Toro Co (TTC) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to The Toro Company's third-quarter earnings conference call. My name is Shannon and I will be your coordinator for today. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's conference, Heather Hille, Director of Investor Relations and External Communications for The Toro Company. Please proceed Mrs. Hille.

Thank you and good morning. Our earnings release was issued this morning by BusinessWire and a copy, along with the investor deck, 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 our listeners. This morning we are pleased to announce record third-quarter earnings.

While net sales for the third quarter decreased 1.4% to $601 million, net earnings per share rose 6.4% to a record $1 per share. If not for unfavorable currency rates, our third-quarter sales would have been flat. Year-to-date sales increased by just under 1% with earnings of $3.58 per share.

Our professional segment sales grew 1.4% for the quarter, driven primarily by demand for our golf equipment and irrigation offerings, as well as our rental and specialty construction products. Lower channel demand for landscape contractor equipment somewhat offset these gains for the quarter. While retail demand for walk-power mowers and zero-turn riders was solid through the summer, our residential shipments declined 4.6% for the quarter due to the channel reducing field inventories below last year's level. Overall it was another solid quarter.

We are also pleased to announce that our Board of Directors declared a 2-for-1 stock split in the form of a 100% stock dividend. The stock dividend will be distributed September 16 to shareholders of record as of September 1.

Following a brief commentary on the state of our company through the first nine months of the fiscal year, Renee will discuss our financial and operating results in more detail; followed by Rick, who will discuss our outlook.

First, our golf equipment business had a very good quarter. Momentum from the robust start of the 2016 golf season continued through the quarter thanks in part to favorable golf weather conditions, resulting in a promising uptick in golf rounds played. Increased play helped spark strong demand for our innovative equipment offerings.

We were pleased to be able to showcase our industry-leading products in July during the PGA Championship held at the venerable Baltusrol Golf Club in New Jersey, a Toro customer since 1922. We've been privileged to work hand-in-hand with Baltusrol's renowned Director of Grounds, Mark Kuhns, through his noteworthy career. He has successfully hosted a number of major championships over the years; it's an honor to be associated with Mark and Baltusrol Golf Club.

Along with our high-performance equipment, the Baltusrol grounds crew, like countless other leading courses, uses our latest irrigation solutions to maintain optimal playing conditions. Their pristine greens and fairways serve as testimonials to the quality of our comprehensive golf equipment and irrigation offerings.

Like equipment, our golf irrigation business is enjoying a good year as we continue to benefit from strong golf installation and renovation project sales. A major Toro irrigation project recently received international exposure during the 31st Olympiad as we were honored to support golf's return to the games after 112 years. Our latest irrigation technologies enabled the Olympic course in Rio to responsibly manage their water usage without compromising the health and playability of the turf.

Industry-leading product performance also propelled our rental and specialty construction businesses in the quarter. As commercial and residential construction continues at a steady pace, so has demand for our brand across channels. The continued growth of the compact utility loader market provides promising sales opportunities for our market-leading TX 1000 that set a new industry standard with its 1,000 pound lift capacity.

Next, although our landscape contractor business hit a bit of a speed bump in the quarter, strong demand for our professional zero-turn riding and stand-on mowers resulted in overall sales finishing ahead on a year-to-date basis. The dip in the quarter was due in part to heighten demand a year ago for newly-released products as well as softening of retail during the quarter following a robust activity early in the spring. We are poised for fall sales with products that offer contractors best-in-class productivity, versatility, and operator comfort.

As anticipated, our BOSS snow and ice management business also experience a softening demand in the quarter following lighter snowfall this past winter. However, contractors' enthusiastic response to our latest products, including a highly-innovative expandable plow and a new V-blade for half-ton trucks, generated encouraging preseason sales activity. BOSS continues to lead with expanded offerings of highly-innovative solutions for the worst snow and ice conditions winter can muster.

Demand for our innovative solutions also delivered strong results in our micro irrigation business. Increased sales of our Aqua-Traxx tape with FlowControl and our Blueline pressure-compensating dripline delivered gains for both the quarter and the first nine months. Agricultural customers value the flexibility, control, and efficient water management capabilities our products provide.

Similarly, our residential and commercial irrigation offerings enjoyed a good quarter, driven by increased channel demand and increased do-it-yourself retail activity. This demand resulted in part from a slow start to the irrigation season that pushed more sales into the third quarter.

Conversely, an early start to the spring mowing season resulted in mixed results for our residential equipment business. Walk-power mower sales got off to a quick start this year, pulling more sales into the first half of the year. However, the momentum slowed during the summer, along with the rest of the industry, due to challenging weather conditions along with the channel's reduction of field inventories. This one-two effect on walk-power mower activity resulted in decreased sales for the quarter, yet increased sales year-to-date.

Sales of our zero-turn riders were mixed, with good retail demand domestically but softer demand internationally. Similar to walk-power mowers, our riding products field inventory is down compared to a year ago. Increased snow shipments also helped offset the overall shortfall in the third quarter. Combined impact of walk and riding demand resulted in a decline in residential segment sales for the quarter and year to date.

Finally, our international business has faced a number of regionalized challenges that ultimately delivered decreased sales for the quarter and the year. While most of our professional businesses saw growth in various countries, residential saw fewer bright spots. Challenges included unfavorable currency rates, adverse weather conditions, and the uncertainty caused by Brexit. Where favorable market conditions prevailed, acceptance was strong for our innovative products across businesses.

Overall, we are pleased with our third-quarter results. Field inventory is somewhat higher on the professional side, but at manageable levels as we head into the fall selling season. We are confident in our prospects for successfully closing out FY16.

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 $601 million, compared to $609.6 million for the same period a year ago. Without the impact from currency, our sales would have been flat.

We also delivered net earnings of $55.8 million, or $1 per share, compared to $0.94 in the third quarter of FY15. Year-to-date net sales were up nearly 1% to $1.924 billion. We achieved net earnings of $200.8 million for the first nine months, or $3.58 per share, compared to $3.13 per share a year ago.

Professional segment sales were up 1.4% for the quarter to $427.8 million, led by our golf equipment and irrigation and our rental and specialty construction businesses. These gains for the quarter were somewhat offset by lower channel demand for landscape contractor equipment. Year-to-date professional sales were up 3.6% to $1.362 billion, fueled by demand for our golf, landscape contractor, and rental and specialty construction equipment.

Professional earnings for the quarter totaled $86.3 million, up 4.9% compared to last year. For the first nine months, professional segment earnings were $289.5 million, up 11.9% compared to the third quarter of 2015.

Third-quarter residential sales declined 4.6% to $167.8 million, due to reduced channel demand for both walk and riding mowers, which was somewhat offset by higher shipments of snow throwers. Year-to-date residential sales decreased 4.9% to $550.3 million. The drop in residential sales for the first nine months reflects decreased worldwide sales of zero-turn riders and snow products.

Earnings in the residential segment for the quarter totaled $15.6 million, a 24.2% decrease from last year. Year-to-date earnings were $67.3 million, down 2.6% compared to the first nine months of FY15.

Gross margin as a percent of sales for the third quarter increased 50 basis points to 36%. Gross margin improved by 160 basis points to 36.5% year to date. The increase during both periods was due primarily to favorable commodities, productivity, and segment mix. We now expect gross margin to increase by about 130 basis points for the year.

SG&A as a percentage of sales decreased by 10 basis points for the quarter to 22.4% and increased by 20 basis points year to date to 21.4%. We continue to expect SG&A to be similar to slightly higher for the year.

Operating earnings as a percent of sales increased 60 basis points to 13.6% for the quarter and by 140 basis points to 15.1% year to date. Interest expense was up slightly 1.3% for the quarter, but remained flat year to date.

Our effective tax rate for the quarter was 30.9% compared to 31.3% last year. For the first nine months the tax rate was 30.5% compared to 30.4% for the same period in 2015. We now expect the full-year tax rate to be about 30.5%.

Turning to the balance sheet. Accounts receivable for the quarter totaled $202.4 million, down 11.2%. Net inventories decreased 6.6% for the quarter to $327.1 million. Third-quarter trade payables were $172.2 million, up 1.3% from a year ago.

Our net working capital, as a percent of sales, stands at a 12-month rolling average of 16.4%. We are refining our outlook for free cash flow, which we now expect to be about $220 million for the fiscal year, up $20 million from our previous guidance. The total year improvement is driven by a lower estimate of capital expenditures for FY16 and slightly higher net earnings. We now expect total year capital expenditures to be about $60 million.

During the third quarter, we repurchased approximately 316,000 shares of stock under our Board authorization. There are 4.3 million shares outstanding under our authorization. Year to date we have spent $69 million on total stock repurchases and we expect to spend approximately $100 million on stock repurchases in FY16.

I will now turn the call over to Rick to discuss our outlook.

Thank you, Renee, and good morning, everyone. To date, FY16 has been another good year for Toro. We are well-positioned to successfully close out this quarter and the year.

In light of solid growth in golf rounds played and the course revenues they generate, the prospects for fourth-quarter equipment sales should be favorable. And we have a number of summer irrigation replacement and renovation projects that are tracking well. Recently launched innovations like our new Lynx Smart Hub field controller that has a range of 2 miles and the ability to control up to 1,000 sprinklers per hub are attracting superintendents, as they provide enhanced convenience, accessibility, and productivity.

Back in 1927, Toro Equipment helped Worcester Country Club in Worcester, Massachusetts, prepare their course to host the first Ryder Cup. That was the start of one of the grandest traditions in the sport, with Toro has been fortunate to play a supporting role in time and time again. When the best players from Europe and the United States tee off next month at Hazeltine National Golf Club here in Minnesota for the 2016 Ryder Cup, they will experience an immaculate course cared for using Toro's latest golf equipment and irrigation systems.

Our relationship with Hazeltine goes back to the Club's founding in 1962. We are honored to partner with Hazeltine's Golf Course superintendent, Chris Tritabaugh, and his fine team as they prepare to host this prestigious event.

Next, current forecasts by the American Rental Association suggest rental and construction markets will remain strong for the remainder of 2016 and into next year. Our rental and specialty construction businesses have a solid order base for the fourth quarter. Demand for the TX 1000 compact utility loader shows no signs of slowing down and strong fiber optics and other utility projects bode well for our underground products.

We also have some exciting, innovative products for the rental and contractor markets set to launch in the first quarter of 2017 to keep our rental and specialty construction business momentum going strong.

Our landscape contractor businesses are similarly poised to launch important new products in the weeks ahead. These include a line of commercial zero-turn riders targeting homeowners with acreage and small- to medium-size landscape contractors featuring upgraded performance specifications and a unique approach to versatility. These products are designed to significantly increase operator productivity.

The GrandStand MULTI FORCE stand-on product line, equipped with BOSS snowplow attachments that we've mentioned in previous calls, will also hit the market this quarter just in time for the snow season ahead.

Speaking of BOSS, we are cautiously optimistic about our snow and ice management prospects for the coming winter. While we expect preseason activity to be slower due to last winter's limited snow events, the BOSS channel is enthusiastic about our latest product introductions that Mike mentioned earlier and trucks are selling at a healthy pace.

Next, if favorable weather conditions prevail, the late-summer and fall months should present additional sales opportunities for our residential equipment business as well. Promotional plans are in place to drive late-season retail. Like BOSS, preseason residential snow activity will be moderate compared to the last two years, but it should pick up to normal levels when the snow fronts hit.

Finally, our international business will continue to face a variety of challenges already discussed. Our international team will work closely with channel partners to take advantage of opportunities that occur.

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

Thank you, Rick. So all said, we now expect revenue growth for FY16 to be flat to up 1% with earnings per share for the year of about $3.95 to $4. As always, we will remain flexible and prepared to respond to market conditions.

Before closing I have a few personal comments to offer. As you may recall, a year ago during our F15 third-quarter call I talked about Rick Olson having been named President and Chief Operating Officer. Last month we announced that our Board of Directors had elected Rick President and Chief Executive Officer effective November 1, and then I will continue on as Chairman for a while. As I said at the time, the Board and I are pleased and confident in the handing off of the duties of CEO to such a strong and proven leader as Rick.

While I am not leaving as yet, this is the last earnings call in which I will directly participate. It has been my real pleasure working with all of you and I want to thank you for your interest in our Company. I'm confident our Company will continue to perform and to please you and all our stakeholders in the years ahead.

I never like to end a call without expressing my appreciation for the commitment and hard work of our employees, our distributors, and other channel partners around the world. They make the difference in our company's success. Together we will finish the year strong and set the stage for a successful 2017.

Thank you. This concludes our formal remarks, so we will take your questions at this time. Shannon, back to you.

(Operator Instructions) Sam Darkatsh, Raymond James.

Before I have my questions, Mike, it's been an absolute pleasure working with you over the years. Best wishes on your next chapter. And, Rick, absolutely congratulations on being named at the new post.

Few questions. First off, wonderful job with inventory management sequentially during the quarter. Where would you optimally like to see inventories by fiscal year-end?

Well, Sam, we were happy also to see the progress in inventory and it really was a focused effort to align our production with our outlook and focus on bringing that inventory level down. However, I have to admit, our team is disappointed in our working capital initiative thus far. We had hoped to see more progress related to inventory, so we will keep that focus on inventory.

And as we said before, we do expect that year over year our inventory will be down at year-end and that is incorporated into our cash flow forecast.

To a greater degree than it was down year on year in the third quarter?

I don't know if we will see the same type of step-change, but we are focused on -- certainly if we could drive it down further, we will. But focused on bringing it down year over year.

I think, Sam, the fact is we are a long ways away from our Destination PRIME goal and so it's going to have to come down steadily to make the kind of progress we need to make to get to that goal or even close to it.

Second question, if I could. I recognize and respect you are not giving guidance yet for FY17, but here in August you should have at least an early read on what your commodity costs and potentially your pricing looks like on a net basis. Could you give us directionally some ideas on that?

Well, we are literally in our planning process for FY17 from a pricing standpoint, so we really can't give you much direction there. Again, we don't price to costs, as we've said many times. We price to what the market will bear and that'll be influenced by what innovation we bring, what competitive conditions are going on, and so forth.

And I don't think at this point we expect to see a step-change in commodities, but much work needs to be done there. So I wish we could give you a little more precision, but we will be doing that -- or someone will be doing that with you in December.

Last question, if I could. Your fourth-quarter guidance has a sales range of maybe $30 million to $35 million on the low end and the high end, based on your annual sales guidance. And I think some of your businesses will largely be pre-determined, whether it's initial sell-in for snow or for some of the residential shipments, as the retailers work their inventories lower.

What sorts of variables are you keeping your eyes on or are the most likely to determine whether you hit the low end or the high end of your sales guide for the fourth quarter?

There is always variability, and you mentioned both of them: to what degree will we see retail, both for the lawn and garden products, through the remainder of the fall period. We have a blower season coming up. And then snow is a bit more of a wildcard, and that will be all about the preseason because our fiscal year ends at the end of October.

And so we have a good idea, but could we see some additional velocity with snow, a little more pick up than we would have anticipated? Perhaps. Will we see stronger -- what's the residential lawn and garden equipment or the landscape lawn and garden equipment going to look like over the next couple of months?

I would say it's not that wide a range, but that is obviously factored into our guidance. We are hopeful of trying to get to the high side of that, but that remains a work in progress.

Understood. Thank you all, again. Appreciate it.

Jim Barrett, CL King & Associates.

Mike, I also wanted to congratulate you on your tenure and your track record as CEO of Toro. It's been very impressive.

Thank you, Jim. 39 years went by really quick.

I'm sure it did. I did have a question for you on your Destination PRIME targets, your sales targets. When you look at your new product pipeline over the next one, two years, how strong is it relative to your historical introductions in terms of having the potential to drive you to your Destination PRIME sales target?

Well, our Destination PRIME sales targets and have been and will be looking forward to F17, 5% and obviously we got very close to that last year. We are going to fall short of it this year and not from a lack of new products or not from a lack of execution. I would say it's largely market conditions and we don't control those.

Probably half that impact was snow; Mother Nature has been challenging this summer as well. Economic environment: so, so. Some of the European conditions that we've talked about.

These are goals, not guidance. We will now re-engage in that for FY17. I don't know, Rick, if you want to talk about new products a bit?

Yes, certainly. For those factors that are within our control, first of all, the products that we've launched recently have been very well received. We mentioned in the earlier discussion that we have products that are just ready to launch over the next year that we are very excited about. And we continue to invest strongly in new products as a percentage of sales and are excited about the prospects forward.

So from those factors that are within our control in terms of new product introductions, we feel very positive about that.

Okay, understood. Thank you both. And, Renee, I believe you said the free cash flow guidance for the year was $220 million?

That's correct.

And $60 million worth of capital spending; does that indicate working capital will be a use of cash in the fourth quarter?

Well, what we've talked about is specifically related to inventory and we expect inventory to be down year over year at the end of the year. And I would expect, just depending on timing of sales, receivables continues to perform well. We've been continuing to transition customers to our Red Iron joint venture.

And payables have been good. So I think inventory is the driver in our working capital and we expect it to be down at year-end.

Okay. Thank you very much.

Eric Bosshard, Cleveland Research.

Two things. First of all, in terms of the inventory progress, just curious in working through the numbers, Renee; sales a little bit softer, inventories down notably and the gross margins better. And also the change in receivables. I guess when I connect all those it seems like that's a difficult thing to accomplish all at once and so I'd love to understand a little bit better how all those parts are connected and accomplished at the same time.

Okay. Starting I guess with inventory, as we talked about in our last call, we recognize that our inventory was a little bit higher than we would have liked and we worked hard in the quarter to align it with our sales outlook. And also field inventory declined. So with that we did see some impact of manufacturing variance as we aligned our production, and you see that primarily in our residential margins.

So overall margins were good. Commodities were helpful for us when you look at the overall Toro margins, as well as our focus on productivity, but we did see some impact certainly in manufacturing variance within the residential side.

Receivables continues to be strong from our standpoint. We have good discipline in this area, as well as again our Red Iron joint venture with TCF. We continue to transition customers to that joint venture, which helps us from a receivables standpoint. And payables is continued good performance, but not a significant step-change.

And the Red Iron piece related to receivables, is that -- there's a trend line of that as businesses move from you to them. Is that similar to what it's been, or has there been a strategic emphasis to better utilize that relationship?

Eric, this is Tom. In the past year we did have a few customers move over to Red Iron that had not been there before. We've got a lot of our dealers and distributors that were already on Red Iron. We had some in both the Exmark business and in the BOSS business move over there in the last year, so that's a good chunk of that change that you see in receivables year over year.

As well as just with the biggest piece that we keep on our books is the international piece and just with currency rates that also has a downward effect on receivables balances.

And I would just add that the BOSS transition is underway. There's still some customers who haven't transitioned over and we will look to that for the future as well.

Then just back in terms of inventory, the sales shortfall -- you've reduced your inventories. The channel -- just to be clear -- the channel has less inventory than a year ago as well, even though they've sold less than they initially planned, is that correct?

No, as we said in the remarks, residential channel inventory is down somewhat. Professional inventory is actually up. So overall we are up somewhat but channel inventories are very manageable.

Then the second thing -- the revenue guidance where you are now relative to where you started the year, which I think has gone from 4 to zero to 1, and certainly weather plays out differently every year. But as you've looked at that performance, any way or how are you thinking about your performance relative to the market? Any areas of market share outperformance that you think is notable or any areas of market share underperformance that you are thinking about, especially as we move towards 2017?

Good question. So as we talked earlier, probably the most significant factor in that decline was snow and mentioned some other challenging -- Mother Nature and some economic challenges. But as we look across the portfolio competitively, I don't think we feel like there's any place that we really are losing any share.

By the same token, we've not seen a step-change toward a much stronger share, but -- and we wouldn't necessarily expect that. But directionally I think our portfolio of products in golf is as healthy and robust as it's ever been. And so golf, I think, is at or slightly up in share for both equipment and irrigation.

On the landscape contractor side, we have the two leading brands there with Exmark and Toro and the same thing is true there. The largest part of that business is riding products and that is very healthy, but it goes beyond that to walk-behind units and heavy-duty mowers. Those are sound.

Residential commercial irrigation, as we said in the remarks, is benefiting from housing and commercial construction, and we believe that share is moving positively in the right direction.

And then last, albeit a smaller part of the portfolio, rental and specialty construction products; we think actually the share is moving up there. And some of the products, like the underground, with a very small base, but we are making some progress there. More specifically, rental and specialty construction will be -- like we mentioned, the TX 1000 loader has been just a great success. We had really good share in the compact utility loader area to begin with, but we probably have even higher share now.

So that's what drives our engine here is innovative products and hopefully moving share in the right direction and, as Rick mentioned earlier, that's been good. And we think the outlook for the rest of this year and 2017 with new products continues to be very good.

And then just last piece to follow up on that. In terms of the underlying market demand -- and the influence of weather is difficult to break out, which I appreciate.

But in terms of the underlying market demand relative to the influence of weather, do you have a sense of what's different when you look at the 2 or 3 points of less revenue this year? Is half of it the market grew slower and half of it is the impact of weather? Do you have a sense of that? And I'm asking that in light of thinking about how we should be considering 2017.

I think -- again, we are going to go back -- we are not providing guidance yet, but you understand what our goals are. And so half of the impact for the year is what was the snow variability and currency was another 1.5 points of it, so therein is probably three-quarters of the headwind we face. And then you throw in some other aspects of Mother Nature.

So I think going forward -- actually we think our markets will, in some ways -- some of these will, I won't say bounce back, but will start moving back in the right direction. Assuming we get a reasonable winter, then that should be very positive.

Okay, that's helpful. Thanks and best of luck, Mike. Thank you.

Joe Mondillo, Sidoti & Company.

Just a couple questions. One, in terms of your corporate costs, it seems like they were down 15% in third quarter, but they were relatively flattish for the first nine months. Just wondering if we can expect the fourth quarter to be similar year over year to make the year comp similar.

Yes, our corporate costs were down within the quarter. There is some element of timing that always plays into that. Overall, I think we had good focus on cost control.

We did adjust our incentives, so that's a piece, Joe, that's impacting the quarter, given our performance and our outlook. And then I guess the last thing that I would mention is that we did talk about a divestiture of one of our two company-owned distributors, and so some of that cost would have been captured in our corporate costs as well. That being said, we think there's continued opportunity for us to drive down our SG&A cost and we will be focused on doing that as we go forward.

Okay. So looking at the fourth quarter, it sounds like maybe similar, but maybe slightly down, just given the changes that you made to compensation and maybe that divestiture? Is that fair?

I think that would get you to our guidance, which is similar to slightly higher for the year is what we think overall for SG&A.

All right. And then, just regarding the gross margin expansion that you've been able to see, especially at the professional segment. Just wondering, going forward, is that tailwind with the commodities, pricing, productivity, is that getting more and more challenging going forward, do you think?

Well, as we look for the remainder of the year, we don't expect to see a big change in commodities so we'd expect to see some favorability year over year. It's a small quarter for us in Q4 so we are not producing a lot and purchasing a lot within that quarter. We will continue to focus on productivity.

And then within professional, product mix also impacts us and makes a difference within the segment itself. So we continue to see opportunities and really haven't -- as Mike said earlier, haven't defined our guidance for FY17 as of yet.

All right. Then, lastly, golf; it looks like the season is going to see a second straight year of year-over-year growth of rounds played. I don't think we've seen that in 15-plus years. Are you starting to see an acceleration in your golf revenue, or has it been --? I know you always talked about how it's been steady, low single-digit type growth, but are you starting to see an acceleration just given the strength that the industry has been seeing?

I think we would say steady remains the right term. And the commentary on the demise of golf, the commentary on the growth of golf, a lot of this goes on. Again, remember, we look at golf in a global context, a worldwide view.

And so there's still some pressures here in the US. There still will be some additional courses closed; there is no doubt about that. This is a more competitive environment. But there are many healthy courses and there's still a great interest and the core golfers continue to play the game. As you had mentioned, golf rounds are up year over year. It's fun to see that come back to the Olympics and --.

So we continue to look at the golf business, the combination of equipment and irrigation on a worldwide basis, as a healthy, low single-digit growth kind of business. Nothing has really changed there.

Okay, great. Thanks for taking my questions.

David MacGregor, Longbow Research.

Mike, good luck to you. Thanks for everything you've accomplished here.

I guess just to pick up on that last question on golf and the bigger picture on golf, are the golf renovations projects on average becoming larger in budget? And what are you seeing in the way of trends on the scope of projects that will be positive for your business?

I know for some time the thesis around golf irrigation had been that rising regulation and cost of water was going to push courses to invest more aggressively on the irrigation side. I'm just wondering if that's starting to come through now more visibly.

This is Rick; I will take that question. First of all, just building on the last comments, as we have strung together some increase in rounds over the last couple years it has given the courses confidence to go ahead and make capital purchases they had delayed.

And with regard to the size, I guess I can't say that the size of the projects have necessarily increased, but what has changed is the benefits from increasing or improving the technology that's involved. There's a greater benefit to changing and upgrading this technology and it does relate to the things that you mentioned, much more (technical difficulty) with water, better use of resources. So that is a driver.

I may add one element to that is, as they look for more precision on their irrigation on the courses, one of the things that does require is typically more irrigation heads, which is a core part of what we sell. So we actually benefit from that and, as Rick mentioned, the technology to drive those heads -- in Rick's earlier marks he talked about the Smart Hub that connects to our Lynx system.

And so you can make a good case -- it's a combination for many of these courses. There's the economic argument, but in many cases it's more just their old system is causing problems and it's interfering with the golfing experience. And the courses are saying it's time for us to make a commitment to capital and upgrade it.

With all those courses that were built in the 1990s, it does provide for us a great ongoing opportunity to -- irrespective of whether a new course gets built domestically, we can go into those older courses and replace the system. We will see more of the new courses getting built outside the US though. Ties back to that earlier golf discussion.

Golf, it's a good business for us. We continue to keep good attention on it.

And do you think the marginal course or the incremental course that would have, maybe in a more difficult environment, bought used gear is now buying new gear? And is that contributing to growth for you?

So I think one of the phenomenons is the things that has changed in our industry is, if you backup several years you had this -- they either bought new capital equipment or the used stuff was essentially used and worn out. That was your alternative.

Today because of the -- particularly for the higher level, the A-level courses, whatever, they are running capital leases -- I shouldn't say capital leases -- true operating leases. They are running the equipment for three or four years and they are returning it and getting new. And that's created a great opportunity to take that somewhat used, but still with a lot of asset value left, that used equipment out to the C- and D-level courses and make it really attractive versus they are trying to stretch out to buy just one new piece from a capital standpoint.

And the good news for us is our equipment tends to hold its value better on the turn and so that just creates an opportunity for us I guess versus the competition.

Thanks for that. Just last question. Within the residential segment, I guess your decremental margins in the quarter were nearly 100% and I realize you had a lot going on there. There was the manufacturing variance; you probably had some FX. You did have some lower commodity pricing, as you've indicated.

Is there any way you can -- the mix difference obviously. Is there any way you can deconstruct that and just help us understand some of the moving parts behind that large decremental number?

Yes, it was a tough quarter for residential and you pointed out a lot of the factors that came into play. What I would suggest is maybe looking at the year-to-date margins are more representative of what you can expect from a residential standpoint.

What we saw was, as you pointed out, the impact of -- the benefit of commodities, our focus on productivity. We did see some impact from pricing support in a competitive environment and then the manufacturing variances associated with aligning our volumes with outlook. And some impact from FX as well.

But I think if you look at the year-to-date performance, that's probably more representative of what you would expect to see on an ongoing basis.

Renee, is there any way you can give us some color on -- was manufacturing variance the big one in there, or just any kind of orders of magnitude would be helpful.

I think manufacturing variance definitely was one of the bigger ones. It was probably number two, as far as the impact. Pricing support was also a significant impact within the quarter. And then again, commodities and productivity going to other way were probably the three big ones.

Okay. Thanks very much.

Tom Hayes, Northcoast Research.

Just a quick one on the BOSS line. It sounds like the dealer inventories are okay. I was just wondering if you could maybe remind us of the seasonal ordering patterns, because I think it splits over your Q4 and Q1 if I was right -- if I'm remembering right.

I'm sorry; the seasonal ordering?

The preseasonal ordering patterns.

So it is a bit more tied -- you get a little bit more in advance because of the somewhat more planned nature of this business. And some of that depends on what sort of retail preseason you are going to experience. So we ship some BOSS products in the second quarter, we ship some additional BOSS products in the third quarter, and we will continue to ship that in the fourth quarter. The channel stocks up in anticipation of putting those on the trucks.

But in advance typically -- if you contrast it to the residential business, which tends to be more -- they are going to make their purchase decision in October and November, whatever, and so you have a little more near term variability, whereas BOSS is a little more planful and spread out. Now last year, if you remember, we had obviously good shipments of BOSS in the second, third, and fourth quarter and some of that is following this year. We know it will be a little softer because of the preseason demand that Rick talked about earlier.

Although the good news is, for these folks that are buying new trucks, one of the things they do when they buy new trucks is they, in many cases, equip it with a new plow. And that's a planned purchase and so we are working very close with the channel to make sure we take advantage of that.

I would just add also the response from the channel to the new products has been even better than expected this year from a preseason standpoint. The extendable plow, the V-plow now available for half-ton truck, both of those, in addition to the products we introduced last year, have helped drive the interest in the preseason channel.

Great. Thank you for the color.

Mike Shlisky, Seaport Global Securities.

Wanted to touch with you on your cash balance to start off here. It's one of the highest that it's been over the last couple of years. I guess I was kind of wondering -- I think you had implied you are going to be buying back some more shares here in your fiscal fourth quarter. With your stock at an all-time high or very close to it, wondering if you can maybe go over your current use of cash priorities given what's been going on with your stock recently.

Well, our use of cash in our capital allocation really remains consistent as it's been in the past, so we do look internally and ensure that we are properly equipping our plants, that we investing in R&D, as Rick mentioned earlier. So we look first internally to operate efficiently and continue to invest in innovation.

Our second priority continues to be strategic M&A. That, as we've talked about in the past, we stay disciplined in this approach but it's also related to timing and when targets are actionable or not. And so that continues to be our second priority.

Beyond that, we look at continuing to grow our dividend. We've demonstrated that and continue to focus on growing that dividend in a reasonable and responsible manner.

Beyond that then we look at share repurchases, so we are looking for the total year at about $100 million in share repurchases. We do run a discounted cash flow model related to our share repurchases to ensure that we feel comfortable that we are adding value from that standpoint, but it isn't our top priority related to our capital deployment. But we feel it's a prudent -- assuming the price is at a reasonable level, it's a prudent use of cash versus having it sit in the bank where we are really not earning anything from a return standpoint.

Great. Just to follow-up on that then, Renee, couldn't you invest in your business as you lay out your CapEx for the rest of the year and buy back some shares and do a decent sized M&A deal and still have elevated cash?

Yes, I think we have both the cash as well as the leverage flexibility to do all of those, but we want to remain disciplined. Related to our capital expenditures, we make sure that we are adding value and returning a good return on investment. The same is true for M&A as well and being disciplined around share repurchases.

Just because we can doesn't mean we should. We want to remain -- make sure that we are continuing to add value to the Company.

Got it. Also want to ask a quick question about the golf business. I think it was last quarter when you had mentioned there was some new products being rolled out and have done well for some of the more budget conscious courses out there.

I guess it's a two-part question. First, how are those products doing and have they created any kind of shift in the margin mix for you in your golf business? Secondly, has there been any changeover from some customers that may have bought a higher-end product in the past that might be stepping down to this, what I'm sure is a nice new product, at a lower price point?

I think, again, we have a very high share of the golf equipment and irrigation business, and we've not seen, I don't think, any kind of change there. So these are still good -- they may have a few features off of these products, but they also then have somewhat lower costs, whether that's a smaller or less expensive fairway mower.

The same thing is true for the greens. We did bring out -- we did expand our line, which has been very, very successful -- expand our line of lighter-duty vehicles. So we had a heavy-duty vehicle, we had a mid-duty vehicle, and now we have a lighter-duty vehicle that golf courses need and use. And so that's helped us grow that part of the business.

So, no, nothing going on in that says, boy, we are going to see some marginal impact on the business because of lower-cost products, if you will.

Okay, great. I will just leave it there. Mike, congrats.

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

Thank you for your questions and interest in The Toro Company. We look forward to talking with you again in December to discuss our results for the fiscal year. Thank you.

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