Toro Co (TTC) 2016 Q4 法說會逐字稿

Good morning day, ladies and gentlemen, and welcome to the Toro Company's full-year and fourth-quarter earnings conference call. My name is Andrew, and I will be your coordinator for today. At this time, all participants are in 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 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 Rick Olson, President and Chief Executive Officer; Renee Peterson, Vice President, Treasurer and Chief Financial Officer; and Tom Larson, Vice President and Corporate Controller.

To 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 Rick.

Thank you, Heather, and good morning to all of our listeners. This morning, we are pleased to report that the Company delivered record results for fiscal 2016, including earnings per share of $2.06 and operating earnings of $334 million. The earnings per share reflect the 2-for-1 stock split of September. While somewhat offset by unfavorable currency and snowfall conditions, net sales for the year increased by 0.1% to $2,392,000,000. Foreign currency negatively impacted our sales growth by 1.3%. Our professional products led the way with notable performances by our golf, landscape contractor, rental and specialty construction businesses.

The Company's focus on creating and returning value to our shareholders, remain steadfast as evidenced by our year-end results, along with the increased quarterly dividend that our board just approved. Following a brief commentary on our businesses, Renee will discuss our financial and operating results in more detail.

First, demand for our golf equipment grew for both the quarter and the year. The industry has benefited from recent positive trends in annual golf rounds played, which enabled courses to make capital investments. The number of new product launches during the year, including new greens mowers, vehicles, fuel link precision, spray technology, Reelmaster units, and more all helped drive our solid results. Ongoing course renovations helped fuel strong growth for our golf irrigation sales as well. The fact that customers value the innovation and performance of our golf equipment and irrigation offerings was once again demonstrated during our fourth quarter as we supported our local partner, Hazeltine National Golf Club, during their successful hosting of the Ryder Cup, one of golf's grandest events. We were proud to help Hazeltine's golf course superintendent, Chris Tritabaugh, and his team keep the course in pristine condition using our latest equipment and irrigation solutions.

Next, sales in our landscape contractor business also arose for the quarter and the year, due primarily to strong demand for our innovative zero turn riding mowers and grandstand products. Retail momentum developed early this spring. It continued through the extended fall selling season with the introduction of our new series of zero turn riders designed with small- to medium-sized contractors and large acreage owners in mind.

Continued momentum in commercial and residential construction is helping boost our rental on specialty construction businesses. Rental accounts continue to benefit due to increased interest from residential contractor and DIY customers. Compact utility loader sales remain strong as demand helps us gain share. We have also seen increased interest in rentals of our underground equipment. Our brand continues to gain strength in the rental market.

Like the construction trade, demand for the sports field and grounds markets remained at healthy levels through the year, which helped drive demand for our large mowing equipment. Our focus on government sales, along with our innovative product offerings, contributed to our success and have us well positioned in this important sector.

Our agricultural micro irrigation business also grew in fiscal 2016. Grower demand remains strong for our tape products.

While somewhat tempered by the mild snowfall last winter, we were pleased by the pre-season shipments in retail activity of our BOSS snow and ice management line. Market acceptance of our new expandable plow and the HTX-V blade have been strong, as well as interest in other innovative features like our SmartLight LED headlight system. BOSS dealers are well prepared for the winter ahead.

Like BOSS, our residential snowthrower sales felt the impact of last year's lowest snowfall levels. However, we did see encouraging demand for our new SnowMaster series. Residential walk power mower and zero turn riding equipment enjoyed a strong quarter. Sales of walk power mowers delivered a particularly good year on the strength of our all-wheel-drive and SMARTSTOW mowers. Delayed fall weather conditions extended the mowing season, helping our mowers finish the year strong, while impeding sales of our handheld blowers.

Our international business saw mixed regionalized results with unfavorable currency rates creating the strongest drag on revenues. Professional sales were flat, but benefited from strong showings by our Sitework Systems and micro irrigation products in key markets.

In addition to the currency headwind, residential sales were affected by unfavorable weather conditions across several regions.

I will now turn the call over to Renee to detail our financial and operating results.

Thank you, Rick, and good morning, everyone. Sales for fiscal 2016 grew to $2,392,000,000, a slight increase over fiscal 2015. We achieved net earnings for the year of $231 million or $2.06 per share. This compares to fiscal 2015 net earnings of $201.6 million or $1.78 per share.

As Rick mentioned, our shares and per share data for 2016 reflect the 2-for-1 stock split that took effect in September. Net sales for the quarter were $468.4 million compared to $480.8 million for the same period a year ago. We delivered net earnings of $30.2 million or $0.27 per share compared to $23.6 million or $0.21 per share in the fourth quarter of fiscal 2015.

For the year, we repurchased approximately $112 million of company stock. At year-end, we had approximately 7.7 million shares remaining on our authorization.

Moving to our business segment results, first, professional sales were up 4% to $1,705,000,000 for the year. This includes sales growth of 5.6% for the quarter to $343.5 million. Professional sales growth for both periods was fueled by solid demand for golf products, landscape contractor equipment, and compact utility loader. These results were somewhat offset by reduced demand for snow and ice management equipment, due to lighter snowfall last year.

Professional segment earnings were $352 million for the year, up 14.3% compared to fiscal 2015. Professional segment net earnings for the quarter totaled $59.7 million, up from $49.3 million in the fourth quarter a year ago.

Our residential segment sales for the year decreased 7.8% to $669.1 million. The fourth-quarter saw residential sales decline 19.2% from a year ago to $118.8 million. Results for both the quarter and the year were primarily related to decreased demand for snowthrowers and handheld blowers, somewhat offset by strong demand for walk power mowers.

For the year, residential segment earnings were $73.7 million, down 13.3% from last year. Residential earnings for the quarter totaled $9.2 million, down from $15.8 million a year ago.

Now to our key operating results. Gross margin for the year was up 160 basis points to 36.6%. For the quarter, gross margin improved 170 basis points to 36.8%. The increases for both periods were due to favorable commodity costs and increased productivity, as well as segment mix, which was partially offset by unfavorable currency exchange rates. We expect gross margin in fiscal 2017 to be similar compared to fiscal 2016.

SG&A expense as a percent of sales increased by 10 basis points for both the quarter and the year. Importantly, overall engineering spend was $77.4 million, up $3.8 million, which is sustaining our commitment to investing more than 3% of sales in research and engineering.

For fiscal 2017, we expect SG&A to improve slightly as a percent of sales.

Operating earnings as a percent of sales improved 150 basis points to 14% for the year, including a fourth-quarter increase of 160 basis points to 9.3%. Interest expense increased by $600,000 for both the quarter and the year.

Our effective tax rate for the year was 30.1% compared to 30.7% last year, due to favorable one-time adjustments related to previous years and the permitted extension of the research credit. We expect our effective tax rate for fiscal 2017 to be about 29.5%, which includes the impact of our adoption of a new accounting standard for share-based compensation.

Turning to the balance sheet, accounts receivable at the end of the year totaled $163.3 million, a decrease of 7.8% compared to fiscal 2015. Net inventories were down 8.2% to $307 million. Trade payables increased 14.9% to $174.4 million. At the end of the year, the Company's 12-month average net working capital as a percent of sales decreased to 15.9% compared to 16% a year ago period.

For fiscal 2017, our capital expenditures are projected to be about $65 million, largely on additional investments in product research and development capabilities. We expect that depreciation and amortization will also be approximately $65 million.

In light of our consistently strong performance, our board increased the quarterly dividend to $0.175 per share from a previous rate of $0.15 per share, an increase of 16.7%. In fiscal 2016, the Company paid $66 million in dividends. When added to the $112 million of repurchase common stock, we returned nearly $178 million to our shareholders for the year.

For fiscal 2017, we anticipate spending at least as much on share repurchases as we did in fiscal 2016.

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.

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

Thank you, Renee. We are pleased to have delivered record operating earnings and earnings per share for fiscal 2016, along with increasing our dividend. We believe prospects are very promising for fiscal 2017 as well. Let's take a look at what is on tap for our various businesses.

Our golf equipment and irrigation businesses are poised with innovative new products that capitalize on positive industry trends. For example, our new Workman GTX gas and electric vehicles offer the flexibility to adapt to a wide variety of tasks from hauling equipment to moving people. The GTX offers two-seat and four-seat configurations with either a bench or bucket seat. It is equipped with front and rear attachment points for tools, hose reels, or walk spreaders to increase its hauling capacity by freeing up space in the rear bed.

With over 300 unique configurations available, the GTX is a highly efficient multitasker.

We are pleased to announce that we have reached an agreement to renew our contract to serve as the official provider of golf equipment and irrigation products to St Andrews links in Scotland. Following extensive review and testing of a full range of competitive products, St Andrews, once again, chose Toro products to care for all seven of their courses. It is truly an honor to have the opportunity to extend our partnership with the St Andrews team.

Our landscape contractor businesses are also anticipating a solid new year based in part on strong acceptance of recently launched products. Preseason orders suggest that our new zero turn riders that strengthen our value proposition with acreage owners will prove to be hits this coming spring.

In previous calls, we have discussed contractors' strong interest in the versatility of our new GrandStand MULTI FORCE stand-on mower platform that is available today with a BOSS snow plow attachment. Additional versatility extending attachments will be launched next season.

However, in the near term, we anticipate additional shipments this winter of a recently released snow-only MULTI FORCE unit. This enables us to better serve the snow and ice management market with this highly productive addition to their snow removal fleets.

The new product pipeline is strong in our rental and specialty construction business as well. Construction industry projections are positive. We anticipate the momentum of our Dingo utility loader category to continue into next year -- or to this year. This quarter, we are launching a new tract mud buggy and brush cutter. Preorders are already in place for these new products.

Positive trends in fiber optics and utility projects, as well as talk of major new investment in infrastructure, points to the potential for additional opportunities in the underground equipment market.

Similarly, our innovative sports fields and ground offerings should enable us to gain share in the athletic facilities market and to grow our governmental sales.

Next, truck sales continue to be healthy, and overall retail activity for BOSS snow and ice management equipment is on track with expectations. When winter weather turns ugly, BOSS is ready with high-performance solutions to help customers prevail. Our agricultural, residential and commercial water management businesses should benefit from growing demand for our industry-leading water delivery technologies. Our leadership in water management was recognized for a second year in a row by the Environmental Protection Agency's Water Sense Program. We received a 2016 Excellence Award for our water management and education efforts. We are pleased to help address the world's needs to preserve this vital resource.

Shifting to our residential business, if normal winter weather patterns returned, increased retail and channel demand for our snowthrower line should follow.

We also anticipate another strong selling season in fiscal 2017 for our residential walk power mowers. This coming spring, we will introduce our new PowerPlex family of lithium-ion battery-powered handheld tools. The line includes trimmers, a blower, a hedge trimmer, and a chainsaw that can all be powered with the same interchangeable battery. This versatile system provides impressive run times without sacrificing performance, while allowing the operator to easily switch from task to task. PowerPlex reflects our ongoing commitment to develop innovative equipment, utilizing alternative power sources.

Finally, we expect to close in a few weeks on our recently announced acquisition of a professional irrigation equipment manufacturer based in Germany. Marketed under the Perrot brand, their products are particularly strong players throughout Europe. The Perrot portfolio of retractable sprinklers and coupling systems for agricultural field, rain guns for industrial applications, and long-distance sports field sprinklers will help extend our presence in the sports and agricultural markets. They also strengthen our position in artificial turf maintenance. This deal is consistent with our overall growth strategy and expands our global footprint.

As we move into the final year of our Destination PRIME employee initiative, we continue to focus on its core goals: organic sales growth, operating earnings improvement and working capital management. We believe fiscal 2017 will be another successful year. As always, we are steadfast in our focus on innovation, productivity and profitable growth.

Before 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 fiscal 2016, as well as for their continued efforts in the new year. For fiscal 2017, the Company expects revenue growth of about 3% to 4% and net earnings of about $2.20 to $2.26 per share.

For the first quarter, the Company expects net earnings to be about $0.34 to $0.36 per share.

On a final note, I am honored to have the opportunity to work in my new role with our employees and channel partners around the world as we take this great enterprise into a bright future. On behalf of all stakeholders, I want to salute and thank Mike Hoffman for his strong leadership as CEO over these past 11.5 years that saw us achieve ever greater heights. Personally, I want to express my appreciation for his counsel and friendship. I am mindful of the Company's 102-year legacy of principled leadership that I am entrusted with upholding. I look forward to collaborating with our extended team to advance our shared values and achieve our goals.

This concludes our formal remarks, and we will take questions at this time.

(Operator Instructions) Mike Shlisky, Seaport Global.

I wanted to start off just talking about -- I am trying to piece together your revenue outlook and your earnings outlook and (inaudible) any comments about the gross margin and SG&A. If I am looking at this right, you don't have all that much upside in 2017 on your margins, yet you are still looking at some decent growth on the top-line side of 3% to 4%. So I'm kind of wondering if you can back into us what might be our -- some headwinds or tailwinds on your margins each segment in fiscal 2017.

Sure, Mike. I think maybe it is best to start with looking at our fiscal 2016 results and really what drove, both from a sales standpoint and a margin standpoint. We had a little less balance in our segment mix in 2016 with the professional side growing and the residential side actually declining. So that created some benefit that we saw in 2016 related to segment mix that we wouldn't necessarily expect to repeat. We expect 2017 to be more balanced from a segment mix perspective.

We also saw a benefit from commodities in 2016 that we would also probably not expect to continue at that same rate into fiscal 2017. So we have included in our guidance an assumption that we will see some pressure on commodities, somewhat modest, but we have seen some run-up in sales and some other areas. So we don't expect to see that same year-over-year benefit in fiscal 2017.

So, that being said, we will continue our focus on productivity and improving our quality and introducing innovative products that allow us to expand our margins. So I think what we are forecasting is gross margin to be fairly consistent in 2017 versus what we saw in 2016. With that normalization of segment mix and come some pressure on commodities, we are going to need to work harder to be able to maintain those margins as we go forward.

Okay. As a follow-up to that, Renee, (inaudible) in 2017 as well. If you are not going to have the same sort of tailwind from commodities, do you have any plans to ease up on some of your pricing efforts? Is it a little more principled next year to try and gain share through pricing when you still plan to have only modest price increases next year?

Yes. Our normal range of price -- well, first of all, I should step back. We always price to market, not to cost. So we will go forward with our pricing based on what we feel is the right thing from a market standpoint. Like our normal realized pricing is in that 1% to 2% range. What we would include in our guidance looking forward is probably on the lower end of that range. We get more of our price in the pro business than we do in the residential business. And, again, one opportunity for us from an overall price standpoint is, again, introducing a new innovative product where we don't have that same comparison to other competitive brands.

Okay. And then, lastly, I am not sure if this too early, but you are in the final year of Destination PRIME here. Can you give us a sense as to when you might plan to figure out the next corporate initiative and any kind of preview as to what you are going to at least focusing on a bit more compared to your current plan here?

Yes. We are in the process right now of formulating what that would be. As you know, we have had a tradition of these employee initiatives that we think have been very helpful in driving results. And so we are in the last year. We are continuing to emphasize the current goals, and we haven't specifically identified what the program or what the initiative name would be or exactly what the goals would be. But they are not going to be far off from the types of initiatives or goals that we have looked at in the past in the area of emphasis. (inaudible).

And, Mike, we typically introduce that new employee initiative later in the year. Again, it is intended to be an employee initiative versus guidance, and we really want to keep the employees focused on D PRIME as we go through 2017. So it will be later in our fiscal year before we announce that new initiative.

Okay. Sure. Thank you. That makes sense.

I will hop back in the queue.

Jim Barrett, CL King & Associates.

Rick, one question for you on the acquisition in Germany. Will that be operated as a standalone company, or does it have product and technology that you would expect to be able to leverage through Toro's broader distribution network?

The expectation is exactly what you refer to. It is a -- the products -- the Perrot products are a great complement to our lines in Europe, and we see opportunity to leverage those products around the world through our strong distribution system around the world. So they have -- Perrot today has a strong standalone business in Europe. But we certainly see the opportunity to integrate that into our line and add to our strength, especially in the sports field area and, to some extent, in agriculture as well.

Okay. And, considering the size of the Perrot brand, currently, is the -- do you envision looking out a few years the incremental opportunities in terms of sales as being a significant portion of their current sales base?

It is a relatively small- to medium-sized acquisition. I think the stronger opportunity is, again, the addition to our current lineup and the ability to help us strengthen our position overall.

Okay. And then this may be a question for you, Renee. If the incoming administration were to sharply reduce the corporate tax rate, would there be any change in how capital is allocated at Toro? You presumably would, first of all, have much more cash on your balance sheet than you would today?

I don't know that you would see, Jim, wide swings in our capital allocation approach. We are certainly in a wait and see mode, tracking very closely with what is going on in the administration. But I think you would tend to see us start with some of the same. We look first for internally to ensure that we are investing in our businesses from an innovation and a safety and productivity standpoint looking for acquisitions globally. But you're right. Maybe it is more -- some would be more attractive in regions that are different than today. And then, we look for continuing to increase our dividend, which we have recently done and continuing to share repurchases.

So I think that approach would remain somewhat consistent, but certainly we will -- as we learn more from the new administration, there may be some opportunities that surface.

Good. And then, my last question is, there appear to be a large increase in a dividend from Red Iron this year. Is that sustainable? And then, on a related point, if interest rates were to rise meaningfully, how would that impact the economic model of the JV?

So the increase that you are seeing in Red Iron relates to us continuing to transition distributors and dealers to the Red Iron joint venture platform. In the past year, we had a number of Exmark distributors, as well as some of our BOSS product partners come on to Red Iron. So we do see that as being sustainable from a future perspective, and we will continue to look for those opportunities in other parts of our business.

TCFIF is a strategic partner for us, and we recently renewed the joint venture. So we look at it being a part of our structure for the future as well. I don't think -- we have been in different interest rate environments in the past, and I don't think the structure of the JV would change substantially nor the economics related to it. So I don't see that being a significant change for us should interest rates rise in the future.

Okay. Well, thank you both very much.

Sam Darkatsh, Raymond James.

This is Josh filling in for Sam. Thanks for taking my questions, and congratulations on the quarter. A few quick clarification questions here. First, you talked about segment mix being more balanced. Does that mean they will both grow at a similar rate, or does that mean residential will outpace professional?

We don't give guidance by segment, Josh. But, again, we wouldn't expect to have the same situation that we experienced in 2016 with one segment growing and the other declining. I would just say, again, more balanced across the segments. So I would say similar growth rates, but we don't specifically give guidance by segment.

We are planning, as we commented, on more of a normal snow environment, and that would certainly impact the residential side probably a little bit more than the professional side.

Got it. And what was the FX impact in the quarter?

The FX impact in the quarter was fairly modest. Just a small amount of FX for the year. It was about 130 basis points from a sales growth rate perspective, but pretty modest within the quarter.

And then, regarding commodities, can you quantify the benefit you had in 2016 and the modest headwind that you expect next year?

Sure. Well, we don't specifically break out the impact to gross margin, but typically, we do put them in kind of rough order of magnitude order, Josh. So what we would say for our fiscal 2016 is that the most significant impact on our gross margin improvement was commodities, as well as our focus on productivity. It is kind of hard to break those two out, followed by segment mix and somewhat offset by foreign currency.

As we look forward into fiscal 2017, what we would expect to see is some commodity pressure probably across the portfolio, probably the most significant being in steel. Now, we will work hard to manage that exposure through supplier agreements, long-term contracts, and certainly our focus on productivity and quality improvements as well.

The FX impacts next year especially as it relates to transaction?

We have really issued our guidance based on current state FX. It is hard to predict what is going to happen. So we normally do not try to include any prediction on FX in our guidance, and we have had a practice of hedging to try to minimize the impact in the short term. That doesn't totally negate it, but it does give us a little more predictability over the next year or so.

Good luck with the next year. Thank you.

Tom Hayes, Northcoast Research.

Looking at the professional business a little bit, on the EBIT margin side, it was about up, as you mentioned, Renee, about 180 basis points year over year. I think you mentioned it was kind of driven by mix shift and pricing. Would your comments earlier have a more balanced approach to growth in your 2017 outlook? Should we think about a more smaller incremental gain on the margin side this year?

Yes, I think that is the case. Again, we would expect -- I mean, all things being equal, assuming a normal snow year, that we would see growth across both of the segments, which, again, segment mix was one of the drivers from an overall profitability standpoint in fiscal 2016.

As I mentioned, we do expect in both segments we would see some headwinds from commodities. We do typically get a little more price in the professional side than in the residential side of the business, but we wouldn't expect to see the same professional margin expansion as we did in 2016.

That being said, again, our gross margin guidance is to remain consistent. So we are going to work hard to try to offset some of those headwinds and deliver upon it a good improvement in 2016 and sustain that improvement going into fiscal 2017.

Okay. And then, Rick, it sounds like a good amount of products being rolled -- new products being rolled out across the platform. Maybe you can touch a little bit -- it sounds like you're getting a lot of good traction -- turning into a little bit of a (inaudible) market, your rental and contractor market, maybe just talk about values a little bit. And to just refresh my memory, is most of that business US-based on the rental side?

The rental business is larger in the US relative to global, but we do have business outside the US, and that is a growing part of our business as well. Rental overall market growth is projected to be positive. So -- and even as a part of that rental portfolio, we tend to be in the higher growth categories as opposed to things like tents and chairs and things and so forth that might be part of that same number. So the areas that we participate in are probably the stronger parts of the rental area.

And one of the core pieces for our rental business is our Dingo line of compact utility loaders. The TX1000 that was introduced about a year ago has been extremely well received and continues to be a big part of our rental business, but then also, additional products that have complemented that core product line as well helps us grow that business.

Great. Thank you.

Brandon Rolle, Longbow Research.

I wanted to see how your earnings guidance converts into free cash flow. Thank you.

Brandon, we have posted our investor relations presentation, which will include our guidance on free cash flow, just so that you know for the future. We are expecting about $225 million in free cash flow for fiscal 2017. So that assumes good conversion on our net income, some continued improvement around our working capital as we go through the year, and also having our CapEx and our depreciation and amortization be approximately equal.

Joe Mondillo, Sidoti and Company.

For the professional segment, I was wondering if you could comment on what you are seeing in terms of the inventory and the channels after a pretty solid year here. And then, also, in addition, at professional, the mix issue there, could you just clarify or give us a little more color on what is going on in terms of the mix that is driving the stronger gross margins, and is that sustainable mix into 2017?

Sure. So, on the first part of the question, in terms of field inventory, I think that was the focus of your question. We are very comfortable with our field inventory position really across the product lines. And, at the same time, we are mindful of growth opportunities going forward, but it is a balance. We wanted to be prepared to take advantage of growth in the marketplace (technical difficulty). But, overall, we are very comfortable with our position from a field inventory standpoint on both sides of the business, residential and professional.

And second part of your question was -- remind me of the second part of the question?

Just the product mix and how that has helped drive gross margins. Could you just give us a little more color on what kind of products are actually doing much better than others that are driving that strong margin, and is that kind of mix sustainable? Do you think it turns back the other way and becomes a headwind in 2017 or continues in that same direction and actually continues to be a tailwind? Just any more color regarding that.

Sure. I think the balance that we talked about -- balanced growth really refers to more balance between the professional and residential businesses. The big impact that reduced probably as a percentage the residential portion is now (multiple speakers).

I am talking about just the professional segment. So the mix within professional driving the gross margins at professional.

Yes. What we saw in fiscal 2017 -- and Rick commented on this earlier -- we saw strong performance out of the golf market and good performance from a landscape contractor and then rental. The order of magnitude of those sometimes shifts within a particular year. We don't see that mix being radically different, but every year is a bit different. We would expect within professional to see higher revenue from BOSS, assuming a normal snow year, but not a radical change in the mix within pro. But every year there is some shift as the year progresses.

Okay. So the -- just trying to understand a little bit more the gross margin expansion that you saw in the year, that is not a lot at all related to product mix within the segment? And I guess it is more just the commodities and productivity and maybe a little bit of volume. Is that the --?

Yes. We didn't see -- I mean, there are always -- again, there is some product mix within the channel, but the bigger driver was the segment mix between residential and professional versus (multiple speakers).

I understand within -- between the segments. I am just only primarily talking about professional in terms of the gross margin expansion that we saw throughout the year.

Yes. And we don't separately -- the reason -- I am going back to the total. We don't separately give guidance as far as the professional and residential gross margins. But that being said --

I mean operating margin, I guess. 180 basis points of the operating margin. I guess that is what I am really referring to.

Okay. So there was -- certainly within pro, there was some gross margin improvement. Again, product mix wasn't the biggest driver. SG&A also improved based on revenue leveraging of SG&A and revenue growth.

Okay. So revenue growth, SG&A -- I am just trying to understand the buckets that are really driving the margin expansion.

Yes. That is commodities productivity. It was not really weighted toward one particular item being the driver. I would say, if I had to choose the most significant, it would probably be commodities and productivity.

Okay. And then, just a follow-up question, actually, in terms of the other income line -- I believe you addressed this earlier with the Red Iron joint venture -- is that the main driver to that other income line expanding? And, if not, could you talk about the buckets within that other income line and what your expectation is for 2017?

Sure. Red Iron is a component of that. There are a number of other smaller items as well, none of them being terribly significant in and of themselves. We did have some. I guess the biggest single item beyond that we talked about already would be the FX change. So gains on hedging from an FX standpoint, but then there are some other one-time items, which is inherent in, I guess, what is scored in other income and expense. So nothing that is really large or notable, other than, again, the sustainability of Red Iron.

Okay. All right. Thank you.

Jon Fisher, Dougherty & Company.

A follow-up on some points that you have made. You've mentioned you are assuming a normal snow year in your 2017 forecast. So just wanted to confirm that I have heard that correctly. And then, does that also means that when you get to the second half of your fiscal year, that you then would also be assuming a normal preorder for the subsequent winter season?

Yes, that is correct. So, if you just look at the impact of snow, so last year at this time, we were coming off a very strong snow season throughout the year, which resulted in higher preseason and preseason orders. This year, we are coming off of a weaker snow season last year, so the preseason orders are weaker this year. But if we get back to a normal winter type of cycle, which recent patterns here are more positive, and we would expect for the fourth quarter to be more typical of a normal season.

Okay. Thank you. And then, on inventory, it sounds like, as we enter fiscal 2017, you are comfortable with the inventory situation. Obviously, that was a focus for 2016, but it sounds like you have got your hands around everything, and you are comfortable with where you sit.

Are you talking about the channel fuel inventory or our inventory?

The channel inventory. One of the overhangs on sales during fiscal 2016 was just the excess inventory situation that you had that you needed to work down coming out of fiscal 2015.

Yes. We are comfortable with our field inventory or channel inventory, and related to that, we have seen really quite positive retail across the businesses throughout this last year. So we believe we are in good position from a field inventory standpoint. And internally, I think as we have communicated in previous calls, we have been working to reduce our inventory and have made progress in -- towards our objectives there. We are not there yet. We still have work to do in that area, but we have made progress internally as well.

Okay. And then, the final question. Just, in the professional segment, the strength in fiscal 2016 was pretty broad across the sub product or business unit categories. Would you expect that breadth of strength to be repeated in 2017?

Well, there are variabilities every year across the segments, and they are affected by different factors, external factors, but we go into the year expecting each of our categories to grow but at varying degrees. So, at the higher-end of the growth for us would be things like, from a professional standpoint, landscape contractor, the rental business that we talked about, specialty construction has been very strong, the micro irrigation and ag business has been strong, although it is a small portion of our business. And even in the more mature areas, for example, in some of the golf areas that we have talked about, there is good replacement business for irrigation systems that were installed in the 1990s that is coming along nicely. As well as internationally, they continue to build golf courses and continue to grow the game of golf internationally. So we look for golf across all of those product categories, but it is varying degrees that contribute to the overall growth.

Okay. Thank you very much.

Mike Shlisky, Seaport Global.

I just wanted to check in with you on Perrot, your growth expectation of 3% or 4% next year, can you give us a sense as to what portion of that has come from already announced acquisitions?

Are you talking about already announced acquisitions including -- oh, Perrot. We don't get specific about that in this case. But --

Yes. It is a small acquisition, so it is not going to be material to Toro's performance. So we will likely not provide specific guidance.

That being said, so it is not going to be a big growth driver for us in fiscal 2017. However, it is a strategically important acquisition for us, as Rick talked about earlier. Fill some product line gaps that are important for us.

Okay. Kind of like last quarter, your cash balance is up substantially from the previous year. You mentioned you had some share buybacks planned for next year as well as, obviously, your dividend. But can you give us a sense to the M&A pipeline, how close are you (inaudible) new deals done going forward here? Will that cash that you have got on the balance sheet pay for it, and does any of your guidance for next year of 3% to 4% include any sort of unsigned deals yet?

We have a dedicated M&A group that continues to look for opportunities for us, but beyond that, we really can't comment on anything that we would have in process at this point.

Related to our guidance of 3% to 4%, we would typically not include acquisitions that have not yet been announced. We would consider acquisitions that are in process when we are giving our guidance, but we wouldn't normally assume other acquisitions that we have not yet announced.

And related to use of our cash balances, we talked about earlier, I don't know that our priorities will shift substantially from what we have communicated. We do have cash available. Should we find other small acquisitions, that are strategically important, that would be a good use in our mind of cash. So that would be our first place to go. And, certainly, as we did with the BOSS acquisition, which was (inaudible), we would look for ways to fund those with debt as well.

All right. Fair enough. Thank you so much, guys.

Jim Barrett, CL King & Associates.

Rick, on the new product front, the interchangeable battery for the handheld products, does that represent a major step forward in battery technology? And really, a related question is, do you feel the Company is closer to putting out a viable electric lawnmower with sufficient battery power?

To your first question, does that particular platform represent advancement in battery technology, I would say it does not. But it is really -- there are other offerings that are in the marketplace right now. We happen to believe that our execution of that product family is very good in terms of applying our expertise in that particular category. That is probably where the value is that we add in that area as opposed to a revolutionary battery technology.

And in terms of battery-powered mower, we continue the development in these categories continuously. So we are making advancements consistently in that area as well.

And then, related to that last point, are robotics and lawnmowers of strategic interest to the Company looking out five or 10 years, or is that simply an area that you don't feel is a viable possibility down the road?

We are very well aware of the market for robotics products, and it is particularly more mature in Europe than it is here. And Toro has worked in that area for more than a decade, actually, in various areas. So it is not a matter of if, it is a matter of when, and we certainly have activities that would support that sort of product in the future.

I see. Well, thank you, again.

Jon Fisher, Dougherty & Company.

Just had a quick follow-up. Now that we are past the US election, I was just wondering what feedback you're getting from your sales force as far as customer sentiment, customer confidence, customer willingness to spend and reinvest back into their businesses? Predominantly North American revenues and you deal with a lot of small- and medium-sized business owners. So just would be interested in what you are hearing from your sales force about sentiment and confidence from your customer base?

Well, anything I say would just be completely anecdotal, so I can't say definitively. I would say general feedback has been positive.

Obviously, there are a number of initiatives that have been talked about from the new administration. We are aware of those, and we are tracking those. Those potential impacts. And we listen to the news like you do as well.

So we are tracking any kind of initiatives that would help to improve the business environment, and we would certainly welcome, and we will continue to watch those going forward.

Thank you.

Beth Lilly, GAMCO Investors.

I wanted to -- we spent a lot of time talking about professional, but I wanted to spend a minute and talk about the residential side and just challenges that you have had the past two years on the margin side. And, as you look forward, it sounds like you are more optimistic in the mix of your business than the split between the two businesses. And I guess what I want to drill down on is, Rick, you have now taken the reins over from Mike, and where do you think the residential operating margins can go over the next, let's call it, two to three years?

You know, I think the answer to that, primarily lies with the -- on our product development side. So we would tie that to innovations that we can -- and product value that we can add. So that, I think, is one of our better opportunities as we continue to innovate in that area, and we are committed to that business. So it continues to get strong attention from us as a company. So we are not diminishing our emphasis on the residential business at all. We are very interested in continuing to grow that, and we would look to drive improvement through -- particularly through innovation that we can provide in our new products.

I would also comment on when we look at it over the last couple of years from a residential margin perspective, we had challenges with snow. And so we came into, in particular, for fiscal 2016, assuming a normal snow year, it didn't quite turn out quite that we had planned, and we reflected that in our guidance as we went throughout the year.

We also, you may recall, had some intentionally higher inventory coming into the year to be a better supplier. We were focused on bringing down that inventory and our revenue at the same time. It did drive some manufacturing inefficiencies that we would not expect to repeat again in the future.

So I think that is definitely a driver in the last couple of years have been the revenue challenges and the associated manufacturing inefficiencies. So, as we go forward, we wouldn't expect that to repeat as well as continued focus on productivity improving our quality, and certainly, as Rick said, a big driver is that innovation.

And we do have good momentum. As we had mentioned, the season -- the mowing season was extended this last year, and we had really terrific sales of walk power mowers in the latter part of the year. We would expect that to continue. We believe that we took market share in that case, and we view that obviously as a positive.

Okay. So, as I look -- so it sounds like there is a couple of issues. One is, you are innovating more, which you should be able to charge more for the product, which means margins should be higher from that, and then you have got the issue, then, that, hopefully, won't repeat that you have had with snow for the last couple of years with the higher inventory levels.

So, as you move forward, then, margins should go up on the residential side. Is that what I hear you saying?

Yes. We don't give specific guidance, Beth, on residential versus pro margins going forward. But, yes, we would expect, given a normal snow year, that we would see improvement across both the pro and the residential business, but certainly more in the residential business given that snow headwind.

Okay. Great. That is very helpful. Thank you.

Ladies and gentlemen, this now concludes our question and answer session. I would like to turn the call back over to management for closing comments.

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.

Ladies and gentlemen, thank you, again, for your participation in today's conference call. This now concludes the program, and you may all disconnect at this time. Everyone, have a great day.