Toro Co (TTC) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to The Toro Company's Full Year and Fourth Quarter Earnings Conference Call. My name is Sandra, and I will be your coordinator for today. (Operator Instructions) And 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, Chairman and Chief Executive Officer; and Renee Peterson, Vice President, Treasurer and Chief Financial Officer.

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 Rick.

Thank you, Heather, and good morning to all of our listeners.

The conclusion of fiscal 2017 marks the completion of our Destination PRIME initiative. We are pleased by the strong finish our employees' hard work delivered. The company achieved operating earnings of 14.2%, surpassing the initiative's original goal of 13%, and regained momentum in sales growth and working capital improvement. Thanks to our employees' dedication, we are able to declare our Destination PRIME journey a success as we embark on our next multi-year employee initiative that I will discuss later in the call.

This morning, we are pleased to report that the company delivered record sales and earnings results for fiscal 2017. These records include net sales of $2.5 billion, operating earnings of $355 million, net earnings of $268 million and earnings per share of $2.41.

Professional products led the way, with notable performances by our golf, landscape contractor, rental and specialty construction businesses. Our international business also contributed nicely for the year with sales growth of 5.6%, primarily driven by our newly acquired Perrot's professional irrigation offerings and solid performances by our golf, sports field, and grounds product lines.

The company's focus on creating and returning value to our shareholders remains 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, our golf, sports field and ground equipment businesses delivered solid sales growth for both the quarter and the year. Demand for greens mowers, large reel and rotary mowers as well as utility vehicles fueled strong retail gains for the year. Our latest product and service innovations continue to help us grow market share. Similarly, sales in our landscape contractor businesses rose for the quarter and the year. Solid retail activity continued through the late summer and fall months. Demand for our innovative zero-turn riding mowers helped deliver growth for both the quarter and the year, while sales of our GrandStand products also helped boost results for the quarter. All of these products are designed to be highly versatile in order to help contractors increase productivity.

As the momentum of commercial and residential construction continued, so did demand for our rental and specialty construction businesses. Sales of our Dingo compact utility loaders remained strong based on favorable market conditions and customer interest in our innovative offerings. Additionally, the rental market's favorable reception of our Tracked Mud Buggy further increased our sales results for the year.

Our agricultural micro-irrigation business enjoyed increased sales for both the quarter and the year. Although our other irrigation businesses faced challenging weather conditions that delayed projects in North America, our overall irrigation business was up for the year while delivering quarterly results consistent with the year ago. Golf projects increased for the quarter, while Perrot made significant contributions for both the quarter and the year.

Next, sales of our BOSS snow and ice management products saw lower sales for the quarter due to the timing of shipments. The market's enthusiasm for our latest product innovations and improved field inventory position compared to a year ago accelerated shipments. Demand for these new products enabled BOSS to deliver increased sales for the year. Like BOSS, our residential snow thrower sales were down for the quarter due to the timing of shipments. However, sales for the year were up, driven by snow events across the Midwest early in the fiscal year. Residential zero-turn riding equipment enjoyed a good quarter based on the demand for our new TimeCutter HD. Sales of walk power mowers were down for the quarter but up slightly for the year. Sales of our Pope residential products also increased for the year due in part to favorable weather in Australia. These increases were somewhat offset by a decreased demand for our zero-turn riders with steering wheels and by some homeowners choosing to step up to our newly launched lines of contractor-grade riders that are reported in our professional segment.

Our international business enjoyed a good year due to increased sales related to our Perrot acquisition as well as increased sales of our golf, sports field, and grounds equipment. Overall, the international business grew 5.6%. Unfavorable currency exchange rates decreased net sales for the year by $3.3 million. Without the currency effect, international sales would have grown by 6.1%.

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

Thank you, Rick, and good morning, everyone. Net sales for fiscal 2017 grew 4.7% to a record $2,505,000,000. We achieved record net earnings for the year up $267.7 million or $2.41 per share. This compares to fiscal 2016 net earnings of $231 million or $2.06 per share.

Net sales for the quarter were $488.6 million compared to $468.4 million for the same period a year ago. We delivered net earnings of $33.8 million or $0.31 per share compared to $30.2 million or $0.21 per share in the fourth quarter of fiscal 2016.

For the year, we repurchased approximately $160 million of company stock. At year-end, we had approximately 4.9 million shares remaining on our authorization.

Moving to our business segment results. First, professional segment sales were up 6.2% to $1,812,000,000 for the year. This includes sales growth of 4.9% for the quarter to $360.4 million. Professional sales growth for both periods was fueled by solid demand for our latest landscape contractor, golf and specialty construction equipment. Our rental and BOSS snow and ice management products also contributed to our results for the year. Professional segment earnings were $379.5 million for the year, up 7.8% compared to fiscal 2016. Professional segment earnings for the quarter totaled $65 million, up from $59.7 million a year ago.

Our residential segment sales for the year increased 0.6% to $673.2 million. The fourth quarter saw residential sales increase 3.2% from a year ago to $122.6 million. Increased sales of Pope and snow thrower products contributed to the favorable results for the year. Pope sales also drove our growth for the quarter. For the year, residential segment earnings increased 1.4% to $74.7 million. Residential earnings for the quarter totaled $11.7 million, up from $9.2 million a year ago.

Now to our key operating results. Gross margin for the year was up 20 basis points to 36.8%. For the quarter, gross margin improved 90 basis points to 37.7%. The margin improvement for the year was the result of operational productivity and segment mix, partially offset by increased commodity and freight costs. Operational productivity and favorable currency exchange rates drove the margin improvement for the quarter, which was partially offset by higher air commodity costs. We expect improvement in gross margins in fiscal 2018.

SG&A events as a percent of sales was consistent with last year and increased by 50 basis points for the quarter. The increase for the quarter was mainly due to improved performance that resulted in higher incentive expenses. For fiscal 2018, we expect SG&A to improve as a percent of sales.

Operating earnings as a percent of sales improved 20 basis points to 14.2% for the year, including a fourth quarter improvement of 40 basis points to 9.7%. Interest expense was 1.2% lower for the year, which included a decline of $500,000 for the quarter. Our effective tax rate for the year was 24.2% compared to 30.1% last year, mainly due to the adoption of the new share-based accounting standard. Based on the current tax law, we expect our effective tax rate for fiscal 2018 to be about 26% under the assumption that the dollar amount of share-based compensation will be similar to fiscal 2017. In the event U.S. tax reform passes, we expect to communicate the estimated impact and revise our guidance as appropriate.

Turning to the balance sheet. Accounts receivable at the end of the year totaled $183.1 million, an increase of 12.1% compared to fiscal 2017 due to the timing of shipments. Net inventories were up 7.2% to $329 million. Trade payables increased 21.2% from -- to, excuse me, $211.8 million. At the end of the year, the company's 12-month average net working capital as a percent of sales increased to 13.8% compared to 15.9% a year ago. We ended the year with strong free cash flow of over $300 million. Capital expenditures for fiscal 2018 are planned to be approximately $75 million, as we plan to invest in our new facilities, new product tooling, new technology and production processes. Asset(inaudible) depreciation and amortization will be approximately $65 million.

In light of our consistently strong performance, our board increased its quarterly dividend to $0.20 per share from a previous rate of $0.175, an increase of 14.3%. In fiscal 2017, the company paid $76 million in dividends. When added to the repurchased common stock, we returned nearly $236 million to our shareholders. For fiscal 2018, we anticipate spending a similar amount on share repurchases as we did in fiscal 2017. These actions are consistent with our focus on returning value to shareholders. That said, our overall investment priorities remain the same. We will continue our disciplined approach to pursue opportunities that drive profitable growth, both organically and through value-added acquisitions.

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

Thank you, Renee. We are pleased to have delivered record results for fiscal 2017 and believe prospects for the -- are very promising for fiscal 2018. In coming months, we will be participating in leading industry trade shows at which we will unveil a number of new product and service innovations. Let's take a look at what lies ahead for our various businesses.

We begin with our golf, sports fields and grounds markets -- excuse me, grounds businesses. Our company is well positioned to continue to capture share in these important markets by providing real solutions for turf managers' needs like the new Toro Outcross. Anticipation is running high among our channel partners and customers for its launch. Described by one customer as a new super machine, the Outcross is designed to perform multiple tasks for which turf managers commonly use a combination of ag tractors and heavy-duty utility vehicles. More turf-friendly than a tractor and more powerful than a utility vehicle, this highly versatile machine can help our customers save money and increase productivity. Its smart programmable attachment system and automotive-like controls make the Outcross intuitive and easy to use. The Outcross will be joined by other exciting golf, sports fields and grounds innovations as they are announced at upcoming shows.

Our landscape contractor businesses also anticipate a solid year based on the excitement generated by the new products we launched during the Green Industry and Equipment Expo in October. A few highlights include: 24-inch stand-on aerators designed for operating in tight spaces and providing easy access through gates; 2 new series of diesel-powered zero-turn riding mowers that deliver enhanced power, speed and productivity.

These mowers have wider decks with wings that can be raised, which allows them to fit on standard trailers. This is a very important benefit to landscape contractors. Enhanced onboard intelligent systems designed to increase productivity through defined performance modes, reduce fuel consumption, monitor machine health and allow operators to schedule maintenance reminders. This is another example of smart technologies enhancing our customer satisfaction and fleet efficiencies.

And a new commercial-grade Power Max 2-stage snow thrower to round out our contractor snow line. We believe these new products will help generate strong, detail dealer orders and profitable growth as we equip contractors for year-round operations.

Moving to our rental and specialty construction businesses. The construction industry anticipates continued growth in 2018. Forecast suggests that single-family housing starts will be particularly strong. Similarly, the American Rental Association expects strong gains. We believe our Dingo compact utility loaders will continue to compete effectively, as should our other recently introduced introductions, including our Tracked Mud Buggy.

We also just launched an all-new midsize directional drill that was designed based on input from our utility and underground contractors. The new drill offers enhanced power, along with our next-generation operating system, that makes it easier to learn and operate. The new drill should help contractors save time, streamline operation and increase overall productivity.

Next, continued investment in permanent and high-value cash crop supports a positive outlook for our micro-irrigation business. We believe other irrigation -- our other irrigation businesses will pick up in North America with normal precipitation patterns. Last month, we were pleased to announce a new series of long-radius sprinklers, impact sprinklers and rotors for the U.S. market that are designed for a variety of natural and artificial turf applications.

These offerings are part of our integration of products and technologies gained from our Perrot acquisition. The series includes sprinklers with long-distance drilling abilities that allow installation around the perimeter of sports fields while providing full coverage of the playing surface. These sprinklers are also suited for washing and cooling synthetic fields. This new sprinkler series represents an important extension of our sports field and grounds footprint.

Our leadership in the water management arena was recognized for the third year in a row by the Environmental Protection Agency's WaterSense program. We were honored to receive a 2017 Excellence Award for our innovation and education efforts promoting efficient water utilization.

Shifting to winter products. Our BOSS team is optimistic about the prospect for increased sales this season. The positive outlook is based on broad customer acceptance of our latest innovations, continued strong truck sales and encouraging retail activity at BOSS dealers. Similarly, our residential snow business enjoyed a good start at retail. We are well positioned with a dynamic product line. All we need is snow.

On the turf side of the residential business, we see new growth opportunities in the second year over our successful TimeCutter HD zero-turn riders, the expansion of our walk power mower platforms and full availability of our power plex battery-powered handheld tools. One of our more promising introductions is a series of walk power mowers that offer 2 of our most popular features. These new units are equipped with both PoweReverse, which we introduced this past season; and SmartStow. The combination of these customer valued features, along with our personal pace, self-propelled drive system, represents a significant advancement in mowing convenience. These mowers are easy to propel, easy to back up and easy to store. We are confident these new mowers will receive an enthusiastic reception from homeowners everywhere.

Finally, from a global perspective, we are very pleased with the strong performance our international business delivered in fiscal 2017 and anticipate another good international showing in 2018. Prospects for our professional products portfolio are particularly promising due to the strength of new products and the commitment of our team and channel partners. Notable example of innovation in our international product lineup is the new ProLine H800, a professional, direct-collect rotary mower. Its clean-cut and high lift capability help to drive stronger-than-expected sales. The H800 should prove to be a valued addition to fleets across our international markets.

In summary, we remain steadfast in our focus on innovation, productivity and profitable growth as we transition from Destination PRIME to a new 3-year employee initiative named Vision 2020. We're very proud of the team's Destination PRIME accomplishments. We achieved our operating earnings goal and made progress on improving revenues and reducing working capital. In Vision 2020, we will once again focus on driving profitable growth with an emphasis on innovation and serving customers. The initiative's specific targets are achieving 5% or more in organic growth each year and operating earnings of 15.5% or more by the end of fiscal 2020.

While there is not a specific target for working capital in Vision 2020, it is our intent to maintain the momentum we have gained and to not lose sight of this important metric. We believe our Vision 2020 goals support our key corporate priorities of accelerating profitable growth, driving productivity and operational excellence and empowering our greatest asset, our people. The tagline for Vision 2020 reads, "Customer needs, my commitment, our future." These themes highlight our cultural belief that customers come first, that each of us is personally responsible for serving our customers and that when we do that, we secure and strengthen our company's future and advance the interest of all our stakeholders.

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 2017 as well as for their continued efforts in the New Year. For fiscal 2018, the company expects revenue growth to exceed 4% with net earnings of about $2.57 to $2.63 per share. For the first quarter, the company expects net earnings to be about $0.42 to $0.44 per share. Again, these estimates exclude any impact of potential tax reform.

This concludes our formal remarks. We will take questions at this time.

(Operator Instructions) And our first question comes from the line of Sam Darkatsh with Raymond James.

Hopefully, everyone will find my questions this quarter will be of a less truculent nature than the last quarter.

No problem.

The -- 3 questions for you. First, as it relates to capital allocation, and thank you for the level of detail as it relates to the guidance and free cash flow and plans on share repo, and these are first-world problems, clearly. But the balance sheet remains highly unlevered and the free cash flow expectations for fiscal '18 are above the expected share repo and dividend rates. So it suggests that without any M&A, you would further delever from here. What do you and the board feel about things like special dividends? Or would you consider accelerating share repurchase? Or -- I mean, your optimal capital structure is significantly more levered than where you're at right now.

Yes, Sam, I think, starting with just the capital allocation approach. The general approach is the same, and we would look at order of magnitude as the year develops. Keep in mind that our cash, it does vary quite a bit seasonally. And we're at really a high point pretty much at the end of the year. So that is important just as a point of reference. And also, about 40% or 50% of our cash is outside of the U.S., and we don't view that as an issue.

We used some of it for our Perrot acquisition and we use it for other investments as well, so that also should be factored into it. I think when you look at the overall capital allocation, though, it would remain the same, looking first internally. And we have great opportunities to invest internally in new products and improving our productivity and efficiency within our plans. That would be always our first priority and where we think we get substantial return.

Then continuing our approach on M&A in a disciplined manner. We have a solid pipeline. As you know, we dedicated more focus on developing that pipeline and our business development resources over the last number of years. And we feel that we have a good pipeline, and certainly, we were interested, as we've talked about in the past, in larger, more meaningful acquisitions such as the size of BOSS. But we also recognize that when you look at just the parado of the types of opportunities, there'd probably be more of those smaller ones than larger ones. But often, the smaller ones can be pieced together and really have a meaningful impact on the company.

I think the Perrot acquisition is a good example of that. We obviously gained the sales related directly to Perrot, but also, it fit very well into our product line. It increased the critical mass of our sports fields and grounds offering, and we're able to leverage also our distribution around the world. So those kinds of -- we're looking for the larger acquisitions, clearly, but also, in the meantime, we've got -- we're picking up some really significant benefits from the smaller acquisitions as well.

Then, Sam, I would say we also are continuing to increase our dividend and then look at share repurchase as really more as we have it effectively deployed the other cash that we have in share repurchases, assuming that our discounted cash flow model supports that, would be a great opportunity as well. So we would continue on that same path. I think we would be more interested probably in a sustainable change in the dividend versus a special dividend. But that would -- time will tell as well.

The second question I have, Rick, as it relates to Vision 2020, you mentioned that you're expecting continued momentum in working capital. What was the thinking behind not overtly including it though within the Vision 2020 metrics?

So this is, I think, the seventh employee initiative that we've had, and working capital, I think, has been included, is it 2 times, Renee?

Yes, only twice. Yes.

Only twice in that time. So at this point, we really chose to focus on those top 2 objectives, not to say we're going to take our eye off the ball at all with working capital. We have, in the last year, for example, built in some real structure to make sure we're monitoring that very closely, and each of the businesses is very much responsible for performance there. But working capital is one that is not as easy for people to engage with across the organization. The top 2 of growing our revenue and increasing our operating profit is very, very clear. Those are very, very clear, and we've chosen to focus on those 2 at this point.

And also, Sam, keep in mind that our incentive structure for our key leaders and our officers remains the same. So certainly, revenue growth is a piece of that. Profit growth is a piece of that. And there's a component of either working capital or asset turn. So we have the same vested interest in continuing that focus and that improvement going forward.

Third question, Renee, what do you contemplate within guidance for inflationary pressures and pricing?

So when we look at, in particular, material and commodities, we think there will be a similar impact in fiscal 2018 as we saw in 2017. So fairly modest, not a real rapid and sharp increase in commodities. And the same major areas would be where we're seeing the impact, primarily steel and resins, some impact in engines as well. And we will work very hard to offset that to the best of our ability through our productivity and lean initiatives as well as pricing. So we continue to look at price. We always price to market, as you know, not to cost. And we would anticipate a normal range of price between 1 and 2 points of realized price, more of that recognized in the professional segment than in the residential segment. And we'll also focus on -- continue our focus on innovation where we can offer a product that offers a different customer value-added feature. That is also an opportunity for us to differentiate ourselves and potentially gain some margin.

Final question, then I'll defer to others. The 26% tax rate, this is obviously assuming that without tax reform coming to be. But should we assume that 26% rate in the out years, too? Or is there something that is one-off as it relates to fiscal '18 tax rate?

The consideration is the inclusion of about $20 million for share-based comp in 2018. We've included that. That's very similar to what we saw in 2017, Sam. It's really difficult to know what every year will be going forward, but the change in accounting standard is a change that's here to stay. So we'll continue to evaluate each and every year, but it's not necessarily a 1-year impact. But it will introduce some variability in our tax rate, both from quarter-to-quarter and from year-to-year, because as you know, the impact is based on the exercise of stock options, vesting of our SKUs and the stock price. So it's a little hard to forecast. I know the intent of the change is to simplify the reporting. I think it does that maybe, but it does make the forecasting a little bit more difficult. So that impact will continue. The exact dollar amount may be different from year-to-year. But we've included a similar amount in '18 as we did in '17.

And our next question comes from the line of David MacGregor with Longbow Research.

I wonder if, as you talk about kind of the Vision 2020, and you talk about the margin targets, can you talk a little bit about what the drivers are for further improvement in operating margins from here? Is it really just kind of -- I mean, if you model that, you're implying kind of a 24% incremental margin between here and there. Is there more going on here than just simply leveraging the volume? Maybe if you could give us a little bit of detail on that.

Sure. The first thing I would mention is really related to the topic in one of the key areas of Vision 2020, and that's innovation. And we do see, as we are moving now to next-generation type of products, that those are more highly engineered, especially on the commercial or professional side where they bring a lot of additional value to the customers, they're displacing other pieces of their budget. So where we can have more productive machines, that's money that comes out of their labor budget. Where we can have more fuel-efficient machines, that's money that comes out of their fuel budget. So we see opportunity to transfer some of those into equipment and product offerings that are higher-value and more highly engineered. So that innovation part of it is a big piece of it. Productivity is another really key portion of that. We're seeing pretty impressive returns on our lean initiatives so far. We largely offset the increases of our commodity prices, our escalation with productivity improvement in our plants where we are really initiating our lean activities. So those are a couple of the areas. Renee, other?

Yes, I would say, again, continued growth in the professional segment as faster rate than residential is also beneficial and then continuing to leverage fixed costs. So whether they're within production area or within SG&A, is making wise investments for the future, but also recognizing that we shouldn't see the same costs dollar-for-dollar as our revenue grows.

Second question, just on the residential business, you had a more pronounced sequential margin recovery in 4Q than you typically do, 9.6 versus 7.5 last quarter. Is that Pope? Or was there something else going on in residential that helped you on the fourth quarter margins? Or maybe it was depressed third quarter, I don't know, but could you talk about that step-up?

I think, certainly, a piece of it would be product mix as well as good execution on the residential business. So I think it's probably -- it is some of both.

Okay. And the last question, kind of big-picture and longer term, but can you just talk about the development of battery-operated lawnmowers, both in pro as well as residential? And just where the category is, how close we are to seeing more pervasive presence from that kind of a product in the marketplace. And to the extent you're comfortable talking about it, just where you are in terms of being a leader in that advance.

We definitely see that as a trend, and it's something that our customers are interested, it's something that we're interested in offering as well. As you said, you have the look across our entire spectrum of products. So we just introduced our 40V platform of handheld products. That's been well-received. I personally have that product. It works terrifically. And then you go to the other end of the spectrum on our professional products. We have a fully electric walk greens mower. And what's in between is the hybrid technology, which for our professional customers, really, at this point, is a very good fit because of the additional range and all day capability that they provide. So there's definitely a transition taking place. We're investing in battery technology, and you would expect to see additional offerings from us, pretty much across the line, to offer battery options in many of the product categories across from residential to professional.

If you were to see a competitor come to market with, say, a battery-operated ZTR sometime in 2018, how prepared would you be to respond to that?

We would be making our own strategies relative to that business. So we have our own investments that are taking place across the product lines. So that would not be something there is -- there are actually offerings that are out there right now. There are Z offerings in the landscape contractor area for electric products. So that's still a very, very, very small portion of the market at this point.

And our next question comes from the line of Mike Shlisky with Seaport Global.

This is Jordan Bender on for Mike this morning. So I know your guidance is about 4% or more for fiscal 2018. Can you guys give us a sense of how high that growth can get? I mean, could we see Toro get double-digit growth? Or what might be the higher end of that or more?

Yes, we probably wouldn't get extremely specific about that. We're at 4%. We mentioned the snow season so far this year that has yet to play out, where we've built in a average snow year for this year. We still expect winter to develop here. There are some unknowns. But we also -- we do have a number of good drivers at this point. The Z business continues to be very strong. The response to our products that we introduced just last year, the Exmark, Radius and the Toro TITAN HD, as well as the high end of our residential Z offerings have done very well, the TimeCutter HD. We've got growth potential in the rental market, especially construction market. And utility vehicles have been strong as well. So we have a number of areas that could exceed our expectations, but we also have some unknowns at this point.

I would just add, over the long term, what we've talked about is mid-single-digit type of growth for Toro. But years -- certain years can vary. But that would be long-term growth rate. More of that coming from the professional business and a little lower growth rate from the residential business.

Okay. And then what's the pricing environment in the zero-turn mowers at the moment? And what do you think will be the environment going into next spring?

The pricing environment?

Yes.

It's really -- it's -- I would probably describe it across the spectrum of Z, so going from residential through the very high-end professional. There is more price pressure at the lower end of that market than there is at the higher end because you're talking more about features in -- for our professional -- for professional. And then really, the rest of it, really, is the features and benefits relative to the price. So probably can't be real general about that. More price capabilities the further you go up, more price pressure in the lower side. But we still have the ability to get price based on our feature set and the innovations that we deliver.

And our next question comes from the line of Eric Bosshard with Cleveland Research.

This is Tom Mahoney on for Eric today. Do you guys have any way to quantify the impact of storms on the business in the fourth quarter? And then are you contemplating any 2018 tailwind from Florida and Texas?

So specific to the hurricanes?

Correct, correct.

Okay. Yes, I would say for the hurricanes, what we normally will see when actually that type of event occurs, there's not a lot of immediate impact because people are very focused on other things immediately. But then we do tend to see some favorable impact over time as that equipment gets replaced. If it was destroyed, it would get replaced. I think we found more actual devastation in Texas than we did in Florida, and it was just based on the type of storm. And the Florida storm moved through very quickly. And I think, in Texas, it was a more intense and longer-term event. So we tended to see a little more damage there.

And immediately, you would see also just lots of, for example, of retail stores not being open. So our dealers, the Home Depot, for example, stores being closed during the storm, but at short term, even more negative. But for example, in Houston, most of the golf courses had some type of damage, so that's both directly to the equipment and also to the grounds that require equipment to bring them back into shape. So we did see a pickup there. These are not huge swings by any means but slightly positive.

Yes. When we look at the number of golf courses contrasted to the total number, it is, to Rick's point, a fairly small amount. But it's slightly positive, I would say, towards the end of fiscal 2017 and then that would carry into '18, but not a large number.

And then on inventory, up 7 exiting the year, is there a way to size the contribution of mowers within that snow and then if any acquisitions are still incremental year-over-year?

I think, as we look at the inventory, we feel good about the position that we ended the year. We made significant improvement on our 12-month working capital average across the year. But at year-end, what we really were doing is positioning ourselves well for the year ahead. We feel that field inventory, both from a residential and from a professional standpoint, is in good shape. And so we want to make sure that as the year develops, we're ready to deliver.

I believe snow inventory is actually lower than it was last year at this time. So we're in good shape with whatever winter happens to play out, whatever happens to play out.

And our next question comes from the line of Joe Mondillo with Sidoti and Company.

Wanted to ask on in terms of your operating costs outside of the 2 segments, that little bucket was up about 15% in the fourth quarter, and it was up about 8% for the year. Just wondering why was that and sort of what the outlook is for fiscal '18.

So when we look at the other segment, there's really a couple of things going on when you look at just the operating loss for other. First of all, just within the area of gross margin, this is where we do a lot of our eliminations, consolidation, that type of thing.

So it gets to be a little bit messy as far as all the eliminations. But just in general, just to offer clarification, when we look at other gross margins for the other segment, it was actually down year-over-year. As contrasted to our other segment, both professional and residential, the gross margin was up year-over-year. We don't disclose the specifics, but I think that's important. And with really the other segment was impacted by 2 items that, I think, are notable.

I mentioned we have our eliminations and company-owned distributors in other. In 2016, we sold a distributor, one of our 2 company-owned distributors. And so we did recognize a favorable impact in Q1 of 2016 was in the other segment that didn't repeat in 2017, so year-over-year impact. And then in the other pieces in 2017 -- well we have LIFO inventory pools for many of our location. What we had occurring is in 2016, there was a favorable impact associated with our LIFO accounting.

And in 2017, it just went the other way. Either one of them not that significant, but the combination of the 2 is more meaningful. So again, the other segment gross margin wound up being negatively impacted, to the extent that it was about a 20 basis point negative impact on the company's gross margin for the year. So more than anything, a year-over-year impact. When we look at SG&A, which I think is the other portion of your question, we did have overall some general inflation in corporate costs. But the most significant kind of outlier would be the incentives.

So we talked about this in the past, and I had mentioned our incentives, generally speaking, are in sales, profit and some type of either working capital or asset turn. In 2016, we did great from a profit standpoint, but our sales growth was very low, modest 0.1% for the company, and our working capital actually moved in the wrong direction. So we scored well on one of 3 of our incentive measures in 2016. And when you look at 2017, we had good sales growth, good profit conversion and good improvement in working capital. So that incentive piece that you're seeing in SG&A is really bringing it back up more to a normal level and good execution on all fronts and some impact of inflation.

So going forward, is it fair to say, if everything sort of trends sort of normally, that this would be up year-over-year? But I guess, the goal maybe is slower than what revenue is up.

Yes. That is definitely true for all of SG&A, and I don't know why the corporate piece would be any different.

Okay. And then my second question, I wanted to ask about the golf market specifically. The last several years were actually pretty good for golf. However, last year, in terms of rounds played, it wasn't really good at all, actually. So I'm just wondering sort of the growth rates in golf, I know you've always talked about low single digit every single year sort of. But has there been any change to that after 2015 and '16 were so strong? Did that accelerate in fiscal '17? And just given sort of the slowing or actually decline in rounds played last year -- in fiscal '17, does that sort of worry you of CapEx spend in 2018 at all and how that affects your business? Or any slowing or anything like that?

Right. From our perspective, the golf business continues to look strong. First of all, if you look at rounds played, that's one that can move around quite a bit, again, based on some things we've talked about, the number of playable days. And I think if you correct for playable days, it's not down as much as it appears.

So there's a few variables like that. We've also talked about just the normalizing of the golf market. And in fact, we are expecting in the neighborhood of 100-plus golf courses to go out of business per year for the next couple of years. So that's -- we see these as corrections in a market. If you take out sort of hype years of golf, you're back to a more kind of rational market looking trend. And then, I guess, just lastly, our customers are very much investing. We can see projects on the horizon.

And we see no sense that our -- or we get no sense that there's a change in those low single digit numbers that we've provided in the past. And in fact, we -- specifically, based on some of the innovations that we've talked about and products like the Outcross that will be introduced to the market this year, we believe that we are taking market share in that area as well off of added opportunity for us above the market growth itself.

So in terms -- I know you don't want to define the actual growth, but have you seen a slight acceleration at all in growth over the last few years?

What we have seen is there are several factors. There was a pent-up demand based on delayed spending by a lot of our customers, especially for larger capital projects on the golf irrigation side. And then as an accelerator, the better technology that's available with the systems that we can install today in terms of better control, lower energy use, lower water use, there is a return on investment that helps push those organizations over the edge to make the investment because there is at least a partial return. So that's been an accelerator.

Okay. Just last question, just in terms of that other income line. I know there's several different buckets there, including your financing arm of your business. Just wondering, in terms of the guidance that you provided, what you're thinking that looks like in fiscal '18. I know, in '17, it saw a decent jump. Is that -- are we expecting a similar type of jump in fiscal '18?

Yes. We would expect -- I mean, other income is -- normally does not change substantially year-to-year. You're correct that there is an impact of the Red Iron joint venture that goes through there. And we did see some favorable impact of foreign currencies that went through in fiscal 2017 that is going to be hard to estimate for the future. Not material, but that would be the only other impact.

So does the guidance sort of assume sort of similar fiscal '17 levels?

Yes, we don't break out the other income specifically, but there's not a dramatic change, that's correct.

And our next question comes from the line of Jon Fisher with Dougherty & Company.

First question, on Vision 2020, the 5% organic revenue growth, I thought I heard you say 5% each year, where the last objective, it was at 5% annualized over the 3-year period. Did I hear that correctly or wrong?

It is 5% each year. And just to keep in mind, this is an employee initiative, so it's not guidance. This is our internal initiative, but it is 5% per year.

Destination PRIME, just to clarify, was also 5% per year. We didn't issue it each and every year, but we do try to always keep people focused on, if they have a great year, they don't get to carry that forward every year. From an employee initiative standpoint, we try to start with a clean slate, and each year, has to stand on its own.

Operating earnings is obviously to achieve by 2020.

Correct. That's a multiyear.

Right, right. That was 15.5% by the end of 2020.

Right. That's correct, absolutely.

On Residential, when you look out for next year, would you expect similar growth in 2018 as you had in 2017? Or are you expecting improved growth in Residential in 2018 versus 2017?

We've -- what we talked about for the Residential business typically is GDP-like growth. And that's what we -- that's the kind of thing that we would expect for next year. We do have growth -- their business, we do plan to grow that business, as we do really for all of our businesses. But we would expect to be closer to what we typically talk about, which is the GDP-like growth.

It's some really great new products that we would expect to see an impact of as we go forward as well. The walk power mowers with PowerReverse and SmartStow that Rick mentioned as long as the 40V and the TimeCutter Z, I think, has also been really successful -- TimeCutter HD.

The TimeCutter HD has been extremely well received. That's pretty much the top-of-line for the residential V products. And the feature set versus the price point has been a homerun, really. So that continues to do well. So we have a number of drivers that can continue to grow that business, and we expect to grow the Residential business.

Okay. And when you look at your market share in zero-turn and you just kind of level set that against general market share of your products on the landscape side, are you still kind of below where Toro's fair market share kind of should be? Or have you -- with growth in that category and growth in -- and performance of Toro in that category, have you kind of gotten to kind of your in line fair share of market share in zero-terms?

Yes, we -- if you look at across the spectrum of Zs from a residential through the landscape contractor Zs, we believe that we have minimally held our own in terms of market share. If not, ticked that up slightly over the last year. And that's really fueled by the new product successes that we've had with the Radius from Exmark and with the TITAN HD on the more of landscape contractor side from Toro. And what -- the reason why I say look across the whole line, because in the intersection of those 2 areas, you have the high-end of the residential business and the basic start of the landscape contractor, there is some crossover. So homeowners with acreage that have larger properties can choose to have a higher-end residential product where they can step up to the professional grade, which we saw, to a greater extent this year, happening as we talked about in previous quarters.

Okay. And then the last question. How would you describe kind of the winter sell-in season that occurred during the fall and early part of winter here? Would you describe it as average, good, strong, poor...

The preseason and the sell-in to the season was solid. And we saw some of that in the third quarter. That's the timing that we talked about. We had a favorable inventory position in the field and had good response to our product offerings preseason. We had a few teaser snow events early in the year with Canada, some in Colorado. But since then, it's been a pretty mild winter so far. I think, just this week, there is a pretty good storm system that's giving some snow effect or lake effect snow around the Great Lakes. And I just looked at The Weather Channel this morning. You may not be surprised about that, but looked at The Weather Channel this morning, and they talked about the colder conditions and that region being set up really to produce snow if moisture moves through that system. So we keep a close eye on that. This is something that we manage every year, so it's not something new to us. And we build our business plan around looking at what snow does through the first quarter, especially.

And we do have a follow-up question from the line of David MacGregor with Longbow Research.

Well, they're forecasting snow this weekend for Cleveland, so...

That's great.

Yes, great.

Get it started here. Just a couple of quick follow-ups here. Just talking about snow, any opportunity here to achieve growth in 2018 by expanding distribution on BOSS and some of those other product beyond the home centers, I guess, with reference to the other product? And then also, if you could just talk about your expectations for free cash flow conversion in '18.

Yes, first of all, in snow, so a combination of the residential business and the professional products from BOSS. On the residential side, that will be driven by the new products that we talked about. And if we have the opportunity to sell into a snowy season or even an average season, we feel very strongly that we have a product line that our customers will respond to. BOSS continues to do very well, and we continue to use the test that we talked about before, and we feel better about BOSS today than we did the day that the deal was closed.

They've been -- there's been a lot of synergies with The Toro Company and the BOSS team. And they've continued to grow their market share even as we go through stronger and weaker winter seasons. The secret to that is really the string of innovations that they have continued to introduce.

So the HTX, the straight-blade plow that's used for half-ton pickups that expands the pickups that can take a plow; the EXT that extends the width of the plow but allows us to go down the road; and more recently, the down force system and the QuickCube, which I think we talked about in previous calls. So they've got just a really exciting stream of innovations that have come along, and we believe that they've taken market share in the midst of whether the winters are up or down.

And just thinking back to when you bought BOSS, part of the thesis was that you could expand distribution. It was kind of a regionally distributed product, and it was an opportunity to maybe move into some other regions. And obviously, that required growth in distribution and dealer representation. Is there any progress on that front?

We are making progress. We've got some specific cases internationally. So Canada, we've been able to leverage distribution in Canada. We've -- the international market opportunity is smaller, and it's a little bit more complicated because the snow removal practices are different by region. But we've been able to leverage our relationships and our structure in China, for example. And then also just on the relationship with landscape contractors themselves. Been able to leverage the relationship either with Exmark or Toro products and introduced the BOSS products in some cases. And I think, regionally, you mentioned one of the areas we talked about is more in the Northeast, and we have been able to work with our existing Toro infrastructure there to be able to grow our BOSS business.

And then the free cash flow conversion for '18?

Free cash flow, we would expect, David, cash conversion approximately equal to net income. We do -- when you look at year-over-year, we have certainly higher net income coming into free cash flow, but also slightly higher capital expenditures. We've got some great opportunities to invest in new products and productivity related to our businesses. And then always looking at maintaining the right level of working capital as well.

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

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

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