Toro Co (TTC) 2018 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to The Toro Company's Third Quarter Earnings Conference Call. My name is Ashley, and I'll be your coordinator for today. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

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

Thank you, and good morning. Our earnings release was issued this morning by Business Wire, and a copy of the earnings release, including a reconciliation of non-GAAP financial measures, 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 as well as information regarding non-GAAP measures.

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.

Our earnings release and this related call contain certain non-GAAP measures consisting of adjusted net earnings, diluted net earnings per share and effective tax rate as financial measures of our operating performance. The company believes these measures may be useful in performing meaningful comparisons of past and present operating results to understand the performance of its ongoing operations and how management views the business.

Reconciliations of adjusted non-GAAP measures to reported GAAP financial measures are included in the schedules contained in our earnings release. Such non-GAAP measures should not be considered superior to, as a substitute for or as an alternative to and should be considered in conjunction with the GAAP measures presented in our earnings release and this related call.

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 announce record third quarter results. Net sales for the quarter increased 4.4% to $655.8 million. Third quarter net earnings per share grew 19.7% to $0.73, while adjusted earnings per share rose 17.2% to $0.68. Year-to-date net sales increased 3.1% with earnings of $2.14 per share and adjusted earnings of $2.35 per share.

Our professional segment sales grew 3% for the quarter driven by demand across our professional portfolio, most notably for our landscape contractor equipment. For the first 9 months, professional sales grew 6.6%. As anticipated following the late start of spring, residential segment sales rebounded nicely for the quarter with an increase of 9.5%.

Strong demand for our walk power mowers and zero-turn riders, along with improved weather conditions, drove the third quarter growth. Residential sales were down 5.4% year-to-date as demand for our snow and turf products were negatively impacted by below-average snowfall early in the season and the late arrival of spring.

Overall, it was a solid quarter, exciting new products fueled continued momentum across our businesses. Our team performed well against the backdrop of inflationary pressures and supply challenges to deliver these record results.

We continue to prudently manage expenditures focused on productivity, invest in innovation and leverage operational efficiencies. We also implemented price increases across our businesses. Our team's dedication and consistent execution have us on track to deliver another record year.

Following a brief commentary on our businesses through the first 9 months of the fiscal year, Renee will discuss our financial and operating results in more detail.

Our strong third quarter showing in the professional segment was led by our landscape contractor businesses. Demand for our zero-turn riders, including our new diesel-powered offerings, fueled solid shipments in risk retail through the quarter. Our stand-on mowers and 30-inch TurfMaster walk behind also performed well at retail.

Similarly, our worldwide golf and grounds businesses extended their very positive run with strong contributions from our international partners. Large reels, greensmowers and sprayers were in high demand.

During the quarter, we also were pleased to unveil additions to our Workman GTX vehicle line, including new electronic fuel injection models and additional attachments. These introductions will help golf and grounds managers maximize performance and productivity.

We were honored to support Shinnecock Hills as they successfully hosted the 2018 U.S. Open. Our equipment helped them showcase their beautiful course to the tournament's large audience. Our golf irrigation offerings posted positive results for the quarter on the strength of increased course projects. Ag irrigation made gains in North America for both the quarter and the year, although their quarter results were offset by lower demand elsewhere.

The ongoing positive trends in construction helped drive another good quarter for our rental business based on demand across the product categories. The Dingo TX 1000 compact utility lower continues to sell well as do our mixers, Mud Buggies, stump grinders and trenchers. All have generated sales increases.

BOSS snow and ice management product sales decreased for the quarter due to the timing of shipments of preseason orders, but remained ahead for the first 9 months as contractors continue to turn to BOSS for reliable products upon which their livelihoods depend.

As noted, our residential business delivered the quarter's highest percentage sales gain at 9.5% when spring finally arrived, sales of our walk power mowers and riders rebounded to register solid gains for the third quarter. We also benefited from increased sales of our portable power products during the period.

In June, we introduced our new PowerJet blower line that delivers the highest CFM or airflow of any blower in their class. Changing seasons, our residential snow products were down for both the quarter and the first 9 months due to the timing of preseason shipments and the below-normal snowfall across the Midwest during the first quarter. However, we generated excitement for the winter ahead with the unveiling of the new heavy-duty Power Max snowthrower. This large 2-stage machine features our patented anti-clogging system that regulates snow intake to virtually eliminate clogging. The Power Max is designed to optimize productivity and help homeowners tackle winter's worst, faster and easier than before.

Moving to our international businesses, we enjoyed a good quarter led by strong golf, grounds and ag irrigation results in the professional segment, bolstered by increased sales of Pope and Hayter residential products.

Other businesses delivered mixed results on a regionalized basis and some efforts were impeded by adverse weather, most notably severe drought conditions in Europe and Australia. Our international team and channel partners won a number of large fleet deals and generated excitements across markets for our newest product introductions. Furthermore, we had the opportunity to proudly support the host of 2 major international sporting events that command the global stage. Our golf equipment helped prepare the course at historic Carnoustie Golf Links in Scotland for the 2018 Open Championship, and our turf and Perrot irrigation equipment were on duty at World Cup stadiums and training facilities across Russia.

In total, we are pleased with our third quarter results. As we head into the fall's selling season, we are confident in our prospects for successfully closing our fiscal 2018 in record fashion.

I will now turn the call over to Renee for a more detailed discussion of our financial results.

Thank you, Rick, and good morning everyone. As we reported earlier this morning, net sales for the quarter were $655.8 million compared to $627.9 million for the same period a year ago. We also delivered net earnings of $79 million or $0.73 per share compared to $0.61 per share in the third quarter of fiscal 2017.

Adjusted net earnings for the quarter were $73.5 million or $0.68 per share compared to $65.5 million or $0.58 per share, an earnings per share increase of 17.2% over the comparable 2017 period.

Year-to-date net sales were up 3.1% to $2,079,000,000. We achieved net earnings of $232.9 million for the first 9 months or $2.14 per share compared to $2.10 per share a year ago.

Reported net earnings for the first 9 months were slightly lower than the $233.9 million reported for the comparable period in 2017 due to the one-time impact of tax reform.

Adjusted net earnings for the first 9 months increased by 21.8% to $255.9 million or $2.35 per share. This compares to adjusted net earnings of $215 million or $1.93 per share for the first 9 months of 2017.

Please see the tables and information provided in the earnings release for a reconciliation of non-GAAP adjusted net earnings and adjusted diluted earnings per share to the comparable GAAP measures.

Professional segment sales were up 3% for the quarter to $482.5 million, led by the demand for our landscape contractor equipment. Year-to-date, professional sales were up 6.6% to $1,547,000,000, fueled by the demand in our landscape contractor, golf, grounds, rental and specialty construction businesses. Professional earnings for the quarter totaled $97.7 million, up slightly compared to last year. For the first 9 months, professional segment earnings were $338.6 million, up 7.6% compared to the same period.

Third quarter residential sales increased 9.5% to $166.5 million due to the demand for our innovative new products as well as improved weather conditions versus the late arrival of spring during the second quarter. Year-to-date, residential sales decreased by 5.4% to $521.2 million due to the effect of unfavorable weather conditions, on demand, for both our turf and snow products during the period.

Earnings in the residential segment for the quarter totaled $16 million, a 40.9% increase from last year. Year-to-date earnings were $58 million, a decrease of 7.9% compared to the first 9 months of fiscal 2017.

Moving to our operating results. Gross margin as a percent of sales for the quarter decreased 50 basis points to 35.6% due to unfavorable commodity and freight costs, supply challenges and segment mix. The decline was partially offset by net price realization. Gross margin for the first 9 months improved by 10 basis points to 36.6%. The improvement was driven by net price realization, favorable foreign currency and the positive impact of segment mix, somewhat offset by increased commodities and freight cost, along with supply challenges. We now expect gross margin, as a percent of sales, to be slightly lower for the year.

SG&A as a percent of sales decreased by 70 basis points for the quarter to 21.4% and decreased by 50 basis points to 20.7% year-to-date. Prudent expense management and leveraging of costs over higher sales volume contributed to the improvement. However, while effectively lowering expenditures overall, we increased investment in key strategic initiatives, including higher engineering spend on new product developments.

Third quarter operating earnings as a percent of sales were 14.2%, an improvement of 20 basis points from 14% in the same period last year. Operating earnings as a percent of sales improved 60 basis points year-to-date to 15.9% compared to 15.3% a year ago. Interest expense was slightly lower by 1.6% for the quarter and by 0.7% year-to-date.

The reported tax rate for the third quarter was 15.3% compared to 22.6% last year. The adjusted tax rate for the quarter was 21.2% versus 25.9% for the third quarter of fiscal 2017. The third quarter adjusted tax rate excludes the benefit of excess tax deduction for share-based compensation as well as adjustments to the provisional tax items recorded in the first quarter of fiscal 2018. For the first 9 months, the reported tax rate was 29.2%, up from 23.6% a year ago, and the adjusted tax rate was 22.2%, down from 29.8% for the comparable period in 2017. The adjusted tax rates were positively impacted by the enactment of U.S. tax reform, as previously reported.

For the reported rate, the unfavorable impact of onetime charges associated with the provisional remeasurement of deferred tax assets and liabilities and the provisional calculation of the deemed repatriation tax were mostly offset by the benefit resulting from the reduction in the federal corporate tax rate. The company continues to estimate that its full fiscal year adjusted 2018 effective income tax rate will be about 23%.

Turning to the balance sheet. Our net working capital as a percent of sales stands at a 12-month rolling average of 14%, the same as a year ago. Accounts receivable for the quarter totaled $219.5 million, down 1% from a year ago. Net inventories increased 4.4% for the quarter to $364.5 million, due to slightly elevated levels of work-in-process inventory. Third quarter trade payables were $229 million, up 8.3% from a year ago.

During the third quarter, we repurchased approximately 584,000 shares of stock under our board authorization, and there are 2.5 million shares remaining under our authorization.

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

Thank you, Renee. To date, fiscal 2018 has been another record year for Toro. Let's take a moment to review why we are confident that our businesses are well positioned to successfully close out the fourth quarter and the year.

First, the momentum our landscape contractor businesses have achieved should carry through to year's end. Overall field inventories are in good shape and forecast suggests we will receive ample precipitation levels in most markets. That should help maintain more sales. And just in time for contractors' fall cleanup business, our MULTI FORCE stand-on machines' versatility has once again been enhanced with the recent release of our new turbine blower attachment. Such versatile equipment enables contractors to stretch their investment dollar, perform tasks more easily and increase productivity.

Next, our golf and grounds businesses are optimistic about the remainder of the year. Park and municipal bid activity remains consistent and mini country clubs continue to generate solid revenue. Excitement is running high for our latest Smart products, including our revolutionary Outcross turf utility vehicle that begins shipping this quarter. We are also experiencing strong demand for our GeoLink sprayers, and anticipate capitalizing on the healthy vehicle market with our Workman GTX line. Our new Groundsmaster 1200 pull-behind rotary for the Outcross and other tractors will begin shipping this quarter as well.

Ultimately, as customers struggle to find labor, the productivity of our Outcross, Workman GTX and other products can help them increase the capacity of their crews and to do more with less.

The number of favorable industry forecast bode well for the rental and specialty construction businesses. Overall, the outlook for construction remains strong as do prospects for increased residential improvement projects. The American Rental Association is projecting larger increases and revenue over the next several years. This, coupled with the additional available cash related to tax reform, presents an opportunity for rental companies to invest in additional equipment for their rental fleets. Many large rental accounts are reporting increased appetites for doing so. Ongoing labor shortages mean productivity is a must, which fits perfectly with our focus on developing rental and specialty construction products that equip customers to increase productivity.

Based on strong pre-season orders, the BOSS sales outlook is also optimistic. Economic conditions are positive and customer enthusiasm runs high for the latest BOSS advances, including the rear-mounted Drag Pro plow that enables operators to back up to buildings and garage doors and efficiently pull snow away from structures. Other customer favorites include our extendable plow and line of V-Box spreaders. BOSS contractors are ready for the snow to fly.

Solid bookings and healthy field inventories suggest our residential businesses like BOSS are well positioned to meet snowthrower demand. Heightened channel excitement over the new heavy-duty 2-stage Power Max should help accelerate retail once the season hits. We also anticipate continued demand for our turf products through the fall.

Finally, our international businesses are also experiencing broad market acceptance of our recent product introductions. The ProLine H800 direct collect rotary mower, TITAN HD and MyRide-equipped zero-turn riders and the newest Hayter mowers and our new line of 2-stage Toro snowthrowers are all generating strong interest. Our International team is also focusing heavily on the launch of the new Outcross and Groundsmaster 1200.

All said, we are well positioned to close out the year in a positive way. The company continues to expect revenue growth for fiscal 2018 to be about 4%. We now expect earnings per share of about $2.66 to $2.69 for the year. Our guidance now reflects the net near-term impact of recently announced and enacted trade policy changes, tariffs and related inflationary pressures on our input costs.

At the time of our last call, trade policies impacting us had not materially changed or been enacted so these factors were not included in our guidance at that time.

With the fourth quarter underway, our final drive to deliver another record year has begun. While focused on our strategic priorities, we remain prepared to flexibly respond to market condition.

As we prepare to wrap up the year, I thank our employees, distributors and channel partners around the world for their commitment and hard work that help make our strong performance possible. Together, we will finish the year strong and set the stage for a successful 2019. Thank you.

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

(Operator Instructions) Our first question comes from Joe Mondillo of Sidoti & Company.

So I wanted to start off with a -- just the margin that you realized at the professional segment, a little weaker than I anticipated. So could you walk us through sort of the puts and takes regarding price cost, if there is any unfavorable mix, the timing of the BOSS shipments and any other factors that may have contributed to the margin?

Sure. So when we look at the pro margins, in particular, for Q3, we did see a greater impact from inflationary pressures, which we had anticipated for the year. In particular, from a commodity standpoint, I would say, steel is probably the biggest one that we saw. And as we went through the year, like others, we're seeing greater impact from freight as well with freight rates increasing. So we certainly taking action to try to, from a freight standpoint, to do as much as we can to minimize that and have been pretty successful in doing that but still seeing some pressure related to that. We're trying to ship as efficiently as possible. Then we have seen some impact of supplier challenges. I think it's just a sign of a good economy, that some of our suppliers are having difficulty keeping up with demand. And so we've seen some disruptions just from a manufacturing standpoint, able to produce all of the product but maybe not as efficiently as we would normally like to. And related, particularly to snow with the late spring, we've seen just more of an interest in continuing with the turf products. We do have a strong book of pre-season orders, but we'll probably see a little more of that ship in Q4 than we did last year. Overall, from an overall margin standpoint, we continue our focus on productivity, always doing what we can to offset cost increases. And we have implemented price increases across our businesses. As you can expect, not all of that is immediately realized. And so as we go through the remainder of the year and into next year, we'll see full realization related to that.

Okay, great. That's helpful. So that actually brings me to my next question that I wanted to ask, sort of if we see material prices sort of level up from where they are here, could you just walk us through the sort of the trajectory of how price cost that headwind? What degree does it hit your P&L on a quarterly basis? Is the fourth quarter the worst quarter, and then it becomes small in the first quarter? Just sort of walk us how you're thinking about how that plays out over the next, including the third quarter, over the next couple of quarters?

Yes. We would say that we're probably would expect -- there's a couple of dynamics, just that impact of commodity increases and other price increases that we would see more of an impact to that in Q4. It's a small quarter, too, so that's why it tends to be a little bit more difficult because you don't get that leveraging of fixed cost over smaller quarter. So I think it is important to always with Toro step back and look at the year. We would expect going forward then into F'19 that we would see that more normalize. And our goal always is to maintain our gross margins by business, and then focus on productivity and leveraging fixed costs to improve our margins.

Okay. So probably by mid-year, it becomes sort of neutral type of a thing, do you think?

Yes, we are in a process of going through our detailed planning. It's really a dynamic environment so it's difficult to predict as we sit here today, but we will, I think, have a better appreciation for that when looking next year on the timing of that when we meet in December, but we would certainly expect that it will improve as we go through the year.

Okay. Yes. I'm sure it's very complex.

Changing is the reality.

Our next question comes from Sam Darkatsh of Raymond James.

A few questions, if I might. First, with respect to the price increases themselves, could you give us a range of the amount of the price increases in percentage terms? What were the price increases that you instituted last year? Trying to get a sense of the step-up of it. And does it include residential? And are you concerned about any elasticity or placement set as a result?

Sure. I'll take that, Sam. So if you -- what we would typically say, and it's true for the last couple of years, 1% to 2% price realization is what has been typical. And it's a tough number to exactly pin down because of exactly what you mentioned, because of the different businesses that we're in and the nature of each of those markets and channels and so forth. But we would, based on the mid-year increases, the range is about 1.5% to 3% on top of our normal annual increases. And then that's going to be subject to, of course, evaluation as we go into '19 to see where the commodity prices and input cost are going, and what's happening in the marketplace.

So does that include residential, Rick? Or is that mostly pro, and then there's not much in residential coming in?

That would be inclusive of residential as well.

So then it leads me to my next question then. You mentioned, I think, in the prepared remarks that you've found the channel inventory status to be in good shape, so that's good. The new product vitality expected percentage next year, is that going to be at a level that would also support the higher pricing?

Yes. We've got, I think we've listed quite a few of them, but we have a number of new products that will be introduced and start shipping beginning early in the fourth quarter, and then really hitting their pace in '19. So our vitality index will be very healthy next year. It's obviously available in the investor deck but that 35% threshold should not be a problem for us.

And then 2 more quickies if I could. The commodity and freight costs, some of it's obviously, naturally going to flow normally, but how much of that is locked in versus how much of it is the treadmill that you would be facing potentially?

Yes, regarding the commodity and freight costs, we have contracts, typically, for those types of expenses. So in some cases, if we're experts at this point, would say that steel is at the top of this range at this point, so we're in shorter contracts periods at this point. Regarding freight, there are some fundamental changes, probably in the freight outlook, that would say, freight costs are going up, fundamentally. So those are probably longer-term freight costs. But on the flip side, there are a lot of things that we can do to minimize those and offset them, everything from the way that we ship based on programs, more truckload or even going back and looking at the shipping densities, so we can change packaging, and the approach to filling the trucks up, as well as efficient lanes and so forth. So there's a lot of things that we can do to offset the freight costs, but it is apparent to us that freight costs are going up going forward, until there's a substantial change in the capacity that's out there.

Final question, Rick. I appreciate that at this stage here, in August, there are some aforementioned complexities looking into fiscal '19, but as you look at Vision 2020, which has an implication of mid-20s kind of incremental margins, do you anticipate this fiscal year '19 would still, with all the moving parts around cost, still have kind of that mid-20s incremental margin that is inherent within the initiative?

No, we -- as Renee mentioned, we work hard to improve our gross profits and the -- and we are -- remain committed to our Vision 2020. So the implied improvements there are certainly, that's what we're working to achieve.

Our next question comes from Eric Bosshard of Cleveland Research.

Two things. First of all, on SG&A, the SG&A leverage was better in the quarter on okay sales growth, how are you managing SG&A? And is this level of improvement or this level of leverage sustainable?

Yes, we always try to make prudent decisions about SG&A. As you know, we have really disciplined processes, and I think this quarter would just be another example of that. We continue to invest in our strategic initiatives, so we set more new product development this quarter over last year, and we'll continue to keep that focus. But, I mean, looking forward, we'll continue our focus on productivity and making wise decisions. And as you know, sometimes there are investments that have more of a step change. And if those are the right things to do, we'll do that. But otherwise, that is our focus on always improving in both gross margins as well as SG&A.

Okay. And then secondly, in terms of sales growth, I understand this year, the weather was different to start the year and coming out of last year. But as you look at sales growth over the next couple of years, curious how you all are thinking about it in terms of the underlying market growth opportunity and your market share opportunity. This is a year where, I think, you're expecting to get back to 4% growth than the original was around 4.5% is -- are those the right numbers for the next couple of years? Is there a reason to believe that the numbers can be better than that? And why -- would just like a little bit of your thinking on that area?

Yes, we have no reason to back off of those numbers at this point. As we've talked about mid-single digits growth perspective going forward, that's where we would remain. We're working to continue to improve that. We think our markets have opportunity to continue to grow, for us to continue to grow our share and for the market growth itself in areas like specialty construction, the landscape contractor business, those types of areas, we still see lots of opportunities. And even in areas like golf that we talk about as being a low single-digit type of growth area. We've seen some strong growth there with golf course renovations and equipment replacement. So we still continue to see opportunity to grow organically. And then through M&A, that continues to be a focus for us. We've had some really excellent small acquisitions, and then we've got a good pipeline at this point with additional opportunities going forward.

Our next question comes from Mike Shlisky of Seaport Global.

So I did hear your comments, Rick, that golf did very well internationally, but does that suggest that it wasn't quite as strong domestically? So maybe share with us what kind of the current trends that you're seeing kind of in your U.S. core golf business?

Really, the U.S. core business remains strong. Based on the anticipation of the summer, there's early emphasis on products that shipped early in the spring. The April effect that hit the residential business also affected some rounds early in the spring. So if you adjust for weather, the rounds played or in good shape. And fundamentally, our customers, our golf customers, with a little bit of economic confidence, are investing in their courses and buying equipment. So we feel very strongly and we expect good growth for the year.

Okay. And just following up on that, on the Outcross products, these start shipping in the very near term here. Can you give us a little bit more color? Can you share with us maybe have the orders been within your range expectations? Anything you think you have to change once it gets out there as far as new features and size-wise, et cetera?

So far, we have a small number of products that are out. In fact, many of them have gone for demo purposes at this point, and it's been right on target. The interesting thing is that it's a new category so it's something that once you have a chance to try it on your course or your facility, it's a very easy case to make and much of the target has been for golf, so we've talked about that we've already had some great response from sports field customers as well, including some of the premier league venues in Europe.

Got it. I just wanted to ask about your snow business and the box plow fixture that you had mentioned. I've seen that at some of the trade shows out there. But in chatting with some of the dealers and other folks in the industry, it seems that the box plow is a pretty, call it, regional products. I was kind of curious to see if you had a plan to expand kind of where -- the overall growth and reach of the box plow group nationally? Or is it still going to be a provisional product in the next 12 to 18 months?

We have regional strength but there is no intention to have only a regional focus, and we continue to grow our scope and strength in nontraditionally strong parts of the country and parts of the world as well. So it's no intention to keep that regional, and we continue to see growth across the regions.

Our next question comes from David McGregor of Longbow Research.

Just a follow-up on the golf questions, I guess. It sounds like maybe there were some pull forward into 2Q away from 3Q, and that may have contributed some of the weakness this quarter. Is that what we should take here?

I would just say, we often times talk about looking over a couple of quarters. So the transition between the second quarter and the third quarter lands at a kind of a critical time in the spring and the transition in the third and fourth quarter is another critical point. So we just need to look across several quarters. To your call, going into the spring with everything being very positive from an economic standpoint in new products and so forth, there was anticipation for a great summer, and it has been a great summer. But April, we kind of tapped the brakes a little bit going into the first part of the season. But it's been a very, very solid retail season. We've got the open order status is very positive going forward, so we remain very confident.

Do you think that with the Outcross intending to ship this quarter, do you think that some of these course operators and superintendents were just holding off ahead of the Outcross shipment?

No, I don't think so. I think the shipments of across the board continue to be very strong going into the fourth quarter. And -- the Outcross is not necessarily changing people's budgeting plans. It's another opportunity for them.

Okay. Next question, just on the landscape contractor business, you talked about the strength in there, in that area of the business. I guess, that business, I believe, had a price increase in early August. I'm just wondering to what extent did pre-buy ahead of the increase contribute to the third quarter pro sales growth?

Yes, I would not say that, that's not a significant factor at this point. I would -- not a factor.

Can you talk about cadence within the quarter within pro. I'm sure you saw a good May, just given the weather pattern push. But how did that flow into June and July?

It was actually -- it was a fantastic May. At the last earnings call, we had just kind of entered into the period that was a real frenzy in May. But the entire summer, overall, has been very positive, at least, in North America, with temperatures that were above normal and also above normal precipitation, on average, across the U.S. The new products were very well received like the TITAN HD and the Radius, and it continues to drive a lot of excitement. The new diesel that we talked about. As diesel, what's particularly remarkable is new deck options that are larger. And so, for example, a 96-inch deck that if you just take the map is about 33% more productive just by width, but also reduces the turnaround time, et cetera. So people are seeing the productivity benefits. And then the last feature of that product is that the ends of the deck tip up so that a landscape contractor can put it on their conventional trailer where they used to pull a narrower product. So it's just a really great combination that the market is responding to.

Good. Last question for me. I ask you about this from time to time, but just the whole area of battery-powered residential motors and I guess, my question is, when do you get more visible in this rapidly developing category? Is there a plan to be a fast follower here? And I guess, I'm just wondering if you're losing the pioneer advantage here being kind of the brand that consumers are associated with the best in the new class? And just kind of your whole thoughts around Toro and battery power, would be helpful.

Sure. We understand that it's a growing part of the market, it's still very small at this point. And what's important for us is that we introduce the product that meets our expectations, first of all, but that we know our customers will be pleased with. Adoption of battery-powered products in Europe has been stronger than in U.S. and there are fundamentally some reasons for that smaller lots and yards and so forth. But we believe it will continue to be a factor. We obviously have a lot of activities going on in different technology areas. And for the pro side, the hybrids that we've introduced with our professional products have been extremely well received and really solve the energy problem that's inherent with batteries. So we continue to feel the alternative energy sources are a major factor going forward, and we have a lot of activity going on in those areas.

You noted the group is -- the category is still small. At what point does it become maybe a higher priority for you then? I mean, the category is already starting to segment. People are developing good, better, best offerings at retail. Just what level of development in that category do you need to see to become more active?

Yes, we are investing in those categories right now. So it's an area that's definitely interesting to us. I think, again, the key is that with the right products, which is the approach that we took with the commercial side and when we introduce products, they have done extraordinarily well in the marketplace. So that will continue to be our approach is making sure we've got the right product before we introduce something that we're not pleased with.

And we have a follow-up question from Joe Mondillo of Sidoti & Company.

I wanted to -- I have a couple of follow-up questions. I wanted to ask you first off about, sort of the productivity improvement projects that you have underway. I know you've talked about, over the next couple of quarters, that going forward, we should anticipate maybe some larger benefits given what you're doing and such. Have we started to see some of those larger benefits? Or is it still sort of when do we sort of see a pickup of benefits from productivity improvement projects that you're doing?

Yes, I'm happy to talk about that. We were already seeing the benefits and we initiated and increased our investment in those areas some time ago and for good reason and thankfully so, because it's really helped us offset much of the impact that we've seen with higher input costs from commodities, freights, et cetera. So we've had some challenges with suppliers, with the consistent flow of components to our plants, but the fact that we had already done work to improve the plants, especially using lean as a tool, have been extremely helpful. And that's helped us offset a lot of what we would have otherwise had to pass on either as price increases or taken our margins. So the work that we've done has been very helpful, and there's much more that we can do.

So given -- and just a follow-up on that, given the backlog of things that you got going on, projects that you foresee, do you see the magnitude of benefits increasing, say, in fiscal '19? Or is it sort of going to be a steady Eddie or you continue to see some of these benefits that you've already started to see here?

My prediction would be that we could steadily -- we can be steady, but we can steadily improve the productivity opportunities or productivity results over time. As I mentioned, the supply disruptions, when we have had consistent supply of components, we've just seen a tremendous benefit in the work that we've done with lean and improving our operations.

Great. And -- I'm sorry?

I was just going to mention the other side would technology. The technology is what we're excited about for our products. In many cases hold true in our plants as well so there are great opportunities for us to invest in projects that have a great return and improve our productivity as well.

Okay, good. Also wanted to ask you on the landscaping part of your business, could you talk about competition? Are you seeing any change in the competitive landscape there at all?

Yes. In the landscape area, the -- for the landscape contractor, it's always been a large field so there are lots of competitors there. With any group of competitors, there are a few major ones, but then we have lots of secondary competitors, if you will. And that, fundamentally, hasn't really changed. There's been a few who have gone, and then a few more that have come in.

Okay. And then lastly, regarding your European footprint, with this drought that we're seeing, at this point in time, and I know it's probably early, but what kind of risk do you see in inventories ending the year above-average levels and sort of affecting the spring season next year?

Yes, we're actually in great shape in inventories really across the company, so that's not a concern. I would point out, just speaking recently with some of our channel partners from Scandinavia and Northern Europe, they did have an excellent winter so that was after 3 years, roughly, of kind of lower snowfall. We did have a good winter in parts of Europe, so that helped us offset from the effects of the drought during the middle of summer.

I was actually, more so, talking about the channel inventory. So if the market ends up with above-average inventories, do you see that as a risk? And if so, that would -- I would think it would probably translate into maybe a tougher spring but just wondering your thoughts about the channel inventories, not your internal inventories.

I was actually referring to our field inventory, so that's in good shape, which would include the channel. And we still have good retail momentum in many of our categories, even in Europe.

And we have a question from the line of David McGregor from Longbow Research.

Rick, just, I guess, I wanted to draw from your experience, your years of experience in this business. I know there's a lot of concerns right now about where we are in the cycle. And just -- from your experience with the past business cycles, what are the early cyclical indicators that you would first see in a slowdown? I presume it would be in the residential business but maybe I'm wrong about that. It might be retail inventories. I don't know. But what do you watch as just kind of the "canaries in the coal mine" cycle?

We would probably look at more macroeconomic things. So tying to consumer confidence, those kinds of things would be more broad economic indicators versus any particular part of our business. If you remember, during the last recession, the consumer business actually held up very well and historically, we would say that the professional businesses would be more constant through those periods. So really, we would just look at the overall macro indicators if we were looking for something like that. Right now, our businesses continue to look very strong and our customers are very optimistic about the future.

Could you be specific about 1 or 2 indicators that you kind of overweight or over-index?

The type -- the group of indicators would be, as I mentioned, consumer confidence, business confidence, construction, housing starts, those kinds of things.

Okay. And then nothing on kind of a bottom up basis, nothing kind of intrinsic within the business that's on the dashboard?

We always look at what the business is seeing as far as forward demand and things such as that, if there are any substantial changes. What they're hearing from the field, what we're seeing, we're very connected through our distribution. So absolutely, David, we would be looking at those types of things as well.

Okay. Just second, you normally -- you're seeking price initiatives, and you talked about that already, but I know you normally seek pricing at the end of the year, kind of October each year. I guess, just given the increases this summer, is it likely you'll pursue the regular calendar increase this year come end of the fourth quarter?

We -- the price increases that we talked about as being incremental really, our mid-year price increases. So we'll be going through a normal pricing process as we go into the next year.

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

Thank you for your questions and interest in The Toro Company. We look forward to talking with you again in December to discuss our results for the fiscal year and to provide our outlook for fiscal 2019. Thank you.

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