished flat compared to last year at $4.7 million. Our effective tax rate for the quarter was 26.9% compared to 26.3% last year. The benefit received from the retroactive reenactment of the Federal Research and Engineering Tax Credit for the calendar year 2015 was consistent with the prior year. We now expect the tax rate for the total year to be about 30.5%.

Turning to the balance sheet, accounts receivable for the quarter totaled $190.3 million, down 7.3% compared to the first quarter of fiscal 2015. First-quarter trade payables increased 8% to $211.2 million. Net inventories for the quarter were up 15.8% to $422 million. The growth was due to lower sales of BOSS and residential snow equipment along with planned levels of both residential and landscape contractor riders to meet anticipated early demand which was influenced in part by last year's supply issues.

As you know, continual improvement in working capital is one of our key goals of our destination prime initiative.

At the end of the first quarter, the Company's 12-month average networking capital as a percent of sales was 16.4% compared to 15.5% a year ago. We recognize that we have much work to do to get our working capital moving back in the right direction.

We repurchased over 377,000 shares of common stock during the quarter and have approximately 4.8 million shares remaining in our repurchase authorization as of quarter end.

I will now turn the call over to Rick for his comments regarding our outlook.

Thank you, Renee, and good morning, everyone. Our first-quarter results have us off to a good start for the year and we are encouraged by the prospects for growth for the remainder of fiscal 2016.

Our businesses are in the midst of introducing a number of exciting new products that either were recently introduced or will soon be unveiled at leading industry trade shows.

The timely arrival of spring is important. There have been encouraging forecasts of an early spring -- an early start to spring not only by Punxsutawney Phil but the National Oceanic and Atmospheric Administration. As always, we are prepared to adjust to whatever weather comes our way in order to capitalize on demand for our latest innovation.

We are confident that we are well-positioned to take advantage of opportunities ahead in 2016.

Let's take a few minutes to consider the prospects for each business.

Our residential business is well-positioned with a strong preseason order base for the approaching mowing season. Demand is strong for our latest introductions including our TimeCutter zero-turn riders featuring a new fabricated deck and our new SmartStow recycler walk power mower with personal pace.

Late-season snowfalls that generated additional retail and modest preorders from dealers helped drive field inventory down to manageable levels which will hopefully result in a solid preseason for next year.

The all-new crossover SnowMaster model we launched this year is receiving favorable ratings from customers who purchased one.

Like residential, our landscape contractor businesses have strong preseason booking orders in hand ready to ship in the weeks ahead. This is due to wide acceptance of our latest stand on zero-turn riding equipment with such innovative features as our new advanced suspension system that promotes productivity by allowing operators to mow in comfort.

An early start to spring along with continued growth in construction could also help our rental and specialty construction businesses deliver solid results for the year. We enjoyed a very successful underground construction technology show recently held in Atlanta where we deepened relationships and developed important sales leads.

We anticipate equally enthusiastic responses from our customers for new products we are launching at next week's Rental Show also being held in Atlanta. Projections are for the rental market to remain strong throughout 2016. We are ready to respond with a strong portfolio of products to help our rental and construction customers take full advantage of their market strength.

Those of you who joined us last week in San Diego for the Golf Industry Show experienced firsthand the excitement permeating our customer packed booth. Golf course owners, superintendents and architects alike share their optimism for the upcoming season. Courses are prepared to continue capital investment and architects are busy with new projects. Our latest innovations on display proved to be traffic stoppers and received enthusiastic reception.

Those wishing to stretch dollars without sacrificing performance were drawn to our new Greensmaster 3120, delivers all the performance and productivity one expects from a Toro riding mower at a lower price point. The latest additions to our industry-leading Reelmaster line of fairway mowers offer an ideal blend of maneuverability and performance. The unit's lightweight design and impressive engine power make these new Reelmaster's incredibly versatile and productive.

Our newest golf irrigation offerings captured their share of attention in San Diego as well. For example, the STEALTH kit for our acclaimed INFINITY sprinklers offers an innovative solution that improves playing condition. STEALTH's patent pending design enables below grade installation while promoting turf growth directly atop the sprinkler.

Instead of greens surrounded by visible sprinkler heads, players can now enjoy a continuous seamless playing surface. This enhances course playability by eliminating possible errant lies caused by balls ricocheting off of sprinkler heads.

Furthermore the STEALTH kit does not interfere with the INFINITY smart access feature that allows easy access to all adjustments and other internal components, a win win for golf courses and players alike.

Our professional grounds business continues to benefit from our focus on working with state and local government agencies to supply their turf maintenance needs. We also continue to proudly serve all levels of sports facilities around the world. We were honored to have the opportunity to help repair the field at Levi Stadium for Super Bowl XV as we have for every Super Bowl since this grand tradition began.

We continue to provide turf management customers with highly productive equipment like our new workman GTX utility vehicle. A variety of optional attachments for the GTX allows operators to select from over 300 configurations that fit almost any application. Without a doubt, the GTX is one of the most versatile and cost-effective turf and grounds vehicles in its class, truly a multitasking marvel.

Our team at BOSS is busy preparing for the National Truck Equipment Association Show in March when we will unveil new products to the trade. Superior innovation and customer care will enable BOSS to build on its market leadership position.

An early start to spring and the strength of the construction market should also present opportunities for our residential and commercial irrigation and lighting businesses. If favorable spring weather conditions prevail, residential and commercial irrigation projects will likely pick up.

Our international businesses will continue to encounter a variety of opportunities in special regional economic and political challenges. All in, we believe we will see demand for our turf maintenance equipment across businesses. For example, our hybrid fairway mower that we introduced last year has been as well received internationally as it has domestically. The productivity-conscious as well as those operating on restricted budgets are turning to the value and versatility of our new LT Flair mower that tackles both short and tall grass with ease. It is developing a following with landscape contractors as well as golf and sports field managers.

Our international team will continue to pursue sales growth wherever opportunities exist.

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

Thank you, Rick. So overall, 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 to changing conditions and to manage those things within our control.

I want to take this opportunity to thank our employees and channel partners around the globe for their dedication and hard work that enabled us to achieve strong first-quarter results. I also want to thank them for all they will do to help us deliver another successful year. Our employees' commitment to our destination prime initiative will ensure we remain focused on productivity, relationships and innovation to sustain our momentum driving profitable growth and to build on our legacy of excellence.

We continue to expect revenue growth of about 4% for fiscal 2016 and now expect net earnings of about $3.85 to $3.95 per share, up from $3.80 to $3.90. For the second quarter, we expect net earnings per share of about $1.75 to $1.80.

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

(Operator Instructions). Sam Darkatsh, Raymond James.

Good morning, Mike, Renee, Rick, Heather, how are you? A few questions. First off, I don't mean to put too fine a point on this, I recognize that we are not into the throes of the season yet, we are only one quarter in. But you beat your guidance in the quarter by $0.10 to $0.12 but only raised the guidance for the year by a nickel which suggests at least a little bit more of a mildly more sober look to the rest of the year. What is the reasoning behind that? Was there some pull forward into the first quarter? Were inventories maybe a little bit more flush than you would have thought? Just put a little bit of color on that if you could?

Yes, Sam, it is early in the year and as you said kind of a small quarter. So we look at it really more from a total year perspective. We started off with snow being so-so, okay but there is still a lot of the year still ahead of us. We are continuing to look at sales growth being about 4% recognizing that we will continue to have some impact from FX so our true growth is greater than that. And we are looking to have good earnings growth as well.

Second question, was there any change, Renee, to your expectations for gross margin improvement of 50 basis points year on year for fiscal 2016? I noticed that on an organic basis the first-quarter gross margin was up about twice that amount. And I was just trying to get a sense of why as the quarter would progress the year on year organic change in gross margin might moderate?

No, good question. As we looked first at the quarter and then over spun from a total year standpoint. So if we look at the quarter, about half of the gross margin improvement was related to one-time items, the most significant of which is the BOSS purchase accounting which impacted us last year and doesn't repeat this year. But we are seeing good improvement. We continue to focus on productivity and driving down our costs. Commodities have been favorable. We recognized some price within the quarter but had a fairly significant offset from FX.

So as we look for the total year, we continue to think the gross margin improvement will be about 50 basis points. Keep in mind when commodities change, we tend to see that on somewhat of a lag affect, we are more of an assembler of product versus a pure manufacturer. And as we look throughout the remainder of the year although we expect to see some positive trends, we are also bringing down our inventory as we go through the year and so that has some impact on our manufacturing efficiencies.

A couple more questions if I could. Mike, how do you feel about the 13% working capital goal for fiscal 2017 as it stands right now?

So to be clear, it is a goal, it is not guidance but we are committed to trying to make that happen. And the fact is we lost a little ground and we recognized that when we launched the initiative. Interestingly, when we launched the working capital initiative the last time in 2007, the same thing happened. And so the fact that our first year it actually crept up but we believe we have a path to drive towards that number while making sure we are in fact a good supplier. So it is dealing with inventory that is not as productive as it should be, it is dealing with receivables to some degree in payables. But most of the heavy lifting will be in the inventory side. We have teams focused on that.

So we know we have not performed as well there to date with this initiative but we have every reason to think we can get to our goals.

Last question if I could, this is the first I guess full season that you have BOSS under the umbrella and I am curious as to how the early returns are, Mike, in terms of pushing BOSS into the Northeast? Clearly we had a pretty significant storm late in the end of January I would think that might provide some opportunities for you with your dealers. How are those efforts coming along?

I guess I would start the first comment on BOSS and this is not always the case with acquisitions that a year later we feel as good or better about it than we did when we did it. And so that is an important proof point if you will.

You are right, BOSS has different geographies, has different positions although they have some strength out in the Northeast more if you will mid-Atlantic and that is obviously where the snow really hit hard. So we think that will help both as we kind of wrap up this season, this snow season as well as set the stage for the next snow season. So the BOSS business is very much on track.

As we have talked, snow is variable and putting BOSS and our residential snow together, the Company still has a small exposure versus the whole portfolio but just have more variability there. The late-season snow has certainly help set the stage for both BOSS and for the residential snow to this coming preseason.

The other thing is that BOSS is an innovator like Toro is and that is what has made this partnership and this fit work so well. And the big show for that industry will be coming up in Indianapolis next month and BOSS will again be introducing new innovative products. They have that culture there, we have that culture here, it is working really well.

So we recognize that we have very, very strong return on invested capital and tough to find deals that actually pull that up but we think overall BOSS has been just a terrific addition to the portfolio.

Thank you, Mike, and a terrific performance in the quarter.

Eric Bosshard, Cleveland Research Company.

Good morning. A couple of things. First of all, Renee, the incremental $0.05 to the guidance for the year, what is different that contributed to that relative to the original expectations?

Yes, Eric, the biggest change is the reenactment of the Research and Engineering Tax Credit, the retroactive reenactment and that yielded a benefit in the quarter and then now going forward, it is supposedly implemented on an ongoing basis and so we see a little bit of additional pick up as well for the remainder of the year.

Secondly, the snow, I'm not -- I don't totally understand, the snow relative to however you would put this in context either a year ago or your overall expectations, I understand how the season has moved and softer and then improved. But as you look at it now I know you made a comment that you should have better reorders next year, can you just put in context snow relative to a year ago and relative to expectations?

Sure. So when we look at the snow business we look season to season and that is broken into two parts; to what degree are you going to enjoy a good preseason, to what degree are you going to enjoy a good end season? So we as we went into this fiscal year, we knew we were going to enjoy a good preseason and that did play out kind of per our expectations. We didn't know what the end season would bring and as you know in December, early January time period, not much happened.

The fact is that it was still going to be a solid snow season for us in the 2015, 2016 season. This was as much about setting the stage for next year's preseason if that makes sense and so these late snowfalls have helped move products at retail so our retail is comping well versus last year on a season-to-date so that is good. And then importantly, we will count on a solid preseason next year that hopefully will comp well versus the preseason we experienced this year.

Now it wasn't quite as strong as we had hoped and that is one of the reasons some of our inventory is up that Renee talked about so we will carry a little bit of that. That is just the way we have to deal with a more variable business.

So bottom line is for fiscal 2016, we have had a good snow season to date and we will expect a good preseason this fall.

And so just to make sure that the preseason was up and the end season is also up, the year-over-year in season sales are also up. Did I understand (multiple speakers)?

So I said all in retail is comping equal to last year but not up. But remember last year was particularly good. So we just have to deal with some of that variability.

Perfect. And then next or last -- the landscape contractor growth, could you help understand or help explain, is the market performing better or is your market share performing better? How would you compare and contrast those two?

There are a number of factors. It is not just a timing of shipments. We do believe that there is strength in that market. There certainly was some reaction from the channel to the shortages that we had last year in the first quarter due to some of these supply issues that we had. But beyond that, there is good momentum from last year, it was an extended mowing season last year in a number of areas of the country. And this year the positives are anticipation of a good early spring. So we think there is good substance for growth in that area.

And within the expectation for the good early spring, what does that exactly look like? I don't totally understand that.

You get potentially an extended season so it is not like you sustain the peak through a much longer period but to some degree. And there is nothing worse in our business than kind of false start to spring and then get a late cold spring. Remember our peak demand is in the March, April, May time period. March, April, May, June on the residential side.

So we had -- don't want to get into the weather here to deeply -- but in 2013 and 2014, we had what I will call poor springs. They were late, they were cold and wet. Last year we had versus those, a better spring so it was earlier and warmer but I would characterize that as somewhat more normal. You are seeing -- again this is always the risk of weather predictions -- but you are seeing, some people looking at or some of the forecasters are looking at this spring contrasted more to 2012 and if you look back at 2012, it was a very early spring. And Punxsutawney Phil was not seeing his shadow and the fact is it got warm early and it was moist and we had a very robust, early demand.

And that also plays a role into some of this inventory that we have. We want to be very good suppliers especially as a result of last year. So we do have some additional inventory and we are anticipating that when you get into that spring period, it is as much about not only what is on the shelf but it is how fast you are replenishing what is on the shelf. You get a lot of velocity and a lot of turn. So we will see but we are hopeful or optimistic that we are going to see that.

Wonderful, thank you.

Joe Mondillo, Sidoti.

I was just wondering at what point in time do you really get a sense that the spring season is really going well, that you see the effects from an early spring? How does that progress within the order flow and the inventory and at what point in time do you get a stronger sense of that?

It will start shortly. So the fact is the shelves are stocked in anticipation. I am talking particularly the residential business right now and the velocity of those turning over and being replenished will start to increase.

Now if you remember a couple of years ago, it was snowing in May and so that velocity was not very fast. It was late and that knocks off some of the seasonal peak. We believe that we could see that being last year it was in April, we believe we could actually see some of that start in March.

So it is right around the corner and we just need to be -- we want to be a good supplier to our customers. We need to be ready to deal with those orders as that retail velocity picks up.

Okay. Then in terms of the margin for both those segments, just wondering if you could at all break down sort of the drivers within each segment that was able to drive the margin that you got -- I mean the professional side particularly was a surprise given the top line. So if you could at all break down sort of the drivers within each of both the segments of that margin expansion.

Joe, it was really pretty similar across both of the segments and it was driven by gross margin as you saw at the Company level. So if you look at it, it is really the items that we were talking about earlier about half of that gross margin improvement was one time and a nonrecurring item. The biggest -- which was the BOSS purchase accounting which is an impact from last year that doesn't carry forward.

But overall the remaining half of the improvement, it really was our focus on cost reduction productivity, favorable commodities, price and then somewhat offset by unfavorable currency. Neither one of those were necessarily the only driver, it is really be sum of those that made up the other half of that improvement. And again, pretty good improvement across both of the segments.

Now we don't expect that same kind of gross margin to hold for the year. As I mentioned earlier, we are expecting about 50 basis points of improvement in gross margin from an overall standpoint for the year and we expect SG&A to be slightly better for the year.

So I guess looking at the professional, you can sort of say half BOSS so you had a good comp there and then half productivity commodities. But then on the residential side, I would assume volume was much more of a driver, you didn't get the BOSS because BOSS really isn't in that segment, right?

Right.

So is volume more of the driver in that segment or is it sort of across the board volume, productivity, commodities really not one type of thing? One of them is not stronger than the other.

Within the residential area, we do not get the same level of price. We have talked about more of our prices in the pro side versus the residential side so we focus a lot more on cost reductions, commodities are more impactful. Certainly there can be mix within the segments as well. Those would all be factors as well as with the sales growth certainly that volume helps additionally.

Okay. And then just in regard to -- I was just wondering your just sort of general thoughts at this point in time,. just overall the US economy, the consumer. Any thoughts on -- there has been a long time thinking that lower oil prices are going to strengthen the consumer and whether it is directly or indirectly or end customer as the consumer. Any general thoughts on how that is sort of playing out?

We continue to watch that, try to understand what is going on and as we have talked in the past, if we were to pick a driver of our business all in across the portfolio, we would take consumer confidence as the number one factor, consumer confidence in terms of buying residential durables, consumer confidence in whether you outsource your lawn maintenance to a landscape contractor, consumer confidence if they are outsourcing to account landscape contractor and going out and playing golf.

So the fact is that it touches all of our businesses. That sounds today but we all know there is some level of uncertainty out there and we are being mindful of that. If there was a step change to the negative we know that could have certainly an impact on our business as well as every other business. And so we are trying again be -- stay flexible, stay nimble and expecting it -- 75% of our revenues are in the US -- to kind of sustain at this point but being very mindful that it could change.

And then I just have one last question sort of regarding currency and tax rates. In terms of the currency, Renee, I believe you said earlier in the prepared remarks that you anticipate that currency could potentially continue to be a headwind, the dollar seems to be stabilizing somewhat. At one point in time is it within the second quarter that we start to see that become less of a headwind?

Also just in regard to currency, has your international business, what kind of volume declines are you seeing there and are you seeing effects not only on the translation but on the actual demand side of things given the competitive disadvantage with your international competitors?

Lastly, in terms of your -- what you are baking in for a tax rate for the year.

So first starting off with the question around FX, so within the quarter, we talked about that it was almost 3 points of sales growth for us. So fairly significant consistent with the past, about half of that, Joe, hits our P&L so we see that type of an impact. We do consistently hedge our exposure but year-over-year when you are hedging you are the current rates versus the rates that were in effect a year ago.

We do expect to see that FX moderate. It is probably more in the second half of the year that we will see that just based on the timing of when exchange rates change and our hedges rolled off last year. For the year, it is probably in the ballpark of about 2 points of sales growth and again, we would expect about half of that to impact our P&L.

And Joe, I would add regarding the demand side, we haven't seen a significant impact to date. Some of these products, all the supply is coming from North America so it is kind of impacting all of the competitors equally although that can still be a factor for customers in terms of their dollars not going as far. But to date, the demand outside the US for these products more weighted to professional products has been very sound. So we haven't seen that yet, not to say that couldn't change but so far so good.

Okay, thank you. And then just expectations on the tax rate for the year?

We would expect the tax rate to be about 30.5% for the year and that is down from our prior guidance which was about 31% and that change relates to the retroactive reinstatement of the research and engineering tax credit both for calendar year 2015 and also going forward.

Okay, great. Thank you.

Jim Barrett, CL King.

Good morning, everyone. Renee, I have a question for you. I heard what you said about gross margins and about the BOSS purchase accounting. To what degree will lower steel prices help your gross margins as we look to this year?

Yes, steel is one of our major commodity areas so it is significant to us. What I would say certainly it is beneficial for us but as I mentioned earlier, we are more of an assembler of product. We buy some raw steel but the majority is fabricated. So we won't see that impact as directly and for whatever reason it always seems like when prices go up we see it faster than when prices go down but we are working to capture that savings certainly and have tried to build that into our forward guidance related to gross margin improvement.

And the cost of engines, if there were a significant further devaluation of the Chinese currency, would you anticipate even a greater shift to buying engines made in that country relative to elsewhere?

Yes, that is one of those it depends questions and so we have to look across the portfolio of products. Some engines are easier to change like on some of the residential products versus those that are engineered in landscape and the larger commercial products. So it certainly is a factor.

I think the stage is set largely for fiscal 2016 but this is more to your point looking out in 2017 and beyond and I guess we will see.

And Mike, one question for you. Can you talk specifically for the spring lineup, how your line reviews went with your major retail customers? And did you increase the product offering or has it remained the same or has it declined in terms of the number of different products you have available at retail?

Good question. That is something we are always working on particularly with our large retailer. I will tell you we are in a very good position on a year-over-year basis, there is always some puts and takes on the lineup but we have a really solid walk power mower lineup with both the Toro and the Lawn Boy brands. We have some new products in that space which are exciting and then we have a slightly different model lineup on the riders.

I guess I would say that all in, we are going to comp from a sell in standpoint and be in similar position. This will be much about the retail velocity that happens there. But I think bottom line is we are encouraged by that. We know we have to kind of earn that business every day.

We had the SnowMaster on the winter product side that was an addition this last year that certainly has while it has been a less robust snow season, the SnowMaster has been a new model and garnered some good attention and customer response there and obviously we will be setting the stage now with those products for the coming preseason in the fall of 2016.

So a solid lineup, very good shape going into the spring of 2016.

Okay. Thank you both very much. I appreciate it.

(Operator Instructions). David McGregor, Longbow Research.

Good morning, everyone. Congratulations. Nice quarter. Let me start with a question on BOSS. What are the number of dealers that you have now and what do you expect that to be a year from now or three years from now, whatever you can talk about in terms of achievable deal or network growth?

I apologize. I don't have that number here. Let's start with BOSS has a pretty comprehensive dealer base throughout North America. One of the things we are looking at as we have talked in the past is the growth particularly in developed markets like internationally like Europe although Europe had very marginal snow season this year so that will slow that a bit.

And so there is not a material change in the number of BOSS dealers a year later as a result of buying that business and to be clear as we said last year, we wouldn't want to do that because BOSS has a very solid position. It is only a case where we are looking at the market to say we are too thin there, can we leverage some of the Toro relationships with the BOSS business and we have done that in a couple of cases in North America. But not by any means a step change versus a year ago.

Is it within the plan to just pursue those regions? The question earlier about the Northeast and trying to penetrate that more fully, do those regions represent opportunities for you to build out the dealer network? And if so, what might that represent in terms of growth over the course of the next year or two?

Yes, we clearly expect to grow the BOSS market share in any region that is lower versus ones where we have very strong position. And the upward Northeast, we have a good position in the mid-Atlantic area if you will but probably less so. There is another brand that is somewhat stronger in the upper Northeast and we will be working on that. But that is a question to what degree is it the channel and the dealers there, to what degree is it just the customer awareness? And as we have talked in the past, many of those landscapers up there just have less understanding of the BOSS brand and business because they have used someone else's. But they have a great understanding of the (technical difficulty) brands and we will be continuing to work with those end-users as well as the municipalities to accelerate the BOSS business in those markets.

We are making some progress. All in, we feel very positive about that.

Okay, good. Second question is just on last week's Golf Show, Mike or maybe this is a question for Rick, but can you talk about what you felt were the two or three most important takeaways from the shows that would pertain to the broader industry demand in 2016?

I will let Rick weigh in here but I will offer, this was my 39th consecutive Golf Show and I have to say that as I stood there as it was winding down and I was leaving, we wouldn't want to be anyone else and those who went to the show whether it is (technical difficulty) folks, hopefully saw that whether that would be a leader innovation at the show, we were leaders in customer relationships at the show. It was pretty special and we don't take that for granted. We know we have to continue to earn that. But I don't think into one introduced more new products at the show than Toro whether that is on the commercial side, the equipment side or on the irrigation side. So, Rick, you can maybe comment.

Certainly. The interest in our products, the new products I had a chance to have a lot of conversations within our booth about the GTX and the new Reelmasters, the new Greensmasters and so tremendous response to the new products. That was exciting for us. And I think in the general perspective of the industry and the market, it is an overused phrase, but cautiously optimistic about the year ahead.

I spoke to a golf course architect who is actually turning away business and that is the first kin of conversation that I've had like that in some time.

Is there any way that you can kind of extrapolate that to kind of growth rates in spending? And I guess should we be thinking about irrigation growth outpacing equipment growth or is it the other way around?

Right, how do you extrapolate from that? I think we would just say the health of the golf industry and again, we look at the golf industry globally as sound and so the predictions of its demise are a bit on the Mark Twain a little premature. In fact, the golf industry, the leaders within that space have a lot of very good points data that more new golfers came in in 2015 than the last number of years, golf revenues and rounds are positive certainly influenced by mother nature.

When we talk about these architects in that business, we are not suggesting there is all kinds of new golf courses being built in the US. There are not or in the well-developed markets like the UK or Japan but many of those architects are busy because they are going back in in kind of a refurbishment, new irrigation system, re-landscaping if you will and then outside those well-developed markets, we are seeing new golf growth. And whether that is Southeast Asia or South America or Eastern Europe, different markets like that, that continues.

So to put it all together, we say golf -- if our goal is to provide mid single-digit growth golf -- it is not going to pull the average up but it is still positive, still adding to the portfolio of the company in a very positive way.

Okay. Last couple of questions just on construction equipment, I realize the show is upcoming and you will know a lot more after that but just how is rental spending comparing on a year-over-year basis for you right now?

So rental is very positive. The industry was up last year high single, low double digits and I think the expectation is that will continue through 2016. And then coupled with that, we brought a number of new products out, we just introduced late last year, the TX 1000 to great customer reviews and acceptance and demand.

So while a small part of the portfolio, a lot to be encouraged about. As I mentioned in the earlier remarks, we have got -- we get the rental industry places their orders, many of them at the show, but sometimes earlier than that. We haven't been to the show yet but the early demand has been very positive and we would expect that to continue when we get to the show. So a lot to look forward to there.

That is an exciting area of growth. Last question, just on the M&A, I just wondered if you could talk about what is changing in your conversations with potential sellers? And I guess the extent to which you are seeing valuation expectation easing?

Well, we continue to have those conversations that is -- we try to be systematic around that, a pretty consistent theme. Most of them or many of them are going to be private deals and until mom or dad is ready to sell, it is very difficult to make it actionable. The preference is not to have it go to auction.

And so we haven't seen in the places where we are in today or slightly adjacent, we haven't seen a lot of deals but we continue to cast a wide net there and if we find one that is good for them and good for us like the BOSS acquisition was, then we will try to (technical difficulty)

Do think valuation expectations are easing here just given what is happening in the public markets?

I don't have a good answer for that. That is oftentimes the eye is the beholder there.

Yes, right. Thanks and congratulations on all the progress.

Thank you.

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

Thank you. Thank you for your questions and interest in Toro. We look forward to talking with you again in May to discuss our second-quarter results and to hopefully confirm that Punxsutawney Phil was correct. Have a great day.

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